1 


1 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 


A  TREATISE 


ON  THE   LAW  OF 


CORPORATIONS 


HAVING  A 


CAPITAL  STOCK 


BY 


WILLIAM   W.  COOK,  LL.  D. 

Of  the  New  York  Bab 


SIXTH    EDITION" 


VOL.   I 


CHICAGO 
CALLAGHAN  AND  COMPANY 

1908 


T 

1909 

Copyright, 

1887, 

by 

WILLIAM  W. 

COOK. 

Copyright, 

1889, 

by 

WILLIAM  W. 

COOK, 

Copyright, 

1894, 

by 

WILLIAM  W. 

COOK. 

Copyright, 

1898, 

by 

WILLIAM  W. 

COOK. 

Copyright, 

1903, 

by 

WILLIAM  W. 

COOK. 

Copyright, 

1908, 

by 

WILLIAM  W. 

COOK. 

PREFACE   TO    SIXTH   EDITION. 


A  GOVERNMENTAL  RAILROAD  HOLDING  COMPANY. 


In  the  various  editions  of  this  work  during  the  past  twenty  years,  the 
author  has  presented  from  time  to  time  his  ideas  of  the  contemporaneous 
development  of  corporation  law.  The  following  preface  was  written  with  that 
purpose  for  this  edition,  out  at  the  request  of  many  friends,  it  teas  published 
in  the  North  American  Review  for  June,  190S.  It  is  now  republished,  in  a 
revised  form,  in  the  place  for  which  it  was  originally  written.  It  lias  been 
characterised  by  lay  critics  as  "daring."  The  radical  propositions  of  both 
political  parties,  however,  during  the  past  four  years,  indicate  deep  dis- 
satisfaction with  present  management  of  corporations,  and  when  the  wave 
of  socialism  rolls  high,  as  it  certainly  will  sooner  or  later,  conservative 
thought  may  have  to  turn  to  some  such  plan  as  is  outlined  herein  to  avoid 
the  perils  of  governmental  ownership  of  quasi-public  properties.  In  the 
'meantime  it  is  submitted  to  the  discriminating  judgment  of  the  most  in- 
fluential and  intellectual  constituency  in  the  world— the  American  Bar. 

The  most  striking  feature  of  corporation  law,  during  the  past  five 
years,  has  been  the  evidence  of  determination  on  the  part  of  the 
American  people  to  correct  corporate  abuses  and  to  control  wealth  ac- 
cumulated through  corporations.  This  determination,  which  has  long 
been  apparent  to  all  trained  observers,  became  unmistakable  during 
the  insurance  investigation  and  scandals,  and  has  reached  the  point 
of  heavy  fines  and  the  conviction  of  corporate  officials  for  criminal 
offences  involving  secret  rebates  to  favored  shippers.  It  is  signifi- 
cant that  nothing  but  the  fear  of  imprisonment  finally  stopped  these 
iniquitous  violations  of  corporation  law.  It  was  corporation  law 
applied  with  terrifying  force  to  the  illegal,  disgraceful  and  criminal 
practices  of  great  corporations. 

All  this  has  led  not  only  to  resentment  against  the  offenders  but  also 
to  a  popular  fear  that  the  growing  wealth  and  power  of  corporations 
may  jeopardize  our  republican  form  of  government  and  the  rights  and 
liberties  of  the  people.  Thus  far  the  crusade  has  accomplished  some 
beneficent  results.  The  "Railroad  Rate  Bill"  of  1906,  enacted  by 
Congress,  while  drastic  in  its  restrictions,  has  proved  beneficial  to 
the  railroads,  as  well  as  to  the  public,  and  has  not  unduly  increased 
the  power  of  the  national  Government  over  the  corporations;  the 
prosecution  of  railroads  and  of  individuals  for  giving  and  receiving 
secret  and  illegal  rebates  has  effectually  stopped  that  prolific  source 

iii 


iy  PREFACE   TO  SIXTH  EDITION. 

of  unfair  competition ;  the  campaign  against  the  so-called  "Trusts" 
has  resulted  in  a  number  of  convictions  which  has  discouraged  illegal 
combination,  restriction  of  output,  increase  of  selling  price,  and  per- 
secution of  competitors ;  the  Supreme  Court  of  the  United  States  has 
decided  that  a  corporation  cannot  refuse  to  submit  its  books  and 
papers  for  examination  at  the  suit  of  the  State,  even  though  they 
furnish  proof  of  criminality  on  the  part  of  the  corporation,  inasmuch 
as  a  corporation  is  a  creature  of  the  state,  and  the  legislature  has  an 
absolute  right  to  investigate  its  contracts  and  learn  whether  it  has 
exceeded  its  powers.*  This  goes  far  toward  realizing  that  absolute 
control  over  corporations,  upon  which  the  American  people  are  in- 
sisting. Such  are  some  of  the  instances  where  the  upheaval  of 
public  opinion  against  corporations  has  produced  beneficial  results. 

There  are  three  great  forces  in  the  United  States  which  make  up 
the  industrial,  political  and  social  life  of  the  nation.  These  are 
capital,  labor  and  agriculture — a  mixture  of  the  first  two.  Labor  is 
thoroughly  organized  in  the  cities,  on  the  railroads,  in  factories 
and  mines.  The  agricultural  classes,  highly  intelligent,  unorganized, 
widely  scattered,  are  suspicious  of  both  the  corporations  and  the 
labor  organizations.  They  and  their  close  allies,  the  inhabitants  of 
the  small  cities  and  towns,  control  the  moral,  intellectual,  material 
and  political  life  of  the  nation.  It  is  a  constituency  still  true  to  the 
New  England  ideal  of  preserving  this  country  as  the  land  of  oppor- 
tunity, of  self-made  men,  of  freedom  from  class  distinctions  and  the 
power  of  wealth — the  land  where  men  of  ability  and  honesty  rise,  irre- 
spective of  birth,  wealth  or  family  influence.  Capital — in  other 
words,  the  corporations  (for  they  have  virtually  absorbed  the  capital 
of  the  country) — will,  for  their  own  protection,  have  to  unite  with 
the  agriculturists  and  give  the  latter  the  telephone,  the  trolley, 
good  roads,  rural  delivery,  the  reclamation  of  waste  land,  the  revision 
of  the  tariff,  and  educational  opportunities,  literary,  technical  and 
professional,  even  though  all  these  involve  great  monetary  sacrifices. 
Corporations  will  have  to  make  farm  life  attractive  and  comfortable, 
if  they  desire  conservative  government  to  protect  their  property. 
England  to-day  is  threatened  with  socialism  because  the  agricultural 
classes  do  not  control,  being  less  than  ten  per  cent,  as  against  over 
thirty-five  per  cent,  in  the  United  States,  so  distributed  that  they  do 
control.     Farmers  are  not  socialists. 

At  present  the  corporations  and  the  agricultural  classes  in  Amer- 
ica are  far  apart.  In  the  year  1907  the  whole  country  seemed  to 
have  joined  in  a  hue  and  cry  against  corporations.  Railroads  rates 
were  reduced,  although  all  other  prices  had  advanced,     Taxes  were 

*201  U.  S.,  43, 


PREFACE   TO  SIXTH  EDITION.  V 

loaded  upon  corporations,  although  the  general  public  had  prospered 
until  it  had  become  wasteful  and  reckless.  Commissions  began  to 
harry  corporations,  although  extravagance,  luxury  and  improvidence 
were  rampant  in  every  grade  of  society.  New  and  strange  theories 
floated  out.  The  separate  states  were  to  be  dismantled  as  to  their 
most  important  powers,  and  the  national  government  was  to  dominate 
corporations.  The  government  was  to  acquire  all  the  railroads  of  the 
country.  Upon  the  death  of  a  person  all  his  wealth,  in  excess  of  a 
specified  arbitrary  amount,  was  to  go  to  the  state. 

But  not  yet,  The  American  people  are  not  prepared  to  abandon 
their  ancient  moorings  and  embark  on  an  unknown  sea,  without 
chart,  compass,  landmark  or  pilot.  The  fundamental  principle  of 
Anglo-Saxon  life,  that  whatever  a  man  honestly  acquires  is  his  own, 
is  not  to  be  swept  aside  to  make  way  for  the  communistic  idea  that 
the  state  should  seize  all  surplus  wealth.  What  would  the  state  do 
with  it,  and  who  would  control  the  state  ?  What  a  source  of  tempta- 
tion, corruption,  riot  and  revolution  the  prize  of  the  control  of  such 
a  state  would  be  !  The  Roman  Republic  was  practically  a  single  city, 
small  in  wealth  and  population  as  compared  with  the  modern  world, 
and  yet  the  turbulence  of  its  last  days  has  echoed  down  the  centuries 
for  well-nigh  two  thousand  years.  If  history  were  to  repeat  itself  in 
the  American  Republic  with  its  coming  two  hundred  millions  of 
people,  two  hundred  billions  of  wealth,  a  thousand  cities,  and  a  con- 
tinent for  its  workings,  the  result  would  be  chaos.  There  would  then 
arise  colossal  demagogues  like  Caesar  and  Napoleon,  who  established 
monarchies — for  themselves — "to  save  society." 

The  historic  mistake  of  the  American  people  in  giving  to  the 
ignorant  a  voting  power  over  public  property  and  public  expendi- 
tures, especially  in  the  South,  cannot  be  repeated  with  safety  in  deal- 
ing with  railroads.  But  the  clash  which  has  been  going  on  for  over 
fifty  years  between  the  railroads  and  the  legislative  and  executive 
departments  of  the  government  cannot  continue  indefinitely.  Some 
solution  is  necessary. 

During  the  past  five  years  the  national  government  has  travelled 
rapidly  and  far  in  the  direction  of  control  of  railroads.  On  the  plea 
that  the  states  are  derelict,  it  calls  for  federal  supervision,  and 
would  have  every  corporation  engaged  in  interstate  commerce  obtain  a 
license  from  a  United  States  Commission,  which  should  also  pass 
upon  all  issues  of  stocks,  bonds  and  notes.  This  is  the  sequel  to  an  in- 
vestigation of  a  great  railroad  company  which  disclosed  the  fact  that 
a  group  of  prominent  officials  had  caused  it  to  issue  for  their  benefit  a 
large  amount  of  stock  and  bonds  at  low  figures.  At  the  same  time  the 
policy  of  another  railroad  system,  in  making  enormous  purchases  of 


Vi  PREFACE   TO  SIXTH  EDITION. 

the  stock  of  other  railroads,  brought  clearly  before  the  public  the 
fact  that  a  great  railroad  investment  and  speculative  trust  had  come 
into  existence  and  might  destroy  the  existing  competition  between 
wide-spread  railroad  systems.     All  this  added  force  to  the  argument 
that  the  authority  of  the  Interstate  Commerce  Commission  should  in- 
clude supervision  of  new  issues  of  stock  and  bonds  by  interstate  rail- 
road companies,  somewhat  as  provided  for  by  the  existing  Massa- 
chusetts law  on  that  subject.   Here  is  a  wide  departure  from  old  ideas 
of  state  rights  and  limitation  of  federal  power.     However,  the  claim 
is  that  it  has  been  demonstrated,  both  as  a  matter  of  fact  and  as 
a   question   of  law,   that   single   states   cannot   regulate,    control   or 
successfully  grapple  with  interstate  railroads,  and  that,  therefore,  the 
national  government  must  assert  its  authority  even  if  this  leads  in 
the  end  to  government  ownership.     But  the  safety  of  the  public  lies 
in  separating  the  legislative  and  executive  departments  of  the  govern- 
ment from  the  corporations,  and  not  in  merging  them.     Our  fore- 
fathers learned  this  lesson.     Nearly  ar  hundred  years  ago  they  ex- 
perienced the  evil  results  of  corporations  being  thrown  in  contact  with 
the   legislature.       Franchises  were  granted   or   blackmailed.       Cor- 
porations bought  and  protected  franchises  until  the  situation  grew  so 
intolerable  that  the  powers  of  the  legislature  were  restricted,  first, 
by  constitutional  prohibitions  against  legislatures  granting  special 
charters  or  franchises ;  and,  second,  by  delegating  to  commissions  the 
regulation  of  corporations.    A  great  source  of  political  corruption  was 
removed  by  the  enactment  of  those  reforms,  and  we  ought  not  to  take 
any  backward  steps.    It  cannot  be  denied,  however,  that  the  present 
policy  of  government  regulation  and  supervision  of  railroads  is  tend- 
ing toward  governmental  control  and  ownership.     This  prospect,  of 
course,  delights  the  socialists — those  naive  optimists  who  disregard 
the  lesson  of  Europe's  governmental  railroads — but  it  is  less  attract- 
ive to  conservative  men.     Such,  however,  is  the  existing  situation. 
The  next  move  will  certainly  involve  a  grave  responsibility  and 
possibly  commit  us  to  a  policy  involving  the  future  of  the  Republic, 
for  it  is  to  be  borne  in  mind  that  a  republican  form  of  government 
is  not  imperishable.     Sir  Henry  Maine,   a  powerful  and  profound 
thinker  and  writer,  in  his  work  on  "Popular  Government,"*  has  well 
said,  "It  is  characterized  by  great  fragility"  and  "of  all  the  forms 
of  government,  Democracy  is  by  far  the  most  difficult" ;  and  that  the 
democratic  form  of  popular  government  "will  tax  to  the  utmost  all 
the  political  sagacity  and  statesmanship  of  the  world  to  keep  it  from 
misfortune. "     The  question,  "Shall  the  nation  own  the  railroads  or 
the  railroads  own  the  country?"  is  already  being  asked  by  serious- 

*Pp.  20,  87,  and  Preface,  p.  x. 


PREFACE   TO   SIXTH  EDITION.  vii 

minded  men,  and  the  issue  is  likely  to  be  fought  out  on  some  such 
line  in  default  of  a  sane  practical  solution  of  the  difficulty. 

Even  now  the  railroads  are  being  drawn  into  politics;  political 
parties  are  vying  with  each  other  in  attacks  on  railroads ;  conditions 
are  unsettled  and  menacing,  and  it  is  high  time  that  some  rational 
plan  be  devised  to  meet  the  popular  demand  without  destroying  values 
or  subjecting  our  democratic  government  to  a  greater  strain  than  it 
could,  perhaps,  withstand. 

A  radical  solution  of  the  whole  problem  would  be  a  holding  com- 
pany, organized  gradually  to  acquire  the  stock  of  all  the  railroads  in 
the  country.  Such  a  holding  company,  chartered  by  Congress  (a 
District  of  Columbia  corporation),  could  be  moulded  to  solve  many  of 
the  political  and  economic  problems  involved.  The  stock  could  be 
issued  gradually  in  exchange  for  or  purchase  of  railroad  stocks3  at 
valuations  to  be  approved  by  the  Interstate  Commerce  Commission  in 
each  instance  and  from  time  to  time,  just  as  is  now  done  in  Massa- 
chusetts by  a  Corporation  Commission.*  The  board  of  directors  could 
include  the  Interstate  Commerce  Commission,  and  the  remainder, 
constituting  a  majority,  having  been  carefully  selected  in  the  begin- 
ning, would  thereafter  become  practically  self-perpetuating  by  the 
board  recommending  to  the  stockholders  for  election  new  men  to  fill 
vacancies  in  the  board.  The  charter  could  likewise  give  the  Inter- 
state Commerce  Commission  the  right  to  vote  the  railroad  stocks  pur- 
chased by  the  holding  company. 

!Now,  let  us  see  how  this  would  work  in  practice.  The  statistician 
of  the  Interstate  Commerce  Commission  estimates  that  the  railroad 
stocks  in  the  hands  of  the  public  amount  to  about  $4,800,000,000.f 
If  a  holding  company  owned  all  of  this  stock,  it  would  have  a  capital- 
ization of  about  four  billion,  eight  hundred  millions  of  dollars,  which 
would  mean  forty-eight  million  shares  of  the  par  value  of  one  hundred 
dollars  each.  If  these  were  owned  by  one  million  American  people, 
owning  forty-eight  shares  each,  the  railroads  would  practically  be 
owned  not  by  the  government,  but  by  a  power  higher  than  the  gov- 
ernment, namely,  the  American  people. 

An  illustration  will  show  the  workings  of  such  a  governmental 
holding  company.     Suppose  1,353,000  shares  are  sold  to  the  public 

*  The  Philadelphia  Public  Ledger  doubts  whether  the  railroad  stock- 
holders would  exchange  their  stocks  for  the  holding  company  stock.  The 
above  plan  is  not  restricted  to  railroad  stockholders  turning  in  their  stock,  but 
it  also  contemplates  selling  the  holding  company's  stock  to  the  public  for 
cash  and  buying  railroad  stocks  in  the  open  market  with  the  proceeds.  The 
latter  would  be  the  chief  means  of  bringing  about  the  desired  result. 

t  Intercorporate  Relationships  of  Railways  in  the  United  States  as  of 
June  30th,  1906,  page  9. 


Vlil  PREFACE   TO   SIXTH  EDITION. 

for  cash  at  par.  That  would  produce  $135,300,000 — not  an  extrav- 
agant sum  in  comparison  with  the  sums  raised  by  single  railroad 
systems.    With  that  amount  could  be  purchased : 

100,000  shares  Perm.  R.  R.   (full  shares) costing  $12,500,000 

100,000  "  N.  Y.,  N.  H.  &  H.  R.  R "  14,200,000 

100,000  "  New  York  Central  R.  R "  10,600,000 

100,000  "  Illinois  Central   R.   R "  13,900,000 

10*0,000  "  C.  &  N.  W.  R.  R "  16,200,000 

100,000  "  C,  M.  &  St.  Paul  R.  R "  14,400,000 

100,000  "  Great  Northern  R.   R "  13,800,0'00 

100,000  "  Northern  Pacific   R.  R "  14,400,000 

100,000  "  Union   Pacific  R.  R "  16,300,000 

100,000  "  Atchison,  T.  &  S.  Fe  R.  R "  9,000,000 


$135,300,000 


The  income  from  these  stocks,  at  the  present  dividend  rates,  would 
be  $0,900,000  per  annum.  The  expenses  of  the  holding  company, 
judging  from  the  expenses  of  The  Mackay  Companies,  a  similar 
holding  company  for  telegraph  and  cable  stocks,  should  not  exceed 
$25,000  per  annum,  being  the  expense  of  transfer  offices,  registrars 
and  the  engraving  of  the  certificates  of  stock.  That  would  leave 
about  five  per  cent,  on  the  holding  companies'  stock — an  attractive 
rate  in  view  of  the  safeguards  thrown  around  the  management  and 
investments. 

The  Interstate  Commerce  Commission  would  vote  the  railroad 
stocks.  They  would  have  a  large  vote  in  each  company.  They  would 
also  have  the  right  to  receive  and  vote  proxies  for  other  stockholders. 
When  it  is  remembered  that  nearly  every  great  railroad  system  in 
the  country  is  controlled,  not  by  a  few  men,  but  by  a  multitudinous 
body  of  small  stockholders,*  it  is  apparent  that  it  might  be  easy  for 
the  Interstate  Commerce  Commission  to  control  any  railroad  by  means 
of  proxies.  If  that  commission  had  had  the  vote  of  a  large  block  of 
stock  in  the  Illinois  Ocntral  Railroad  Company  last  year,  and  had 
been  willing  to  receive  proxies  from  other  stockholders,  who  would  be 
in  control  of  that  railroad  system  to-day?  Even  though  great  finan- 
cial interests  should  obtain  control  of  the  holding  company,  no  harm 
could  come,  because  they  could  not  vote  or  sell  or  encumber  the  rail- 
road stocks,  the  charter  having  provided  against  that. 

Surely  it  were  better  that  a  million  intelligent  and  conservative 
American  investors  should  own  and  control  all  the  railroads,  through 
such  a  holding  company,  than  that  the  government  with  its  vacil- 
lating and  at  times  incompetent  and  dishonest  administration  should 

*  One  of  the  leading  American  railroad  systems  has  now  78,000  stock- 
holders, and  it  is  estimated  that  there  are  between  three  hundred  thousand 
and  a  half  million  stockholders  in  the  American  railroads. 


PREFACE  TO  SIXTH  EDITION.  IX 

own  and  mismanage  this  vital  element  of  national  prosperity.*  When 
one  considers  the  waste  of  the  present  system  and  realizes  that  all 
saving  from  consolidations  would  mean  lower  rates  and  better  service, 
under  the  rigorous,  drastic  and  relentless  regulation  by  Railroad 
Commissions — and  no  one  will  deny  that  the  present  commissions  are 
rigorous,  drastic  and  relentless, — it  would  seem  better  that  the  stock- 
holders in  American  railroads  should  have  stock  in  one  holding  com- 
pany controlling  all  the  railroads,  than  that  they  should  have  stock  in 
several  hundred  different  companies  as  at  present,  with  wasteful  com- 
petition, duplication  of  trains,  offices,  agents,  stations,  staff  and  an 
army  of  competing  employees.  The  investor  would  have  a  more 
stable  investment ;  the  railroads  would  be  able  to  get  money  for  neces- 
sary extensions  and  improvements  and  retain  the  services  of  the 
strong,  experienced,  competent  officials  who  now  operate  them,  in- 
stead of  intrusting  the  practical  management  to  politicians,  as  would 
be  the  case  if  the  government  assumed  the  business;  the  Interstate 
Commerce  Commission  would  vote  the  railroad  stocks;  the  ruinous 
competition  of  competing  railroads  would  disappear ;  the  clashing  of 

*  The  Railroad  Gazette  of  June  2i6th,  190®,  quotes  the  above  statement 
and  says:  "The  point  is,  however,  that  American  investors  would  not  con- 
trol the  railroads  under  this  plan.  It  would  be  left  to  a  commission  having 
no  real  interest  in  the  economical  management  of  the  railroads  to  control 
them." 

The  answer  to  this  criticism  is  that  such  ownership  and  control  by  the 
American  investors  would  be  attained  by  giving  the  vote  of  the  railroad 
stocks  to  an  honest  and  disinterested  commission,  instead  of  a  group  of 
capitalists  as  at  present,  who,  with  a  small  minority  of  the  stock,  capture 
the  control  for  their  own  selfish  aggrandizement,  with  "economical  manage- 
ment" to  enlarge  their  gains.  They  continue  their  control  by  the  proxies  of 
the  scattered  multitudinous  majority  stockholders,  until  they  are  able  to 
sell  out  at  a  large  profit  or  bring  about  a  consolidation  and  issue 
watered  stocks  and  bonds,  which  they  sell  to  the  public.  In  England 
the  boards  of  directors  of  the  railroad  companies  are  made  up  of  men 
whose  business  ethics  are  the  best.  In  America  it  is  different,  and  the 
people  will  not  forever  tolerate  a  situation  such  as  is  described  above.  The 
vast  individual  fortunes  in  America  were  created  chiefly  by  the  railroads. 
They  dominate  the  railroads,  and  the  railroads  are  used  by  them  in  the 
struggle  for  financial  supremacy.  It  is  doubtful  whether  the  law  is  powerful 
enough  to  control  them.  Certain  it  seems  to  be  that  the  only  way  to  wrest 
the  control  of  the  railroads  from  Wall  Street  is  some  such  plan  as  is  outlined 
above  or  else  by  government  ownership.  Meantime  the  drift  towards  plu- 
tocracy continues.  The  problem  in  America  is  how  to  allow  the  accumulation 
of  wealth  and  at  the  same  time  prevent  any  pernicious  use  of  its  power. 
Unless  controlled,  plutocracy  and  the  brutal  use  of  wealth  means  a  revolt 
of  the  masses  and  a  dictator,  just  as  happened  in  the  time  of  Caesar  and 
Napoleon.  The  above  plan  would  allow  the  accumulation  of  wealth,  but 
would  most  decidedly  limit  its  power. 


X  PREFACE  TO  SIXTH  EDITION. 

private  interests,  together  with  the  din  of  public  clamor,  would 
cease,  and  the  American  people  could  pass  on  to  some  other  subject 
less  dangerous  to  the  public  weal.  That  would  be  the  effect  of  such 
a  holding  company  as  is  mentioned  above. 

Later  on,  if  the  government  should  guarantee  three-per-cent.  divi- 
dends  (any  amounts  so  paid  to  be  repaid  to  the  government  with 
interest  out  of  subsequent  surplus  profits),  leaving  the  company  free 
to  declare  such  higher  dividends  as  it  could  earn,  the  value  of  the 
stock  would  rise,   and  the  higher  its  value  the  greater  quantity  of 
railroad  companies'  stocks  could  be  obtained  in  exchange  or  for  cash 
realized  from  the  issue  of  the  holding  company  stock,  thus  reducing 
the  cost  of  acquisition,  just  as  New  York  City,  by  using  its  credit 
in  the  construction  of  the  underground  railways  in  that  city,  reduced 
by  probably  one-half  the  outstanding  obligations  to  pay  for  con- 
struction.    Such  a  guaranteed  stock  would  be  equal  to  English  con- 
sols or  French  rentes,  and  might  be  owned  by  banks  and  trust  com- 
panies, and  used  as  a  basis  for  the  currency  on  a  par  with  United 
States  bonds,  and  would  be  a  stable  investment  for  the  savings  of  the 
poor,  the  accumulations  of  the  investor  and  the  wealth  of  the  rich. 
If  the  American  people  ever  decided  that  the  government  should 
own  the  railroads,  the  government  could  acquire  a  majority  of  the 
stock,  the  same  as  the  English  government  acquired  the  stock  of  the 
Suez  Canal.     In  fact,  the  charter  might  reserve  that  right  to  the 
government,  just  as  the  Act  of  Congress  of  July  24th,  1866,  reserves 
to  the  government  the  right  to  take  over  the  telegraph  lines  at  an 
appraisal. 

The  three  objections  to  a  railroad  stock-holding  company  are  elimi- 
nate* 1  by  this  plan,  namely,  the  danger  that  the  railroad  stocks  would 
be  purchased  by  the  holding  company  at  unfair  prices  or  for  personal 
purposes ;  the  danger  that  the  railroad  stocks  so  held  would  be  voted 
for  selfish  ends;  and  the  danger  that  competition  between  railroads 
-von Id  be  destroyed,  to  the  detriment  of  the  public.     This  fetish  of 
insisting  upon   competition   between  railroads   is  perhaps  the  most 
serious  obstacle  to  a  realization  of  the  suggested  plan.     The  American 
people  are  opposed  to  the  consolidation  of  competing  railroads.     But 
if  the  government  were  to  own  all  the  railroads,  competition  neces- 
sarily  would  disappear.     So  also,  if  the  government  had  the  voting 
of  the  stocks  of  the  competing  railroads,  there  no  longer  would  be 
occasion       -  competition.     If  the  Intel-state  Commerce  Commission 
had  had    Lhe  voting  of  the  railroad  stocks  owned  by  the  Northern 
Securities  Company,  there  would  have  been  no  attack  on  that  com- 
pany, because  the  Int<  rstate  Commerce  Commission  would  have  voted 
those  stocks  in  the  public  interest,  the  same  as  they  would  administer 
the  railroads   themselves,   if   the  government   owned  the   railroads. 


PREFACE   TO   SIXTH  EDITION.  XI 

State  prohibitions  against  the  consolidation  of  competing  railroads 
would  quickly  disappear  before  such  a  dispensation. 

There  is  also  a  still  broader  view  of  this  question  of  future  com- 
petition between  railroads.  In  England,  for  more  than  thirty  years, 
Parliament  legislated  against  the  consolidation  of  railroads.  This 
legislation  proved  to  be  utterly  futile,  and  in  1872  a  Parliamentary 
Committee  made  an  elaborate  and  exhaustive  report  on  the  subject, 
and  said,  among  other  things,  that  consolidation  "had  not  brought  with 
it  the  evils  that  were  anticipated,  but  that,  in  any  event,  long  and 
varied  experience  had  fully  demonstrated  the  fact  that,  while  Parlia- 
ment might  hinder  and  thwart  it,  it  could  not  prevent  it."  The 
committee  showed  that  at  that  time  the  North  Eastern  Railway  Com- 
pany was  a  consolidation  of  thirty-seven  independent  companies, 
some  of  which  had  formerly  competed,  and  that  before  the  consolida- 
tion they  had  as  a  rule  charged  higher  rates  and  paid  smaller  divi- 
dends, but  that  in  1872  it  was  the  most  complete  monopoly  in  Eng- 
land, and  while  charging  the 'lowest  rates  had  paid  the  highest 
dividends  of  all  the  great  English  combinations.  In  December,  1907, 
the  Great  Northern  Railway  Company  and  the  Great  Central  Rail- 
way Company,  which  for  many  years  had  been  keen  competitors  for 
the  railway  traffic,  in  a  large  part  of  the  north  of  England,  entered 
into  a  combination  by  which  competition  was  eliminated.  Again, 
as  recently  as  August,  1908,  the  two  greatest  English  railway  sys- 
tems, the  London  &  North- Western  and  the  Midland,  entered  into  a 
combination  or  working  agreement  for  a  long  period,  and  it  is  ex- 
pected that  economies  in  operating,  amounting  to  $2,000,000  a  year, 
will  be  thereby  effected.*  Those  combinations  are  to  be  ratified  by 
the  stockholders  and  approved  by  Parliament,  and  is  a  recognition  of 
the  fact  that  the  public  is  better  served  and  more  cheaply  served  by 
a  closely  scrutinized  combination  than  by  ruinous  competition. 
•  Even  now  the  opposition  of  the  American  people  to  the  consolida- 

*The  Chairman  of  the  London  &  North-Western  Railway  at  a  meeting 
held  August  14th,  1908,  said: 

"The  geographical  positions  of  the  two  companies  are  such  as  to  place 
them  in  competition  for  traffic  between  many  important  places. 

"We  have  been  able  to  make  an  agreement  which  will,  we  hope  and 
believe,  have  very  important  results.  Its  principles  are  first  the  elimination 
of  all  inducements  to  excessive  competition,  which,  while  expensive,  produce 
no  additional  traffic;  and,  second,  co-operation  in  the  working  of  all  compet- 
itive traffic  in  the  manner  most  convenient  to  the  public  and  most  economical 
to  both  companies." 

"The  Statist,"  in  its  issues  of  August  8th  and  August  15th,  1908,  pointed 
out  that  the  above  arrangement  "is  not  only  for  the  good  of  the  railways,  but 
is  also  for  the  good  of  traders,  the  traveling  public,  and,  therefore  of  the 
country." 


Xii  PREFACE   TO   SIXTH  EDITIONo 

tion  of  competing  railroads  is  largely  futile.  We  may  delay  it,  but 
we  cannot  prevent  it,  and  we  will  find  that  ultimately  the  laws  of 
trade  are  stronger  than  the  laws  of  men.  We  will  find  also  that  a 
vast  consolidated  railroad  system  is  more  easily  controlled  than  a 
hundred  small  ones,  and  that  with  railroad  power  there  will  come  rail- 
road responsibility,  responsive  to  the  public  will.  The  special  report 
of  the  Interstate  Commerce  Commission  of  July,  1907,*  demonstrates 
that  such  amalgamations  are  even  now  going  on  with  great  rapidity  in 
the  United  States.  Some  seventy-five  years  ago  George  Stevenson, 
the  originator  of  the  railroad  locomotive,  truly  said  that  "where  com- 
bination is  possible,  competition  is  impossible." 

Even  though  the  Interstate  Commerce  Commission  voted  a  major- 
ity of  the  stock  of  a  railroad  company  and  thereby  elected  its  board 
of  directors  this  would  be  vastly  different  from  government  owner- 
ship. The  officers,  general  manager,  superintendent  and  employees 
would  be  paid  by  the  railroad  company  and  not  by  the  government. 
The  power  to  employ  and  discharge  would  be  in  the  railroad  company 
and  not  in  the  government.  The  evils  of  bureaucracy  would  not  be 
present.  If  the  government  owned  the  railroads,  Congress  and  the 
Executive  would  be  very  active  in  the  patronage  and  power  of  rail- 
roads, but  under  the  above  plan  Congress  and  the  Executive  would 
have  nothing  whatsoever  to  do  with  it.  The  board  of  directors  of  the 
railroad  company  would  be  made  up  of  men  representative  of  the 
locality  of  the  railroad  itself,  as  well  as  of  the  financial  and  operat- 
ing departments  of  the  railroad.  The  only  connection  between  the 
government  and  the  railroads  would  be  through  that  quasi-judicial 
body,  the  Interstate  Commerce  Commission,  and  even  that  connec- 
tion would  be  indirect,  remote  and  free  from  the  objections  incident 
to  government  ownership. 

Railroad  men  estimate  that  one  billion  dollars  should  be  expended 
by  the  railroads  each  year  for  the  next  five  years  to  provide  additional 
facilities  necessitated  by  the  growth  of  the  country  in  population  and 
production.  The  railroads  have  found  it  impossible  to  sell  their  securi- 
ties to  obtain  such  a  vast  amount  of  money.  If,  however,  the  control 
of  the  railroads  were  vested  in  the  Interstate  Commerce  Commission, 
as  outlined  above,  there  should  "he  no  difficulty  in  the  railroads  ob- 
taining from  the  sale  of  their  securities  all  the  money  they  need. 

The  practicability  of  a  holding  company  to  control  all  the  rail- 
roads of  the  country  is  strikingly  illustrated  by  the  facts  set  forth  in 
a  very  recent  publication.  In  April,  1908,  Henry  C.  Adams,  statis- 
tician of  the  Interstate  Commerce  Commission,  in  a  carefully  pre- 

*  Tn  the  Matter  of  Consolidations  and  Combinations  of  Carriers,  Relations 
between  Such  carriers,  and  Community  of  Interests  Therein,  Their  Rates, 
Facilities  and  Practices.     XII  Interstate  Commerce  Reports,  277. 


PREFACE   TO   SIXTH  EDITION.  Xlll 

pared  report,  explained  railroad  holding  companies  as  they  now 
exist.  It  is  an  extraordinary  showing.  The  interweaving  of  rail- 
road interests  has  led  to  a  vast  labyrinth  of  railroad  holding  com- 
panies, some  of  them  being  railroad  corporations,  and  other  holding 
corporations,  pure  and  simple,  the  object  always  being  the  power  of 
control.     Mr.  Adams  in  his  report  says:* 

"These  holdings  are  all  minority  holdings,  and  in  a  strict  legal  sense  do 
not  give  control.  Yet,  because  of  the  wide  distribution  of  majority  ownership, 
the  stock  being  in  many  cases  held  for  investment  in  small  lots  by  individuals, 
and  because  the  proxies  of  such  holders  are  frequently  signed  as  a  matter  of 
form  and  without  any  investigation,  these  minority  holdings  in  concentrated 
form  virtually  dominate  the  situation  and  dictate  the  policy  of  the  corpora- 
tions whose  securities  are  thus  held." 

If  the  railroads  have  found  the  holding  company  efficient  and 
proper  to  use  to  control  other  railroads,  why  is  not  a  holding  company, 
equally  efficient  and  proper  for  the  people  to  use  to  control  all  the 
railroads  ?  The  corporation  has  been  developed  and  utilized  to  own, 
control  and  operate  all  the  railroads  in  the  country.  The  time  has 
come  when  it  may  be  further  utilized  to  nationalize  the  railroads, 
without  destroying  private  ownership  or  the  advantages  of  private 
ownership. 

A  holding  company,  such  as  is  outlined  above,  could  gradually  ac- 
quire control  of  all  the  railroads  in  the  country.  States  could  not 
raid  it,  and  courts  could  not  destroy  it,  under  anti-trust  statutes.  It 
would  nationalize  railroads  without  political  agitation,  without  con- 
demnation and  without  costing  the  national  government  a  dollar. 
If  such  a  nationalization  of  railroads  should  take  place,  state  legis- 
latures and  state  railroad  commissions  would  lose  a  large  part  of 
their  present  occupation.  It  would  be  giving  large  power  to  the 
Interstate  Commerce  Commission,  and  might  at  times  cause  that 
commission  to  use  that  power  for  political  or  personal  ends.  But 
even  so,  the  public  would  always  be  watchful  on  account  of  its  daily 
contact  with  railroad  service,  and  there  would  be  fewer  abuses  than 
under  the  present  system.  Power,  moreover,  leads  to  responsibility, 
and  responsibility  leads  to  conservatism,  and  if  the  Interstate  Com- 
merce Commission  had  the  power  of  voting  railroad  stocks  through- 
out the  United  States,  public  sentiment  would  insist  that  the  person- 
nel of  the  commission  should  represent  the  finest  judgment  and  honor 
of  the  country.f 

♦Intercorporate  Relationships  of  Railways  in  the  United  States  as  of 
June  30th,  1906,  page  37. 

fThe  New  York  Commercial  says  in  regard  to  the  above:  "There  is 
instantly  suggested  in  this  connection,  however,  the  enormous,  the  tre- 
mendous, the  really  appalling  power  that  would  be  possessed  by  the  Inter- 


xiv  PREFACE   TO  SIXTH  EDITION. 

Probably  every  railroad  man  in  the  United  States  would  be  in 
favor  of  such  a  holding  company  as  this,  'provided  the  Interstate 
Commerce  Commission  were  not  given  the  power  to  vote  the  railroad 

stocks. 

Underlying  the  surface  manifestations  of  legislative  enactments, 
political  platforms  and  newspaper  clamor  is  a  deep-seated  distrust 
of  the  present  control  of  the  railroads.  This  distrust  is  working  itself 
out  in  the  following  ways : 

(1)  The  present  system  of  Wall  Street  voting  the  proxies  of 
multitudinous  stockholders  cannot  and  should  not  continue.  As  the 
stockholders  increase  in  number  and  holdings  they  will  seek  a  more 
disinterested  leadership.  Such  leadership  seems  available  only  by 
turning  to  the  Interstate  Commerce  Commission. 

(2)  The  people  demand  still  greater  regulation  of  railroads. 
Regulation  without  control  of  the  board  of  directors  is  necessarily 
feeble,  and  does  not  and  cannot  produce  the  results  which  the  people 
demand.  Regulation  by  control  of  the  board  of  directors  would  be 
complete,  and  is  the  goal  towards  which  events  are  rapidly  tending. 

(3)  The  rapid  tendency  is  towards  governmental  control  of  quasi- 
public  corporations.  Shall  it  come  by  government  ownership  or  by 
utilizing  the  corporate  idea  as  outlined  above? 

A  trial  of  this  plan  does  not  involve  any  risk,  or  irrevocable 
step,  or  large  amount  of  money.  Such  a  company,  if  found  unde- 
sirable in  any  way,  could  be  dissolved  and  the  securities  distributed 
without  loss.  A  very  similar  plan,  covering  cable,  telegraph  and 
telephone  stocks,  has  worked  smoothly,  economically  and  successfully, 
and  there  seems  to  be  no  reason  why  it  should  not  work  equally  well 
with  railroad  stocks.  This  possible  solution  of  the  railroad  problem 
would  seem  to  justify  the  experiment  on  a  small  scale  at  least.   If  the 

state  Commerce  Commission  under  such  a  system.  And  the  question  com- 
pellingly  asks  itself;  Could  politics  be  kept  out  of  that  body  even  if  its  char- 
acter were  to  be  changed  from  an  appointive  to  a  popularly-elected  commis- 
sion?" The  Philadelphia  Public  Ledger  expresses  very  much  the  same  idea 
when  it  says:  "But  in  what  way  the  Interstate  Commerce  Commission 
itself  would  be  protected  from  congressional  control,  and  the  power  of  voting 
the  stock  made  the  great  aim  of  political  ambition,  Mr.  Cook  does  not 
attempt  to  explain."  These  are  very  pertinent  remarks,  but  this  danger  may 
easily  be  obviated.  The  charter  could  contain  a  provision  that  the  railroad 
stocks  should  be  voted  only  by  commissioners  nominated  by  the  President 
and  confirmed  by  the  Senate,  and  that  at  times  when  such  commissioners 
should  not  exist,  the  stock  should  be  voted  by  the  holding  company  itself. 
Such  a  restriction  on  the  voting  power  would  be  protected  by  the  Con- 
stitution of  the  United  States  (see  ch.  28,  infra).  It  is  to  be  borne 
in  mind,  also,  in  answer  to  this  criticism,  that  if  the  American  people  ever 
decided  to  control  the  voting  of  the  railroad  stocks,  they  would  go  further 
and  have  the  government  take  over  the  railroads  themselves. 


PREFACE  TO  SIXTH  EDITION.  XV 

American  people  would  be  content  with  the  present  private  ownership 
of  railroads,  the  same  as  in  England,  that  would  be  the  better  way, 
but  it  is  doubtful  whether  the  English  mode  of  dealing  with  railroads 
would  suffice  for  the  complicated  problems  connected  with  the  Ameri- 
can railroads.  The  English  railroads  in  the  aggregate  are  compara- 
tively small  in  mileage,  capitalization,  traffic  and  growth.  They  are 
free  from  most  of  the  American  troubles  over  rates,  service  and 
statutory  regulations.  They  are  controlled  by  financiers  who  re- 
spond to  the  wishes  of  English  investors.  The  railroads  are  not  used 
as  weapons  of  offense  and  defense.  The  scandals  connected  with  the 
ownership  and  control  of  American  railroads  do  not  occur  in  connec- 
tion with  English  railroads. 

The  above  plan  is  not  socialism ;  it  is  not  governmental  ownership ; 
it  is  not  even  governmental  control  by  the  executive  or  legislative 
branches  of  the  government.  It  is  private  ownership,  regulated  by 
the  Interstate  Commerce  Commission,  protected  by  the  judiciary,  and 

is  absolutely  practical. 

William  W.  Cook. 
44  Wall  Street, 

Norember  2,  1908. 


CONTENTS. 


PART   I. 

ISSUE   OF  AND   LIABILITY  ON  STOCK. 

CHAPTER  I. 

Sec. 
Definitions  and  Nature  of  Corporations 1 

CHAPTER  II. 

Stock  May  be  Issued  Legally  for  Money  or  Property  or  by  a  Stock 

Dividend    16 

CHAPTER  III. 

"Watered"  Stock — Stock  Issued  Illegally  for  Money,  Property,  or  by  a 
Stock  Divedend — It  is  Then  Called  "Watered"  or  Ficti- 
tiously Paid-up  Stock 28 

A.  Nature  of  Watered  Stock. 

B.  Watered   Stock  Issued  for  Cash. 

C.  Watered  Stock  Issued  for  Property  or  Construction  Work,  which 

is  Overvalued. 

D.  Who  May  Complain  and  Against  Whom  Complaint  May  be  Made. 

E.  Issue  of  Watered  Stock  by  a  Stock  Dividend. 

CHAPTER  IV. 

Method  of  Subscribing — Parties  to  Subscriptions — Action  to  Enforce 

Subscriptions 52 

A.  Methods  of  Subscribing. 

B.  Who  is  Competent  to  Subscribe  for  Stock. 

C.  An  Action  Lies  to  Collect  Subscriptions. 

CHAPTER  V. 
Conditional   Subscriptions 77 

CHAPTER  VI. 
Municipal  Subscriptions 90 

CHAPTER  VII. 

Calls  104 

xvii 


Xviii  CONTENTS. 

CHAPTER  VIII. 

Sec. 
forfeiture  of  shares  foe  non-payment 121 

CHAPTER  IX. 

Defense  of  Parol  Agreements  and  Fraudulent  Representations  In- 
ducing Subscriptions  for  Stock 135 

CHAPTER  X. 

Miscellaneous  Defenses  to  Subscriptions  for  Capital  Stock 166 

CHAPTER  XL 

The  Stockholders'  Liability  to  Corporate  Creditors  Upon  Unpaid  Sub- 
scriptions      199 

CHAPTER  XII. 

Statutory  Liability  of  Stockholders  to  Corporate  Creditors 212 

A.  Extent  of  the  Liability. 

B.  Enforcement  of  the  Statutory  Liability. 

CHAPTER  XIII. 

Liability  of  Stockholders  Where  the  Supposed  Incorporation  Does 
Not  Protect  Them,  and  for  Assessments  Beyond  the  Par  Value 
of  the  Stock ° 230 

CHAPTER  XIV. 

Liability  of  Pledgees,  Trustees,  Executors,  Agents,  etc 244 

CHAPTER  XV. 
Li  ability  as  Affected  by  Transfers 254 

CHAPTER  XVI. 

Issue  of  Preferred  Stock  and  Stock  Upon  Which  Interest  is  Guar- 


anteed 


267 


CHAPTER  XVII. 

Increase  and  Reduction  of  the  Capital  Stock  and  Overissued  Stock  . . .  279 

A.  Legal  Increase  or  Reduction  of  Capital   Stock. 

B.  Illegal  Increase  of  Stock,  Being  Overissued  Stock. 


CONTENTS.  Xix 

PART  II. 

TRANSFERS  OF  STOCK. 

CHAPTER  XVIII. 

Sec. 
Legacies  and  Gifts  of  Stock 299 

CHAPTER  XIX. 

Who  May  Buy  and  Sell  Stock 309 

CHAPTER  XX. 

Sales  of  Stock — The  Formation  and  Performance  of  the  Contract — 

Gambling  Sales — Fraudulent  Sales 331 

A.  Formation  and  Performance  of  Contracts  to  Purchase  Stock. 

B.  Gambling  Sales  of  Stock. 

C.  Fraud  as  Affecting  a  Sale  of  Stock. 

CHAPTER  XXI. 

Sales  of  Stock — Sales  While  Suits  Are  Pending  Affecting  that 
Stock;  Forgery;  Lost  and  Stolen  Certificates  of  Stock; 
Confiscation  of  Stock 358 

A.  Stolen  and  Lost  Certificates  and  Purchases  Without  a  Certificate 

of  the  Stock. 

B.  Sales  of  Stock  While  Suits  are  Pending  Affecting  that  Stock. 

C.  Forgery. 

D.  Confiscation  of  Stock. 

CHAPTER  XXII. 

Sales   of    Stock — Formal   Method    of    Transferring   Certificates   and 

Registry  Thereof 372 

A.  Method  of  Transferring  the  Certificate. 

B.  Method  of  Registering  a  Transfer  of  Stock. 

C.  Rights  and  Duties  of  the  Corporation  in  Allowing  or  Refusing 

Registry. 

CHAPTER  XXIII. 

Rules  for  Corporations  in  Regard  to  Refusing  or  Allowing  Regis- 
tries of  Transfers  of  Stock 393 

CHAPTER  XXIV. 

non-negotiabhity  of  stock  and  dangers  incurred  in  the  purchase  of 

Certificates  of  Stock 411 

A.  Non-negotiability. 

B.  Dangers  Incurred  in  Purchasing  Stock. 


XX  CONTENTS. 

PART   III. 

MISCELLANEOUS  RIGHTS  OF  STOCKHOLDERS. 

CHAPTER  XXV. 

Sec. 
Stock-brokers  and  Their  Contracts 445 

CHAPTER  XXVI. 

Pledges  and  Mortgages  of  Stock 46«* 

CHAPTER  XXVII. 

Levy  of  Attachment  and  Execution  Upon  Shares  of  Stock 480 

CHAPTER  XXVIII. 

Constitutionality   of   Amendments   to   Charters — Right   of    a   Stock- 
holder to  Object 4^ 

CHAPTER  XXIX. 

"Trusts"  and  Unincorporated  Joint-Stock  Associations 503a 

A.  "Trusts." 

B.  Unincorporated  Joint-Stock  Associations. 

CHAPTER  XXX. 

Stockholders'  Right  to  Inspect  the  Books  of  the  Corporation 511 

CHAPTER  XXXI. 

Liens  of  the  Corporation  on   Stock  for  the  Stockholders'  Debts  to 

the  Corporation 520 

CHAPTER  XXXII. 

Dividends    5**4 

CHAPTER  XXXIII. 

Lite  Estates  and  Remainders  in  Shares  of  Stock 552 

CHAPTER  XXXIV. 

Taxation  of  Shares  of  Stock  and  of  Corporations 561 

A.  Taxation  of  Shares  of  Stock. 

B.  Taxation  of  Notional  Bank  Stock. 

C.  Other  Methods  of  Taxing  Corporations, 


CONTENTS.  XXI 

CHAPTER  XXXV. 

Sec. 
Forms  of  Actions  and  Measure  of  Damages  Where  a  Stockholder  Has 

Been  Deprived  of  His  Stock 573 

CHAPTER  XXXVI. 

Stockholders'  Meetings — Calls,  Time,  Place,  and  Classes  of  Meetings  588 

CHAPTER  XXXVII. 

Elections  and  Other  Corporate  Meetings 602 

CHAPTER  XXXVIII. 

Dissolution,  Forfeiture,  and  Irregular  Incorporation 628 


PART   IV. 

FRAUDS— ULTRA  VIRES  ACTS— INTRA  VIRES  ACTS— NEGLIGENCE 
AND  IRREGULAR  CONTRACTS  OF  DIRECTORS,  STOCKHOLDERS, 
PROMOTERS,  AND  AGENTS. 

CHAPTER  XXXIX. 

Fraudulent  Acts  of  Directors,  Majority  of  Stockholders,  and  Third 

Persons    643 

A.  The  Occasion,  Scope,  and  Purpose  of  the  Subject  Herein. 

B.  Frauds  of  Corporate  Directors,  of  a  Majority  of  the  Stockholders 

or   of  Third   Persons,   to  Remedy  Which  a   Stockholder  May 
Bring  Suit. 

CHAPTER  XL. 

Ultra  Vires  Acts  and  Contracts — In  Other  Words,  Acts  and  Con- 
tracts Which  Are  in  Excess  of  the  Charter  Powers  of  the  Corpo- 
ration, Directors,  or  Stockholders 667 

CHAPTER  XLI. 

Intra  Vires  Acts  and  Contracts — In  Other  Words,  Acts  and  Contracts 
Which  are  Within  the  Charter  Powers  of  the  Corporation, 
Directors,  or  Stockholders 683 

CHAPTER  XLII. 

Stockholder's  Actions  to  Hold  the  Directors  Liable  fob  Negligence 
in  the  Discharge  of  Their  Duties 701 


xxii  CONTENTS. 

CHAPTER  XLIII. 

Sec. 
The  Power  of  Various  Officers  and  Agents  to  Contract  for  a  Corpo- 
ration, and  the  Mode  of  Drawing  and  Executing  Coki>orate 
Contracts — Admissions  and  Notice 704 

A.  Power   of   Promoters,    Stockholders,    Directors,   Executive    Com- 

mittee, President,  Secretary,  Treasurer,  Cashier,  General  Man- 
ager, and  Miscellaneous  Agents  to  Contract  for  a  Corporation. 

B.  The    Form    of    Corporate    Contracts — Corporate    Seal — Drafting, 

Signing,  and  Sealing— Liability  of  Officers  on  Contracts  Irregu- 
larly Executed. 

C.  Admissions  of  Officers  and  Notice  to  Officers. 

CHAPTER  XLIV. 

Ratification,  Acquiescence,  or  Laches  as  a  Bar  to  a  Stockholder's 
Action  Herein  728 

CHAPTER  XLV. 

Parties,  Pleadings,  etc.,  in  Suits  by  Stockholders  in  Behalf  of  the 
Corporation — Suits  by  or  Against  the  Corporation  in 
General   734 

A.  Suits  by  Stockholders  in  Behalf  of  the  Corporation. 

B.  Suits  by  or  Against  the  Corporation  in  General. 


PART  V. 

BONDS,  MORTGAGES,  FORECLOSURES,  RECEIVERS,  AND   REORGANI- 
ZATIONS. 

CHAPTER  XLVL 

Bonds,  Notes,  etc.,  of  a  Corporation — Guaranties  and  Accommodation 
Paper    760 

CHAPTER  XLVII. 

Mortgages — Power  to  Issue  and  Form  Thereof 779 

A.  Power  to  Make  Mortgages. 

B.  Form  and  Provisions  of  the  Mortgage  Deed  of  Trust. 

C.  Authorizing,  Executing,  and  Recording  Mortgages, 

CHAPTER  XLVIII. 

Trustees  and  Bondholders — Remedies  of  Each 812 

A.  The  Position,  Duties  and  Liabilities  of  Trustees. 

B.  The  Remedies  of  the  Trustee  to  Enforce  the  Security — Foreclo- 

sure, Sale,  and  Taking  Possession. 

C.  Bondholders'  Suits  to  Foreclose  and  to  Protect  or  Enforce  Their 

Rights. 


CONTENTS.  Xxiii 

CHAPTER  XLIX. 

_„  Sec. 

The  Foreclosure  of  Mortgages  by  Suit  in  Equity 832 

CHAPTER  L. 

Peiobity  of  the  Mortgage  Lien  Over  Other  Liens,  Mortgages,  Deeds, 

Leases,  Claims,  Judgments,  Debts,  and  Liabilities 851 

CHAPTER  LI. 
Receivers  862 

A.  Appointment   of  Receiver — Effect  as  to  Title  to  the  Property. 

B.  Suits  and  Claims  by  and  Against  Receivers. 

C.  Duties  and  Powers  of  Receivers. 

D.  Liability,  Compensation,  Accounts,  and  Discharge  of  Receivers. 

CHAPTER  LII. 
Purchases  and  Reorganizations , ,, 883 


PART   VI. 

STEAM  RAILROADS,  STREET  RAILWAYS,  TELEGRAPH,  TELEPHONE, 
GAS,  ELECTRIC -LIGHT,  WATERWORKS,  AND  OTHER  QUASI- 
PUBLIC  CORPORATIONS. 

CHAPTER  LIH. 

Steam  Railroads 891 

CHAPTER  LIV. 
Street  Railways 912 

CHAPTER  LV. 

Gas,  Electric-light,  Telephone,  Water-works,  and  Other  Quasi-publio 
Corporations 922 

CHAPTER  LVL 

Telegraph  Companies 933 


THE  LAW  OF  COKPOKATIONS 

HAVING  A 

CAPITAL  STOCK. 


PART   I. 

ISSUE  OF  AND  LIABILITY  ON  STOCK. 


CHAPTEK  I. 
DEFINITIONS  AND  NATURE  OF  CORPORATIONS. 


§  1.     Definition  of  corporation. 

2.  Definition   of   charters,    general 

and  special — Definition  of 
franchise. 
2a.  Acceptance  of  a  charter  by  the 
corporation  arises  from 
merely  acting  under  it,  and 
a  want  of  formal  acceptance 
is  no  defense  to  actions  on 
its  contracts. 

3.  A  private  corporation  may  be- 

come accommodation  in- 
dorser,  distribute  its  assets, 
issue  its  notes,  stock,  or 
bonds  below  par  or  for  no 
consideration  whatsoever, 
give  away  its  assets,  or  may 
mortgage  its  property  for  the 
personal  benefit  of  a  part  or 
•  all  of  its  stockholders  or  of- 
ficers; provided,  always,  that 
all  the  stockholders  assent, 
and  provided  that  corporate 
creditors  are  not  injured, 
and  provided  that  no  statute 
forbids  such  acts.  The  doc- 
trine of  ultra  vires  is  no 
longer  held  to  forbid  such 
acts  by  a  private  corporation 
under  such  circumstances — 
Powers,  express  and  implied. 

4.  The  certificate  of  incorporation 

under  the  general  act  cannot 
legally  contain  any  powers, 
restrictions,  or  provisions  ex- 
cept those  called  for  by  the 
statute. 
4a.  By-laws  of  a  corporation. 

5.  Mistakes,      irregularities,      and 

illegalities    in    becoming   in- 
corporated. 

(1) 


§  6. 


9. 


10. 


11. 

12. 


13. 
14. 


15. 

15a. 


156. 


"  Dummy  "  corporations — Fraud 
ulent  corporations  —  Courts 
may  ignore  the  corporate  ex- 
istence in  order  to  do  justice 
— Corporations  as  distin- 
guished from  partnerships. 

Classes  of  corporations  and  the 
class  considered  herein. 

Corporations  having  a  capital 
stock — Definition  of  capital 
stock. 

Is  the  capital  stock  a  trust  fund 
for  the  benefit  of  corporate 
creditors? 

Definitions  of  corporator,  sub- 
scriber, shareholder,  stock- 
holder, and  officer. 

Relation  of  stockholders  towards 
the  corporation. 

Shares  of  stock  defined — What 
law  governs — Common  stock 
— Preferred  stock — Deferred 
stock  —  Overissued  stock  — 
Special  stock. 

Certificates  of  stock. 

Definition  of  bond,  mortgage, 
deed  of  trust,  debenture,  arti- 
cles of  association,  memo- 
randa of  association,  scrip, 
certificate  book,  transfer 
book,  stock  ledger,  underwrit- 
ing, founders'  shares. 

Name  of  a  corporation. 

Statutes  which  apply  to  "  per- 
sons "  are  generally  construed 
to  apply  to  corporations. 

Torts  committed  by  corpora- 
tions— Exemplary  damages- 
Indictment. 


1.] 


DEFINITIONS   AND   NATURE   OP   CORPORATIONS. 


[CH.    I. 


§  1.  Definition  of  corporation. — A  corporation  is  an  artificial 
person,  like  the  state.  It  is  a  distinct  existence — an  existence  sepa- 
rate from  that  of  its  stockholders  and  directors.  Chief  Justice  Mar- 
shall, in  the  Dartmouth  College  Case  in  1819,  followed  the 
language  of  Lord  Coke  in  1613,  and  defined  a  corporation  as  "an 
artificial  being,  invisible,  intangible,  and  existing  only  in  contem- 
plation of  law."  1 


i  Dartmouth  College  v.  Woodward, 
4  Wheat.  518,  636   (1819). 

Lord  Coke  in  the  case  of  Suttons 
Hospital  (10  Coke's  Rep.  1,  32),  de- 
cided in  1613,  defined  a  corporation 
as  follows  and  said:  "A  corporation 
aggregate  of  many  is  invisible,  im- 
mortal, and  rests  only  in  intendment 
and  consideration  of  the  law.  They 
can't  commit  treason,  nor  be  out- 
lawed, nor  excommunicate,  for  they 
have  no  souls,  neither  can  they  ap- 
pear in  person,  but  by  attorney.  A 
corporation  aggregate  of  many  can't 
do  fealty,  for  an  invisible  body  can 
neither  be  in  person  nor  swear;  it  is 
n,ot  subject  to  imbecilities  or  death 
of  the  natural  body  and  divers  other 
cases." 

William  M.  Evarts  used  the  follow- 
ing language  in  regard  to  corpora- 
tions: "Now,  what  is  the  absolutely 
indispensable  element  in  the  consti- 
tution of  corporations?  It  is,  in  the 
first  place,  that  they  should  be  im- 
mortal, as  it  was  expressed  in  the  old 
formula — that  is,  that  the  death  of  no 
member  affected  them.  The  next, 
that  the  will  of  the  majority  was  the 
will  of  the  corporation;  that  it  was 
so  as  by  necessity  and  for  utility. 
For,  a  combination  that  threw  mem- 
bers of  corporations  together,  without 
determining  that  there  never  could 
be  but  one  will,  did  not  make  a  cor- 
poration, in  the  sense  of  a  person- 
ality. The  other  was  that  the  indi- 
vidual members,  in  their  estates  and 
their  property,  no  longer  constituted 
any  part  of  the  corporation's  liabili- 
ties, but  that  the  corporate  property 
was  the  whole  fund  of  responsibility." 
The  supreme  court  of  the  United 


States  has  said  that  "an  incorporated 
company  is  an  association  of  individ- 
uals, acting  as  a  single  person  and  by 
their  corporate  name;"  and  again, 
"Private  corporations  are  but  associa- 
tions of  individuals  united  for  some 
common  purpose,  and  permitted  by 
the  law  to  use  a  common  name,  and 
to  change  its  members  without  a  dis- 
solution of  the  association."  U.  S.  v. 
Trinidad  Coal  Co.,  137  U.  S.  160 
(1890). 

In  Re  Gibbs'  Estate,  157  Pa.  St.  59 
(1893),  a  corporation  is  denned  as  fol- 
lows: "A  corporation  is  an  artificial 
person  created  by  law  as  the  repre- 
sentative of  those  persons,  natural  or 
artificial,  who  contribute  to,  or  be- 
come holders  of  shares  in,  the  prop- 
erty intrusted  to  it  for  a  common 
purpose.  As  it  is  the  creature  of 
positive  law,  its  rights,  powers,  and 
duties  are  prescribed  by  the  law." 

The  following  cases  give  definitions 
of  a  corporation:  Ohio  Ins.  Co.  v. 
Nunnemacher,  15  Ind.  295  (1860); 
Ohio,  etc.  R.  R.  Co.  v.  Wheeler,  1 
Black,  286,  295  (1861),  per  Taney,  C. 
J.;  Tippecanoe  County  v.  Lafayette, 
etc.  R.  R.,  50  Ind.  85,  108  (1875); 
Railroad  Com'rs  v.  Portland,  etc.  R. 
R.,  63  Me.  269,  277  (1872);  Thompson 
v.  Waters,  25  Mich.  214,  223  (1872); 
Baltimore,  etc.  R.  R.  v.  Fifth  Baptist 
Church,  108  U.  S.  317,  330  (1883); 
People  v.  Assessors  of  Watertown,  1 
Hill,  616,  620  (1841);  Thomas  v. 
Dakin,  22  Wend.  9,  70,  104  (1839); 
Warner  v.  Beers,  23  Wend.  103,  123, 
124  (1840) ;  Head  v.  Providence  Ins. 
Co.,  2  Cranch,  127,  167  (1804);  Bank 
of  U.  S.  v.  Deveaux,  5  Cranch,  61,  88 
(1809),   per  Marshall,   C.  J.;   Louis- 


OH.  I.] 


DEFINITIONS  AND   NATURE   OF   CORPORATIONS. 


[§    1. 


A  corporation  can  be  created  by  or  under  legislative  enactment, 
and  by  that  alone.1  No  particular  form  of  words  is  requisite  to 
create  a  corporation.2 

The  domicile,  residence,  and  citizenship  of  a  corporation  are  in 
the  state  where  it  is  incorporated.3 
ville,  etc.  R.  R.  v.  Letson,  2  How.  497, 


552  (1844);  2  Kent,  Com.  268;  State 
v.  Milwaukee,  etc.  Ry.,  45  Wis.  579, 
592   (1878). 

In  Tipling  v.  Pexall,  2  Bulst.  233 
(1613),  "the  opinion  of  Manwood, 
Chief  Baron,  was  this,  as  touching 
corporations:  that  they  are  invisible, 
immortal,  and  that  they  have  no  soul. 
A  corporation  is  a  body  aggregate; 
none  can  create  souls  but  God;  but 
the  king  creates  them,  and  therefore 
they  have  no  souls." 

It  is  well  to  state  here  that  a  joint- 
stock  corporation  and  a  joint-stock 
association  are  essentially  different. 
Both  have  a  capital  stock,  and  both 
are  managed  by  boards  of  officers  and 
meetings  of  the  stockholders.  But  a 
joint-stock  company  is  unincorpo- 
rated, is  not  a  distinct  entity,  and  is 
but  a  partnership.  See  ch.  XXIX, 
infra. 

i  Quoted  and  approved  in  Feiner  v. 
Reiss,  98  N.  Y.  App.  Div.  40  (1904); 
Franklin  Bridge  Co.  v.  "Wood,  14 
Ga.  80  (1853);  U.  S.  Trust  Co.  v. 
Brady,  20  Barb.  119  (1855);  Pennsyl- 
vania R.  R.  v.  Canal  Com'rs,  21  Pa. 
St.  9  (1852);  Stowe  v.  Flagg,  72  111. 
397  (1874) ;  Hoadley  v.  Essex  County, 
105  Mass.  519  (1870);  State  v.  Brad- 
ford, 32  Vt.  50  (1859);  McKim  v. 
Odom,  3  Bland,  Ch.  (Md.)  407,  417 
(1829). 

In  England  certain  colleges  have 
power  to  create  corporations.  No 
such  power  exists  in  this  country. 
Medical  Inst.  v.  Patterson,  1  Denio,  61 
(1845). 

Congress  has  constitutional  power 
to  incorporate  a  bank.  McCulloch  v. 
Maryland,  4  Wheat.  316  (1819).  Con- 
gress may  incorporate  interstate  rail- 
roads. California  v.  Pacific  R.  R.,  127 
U.  S.  1,  39    (1888). 


2  Denton  v.  Jackson,  2  John.  Ch. 
320  (1817).  Yet  a  statute  which  seems 
to  create  a  corporation  may  be  con- 
strued not  to  have  that  effect.  See 
Walsh  v.  New  York,  etc.  Bridge,  96  N. 
Y.  427  (1884),  holding  that  the  trus- 
tees of  the  Brooklyn  bridge  are  not  a 
corporation,  but  that  the  property  be- 
longs to  the  two  cities  of  New  York 
and  Brooklyn.  A  charter  is  legal, 
even  though  no  maximum  capital 
stock  is  fixed.  State  v.  Bank  of  Com- 
merce, 95  Tenn.  221   (1895). 

A  board  of  levee  inspectors  created 
by  act  of  the  legislature  may  be  a 
corporation,  although  not  expressly 
declared  so  to  be  by  the  act  itself. 
Board,  etc.  v.  Crittenden,  94  Fed.  Rep. 
613   (1899). 

A  special  statute  incorporating  a 
lumber  association  creates  a  corpora- 
tion, even  though  some  of  the  usual 
corporate  powers  are  not  conferred. 
Sibley  v.  Penobscot,  etc.  Assoc,  93 
Me.  399    (1899). 

"To  create  a  corporation  no  pre- 
cise words  are  necessary."  People  v. 
Barton,  63  N.  Y.  App.  Div.  581  (1901). 

A  supposed  corporation  formed 
without  statutory  authority  may  be 
legalized  by  a  subsequent  statute, 
which  assumes  that  it  is  a  corpora- 
tion, and  no  specific  words  in  a  stat- 
ute are  necessary  to  incorporate  a 
company,  it  being  sufficient  if  the  in- 
tent is  clear.  Smith  v.  Havens,  etc 
Soc,  44  N.  Y.  Misc.  Rep.  595   (1904). 

A  special  act  incorporating  an  in- 
stitution may  create  it  ipso  facto,  and 
not  merely  authorize  organization. 
McDonald  v.  Shaw,  98  S.  W.  Rep.  952 
(Ark.  1906). 

3  American,  etc.  Co.  v.  Johnson,  60 
Fed.  Rep.  503  (1893).  The  domicile 
of  a  corporation  is  entirely  distinct 
from  the  personal  domicile  of  its  of- 


§2.] 


DEFINITIONS   AND    NATURE    OF   CORPORATIONS. 


[CH.    I. 


The  Komans  seem  to  have  originated  the  idea  of  a  corporation. 
The  genius  of  that  people  for  conquest  and  government  led  natu- 
rally, as  with  the  English-speaking  races,  to  industrial  organization 
and  new  modes  of  business  on  a  large  scale.  The  Koman  corpora- 
tion was  much  the  same  as  the  corporation  of  modern  times.1 

§  2.  Definition  of  charters,  general  and  special  —  Definition  of 
franchises.  — A  charter  is  the  instrument  which  creates  the  corpora- 
tion. It  formerly  was  granted  by  the  king.  Later  it  was  granted 
by  an  act  of  the  legislature — a  separate  act  being  passed  for  each 
charter.  At  present  the  constitutions  of  many  of  the  states  require 
that  in  all  possible  cases  the  legislature  shall  pass  general  acts 
whereby,  by  the  simple  filing  of  a  prescribed  instrument,  persons 

ficers  or  stockholders.  Perry  v.  Round    the   plant   is   located.      San    Joaquin, 
Lake,  etc.  Assoc,  22  Hun,  293  (1880) ;     etc.  Co.  v.  Merced  County,  2  Cal.  App. 
Rossie   Iron  Works  v.  Westbrook,  59 
Hun,  345    (1891).     See  also  cases  in 
ch.  XLV,  infra,  where  the  jurisdiction 
of  the  federal  courts  was  at  issue. 

If  the  chief  office  of  the  corpora- 
tion is  not  otherwise  fixed  it  will  be 
held  to  be  the  place  where  the  stock- 
holders are  requested  to  meet.  Such 
office  cannot  be  changed  by  the  gen- 
eral officers  without  action  on  the  part 
of  the  stockholders  or  directors.  Frick 
Co.  v.  Norfolk,  etc.  R.  R.,  86  Fed.  Rep. 
725   (1898). 

The  principal  place  of  business  of 
a  corporation  within  the  meaning  of 
the  bankrupt  act  may  be  in  a  state 
other  than  the  state  in  which  it  is  in- 
corporated. In  re  Marine,  etc.  Co.,  91 
Fed.  Rep.  630  (1899);  Dressel  v. 
North  State  L.  Co.,  107  Fed.  Rep.  255 
(1901);  In  re  Magid-Hope,  etc.  Co., 
110  Fed.  Rep.  352  (1901). 

An  Australian  corporation  which 
has  offices  in  London  and  weekly  di- 
rectors' meetings  and  stockholders' 
meetings  in  London  where  its  general 
accounts  are  kept,  may  be  subject  to 
the  English  income  tax  levied  on  per- 
sons residing  therein.  De  Beers,  etc. 
v.  Howe  119051,  2  K.  B.  612. 

An  irrigation  company  has  two 
franchises;  one  the  franchise  to  be  a 
corporation  and  the  other  the  fran- 
chise exercised  in  operating  the  plant. 
The  latter  franchise  is  located  where 


593   (1906). 

l  Professor  Rudolph  Sohm,  in  his 
Institutes  of  Roman  Law,  says,  pp. 
104-106:  "In  Roman  law,  the  property 
of  a  corporation  is  the  sole  property 
of  the  collective  whole;  and  the  debt3 
of  a  corporation  are  the  sole  debts 
of  the  collective  whole.  ...  It 
represents  a  kind  of  ideal  private  per- 
son, an  independent  subject  capable 
of  holding  property,  totally  distinct 
from  all  previously  existing  persons, 
including  its  own  members.  It  pos- 
sesses, as  such,  rights  and  liabilities 
of  its  own.  It  leads  its  own  life,  as 
it  were,  quite  unaffected  by  any 
change  of  members.  It  stands  apart 
as  a  separate  subject  or  proprietary 
capacity,  and,  in  contemplation  of 
law,  as  a  stranger  to  its  own  mem- 
bers. The  collective  whole,  as  such, 
can  hold  property;  its  property, 
therefore,  is,  as  far  as  its  members 
are  concerned,  another's  property,  its 
debts  another's  debts.  .  .  .  Roman 
law  contrived  to  accomplish  a  verita- 
ble masterpiece  of  juristic  ingenuity 
in  discovering  the  notion  of  a  col- 
lective person;  in  clearly  grasping, 
and  distinguishing  from  its  members, 
the  collective  whole  as  the  ideal  unity 
of  the  members  bound  together  by  the 
corporate  constitution;  in  raising  this 
whole  to  the  rank  of  a  person  (a 
juristic  person,  namely),  and  in  se- 


CH.   I.] 


DEFINITIONS   AND   NATURE    OF   CORPORATIONS. 


[§  2. 


may  form  a  corporation  without  applying  to  the  legislature  at  all. 
These  general  acts  specify  the  contents  of  the  instrument  to  be 
filed,  and  specify  also  the  powers  of  the  corporation.  A  charter  is 
special  where  a  special  act  of  the  legislature  creates  the  corporation. 
A  charter  is  under  the  general  act  when  it  consists  of  a  certificate  of 
incorporation  filed  with  the  public  authorities  in  accordance  with 
a  general  act  of  the  legislature  allowing  corporations  to  be  formed 
in  that  manner.  The  charter  of  a  company  formed  under  the  gen- 
eral law  consists  not  onlv  of  its  articles  of  association,  but  also  of 
the  general  statutes  of  the  state  under  which  the  organization 
takes  place.1  The  general  laws  of  the  state  apply  to  a  corporation 
organized  under  a  special  act  so  far  only  as  the  former  are  consist- 
ent with  the  latter.2     Thus  where  Congress  granted  to  a  Califor- 


curing  it  a  place  in  private  law  as  an 
independent  subject  of  proprietary- 
capacity  standing  on  the  same  foot- 
ing as  other  private  persons." 

i  People  v.  Chicago  Gas  T.  Co.,  130 
111.  268   (1889). 

"Corporations  organized  under  the 
general  law  are  vested  with  the  pow- 
ers conferred  by  the  general  act,  and 
those  contemplated  by  the  certificate, 
and  such  incidental  powers  with  re- 
spect to  the  general  and  special  pow- 
ers as  are  necessary,  in  the  sense  of 
convenient,  reasonable,  and  proper." 
Ellerman  v.  Chicago  Junction,  etc. 
Co.,  49  N.  J.  Eq.  217    (1891). 

Under  the  general  act  the  charter 
consists  of  a  certificate  of  incorpora- 
tion and  the  provisions  of  the  general 
act.  Bixler  v.  Summerfield,  195  111. 
147  (1902).  The  charter  of  a  com- 
pany formed  under  a  general  statute 
consists  of  such  statute  and  of  the 
articles  of  incorporation.  Bent  v. 
Underdown,  156  Ind.  516  (1901). 
Where  the  statutes  in  existence  at  the 
time  of  incorporation  provide  for  the 
extension  of  corporate  charters,  a 
stockholder  cannot  prevent  the  cor- 
poration from  extending  its  existence 
in  accordance  with  such  statutes. 
Smith  v.  Eastwood,  etc.  Co.,  58  N.  J. 
Eq.  331  (1899).  A  corporation  may 
enjoin  the  secretary  of  state  from  tak- 
ing its  certificate  of  incorporation  out 


of  the  state,  even  though  he  proposes 
to  prove  perjury  by  the  officers  in 
swearing  to  the  certificate.  Delaware, 
etc.  Co.  v.  Layton,  50  Atl.  Rep.  378 
(Del.  1901). 

A  statute  relative  to  corporations 
which  is  amended  "so  as  to  read  as 
follows"  operates  to  repeal  by  impli- 
cation provisions  inconsistent  with 
the  new  law  or  omitted  therefrom. 
Davidson  v.  Witthaus,  106  N.  Y.  App. 
Div.  182    (1905). 

2  A  provision  of  the  general  stat- 
utes imposing  a  personal  liability 
upon  directors  of  a  corporation  is  not 
incorporated  into  a  special  charter  by 
a  clause  declaring  that  that  corpora- 
tion shall  possess  all  the  general  pow- 
ers and  privileges  and  be  subject  to 
all  the  liabilities  conferred  and  im- 
posed upon  corporations  organized 
under  the  general  act.  Park  Bank 
v.  Remsen,  158  U.  S.  337  (1895).  The 
provisions  of  the  general  statutes 
relative  to  corporations  are, not  ap- 
plicable to  a  special  charter  so  far  as 
the  provisions  of  the  special  charter 
seem  to  be  inconsistent  with  those 
of  the  general  statutes.  See  People 
v.  Bowen,  30  Barb.  24  (1859);  aff'd 
on  other  points,  21  N.  Y.  517  (1860); 
also  Hollis  v.  Drew,  etc.  Seminary, 
95  N.  Y.  166,  173  (1S84)  ;  Lefevre  v. 
Lefevre,  59  N.  Y.  434  (1875) ;  Clark- 
son  v.  Hudson  River  R.  R.,  12  N.  Y. 


2.] 


DEFINITIONS   AND   NATURE    OF    CORPORATIONS. 


[CH. 


nia  corporation  certain  moneys,  and  took  corporation  bonds  there- 
for  it  being  the  clear  intent  of  Congress,  as  shown  by  the  statutes, 
to  treat  such  California  corporation  as  a  part  of  a  general  plan  for 
the  building  of  a  railroad  through  many  states,  the  statutory  liabil- 
ity of  all  stockholders  in  California  corporations  does  not  apply  to 
such  debt  x     A  general  statute  reserving  to  the  state  the  right  to 
amend  or  repeal  charters  is  a  part  of  all  special  charters  there- 
after  passed,    even    though   not    expressly    made    a    part    thereof. 
Where  a  statute  provides  that  any  corporation  accepting  its  benefits 
thereby  waives  its  exemption  from  the  power  of  the  legislature  to 
amend  its  charter,   the  acceptance  of  the  benefits  of  such   a  stat- 
ute thereby  works  that  change  without  any  formal  action  on  the 
part    of    the    board    of    directors    or    stockholders.3      Although    a 


304  (1S55) ;  Johnson  v.  Hudson  River 
R.  R.,  49  N.  Y.  455  (1872) ;  Burroughs 
v.  Brinkerhoff,  6S  N.  Y.  259   (1877). 

The  duration  of  a  corporation  is 
twenty  years,  although  its  special 
charter  provides  for  "perpetual  suc- 
cession," where  a  general  act  provides 
for  twenty  years'  duration.  State  v. 
Payne,   129   Mo.   468    (1895). 

In  New  York  the  legislature  is  to 
decide  whether  a  special  or  general 
incorporation  law  shall  be  enacted. 
People  v.  Bowen,  21  N.  Y.  517  (1860) ; 
Re  Gilbert  El.  Ry.,  70  N.  Y.  361 
(1877). 

A  charter  cannot  be  sold,  mort- 
gaged, or  assigned,  although  the  prop- 
erty and  power  to  operate  the  prop- 
erty may  be.     See  §  790,  infra. 

In  Citizens'  Bank  v.  Parish  of  Or- 
leans, 54  Fed.  Rep.  73  (1893),  the 
court  held  that  the  acceptance  by  the 
corporation  of  an  act  which  compelled 
the  corporation  to  accept  the  terms 
of  a  new  constitution  did  not  have 
that  effect. 

In  Citizens'  St.  R.  R.  v.  Memphis, 
53  Fed.  Rep.  715  (1893),  the  court 
held  that  a  charter  granted  without 
the  reserved  right  to  amend  or  repeal 
did  not  become  subject  to  the  right 
to  amend  or  repeal,  although  it  had 
entered  into  a  consolidation  after  a 
constitutional  provision  was  passed 
reserving  this  right  in  all  cases.   The 


consolidation  was  held  not  to  have 
dissolved  the  old  corporation.  Cf. 
§  897,  infra. 

i  United  States  v.  Stanford,  161  U. 
S.   412    (1896). 

A  statute  reducing  tolls  on  turn- 
pikes does  not  apply  to  a  corporation 
having  a  special  charter  which  was 
unrestricted  as  to  tolls.  Heath  v. 
Manire,  114  Tenn.  105  (1905). 

A  statute  creating  a  liability  of 
stockholders  in  trust  companies  do- 
ing business  in  the  state  applies  to  a 
trust  company  incorporated  under  a 
special  charter.  Murphy  v.  Wheatley, 
100   Md.    358    (1905). 

2  Citizens'  Sav.  Bank,  etc.  v.  Owens- 
boro,  173  U.  S.  636,  644  (1899).  A 
general  statute  reserving  the  right  to 
alter,  amend  or  repeal  charters  ap- 
plies to  all  subsequent  special  char- 
ters not  expressly  excepted  from  its 
effect.  Watson  Seminary  v.  Pike  Co. 
Court,  149  Mo.  57   (1899). 

A  general  statute  reserving  the 
power  to  amend  or  repeal  charters  is 
a  part  of  all  special  charters  passed 
subsequently.  Griffin  v.  Kentucky  Ins. 
Co.,  3  Bush  (Ky.),  592  (1868);  ap- 
proved in  Louisville  Water  Co.  v. 
Clark,  143  U.  S.  1  (1892).  See  also 
§  640,  notes,  infra. 

3  Louisville  &  N.  R.  R.  v.  State,  45 
S.  Rep.  296  (Ala.  1907). 


CH.   I.] 


DEFINITIONS   AND   NATURE   OP   CORPORATIONS. 


C§2. 


special  charter  gives  the  right  to  a  railroad  corporation  to 
consolidate  with  other  roads,  yet  a  subsequent  general  statute 
may  take  away  this  power  except  so  far  as  the  same  has  been  al- 
ready exercised.1  A  special  charter  existing  at  the  time  of  a  con- 
stitutional amendment  prohibiting  future  special  charters  may 
nevertheless  be  amended  thereafter.2  Where  a  special  charter  is 
granted,  and  nothing  is  prescribed  as  to  its  duration,  it  is  perpet- 
ual.3 


i  Pearsall  v.  Great  Northern  Ry., 
161  U.  S.  646  (1896).  Mr.  Justice 
Brown's  opinion  in  this  case  contains 
a  clear  exposition  of  the  law  on  this 
subject  and  on  the  various  and  far- 
reaching  applications  and  restrictions 
of  the  Dartmouth  College  case. 

The  general  statutes  are  a  part  of 
the  charter,  and  a  subsequent  repeal 
of  a  part  of  the  general  statutes  does 
not  affect  the  corporation  unless  the 
statute  expressly  so  provides.  Knights 
of  Pythias  v.  Weller,  93  Va.  605 
(1896). 

2  Wallace  v.  Loomis,  97  U.  S.  146 
(1877).  A  constitutional  provision 
against  special  grants  does  not  pre- 
vent the  amendment  of  the  whole' 
charter  where  such  amendment  mere- 
ly regulates  powers  already  possessed 
by  the  corporation,  or  merely  gives 
power  to  consolidate  with  another  cor- 
poration. Bohmer  v.  Hoffen,  181  N. 
Y.  390,  409,  411  (1900).  As  to  a  spe- 
cial renewal  of  a  charter  existing 
prior  to  a  constitutional  provision 
prohibiting  special  charters,  see  In  re 
Application  of  Bank  of  Commerce,  153 
Ind.  460  (1899).  A  constitutional 
provision  requiring  incorporation  un- 
der general  laws  only  does  not  pre- 
vent a  grant  of  street  rights  to  a  pre- 
vious existing  corporation.  Smith  v. 
Indianapolis,  etc.  Ry.,  158  Ind.  425 
(1902). 

A  constitutional  provision  against 
special  charters  does  not  prevent  the 
legislature  curing  defects  in  the  or- 
ganization of  a  corporation  under  a 
general  act.  State  v.  "Webb,  110  Ala. 
214   (1896). 

Where  by  an  amendment  an  insur- 


ance charter  is  changed  into  a  bank- 
ing charter,  an  exemption  from  tax- 
ation may  be  lost  thereby  by  reason 
of  a  constitutional  provision  enacted 
after  the  original  charter  was  grant- 
ed, but  before  the  amendment  was 
granted.  Memphis  City  Bank  v.  Ten- 
nessee, 161  U.  S.  186   (1896). 

Although  a  constitutional  provision 
requires  incorporations  under  general 
acts,  if  at  all,  yet  an  old  charter  ex- 
isting prior  to  the  constitutional  pro- 
vision may  be  amended  by  the  legis- 
lature after  such  constitutional  pro- 
vision. Farnsworth  v.  Lime  Rock  R. 
R.,  83  Me.  440   (1891). 

An  old  special  charter  may  be 
amended  although  a  new  constitution 
forbids  the  grant  of  special  charters. 
St.  Joseph,  etc.  R.  R.  v.  Shambaugh, 
106  Mo.  557  (1891).  A  constitutional 
provision  against  the  legislature 
granting  special  charters  does  not 
render  invalid  a  special  charter 
granted  prior  to  that  time,  even 
though  the  actual  organization  of  the 
company  was  after  that  time.  State 
v.  Hancock,  2  Pennewill  (Del.),  252 
(1899).  A  corporation  amending  its 
charter  in  accordance  with  a  new 
statute  thereby  subjects  its  stockhold- 
ers to  a  statutory  liability  provided 
for  in  such  new  statute.  Senn  v. 
Levy,  111  Ky.  318   (1901). 

An  amendment  authorizing  a  cor- 
poration to  increase  its  capital  stock 
is  a  fundamental,  and  hence  is  a  spe- 
cial act  in  violation  of  a  constitu- 
tional prohibition  against  special 
acts.  Marion  T.  Co.  v.  Bennett,  82  N. 
E.  Rep.  782   (Ind.  1907). 

3  See    §  628,   infra.     A  corporation 


2,] 


DEFINITIONS    AND    NATURE    OF    CORPORATIONS. 


[CH.    I. 


The  state  creates  tlie  corporation  upon  the  application  of  indi- 
viduals, who  are  called  incorporators.  The  incorporators  then  or- 
ganize the  corporation.  The  functions  of  the  incorporators  there- 
upon cease,  and  stockholders  proceed  to  contribute  the  capital  and 
elect  directors.  The  directors  then  start  and  continue  to  keep  in 
operation  the  powers  of  the  corporation. 

It  is  a  general  rule  that  "every  public  grant  of  property  or  of 
privileges  or  franchises,  if  ambiguous,  is  to  be  construed  against 
the  grantee  and  in  favor  of  the  public,"  and  especially  so  as  re- 
gards corporations  organized  under  general  laws.1  For  this  reason 
it  is  held  that  the  words  "franchises,  rights,  and  privileges"  do  not 
necessarily  include  an  exemption  fiom  taxation.2  On  the  other 
hand,  a  corporation  chartered  to  exist  only  a  limited  number  of 
years  may  take  the  fee  to  real  estate,3  accept  a  street  franchise  for 
a  longer  period  than  its  own  charter  exists,4  and  enter  into  a  con- 
tract which  cannot  be  fully  performed  during  the  corporate  exist- 
ence.5    A  corporation  as  well  as  an  individual  may  waive  the  ob- 


whose  charter  is  not  expressly  lim- 
ited as  to  duration  is  perpetual.  Snell 
v.  Chicago,  133  111.  413   (1890). 

i  Water  Company  v.  Knoxville,  200 
U.  S.  22  (1906);  Cleveland,  etc.  Ry. 
v.  Cleveland,  204  U.  S.  116  (1907); 
Central  Transp.  Co.  v.  Pullman's  Car 
Co.,  139  U.  S.  24,  49  (1891).  "Any 
ambiguity  in  the  terms  of  the  grant 
must  operate  against  the  corporation 
and  in  favor  of  the  public,  and  the 
corporation  can  claim  nothing  that  is 
not  clearly  given  by  the  law."  Per- 
rine  v.  Chesapeake,  etc.  Co.,  9  How. 
172   (1850). 

2  Phoenix,  etc.  Co.  v.  Tennessee,  161 
U.  S.  174  (1896).  A  charter  exemp- 
tion of  a  street  railway  company  from 
assessment  for  paving  does  not  pass 
to  a  purchaser  of  its  property,  even 
though  the  sale  is  made  under  author- 
ity of  a  statute  authorizing  the  trans- 
fer of  "the  estate,  property,  rights, 
privileges  and  franchises."  Moreover 
if  the  new  company  is  incorporated 
under  the  general  act  which  requires 
it  to  pave,  it  cannot  receive  such  ex- 
emption by  reason  of  any  such  pur- 
chase. Rochester  Ry.  v.  Rochester, 
205  U.  S.  236  (1907);  aff'g  182  N.  Y. 


116.  In  State  v.  Pittsburgh,  etc.  R.  R., 
50  Ohio  St.  239  (1893),  a  franchise  is 
said  to  be,  "as  defined  by  Kent,  a  par- 
ticular privilege  conferred  by  the 
grant  of  the  government  and  vested 
in  individuals,  or,  as  defined  by  Black- 
stone,  a  branch  of  the  king's  preroga- 
tive subsisting  in  the  hands  of  a  sub- 
ject. 3  Kent,  Com.  458;  2  Bl.  Com. 
37." 

A  corporate  franchise  may  mean 
either  the  power  to  act  as  a  corpora- 
tion or  may  mean  the  right  which  a 
corporation  has  to  operate  a  fran- 
chise, such  as  a  railroad's  right  of 
way.  The  former  is  not  property.  It 
is  not  an  element  of  value  in  estimat- 
ing the  value  of  the  majority  of  the 
stock.  Johnson  v.  Kirby,  65  Cal.  482 
(1884).  It  is  not  an  asset.  A  bank 
franchise  does  not  pass  to  its  assignee 
for  the  benefit  of  creditors,  and  the 
court  will  deny  his  application  to  sell 
it.  Fietsam  v.  Hay,  122  111.  293 
(18S7). 

For  various  definitions  of  franchise, 
see  Wait,  Insolv.  Corp.,  §  12. 

3  See  §  641,  infra. 

4  See  §  641,  infra. 
c  See  §  641,  infra. 


8 


CH.   I.] 


DEFINITIONS  AND   NATURE    OF   CORPORATIONS. 


[§  2a. 


jection  that  a  statute  is  unconstitutional.1  The  word  "franchise" 
has  been  construed  to  mean  the  entire  property,  tangible  and  in- 
tangible, when  so  intended,  in  a  taxation  statute.2 

§  2a.  Acceptance  of  a  charter  by  the  corporation  arises  from 
merely  acting  under  it,  and  a  want  of  formal  acceptance  is  no 
defense  to  actions  on  its  contracts. — It  is  an  old  principle  of  law 
that  individuals  cannot  be  compelled  by  the  state  to  accept  a 
charter  to  act  as  a  private  corporation.  Accordingly  an  acceptance 
of  the  charter  by  them  is  necessary  to  the  actual  existence  of  the 
corporation.  But  there  is  no  rigid  rule  of  law  requiring  them  to 
indicate  such  acceptance  in  a  formal  manner.  Any  acts  which 
prove  an  intent  on  the  part  of  the  corporators  to  proceed  under 
the  charter  is  a  sufficient  acceptance  of  it.  It  has  been  frequently 
held  that  an  acceptance  may  be  shown  by  proof  that  corporate 
meetings  and  elections  have  been  held  and  other  corporate  acts 
entered  into.  Mere  user  of  the  right  to  act  as  a  corporation  is  suf- 
ficient.3 


i  Mayor,  etc.  v.  Manhattan  Ry.  Co., 
143  N.  Y.  1  (1894),  a  case  where  the 
title  of  the  act  did  not  meet  the  con- 
stitutional requirements. 

2  Adams,  etc.  Co.  v.  Kentucky,  166 
U.  S.  171  (1897).  In  the  case  of  State 
v.  Portage  City,  etc.  Co.,  107  Wis.  441 
(1900),  the  court  stated  that  a  con- 
tract between  a  city  and  a  water- 
works company,  giving  to  the  latter 
the  right  to  use  the  streets  for  its 
water  pipes,  was  a  franchise,  and 
that  quo  warranto  would  lie  to  for- 
feit such  franchise  for  failure  to  sup- 
ply water,  in  accordance  with  its 
terms. 

3  Acceptance  of  a  charter  is  suffi- 
ciently shown  by  user  under  it.  Dem- 
arest  v.  Flack,  128  N.  Y.  205  (1891); 
Ameriscoggin  Bridge  v.  Bragg,  11  N. 
H.  102  (1840);  Bank  of  Manchester 
v.  Allen,  11  Vt.  302  (1839);  Talla- 
dega Ins.  Co.  v.  Landers,  43  Ala.  115, 
136  (1869);  Blandford  School  Dist. 
v.  Gibbs,  56  Mass.  39  (1848);  Gleaves 
v.  Brick  Church  Turnp.  Co.,  1  Sneed 
(Tenn.),  491  (1853);  Perkins  v.  San- 
ders, 56  Miss.  733  (1879);  Mutual  F. 
Ins.  Co.  v.  Stokes,  9  Phila.  80  (1872) ; 
Penobscot  Boom  Corp.  v.  Lamson,  16 
Me.    224    (1839);    Sampson   v.    Bow- 


doinham,  etc.  Corp.,  36  Me.  78  (1853) ; 
Lincoln,  etc.  Bank  v.  Richardson,  1 
Me.  79  (1820);  Bow  v.  Allenstown,  34 
N.  H.  351,  372  (1857);  Jameson  v. 
People,  16  111.  257  (1855);  Covington 
v.  Covington,  etc.  Co.,  10  Bush  (Ky.), 
69  (1873);  People  v.  Farnham,  35  111. 
562  (1864);  Middlesex  Husbandmen, 
etc.  v.  Davis,  44  Mass.  133  (1841); 
Commonwealth  v.  Bakeman,  105  Mass. 
53  (1870);  Palfrey  v.  Paulding.  7  La. 
Ann.  363  (1852);  Benbow  v.  Cook, 
115  N.  C.  324  (1894)  ;  Trot  v.  Warren, 
11  Me.  227  (1834).  As  to  the  accept- 
ance of  a  charter,  see  also  the  digest 
of  cases  in  12  Am.  R.  R.  &  Corp.  Rep., 
pp.  460-466.  Building  a  part  of  the 
road  is  an  acceptance  of  a  special 
charter.  St.  Joseph,  etc.  R.  R.  v. 
Shambaugh,  106  Mo.  557  (1891).  Ac- 
ceptance is  sufficient  where  the 
grantees  afterwards  apply  for  an 
amendment  to  the  charter.  Farns- 
worth  v.  Lime  Rock  R.  R.,  83  Me.  440 
(1891);  and  see  cases  in  §§183-186, 
infra,  holding  that  a  subscriber  can- 
not defeat  an  action  to  collect  his 
subscription  by  alleging  informalities 
in  organization.  Formerly  it  was  cus- 
tomary at  the  first  meeting  of  the 
corporation  to  pass  a  formal  vote  ac- 


3.] 


DEFINITIONS   AND    NATURE    OF    CORPORATIONS. 


[CH.    I. 


§  3.  A  private  corporation  may  become  accommodation  indorser, 
distribute  its  assets,  issue  its  notes,  stock,  or  bonds  below  par  or  for 
no  consideration  whatsoever,  give  away  its  assets,  or  may  mortgage 
its  property  for  the  personal  benefit  of  a  part  or  all  of  its  stockhold- 


cepting  the  charter.     This,  however, 
is  not  necessary.     The  fact  of  hold- 
ing the  meeting  is  a  sufficient  accept- 
ance.   See  same  cases;  also,  Atlanta  v. 
Gate  City  Gas  Light  Co.,  71  Ga.  106 
(1883),   where   a   charter   granted   in 
1868  was  not  acted  on  until  1877.     It 
was  held  that  the  application  for  a 
charter  constituted  an  acceptance  in 
advance.     McKay  v.  Beard,   20   S.   C. 
156    (1883),   holding   that  an   accept- 
ance existed  though  no  meeting  at  all 
for    organization    was    held,    but   the 
corporation    proceeded    to    business; 
Logan  v.   McAllister,   2    Del.    Ch.   176 
(1858),  holding  that  irregularities  in 
organization  are  immaterial;  Russell 
v.    McLellan,     31    Mass.     63     (1833), 
where    no   notice    was    given    of    the 
first  meeting,  and  a  stockholder  sued 
for  a  dissolution  of  the  company  as 
a   copartnership.     The  best  evidence 
possible  of  the  acceptance  should  be 
given.     Hudson  v.  Carman,  41  Me.  84 
(1856).      Where    subscription    books 
are  opened  and  then  abandoned,  and 
ten  years  later  are  secretly  re-opened 
and  subscriptions  taken  without  giv- 
ing the  statutory  notice  to  the  public 
that  they  may  subscribe,  the  charter 
is  forfeitable.    State  v.  Bull,  16  Conn. 
179    (1844).     So,   also,   where  a  new- 
charter  is  granted  to  an  existing  cor- 
poration, and  it  continues  to  act,  the 
jury  are  to  say  whether  the  corpora- 
tion continued  under  the  old  charter 
or  accepted  the  new  one.     Hammond 
v.   Straus,   53   Md.   1    (1879).     As   re- 
gards   the    acceptance    of    a    charter 
amendment   by   simply   acting   under 
it,  see  State  v.  Sibley,  25  Minn.  387 
(1879);      Sumrall    v.    Sun    Mut.    Ins. 
Co.,  40  Mo.  27  (1867)  ;  Rex  v.  Hughes, 
7    B.    &    C.    708    (1828),   a   municipal 
corporation  case;  Bangor,  etc.  R.  R.  v. 
Smith,   47   Me.   34    (1859);    Lyons  v. 


Orange,  etc.  R.  R.,  32  Md.  18   (1869); 
Wetumpka,  etc.  R.  R.  v.  Bingham,  5 
Ala.    (N.   S.)    657    (1843),   and  many 
cases  in  ch.  XXVIII  and  §  503,  infra. 
Failure  to   organize  under   a  special 
charter    until    after    a    constitutional 
amendment  prohibiting  special  char- 
ters is  fatal  to  it.     State  v.  Dawson, 
16  Ind.  40   (1861).     In  Texas  it  is  a 
sufficient  acceptance  of  a  special  char- 
ter to   organize  under  it,  but  if  the 
organization  does  not  take  place  until 
after  the  constitution  is  changed,  the 
special     charter    is    subject    to    the 
amended     constitution.        Quinlan    v. 
Houston,  etc.  Ry.,  89  Tex.  356  (1896). 
Acceptance  must  be  in  toto  or  not  at 
all.     Rex  v.  Westwood,  4  B.  &  C.  781 
(1825).     A  corporation  cannot  accept 
part  of  a  special  charter  and  reject 
the    rest.      Re    Metropolitan    Transit 
Co.,  Ill  N.  Y.  588   (1889).     A  person 
cannot  be  compelled  to  act  as  a  cor- 
porator in  a  private  corporation.    El- 
lis v.  Marshall,   2   Mass.   269    (1807). 
Hence  his  acceptance  must  be  proved 
by  user  at  least.     Coffin  v.  Collins,  17 
Me.    440    (1S40).      Organizing   out  of 
the  state  may  not  be  legal,  yet  it  suf- 
fices for  an  acceptance  of  the  charter. 
Heath  v.  Silverthorn,  etc.  Co.,  39  Wis. 
146    (1875).     A  special  charter  must 
be  accepted  before  the  corporation  ex- 
ists,  and   such   acceptance   cannot  be 
at  a  meeting  held  out  of  the   state. 
Hence  a  bill  by  a  stockholder  to  set 
aside   a   forfeiture  of   his   stock   was 
dismissed    by    the    court.      Smith    v. 
Silver    Valley    Min.    Co.,    64    Md.    85 
(1885).    Acceptance  of  a  new  charter 
is  not  necessarily  an  abandonment  of 
the  old  one.    Johnston  v.  Crawley,  25 
Ga.   316    (1858);    Woodfork  v.  Union 
Bank,  3  Coldw.    (Tenn.)    488    (1866). 
Acceptance  of  the  charter  is  not  im- 
plied by  accepting  the  benefits,   but 


10 


CH.    I.]  DEFINITIONS   AND   NATURE    OF   CORPORATIONS.  [§   3. 

ers  or  officers,  provided  always  that  all  the  stockholders  assent,  and 
provided  that  corporate  creditors  are  not  injured,  and  provided  that 
no  statute  forbids  such  acts.  The  doctrine  of  ultra  vires  is  no 
longer  held  to  forbid  such  acts  by  a  private  corporation  under  such 
circumstances — Powers,  express  and  implied.  — The  powers  of  the 
corporation  are  given  by  the  charter,  and  these  powers  are  express 
or  implied. 

The  express  powers  are  those  which  are  expressly  specified  in 
the  charter  or  the  statutes  under  which  the  corporation  was  incor- 
porated. 

The  implied  powers  of  a  corporation  are  those  which  naturally 
arise  from  the  nature  of  the  business.  The  implied  powers  are  not 
limited  to  those  which  are  indispensably  necessary,  but  include  those 
which  are  appropriate,  convenient  and  suitable  for  carrying  out  the 
express  powers.1  Thus,  a  corporation  has  implied  power  to  buy, 
hold,  and  sell  necessary  real  estate  and  other  property  in  its  cor- 
porate name ;  to  sue  and  be  sued  in  that  name ;  to  do  business  in  its 
corporate  name  without  rendering  its  stockholders  liable  as  part- 
ners for  its  debts ;  to  govern  its  officers,  agents,  and  business  by  by- 
laws ;  to  issue  transferable  certificates  of  stock  to  its  stockholders ; 
to  have  its  business  managed  by  directors  instead  of  by  the  stock- 
holders as  in  a  partnership ;  to  continue  business  although  its  stock- 
holders die  or  sell  their  stock ;  to  borrow  money  and  give  bills,  notes, 
and  acceptances ;  to  issue  negotiable  bonds ;  to  assign  for  the  benefit 
of  creditors;  and,  except  in  quasi-public  corporations,  such  as  rail- 
roads, to  give  a  mortgage.2 

performing  none  of  the  burdens  im-  name;      (3)     to    purchase    and    hold 

posed,  as  where  a  toll  road  was  estab-  lands   and   chattels;     (4)    to    have   a 

lished    over    a    highway.      Welsh    v.  common  seal;    (5)    to  make  by-laws. 

Plumas  -County,   94   Cal.   368    (1892).  Chancellor   Kent,   in   2   Com.   278,  n., 

Where    a    stock    corporation    has    re-  adds:     (6)    the  power  to  expel  mem- 

ceived   no  stock  subscription   and   is-  bers.     1  Kyd,  Corp.  13,  69,  70,  has  a 

sued  no  stock,   it  cannot  maintain  a  different  summary  of  incidents.     See 

suit.    Aspen,  etc.  Co.  v.  Aspen,  5  Colo,  also  2  Kent,  Com.  277. 
App.  12   (1894).  The  greatest  and  most  vital  features 

i  Flaherty  v.  Portland,  etc.  Society,  of    modern    corporations,    however, — 

99  Me.  253   (1904).  features  that  have  become  prominent 

2  The  definition  of  a  corporation  since  those  authors  wrote,  and  the  fea- 
throws  some  light  upon  its  nature,  tures  that  have  rendered  possible  the 
but  a  still  clearer  idea  is  obtained  by  universal  use  and  great  achievements 
considering  the  inherent  powers  of  of  corporations, — are  two  in  number: 
corporations.  1  Blackstone's  Com.  (1)  The  limited  liability  conferred,  by 
475,  says  that  the  inseparable  inci-  implication,  by  the  granting  of  a  char- 
dents  or  powers  of  all  corporations  ter  (see  §§7  and  241,  infra);  (2)  the 
aggregate  are:  (1)  To  have  perpetual  right  of  the  corporation  to  issue  cer- 
succession;  (2)  to  sue  or  be  sued,  and  tificates  of  stock  and  the  right  of  the 
grant    or    receive    by    the    corporate  members  to  transfer  them.    The  for- 

11 


3.] 


DEFINITIONS   AND   NATURE   OF   CORPORATIONS. 


[CH.   I. 


The  theory  of  a  corporation  is  that  it  has  no  powers  except  those 
expressly  given  or  necessarily  implied.  But  this  theory  is  no  longer 
strictly  applied  to  private  corporations.  A  private  corporation 
may  exercise  many  extraordinary  powers,  provided  all  of  its  stock- 
holders assent  and  none  of  its  creditors  are  injured.  There  is  no 
one  to  complain  except  the  state,  and,  the  business  being  entirely 
private,  the  state  does  not  interfere.  Thus,  fifty  years  ago^  the 
courts  would  summarily  have  declared  it  illegal  for  a  business 
corporation  to  become  an  accommodation  indorser  of  commer- 
cial paper.  But  to-day  there  is  no  rule  of  public  policy  which 
prohibits  a  private  corporation  having  a  capital  stock  from  becom- 
ing the  accommodation  indorser  of  commercial  paper,  provided 
such  indorsement  is  made  with  the  knowledge  and  assent  of  all 
the  directors  and  stockholders,  and  provided  corporate  creditors  are 
paid.1 

Unless  some  statute  prohibits,  or  a  stockholder  objects,  or  a  cred- 
itor is  injured,  a  corporation  may  declare  a  dividend  out  of  its  cap- 
ital stock.2 


mer  is  considered  elsewhere.    See  §  7, 
infra. 

It  has  been  said  that  the  essence  of 
a  corporation  consists  of  a  capacity 
(1)  to  have  perpetual  succession  un- 
der a  special  name  and  in  an  artifi- 
cial form;  (2)  to  take  and  grant  prop- 
erty, contract  obligations,  sue  and  be 
sued,  by  its  corporate  name  as  an 
individual;  and  (3)  to  receive  and 
enjoy  in  common  grants  of  privileges 
and  immunities.  Thomas  v.  Dakin, 
22  Wend.  1,  71  (1839).  The  supreme 
court  of  Illinois,  speaking  of  the 
above,  says:  "The  first  two  describe 
the  franchises  which  belong  to  the 
corporators;  the  last  those  which  be- 
long to  the  corporation."  Snell  v. 
Chicago,  133  111.  413  (1890).  A  cor- 
poration is  not  bound  to  exercise  all 
the  powers  contained  in  its  charter. 
Illinois,  etc.  Bank  v.  Doud,  105  Fed. 
Rep.   123    (1900). 

A  water-power  corporation  organ- 
ized under  a  special  act  of  the  legis- 
lature by  which  the  various  owners  of 
riparian  rights  and  of  the  dam  and  of 
the  water-power  therefrom  became  in- 
terested in  such  company,  no  stock 


being  issued,  but  each  owner  of  wa- 
ter-power being  entitled  to  one  vote, 
cannot  maintain  suit  against  a  city 
for  diverting  the  water  where  the 
title  to  the  water  rights  was  not 
vested  in  the  corporation,  the  business 
of  the  corporation  being  to  maintain 
the  dam  and  raceways  and  reserve 
the  water-power,  the  expense  being 
paid  by  assessment.  Elgin,  etc.  Co.  v. 
City  of  Elgin,  194  111.  476  (1902). 

i  Quoted  and  approved  in  Murphy 
v.  Arkansas,  etc.  Co.,  97  Fed.  Rep. 
723,  727  (1899);  Martin  v.  Niagara 
Falls,  etc.  Co.,  122  N.  Y.  165  (1890). 
See  also  §  774,  infra. 

2  A  statutory  liability  for  divi- 
dends paid  out  of  the  capital  stock 
abrogates  all  common-law  liability, 
and  if  such  statute  does  not  prohibit 
such  dividends  they  may  be  declared 
and  paid  subject  to  such  liability. 
People  v.  Barker,  141  N.  Y.  251  (1894). 
The  Penal  Code  of  New  York  pro- 
hibits such  a  dividend.  Penal  Code, 
§  594.  On  this  subject,  see  also 
§§535,  546,  548,  671,  infra.  Where  a 
few  persons  own  all  the  stock  of  a 
company  and  use  the  profits  for  per- 


12 


CH.   I.] 


DEFINITIONS    AND    NATURE    OP    CORPORATIONS. 


[§3. 


A  corporation  may  execute  its  note  for  the  personal  indebtedness 
of  its  sole  stockholder,  and  no  one  but  the  creditors  of  the  corpo- 
ration can  complain.1  A  mortgage  given  by  the  corporation  for 
the  personal  benefit  of  a  part  or  all  of  the  stockholders  is  legal,  if 
all  the  stockholders  assent.2     Bonds  of  a  corporation  may  be  issued 


sonal  expenses  and  miscellaneous 
purposes,  irrespective  of  the  corpora- 
tion, all  the  stockholders  knowing 
thereof  and  assenting  thereto,  a  pol- 
icy of  insurance  belonging  to  one  of 
them  is  his,  even  though  the  pre- 
miums were  paid  out  of  the  corporate 
profits,  it  being  shown  that  all  this 
was  done  while  the  corporation  was 
solvent,  and  that  no  rights  of  cred- 
itors then  intervened,  and  that  all 
the  debts  represented  by  the  receiver 
arose  subsequently.  Little  v.  Gara- 
brant,  90  Hun,  404  (1895);  aff'd,  153 
N.  Y.  661  (1897).  On  a  sale  of  all 
its  assets,  a  corporation  may  dis- 
tribute the  proceeds.    See  §  671,  infra. 

i  Millsaps  v.  Merchants',  etc.  Bank, 
71  Miss.   361    (1893). 

2  Swift  v.  Smith,  65  Md.  428  (1886), 
is  in  point.  In  that  case  a  person 
had  purchased  all  the  stock  of  a 
corporation  and  paid  for  it  by  notes 
secured  by  a  mortgage  of  the  corpora- 
tion on  all  of  its  property.  The  cor- 
poration became  insolvent.  A  general 
creditor  of  the  corporation  attacked 
the  mortgage,  but  the  court  held  that 
it  was  legal  and  could  be  enforced  by 
the  person  to  whom  the  notes  were 
given.  The  court  said:  "A  man  can 
certainly  do  what  he  pleases  with  his 
own  property,  if  he  does  not  thereby 
prejudice  any  of  the  rights  of  subsist- 
ing creditors.  It  does  not  appear  that 
any  existing  creditors  were  injurious- 
ly affected  thereby."  In  the  case  of 
First  Nat.  Bank,  etc.  v.  "Winchester, 
119  Ala.  168  (1898),  where  a  private 
corporation  had  but  four  stockholders, 
and  two  of  them  bought  the  stock  of 
the  other  two  and  paid  therefor  by 
notes  signed  by  them  and  the  cor- 
poration and  secured  by  mortgage  on 
the  corporate  property,  the  court  held 


that  the  note  was  not  enforcible 
against  the  corporation,  but  held  that 
the  mortgage  was  legal  as  against  sub- 
sequent creditors,  mortgagees  and  pur- 
chasers from  the  corporation  who  took 
with  notice  of  fee  facts.  Approving 
Swift  v.  Smith,  65  Md.  428  (1886). 
Where  an  individual  who  owes  a  debt 
transfers  property  to  a  corporation, 
and  later  the  corporation  with  the 
consent  of  all  the  stockholders  and 
creditors  gives  a  bill  of  sale  of  cer- 
tain property  to  pay  such  debt,  the 
corporation  itself  cannot  subsequently 
complain.  Quee  Drug  Co.  v.  Plaut,  55 
N.  Y.  App.  Div.  87  (1900).  Again, 
where  three  persons  own  all  the  stock 
of  a  company,  two  of  them  may  buy 
the  stock  of  the  third  and  give  the 
company's  notes  in  partial  payment 
of  the  same.  The  transaction  is  legal, 
inasmuch  as  no  one  is  injured  and  all 
consent.  Neither  subsequent  pur- 
chasers of  the  stock,  nor  those  who 
become  stockholders  after  the  notes 
are  paid,  nor  stockholders  who  con- 
sent to  the  arrangement,  can  com- 
plain of  it.  Schilling,  etc.  Co.  v. 
Schneider,  110  Mo.  83  (1892).  An 
improvement  corporation  may  legally 
give  a  mortgage  to  secure  the  per- 
sonal debt  of  its  president,  if  none  of 
the  stockholders  or  the  existing  cred- 
itors object.  Osborn  v.  Montelac 
Park,  89  Hun,  167  (1895);  aff'd,  153 
N.  Y.  672.  In  Germania,  etc.  Co.  v. 
Boynton,  71  Fed.  Rep.  797  (1896), 
however,  it  was  held  that  even  though 
every  stockholder  and  director  acqui- 
esces in  corporate  bonds  being  issued 
to  secure  the  private  debt  of  an  of- 
ficer, yet  that  a  party  receiving  such 
bonds  with  notice  could  not  enforce 
them. 
With  the  consent  of  all  the  stock- 


13 


§  3,]  DEFINITIONS   AND   NATURE   OF   CORPORATIONS.  [CH.   I. 

at  any  price  which  may  be  agreed  upon/  and  stock  may  be  issued 
at  less  than  par  or  even  given  away,  provided  all  the  stockholders 
assent,2  or  do  not  object  within  a  reasonable  time,3  and  provided 

holders  the  officers  of  a  manufactur-  corporation  itself  can  subsequently 
ing  company  may  use  fuel  owned  by  complain  and  defeat  a  suit  by  one 
the  corporation,  if  creditors  are  not  of  them  for  the  amount  so  credited 
injured.  Jorndt  v.  Reuter,  etc.  Co.,  to  him  on  the  books,  corporate  cred- 
112  Mo.  App.  341  (1905).  itors   not   being   injured.     Breslin   v. 

Persons  sued  at  law  by  a  corpora-  Fries-Breslin  Co.,  70  N.  J.  L.  274 
tion  for  accepting  its  money  from  its  (1904).  The  court  said  (p.  282): 
president  and  using  it  to  pay  the  "In  the  present  case  we  apply  this 
president's  debt,  may  file  a  bill  in  doctrine  to  the  nonobse'rvance  of  le- 
equity  to  enjoin  the  suit  at  law  on  gal  forms  respecting  the  creation  of 
the  ground  that  the  president  owned  preferred  stock,  the  abandonment  by 
or  controlled  all  the  stock  and  used  preferred  stockholders  of  voting  pow- 
the  corporation  for  his  private  pur-  ers,  the  resignation  of  directors,  the 
poses,  and  that  the  money  was  so  reduction  of  the  number  of  directors 
paid  with  the  consent  of  all  the  stock-  from  six  to  three,  and  the  apportion- 
holders  and  officers.  Leigh  v.  Ke-  ment  of  dividends  as  between  the 
wanee,  etc.  Co.,  127  Fed.  Rep.  990  stockholders  entitled  thereto.  In  re- 
(1904).  spect  to  these  matters  the  jury  was 

Where  there  are  but  two  stockhold-    fully  justified  in  finding  that  unani- 
ers  in  a  corporation  one  may  contract    mous  consent  of  the  stockholders  of 
with  the  other  that  certain  profits  of    the     defendant     company     had     been 
the   corporation   shall   belong   to   the     given,  and  had  been  acted  on  in  good 
latter.    Giveen  v.  Gans,  91  N.  Y.  App.     faith  by  the  plaintiff  and  others  con- 
Div.  37  (1904),  aff'd,  181  N.  Y.  538.        cerned  during  a  course  of  years,  and 
A  business   corporation  cannot  de-    that   plaintiff   could   not  be   restored 
feat  an  accommodation  note  if  all  the     to  the  status  quo  ante,  were  the  as- 
stockholders     assented     thereto     and    sent  of  his  fellow  stockholders  and  of 
there   are   no   creditors.      Perkins   v.    the  company  to  be  now  withdrawn." 
Trinity,    etc.    Co.,    69    N.    J.   Eq.    723        i  See   §  766,  infra. 
(1905),   the  court  saying:      "To   per-        2  §§  38-,    39,   infra.     Where   all   the 
mit    stockholders   of   corporations   to    stockholders  unite  in  the  issue  of  wa- 
unanimously    make   a    disposition    of    tered  stock  to  the  president  for  his 
the  corporate  property  where  no  one    own  use,  and  assent  to  a  contract  be- 
else's   rights  are   in   any  way   preju-    tween  him  and  the  company,  the  cor- 
diced,    and    afterwards    to    repudiate    poration    itself    cannot    subsequently 
their  action  upon  the  ground  that  it    complain.    Arkansas,  etc.  Co.  v.  Farm- 
was  beyond  the  power  of  the  fictional     ers',  etc.  Co.,  13  Colo.  587  (1889).    An 
body   to   do  the   act,   could   serve   no    agreement  between  a  corporation  and 
useful  purpose,  and  would  be  merely     subscribers  for  its  stock  that  only  a 
available  in  aid  of  fraud."  certain   portion  of  the   par  value   of 

Where  there  are  but  a  few  stock-  the  stock  shall  be  collected  by  the 
holders  in  a  corporation  and  without  corporation  is  binding  upon  the  cor- 
any  formal  corporate  action  they  turn  poration,  but  not  upon  the  corporate 
a  part  of  the  capital  stock  into  pre-  creditors,  unless  such  agreement  was 
ferred  stock  and  thereafter  divide  the  made  a  part  of  the  recorded  articles 
profits  among  themselves  without  of  incorporation.  Bent  v.  Underdown, 
declaring  technical  dividends  with  the  156  Ind.  516  (1901). 
knowledge  and  consent  of  all  the  3  See  ch.  XLIV,  infra. 
stockholders,  no  one  of  them  nor  the 

14 


CH.    I.]  DEFINITIONS   AND    NATURE    OP    CORPORATIONS.  [§    3. 

corporate  creditors  are  not  injured.1  And  even  as  to  the  latter,  only 
those  corporate  creditors  can  object  who  become  such  after  the  wa- 
tered stock  was  issued.2 

A  corporation  may  sell  all  its  property  and  distribute  the  pro- 
ceeds among  its  stockholders,  if  all  its  stockholders  assent,3  or  may 
sell  the  corporate  property  and  take  in  payment  purchase-money 
mortgage  bonds  to  be  distributed  among  the  stockholders.4 

A  bond  dividend  is  legal 5  as  well  as  a  stock  dividend.6  The 
corporation  may  also,  by  consent  of  all,  give  away  corporate  assets,7 
and  in  a  great  variety  of  ways  by  which  directors  and  corporate 
officers  make  a  personal  profit  out  of  the  corporation,  a  profit, 
which  is  fraudulent  and  illegal  if  any  stockholder  objects,8  is  legal 
and  is  upheld  by  the  courts  if  all  the  stockholders  assent 9  or  do 
not  object.10 

In  other  words,  the  question  is,  who  has  been  damaged  ?  The 
state  is  not  damaged  and  cannot  enjoin  the  act;11  neither  can  a 
stockholder  who  assents  or  delays  after  knowledge  of  the  act;12  nor 
can  the  purchaser  or  transferee  of  stock  which  assented  to  the  act;13 
nor  can  a  corporate  creditor  who  is  sure  to  be  paid,  or  whose  debt 
is  not  due,  or  who  has  not  yet  recovered  judgment;14  nor  can  the 
corporation  itself.15  If  no  one  is  injured  no  one  can  complain.  If 
there  is  no  damage  there  can  be  no  suit.  The  theoretical  idea  that 
the  act  is  ultra  vires  or  that  the  corporation  has  exceeded  its  powers 
or  has  violated  some  shadowy  principle  of  public  policy  is  being  rap- 
idly abandoned,  and  the  courts  are  basing  their  decisions  on  the 
logical  principle  of  damage  suffered  or  threatened. 

The  old  theory  of  a  corporation  was  that  it  could  not  legally  do 
anything  in  excess  of  its  express  and  implied  powers.  But  the 
modern  view  is  that  a  private  corporation  may,  if  all  its  stockhold- 
ers assent  and  if  creditors  are  paid.     Public  policy  does  not  require 

i  §§  42,  43,  infra.  contracting  with  the   corporation   do 

2  §  42,  infra.  not  apply.    McCracken  v.  Robison,  57 

3  See  §§670,  671,  infra.                     •  Fed.  Rep.  375   (1893). 

4  United  Lines  Tel.   Co.  v.   Boston,  9  See  §§647-663,    infra. 
etc.   Co.,   147  U.   S.   431    (1893).     See  10  See  ch.  XLIV,  infra. 
also  §766,  infra.  n  See  §§37,  632,  635,  infra. 

5  Wood     v.     Lary,     124     N.     Y.     83  1 2  See  §  39  and  ch.  XLIV,  infra. 
(1891).  13  See  §§  40,  730,  infra. 

6  See  §  536,  infra.  14  See  §§  735,  863,  infra. 

7  See  §§766,  774,  infra.  15  §§  38,    662,    infra.      As   to    public 
s  See  §§647-663,  infra,  for  illustra-    corporations, — as,  for  instance,  a  rail- 

tions.     Thus,  where  the  directors  own    road, — the   rule,    of   course,   is    differ- 
all    the    stock    of    a    corporation,    the    ent.     See  §§  892-894,  infra. 
usual  rules  preventing  a  director  from 

15 


§   4.]  DEFINITIONS   AND   NATURE   OF   CORPORATIONS.  [CH.   I. 

business  corporations  to  confine  themselves  strictly  within  the  limits 
of  the  words  of  their  charter.1 

In  the  case  of  railroad  corporations  public  policy  does  intervene 
and  does  limit  the  implied  powers.  A  railroad  company  has  no 
implied  power  to  sell,  lease,  or  mortgage  its  road,  or  to  charge 
such  rates  for  service  as  it  sees  fit,  or  to  charge  one  man  more  than 
another  for  the  same  service.2  Yet  even  here  the  old  doctrine  is 
breaking  down.  The  New  York  court  of  appeals  has  recently 
drawn  the  line  between  its  decisions  and  the  decisions  of  the  su- 
preme court  of  the  United  States,  and  has  held  that  where  a  con- 
tract of  a  corporation  is  not  immoral,  and  is  not  expressly  prohib- 
ited by  its  charter,  and  has  been  performed  by  one  of  the  parties 
thereto,  the  court  will  compel  the  other  party  to  do  substantial 
justice.3 

§  4.  The  certificate  of  incorporation  under  the  general  act  cannot 
legally  contain  any  powers,  restrictions,  or  provisions  except  those 
called  for  by  the  statute. — Frequently  the  incorporators  desire  to 
obtain  more  powers  than  the  statute  specifies,  or  to  restrict  unal- 
terably some  of  the  powers  possessed  by  the  corporation,  or  to  reg- 
ulate in  some  unalterable  way  the  business  of  the  company.  For 
the  purpose  of  doing  so  they  insert  in  the  certificate  of  incorpora- 
tion under  the  general  act  special  provisions  not  called  for  by  the 
act  which  authorizes  the  incorporation. 

The  law  is  clear  that  the  articles  of  association  of  a  corporation 

1  The  New  York  court  of  appeals  the  harm  of  third  persons.  This  arises 
said  in  Kent  v.  Quicksilver  Min.  Co.,  from  the  principle  that  the  trust  for 
78  N.  Y.  159,  186  (1879):  "A  bank  stockholders  is  not  of  a  public  na- 
has  no  authority  from  the  state  to  en-  ture."  See  also  §  774,  infra. 
gage  in  benevolent  enterprises;  and  2  See  ch.  LIII,  infra. 
a  subscription,  though  formally  made,  3  Bath  Gaslight  Co.  v.  Claffy,  151 
for  a  charitable  object  would  be  out  N.  Y.  24,  29-31,  33,  34,  37  (1896), 
of  its  powers;  but  it  would  not  be  where  the  court  said:  "The  courts  in 
otherwise  an  illegal  act;  yet  if  every  this  state  from  an  early  day,  corn- 
stockholder  did  expressly  assent  to  mencing  as  far  back  as  the  Utica  in- 
such  an  application  of  the  corporate  surance  cases,  have  sought  to  regulate 
funds,  though  it  would  still  be  in  and  restrict  the  defense  of  ultra  vires 
one  sense  ultra  vires,  no  wrong  would  so  as  to  make  it  consistent  with  the 
be  done,  no  public  interest  harmed;  obligations  of  justice."  See  also 
and  no  stockholder  could  object,  or  Augusta,  etc.  R.  R.  v.  City  Council, 
claim  that  there  was  an  infringe-  100  Ga.  701  (1897).  The  old  rule  of 
ment  of  his  rights,  and  have  redress  ultra  vires  has  been  changed  so  that 
or  protection.  Such  an  act,  though  now  only  the  state  or  a  party  inter- 
beyond  the  power  given  by  the  char-  ested  in  the  corporation  can  corn- 
ier, unless  expressly  prohibited,  if  plain.  Farwell  Co.  v.  Wolf,  96  Wis. 
confirmed  by  the  stockholders  could  10  (1897). 
not   be   avoided   by   any   of   them   to 

16 


CH.   I.] 


DEFINITIONS   AND    NATURE    OF    CORPORATIONS. 


[§4. 


organized  under  a  general  act  are  allowed  to  contain  only  those 
matters  and  statements  which  are  required  by  the  statute  itself. 
The  incorporators  are  not  at  liberty  to  insert  additional  provisions 
and  regulations.  If  such  additional  provisions  and  regulations  are 
inserted  they  are  void.  The  law  does  not  recognize  them.  They 
do  not  constitute  a  part  of  the  charter,  but  are  rejected  as  surplus- 
age and  extraneous  matter.  If  the  articles  of  association  contain 
the  matters  required  by  the  statute  and  also  contain  additional 
matters,  the  former  are  sufficient  to  sustain  the  charter,  and  the 
additional  matter  does  not  vitiate  the  legitimate  part  of  the  articles, 
but  the  additional  matter  is  disregarded  by  the  law  as  though  it 
had  not  been  written.  All  of  the  decisions  hold  that  any  statements 
of  restrictions  inserted  in  the  articles  of  association,  outside  of  the 
statements  required  by  the  general  act  allowing  the  incorporation, 
are  unauthorized  and  void.1 

i  Quoted  and  approved  in  State  v.    unauthorized    provisions    are    added, 

all  acts  done  in  pursuance  of  suck 
will  be  void;  but  until  the  corpora- 
tion is  proceeded  against  for  an  abuse 
of  its  franchises,  its  rights  as  a  cor- 
poration will  not  be  affected  by  such 
unauthorized  powers."  Common- 
wealth v.  Yetter,  190  Pa.  St.  488,  495 
(1899). 

The  fact  that  a  certificate  of  in- 
corporation includes  a  purpose  for 
which  incorporation  is  not  provided 
for  by  the  statute  does  not  invalidate 
the  charter  nor  render  the  stockhold- 
ers personally  liable,  there  being  other 
purposes  in  the  certificate  which  are 
authorized.  Tennessee,  etc.  Co.  v. 
Massey,  56  S.  W.  Rep.  35  (Tenn. 
1899). 

A  provision  cannot  be  included  in  a 
charter  under  the  general  act,  where- 
by stockholders  are  to  vote  according 
to  their  stock.  Commonwealth  v.  Con- 
over,  10  Phila.  55   (1873). 

Where  in  addition  to  the  articles 
of  incorporation  the  statute  provides 
for  articles  of  association,  the  cor- 
poration may  in  the  latter  provide 
for  a  lien  on  the  stock.  Mohawk  Nat. 
Bank  v.  Schenectady  Bank,  7S  Hun, 
90    (1894);   aff'd,  151  N.  Y.  665. 

Such  a  lien,  however,  is  not  good 
as  against  a  bona  fide  purchaser  of  a 


Anderson,  31  Ind.  App.  34  (1903) ;  In- 
diana, etc.  Co.  v.  Ogle,  22  Ind.  App. 
593  (1899);  Eastern  Plank  Road  Co. 
v.  Vaughan,  14  N.  Y.  546  (1856);  Ore- 
gon Ry.  etc.  Co.  v.  Oregonian  Ry.,  130 
U.  S.  1,  25  (1S89);  Albright  v.  La- 
fayette, etc.  Assoc,  102  Pa.  St.  411 
(18S3);  Becket  v.  Uniontown,  etc. 
Assoc,  88  Pa.  St.  211  (1878);  Gran- 
gers', etc.  Ins.  Co.  v.  Kamper,  73  Ala. 
325  (1882) ;  Thomas  v.  Railroad  Co., 
101  U.  S.  71  (1879);  Pennsylvania  R. 
R.  Co.  v.  St.  Louis,  etc.  R.  R.,  118  U. 
S.  290,  307  (1886);  Bigelow  v.  Greg- 
ory, 73  111.  197  (1874) ;  Rochester  Ins. 
Co.  v.  Martin,  13  Minn.  59  (1868); 
Western  Union  T.  Co.  v.  Union  Pac 
Ry.,  3  Fed.  Rep.  1,  4  (1SS0) ;  Ancient, 
etc.  Club  v.  Miller,  7  Lans.  412  (1873) ; 
People  v.  Utica  Ins.  Co.,  15  Johns. 
358   (1818). 

A  provision  in  the  articles  of  in- 
corporation, filed  under  the  general 
act,  is  void,  where  such  provision  at- 
tempts to  exempt  the  stockholders 
from  liability  to  corporate  creditors 
on  their  unpaid  subscriptions.  Van 
Pelt  r.  Gardner,  54  Neb.  701  (1898). 

"In  corporations  formed  under 
general  laws  it  is  no  objection  that 
the  articles  of  association  contain  pro- 
visions not  authorized  by  the  act.    If 

(2)  17 


§4.] 


DEFINITIONS    AND    NATURE    OF    CORPORATIONS. 


[cn.  I. 


In  New  York  and  New  Jersey  and  under  the  National  Banking 
Act  the  statutes  expressly  allow  the  insertion  of  special  provisions 
in  the  articles  of  incorporation,  and  a  broad  public  policy  certainly 
favors  such  provisions,  inasmuch  as  thereby  the  stockholders  may 

certificate  of  stock,  where  the  certifi-    manufacturing     company     organized 


cate  does  not  contain  any  reference 
to  the  articles  of  incorporation  or  the 
lien.  Lyman  v.  State  Bank  of  Ran- 
dolph, 81  N.  Y.  App.  Div.  367  (1903); 
aff'd,  179  N.  Y.  577. 

The  articles  of  incorporation  filed 
under  the  general  act  may  contain  a 
provision  that  the  corporation  shall 
have  a  lien  on  stock  for  debts  due 
from  the  holder  thereof  to  the  cor- 
poration. Dempster  Mfg.  Co.  V. 
Downs,  126  Iowa,  80   (1904). 

Where  the  statute  allows  the  in- 
corporators to  include  special  pro- 
visions in  their  articles  of  incorpora- 
tion, and  a  lien  right  is  inserted,  and 
the  certificate  of  stock  on  its  face 
refers  to  the  articles  of  association,  a 
purchaser  of  a  certificate  buys  sub- 
ject to  such  lien.  Gibbs  v.  Long  Is- 
land Bank,  83  Hun,  92  (1894);  aff'd, 
151  N.  Y.  657. 

Provisions  in  the  certificate  of  id- 
corporation  which  are  inconsistent 
with  or  in  addition  to  those  called 
for  by  the  statute  are  a  surplusage. 
Renn  v.  United  States,  etc.  Co.,  36 
Ind.  App.  139   (1905). 

A  provision  in  a  certificate  of  in- 
corporation that  directors  named 
therein  shall  continue  until  they  be- 
come incapacitated,  resign,  or  die,  is 
void  and  does  not  prevent  an  election. 
Such  an  unauthorized  provision  in 
the  articles  of  association  is  not 
binding  either  as  a  part  of  the  char- 
ter or  as  a  by-law.  State  v.  Ander- 
son, 31  Ind.  App.  34  (1903). 

If  a  charter  contains  purposes, 
somo  of  which  are  legal  and  some  il- 
legal, it  is  good  to  the  extent  of  the 
former.  Galveston  Land  &  Imp.  Co. 
v.  Perkins,  26  S.  W.  Rep.  256  (Tex. 
1894). 

A    provision    in    the    charter    of    a 


under  the  general  law,  that  it  may 
buy,  etc.,  a  railroad,  does  not  invali- 
date the  charter,  even  though  it  can- 
not exercise  such  a  power.  People  v. 
Mount  Shasta  Mfg.  Co.,  107  Cal.  256 
(1S95).  For  many  decisions  on  this 
subject,  see  ch.  XIII,  §§  231-234, 
notes,  infra. 

In  incorporating  under  the  general 
act  no  powers  can  be  placed  in  the 
articles  of  incorporation  except  such 
powers  as  the  general  act  authorizes. 
People  v.  Chicago  Gas  T.  Co.,  130  111. 
268   (1889). 

Where  a  land  company  is  incorpo- 
rated under  the  general  act,  and  the 
general  act  does  not  provide  for  any 
statement  in  the  articles  of  associa- 
tion as  regards  the  amount  of  debts 
which  the  corporation  may  incur,  a 
provision  inserted  in  the  articles  of 
association  that  "the  indebtedness  of 
the  company  shall  not  exceed  $500 
at  any  one  time,"  is  not  a  part  of  the 
charter.  The  provision  is  at  the  most 
merely  a  by-law.  The  court  said: 
"We  think  that  the  limitation  of  $500 
in  the  charter  of  the  corporation  can- 
not be  regarded  of  any  more  force 
than  a  by-law."  Sherman,  etc.  Co.  v. 
Morris,  43  Kan.  282   (1890).  - 

A  provision  in  the  charter  that  the 
stock  shall  be  divided  in  a  certain 
way  is  binding  upon  the  corporation 
so  far  as  it  is  concerned,  and  upon 
the  parties  thereto,  but  may  be  con- 
tradicted by  other  evidence  of  what 
the  agreement  really  was.  Bates  v. 
Wilson,  14  Colo.  140  (1890). 

Provisions  for  internal  management 
should  not  appear  in  a  charter.  Re 
Stevedores'  Beneficial  Assoc,  14  Phila. 
Rep.  130  (1880);  Re  M.  E.  Patterson 
Memorial  Church,  41  Leg.  Int.  253 
(1884) ;  Re  St.  Luke's  Church,  41  Leg. 


18 


CH.   I.] 


DEFINITIONS   AND    NATURE    OF    CORPORATIONS. 


[§4. 


restrict  the  powers  of  the  board  of  directors  and  otherwise  regulate 
the  corporation.1 

The  certificate  of  incorporation  may,  however,  provide  that  the 
business  shall  be  two  or  more  of  the  kinds  of  business  which  are  au- 
thorized by  the  statute.2     The  fact  that  a  charter  authorizes  a  cor- 


Int.  74  (1884);  Re  Central  Demo- 
cratic Assoc,  46  Leg.  Int.  380  (1889)  ; 
Booz's  Appeal,  109  Pa.  St.  59 2i  (1885). 
Where  stock  is  issued  for  real  estate 
at  an  overvaluation,  the  parties  re- 
ceiving the  stock  are  liable  for  the 
difference,  and  it  is  no  defense  that 
the  charter  showed  that  the  stock  was 
to  be  so  issued  for  the  real  estate. 
Lea  v.  Iron,  etc.  Co.,  119  Ala.  271 
(1898).     Cf.  ch.  Ill,  infra. 

i  Under  the  New  Jersey  incorpo- 
rating act  which  allows  special  pro- 
\isions  to  be  inserted,  there  may  be  a 
provision  that  stockholders  of  record 
shall  be  liable  for  calls.  Under  such 
a  provision  a  stockholder  of  record  is 
liable,  although  he  has  sold  his  cer- 
tificate and  notified  the  company  of 
the  sale,  no  transfer  having  been 
made  on  the  books.  Brown  v.  Mor- 
ton, 71  N.  J.  L.  26   (1904). 

Even  though  under  the  New  Jersey 
statutes  special  provisions  may  be  in- 
serted in  the  certificate  of  incorpora- 
tion, yet  this  will  not  sustain  a  spe- 
cial provision  which  is  inserted  to 
the  effect  that  a  resolution  in  writing, 
signed  by  all  of  the  directors,  shall 
have  the  same  effect  as  though  they 
had  a  meeting  and  passed  a  resolu- 
tion. Audenreid  v.  East,  etc.  Co.,  68 
N.  J.  Eq.  450    (1904). 

Where  the  statutes  allow  the  in- 
corporators to  insert  in  the  charter 
any  provision  relative  to  the  powers 
cf  the  company,  or  of  its  stockholders 
and  directors,  the  right  to  vote  may 
be  withheld  from  the  stockholders  un- 
til a  certain  date,  thus  leaving  tbe 
first  directors  in  office  during  the  in- 
tervening time,  and  a  further  pro- 
vision that  during  that  time  the  di- 
rectors  may    do   any   act   which    the 


stockholders  might  do  enables  them 
to  sell  all  the  property,  where  that 
was  the  chief  purpose  of  the  cor- 
poration, and  the  corporation  was  un- 
able to  develop  the  property.  Union 
T.  Co.,  etc.  v.  Carter,  139  Fed.  Rep. 
717   (1905). 

Even  though  the  statutes  of  New 
York  authorize  an  insertion  of  spe- 
cial provisions  in  a  charter  not  in- 
consistent with  law,  yet  the  Secretary 
of  State  need  not  accept  a  certificate 
of  incorporation  which  gives  the 
power  to  sell  all  the  property  to  any 
foreign  or  domestic  corporation  on  a 
two-thirds  vote,  it  appearing  that  the 
statute  would  require  a  95%  vote  in 
case  of  a  sale  to  a  foreign  corpora- 
tion. People  v.  Whalen,  119  N.  Y.  App. 
Div.  749   (1907),  aff'd,  189  N.  Y.  560. 

In  Bent  v.  Underdown,  156  Ind.  516 
(1901),  the  articles  of  incorporation 
expressly  provided  that  only  fifteen 
per  cent  of  each  share  of  stock  sub- 
scribed shall  be  paid  in  by  stockhold- 
ers, and  that  "this  possession  of  the 
articles  cannot  be  amended  or  modi- 
fied except  by  unanimous  consent  of 
all  the  stockholders,"  and  the  court 
held  that  the  unpaid  portion  of  the 
stock  was  not  an  asset  for  the  benefit 
of  corporate  creditors  on  its  becoming 
insolvent. 

2  Bird  v.  Daggett,  97  Mass.  494 
(1867).  A  statement  in  the  articles 
of  incorporation  that  the  company 
may  carry  on  such  business  as  it 
thinks  to  be  for  the  benefit  of  the 
stockholders  is  void.  Re  Crown  Bank, 
L.  R.  44  Ch.  D.  634  (1890).  See  also 
§  236,  infra. 

Charters  for  enumerated  objects 
"and  other  purposes"  will  be  re- 
jected.      Re     Journalists'     Fund,     8 


19 


4a.] 


DEFINITIONS    AND    NATURE    OF    CORPORATIONS. 


[CH.   I. 


poration  to  do  business  at  a  certain  place  outside  of  the  state  does 
not  prevent  its  doing  business  in  other  states.1 

Of  course  the  purposes  of  an  incorporation  under  the  gen- 
eral act  must  be  legal  in  themselves  as  well  as  authorized  by  the 
words  of  the  act.2 

§  4a.  By-laws  of  a  corporation. — According  to  Blackstone,  one 
of  the  important  features  of  a  corporation  is  the  power  to  make 
by-laws.  A  by-law  is  a  permanent  rule  of  action,  in  accordance 
with  which  the  corporate  affairs  are  to  be  conducted.  A  by-law 
differs  from  a  resolution  in  that  a  resolution  applies  to  a  single  act 
of  the  corporation,  while  a  by-law  is  a  permanent  and  continuing 
rule,  which  is  to  be  applied  on  all  future  occasions.3  The  power  to 
make  by-laws  is  always  stated  to  be  one  of  the  essential  incidents 
and  rights  of  a  corporation.  This  power  exists  at  common  law. 
Frequently,  however,  it  is  given  by  the  charter  or  statutes.4 

By-laws  are  to  be  made  by  the  stockholders  in  meeting  assembled. 
The  stockholders  have  few  functions  to  perform,  and  this  right  to 
make  by-laws  is  an  essential  and  important  one.  The  directors 
have  no  inherent  power  to  make  by-laws.5      But  the  stockholders 


Phila.  272  (1871).  So  as  to  mining 
for  "minerals."  Re  Glenwood  Co.,  6 
Pa.  Co.  Ct.  Rep.  575    (1889). 

i  Meredith  v.  New  Jersey,  etc.  Co., 
59  N.  J.  Eq.  257  (1899);  aff'd,  60  N. 
J.  Eq.  445    (1900). 

2  See  §  236,  infra. 

For  instance,  an  application  for  a 
charter  for  a  place  of  public  worship 
to  preach  Christian  Science  was  de- 
nied in  In  re  First  Church,  etc.,  205 
Pa.  St.  543  (1903),  on  the  ground 
that  it  interfered  with  the  proper 
treatment  of  disease. 

A  corporation  cannot  take  out  a 
license  to  practice  medicine.  State, 
etc.    Inst.   v.    State,   103    N.   W.   Rep. 

1078  (Neb.  1905);  but  may  contract 
to  furnish  medical  assistance.  State, 
etc.  Inst.  v.  Platner,  103  N.  W.  Rep. 

1079  (Neb.   1905). 

3  Quoted  and  approved  in  Steger  v. 
Davis,  8  Tex.  Civ.  App.  23  (1894). 
"A  by-law  is  a  permanent  and  con- 
tinuing rule  for  the  government  of 
the  corporation  and  its  officers." 
North,  etc.  Co.  v.  Bishop,  103  Wis. 
492    (1899). 


4  People  v.  Crossley,  69  111.  195 
(1873);  Kearney  v.  Andrews,  10  N. 
J.  Eq.  70  (1854);  Commonwealth  v. 
Woelper,  3  Serg.  &  R.  (Pa.)  29 
(1817) ;  Juker  v.  Commonwealth,  20 
Pa.  St.  484  (1853);  Newling  v.  Fran- 
cis, 3  T.  R.  189  (17S9),  the  last  two 
cases  holding  that  at  common  law 
the  corporation  may  make  by-laws 
regulating  elections. 

5  The  board  of  directors  have  no 
power  to  adopt  the  by-laws  unless  the 
statute  expressly  gives  them  that 
power.  North,  etc.  Co.  v.  Bishop,  103 
Wis.  492  (1899);  Morton,  etc.  Co.  v. 
Wysong,  51  Ind.  4  (1875),  holding 
that  a  by-law  made  by  the  directors 
is  void;  Carroll  v.  Mullanphy  Sav. 
Bank,  8  Mo.  App.  249  (1880);  Brink- 
erhoff,  etc.  Co.  v.  Home  Lumber  Co., 
118  Mo.  447  (1893),  holding  that  a 
by-law  made  by  the  directors  restrict- 
ing the  right  to  sell  stock  is  void.  A 
by-law  may  arise  by  custom.  Union 
Bank  v.  Ridgely,  1  Har.  &  G.  (Md.) 
324  (1827).  See  Re  Regents',  etc. 
Co.,  2  W.  N.  79  (1867).  See  also  Rex 
v.  Head,  4  Burr.  2515   (1770),  where 


20 


CH.   I.] 


DEFINITIONS  AND  NATURE   OF   CORPORATIONS. 


[§  4a. 


may  delegate  to  the  directors  the  power  to^make  by-laws.1     Fre- 
quently the  charter  confers  this  power  upon  the  directors.2 

Where  the  statute  states  for  what  purpose  by-laws  may  be  passed, 
none  others  can  be  passed.3  Where  the  by-laws  conflict  with  the 
charter,  the  charter  prevails.4     By-laws  must  be  reasonable;    they 

Lord  Mansfield  said  "that  the  body  at  that  power.  Rex  v.  Westwood,  7  Bing. 
large  had  no  power  to  make  by-laws,  1  (1830).  So,  also,  as  to  the  elec- 
because  that  power  is,  by  the  charter,  tion  of  aldermen.  Rex  v.  Ashwell,  12 
given  to  the  common  council,  consist-  East,  22  (1810). 
ing  of  the  mayor  and  aldermen;  and  A  by-law  that  the  by-laws  shall  be 
the  common  council  could  not  by  a  altered  and  amended  only  by  the  di- 
by-law  take  away  from  the  body  at  rectors  is  illegal.  Alters  v.  Journey- 
large  the  right  of  election  which  the  men,  etc.  Assoc,  19  Pa.  Sup.  272 
charter  had  vested  in  the  whole  body."  (1902). 

Unless  authorized  by  the  charter  the  2  Cahill  v.  Kalamazoo  Mut.  Ins.  Co., 
board  of  directors  have  no  power  to  2  Doug.  (Mich.)  124  (1845);  Samuel 
make  by-laws,  nor  to  alter,  amend,  or  v.  Holladay,  Woolw.  400  (1869) ;  s.  c, 
repeal  the  same  (United  Fire  Assoc.  21  Fed.  Cas.  306;  Commonwealth  v. 
v.  Benseman,  4  W.  N.  Cas.  (Pa.)  1—  Gill,  3  Whart.  (Pa.)  228  (1838).  A 
1877);  but  when  charter  authority  to  by-law  made  by  the  stockholders  in- 
enact  by-laws  is  conferred  upon  the  stead  of  by  the  directors  as  prescribed 
board  of  directors,  they  may  validly  by  charter  is  nevertheless  binding  as 
adopt  a  by-law  authorizing  voting  by  to  past  acts  on  participating  stock- 
proxy  at  all  meetings  of  the  corpora-  holders.  People  v.  Sterling  Mfg.  Co., 
tion  (Wilson  v.  American  Acad,  of  82  111.  457  (1876). 
Music,  43  Leg.  Int.  86—1886) ;  and  Where  a  statute  provides  for  by- 
even  in  the  absence  of  authority  the  laws  being  adopted  by  directors  this 
affirmations  and  acquiescence  of  a  takes  the  power  away  from  the  stock- 
member  may  estop  him  from  question-  holders.  Manufacturers',  etc.  Co.  v. 
ing  the  mode  in  which  the  by-laws  Landay,  219  111.  168  (1905). 


have  been  enacted  (Morrison  v.  Dor- 
sey,  48  Md.   461—1877). 


Even  though  the  charter  gives  the 
directors  the  power  to  make  by-laws, 


i  Rex  v.  Spencer,  3  Burr.  1827,  1837    yet  if  the  stockholders  adopt  by-laws 
(1766),  .where   Lord    Mansfield    said    and  the  directors  act  upon  them  such 


that,  "where  the  power  of  making  by- 
laws is  in  the  body  at  large,  they 
may  delegate  their  rights  to  a  select 
body."  See  also,  in  an  association, 
Heintzelman  v.  Druids'  Relief  Assoc, 
38  Minn.  138  (1888).  Although  the 
stockholders  authorize  the  directors  to 
make  by-laws,  yet  the  directors  can- 
not change  or  act  contrary  to  a  by- 
law made  by  the  stockholders.  Ste- 
vens v.  Davison,  18  Gratt.   (Va.)   819 


by-laws    are    binding.      Graebner    v. 
Post,  119  Wis.  392   (1903). 

3  Ireland  v.  Globe,  etc.  Co.,  19  R. 
I.  180  (1895).  See  s.  c.  20  R.  I.  190; 
21  R.  I.  9. 

4  Republican,  etc.  Mines  v.  Brown, 
58  Fed.  Rep.  644   (1893). 

Where  the  statute  authorizes  the 
stockholders  to  change  the  number 
of  directors  by  a  vote  of  a  majority 
in  interest,  a  by-law  requiring  ninety 


(1868).    The  by-laws  cannot  delegate    per  cent,  in  interest  is  illegal.    Katz 


to  the  directors  the  exclusive  right  to 
make  by-laws.  Alters  v.  Journeymen, 
etc.  Assoc,  19  Pa.  Super.  Ct.  272 
(1902).     City  officials  having  power 


v.  The  H.  &  H.  etc.  Co.,  183  N.  Y. 
(1905). 

A  by-law  cannot  require  a  majority 
in  interest  of  the  stockholders  to  con- 


to  elect  new  burgesses  may  delegate    stltute  a  quorum  where  the  statute 

21 


4a.] 


DEFINITIONS  AND   NATURE   OF   CORPORATIONS. 


[CH.  I. 


must  not  interfere  with  the  vested  and  substantial  rights  of  the 
stockholders ;  and  they  must  not  be  contrary  to  public  policy  or  the 
established  law  of  the  land.1  This  general  rule,  however,  can  be 
understood  only  by  a  study  of  the  cases  themselves,  a  collection  of 
which  is  given  in  the  notes.2 

states  that  those  who  attend  a  meet-  that  the  applicant  should  conform  to 

ing  in  person  or  by  proxy  shall  con-  all  by-laws  then  in  force  or  thereafter 

stitute  such  quorum.    Darrin  v.  Hoff,  adopted,  and  even  though  the  certifl- 

99  Md.  491   (1904).  cate   of   incorporation   provided   that 

The  by-laws  cannot  modify  the  ar-  beneficiaries  should  receive  such  sums 

tides  of  incorporation  in  any  of  the  as  the  by-laws  from  time  to  time  pre- 

particulars  required  by  statute  to  be  scribed.    Evans  v.  So.  Tier,  etc.  Assoc, 

stated  in  the  articles  of  incorporation.  182  N.  Y.  453   (1905). 

Guinness  v.  Land  Corp.,  L.  R.  22  Ch.  The  holder  of  a  policy  of  insurance 

D.  349    (1882).  taken  in  reliance  on  a  statement  that 

A  by-law,  even  though  passed  upon  the  entire  profits  of  a  certain  depart- 
the  organization  of  the  company,  can-  ment  would  be  divided  in  the  regular 
not  legally  provide  that  upon  a  sale  way,  may  enjoin  a  different  provision, 
of  the  company's  property  for  stock  even  though  the  original  charter  pre- 
in  another  company  the  stock  going  scribed  that  the  profits  were  to  be 
to  dissenting  stockholders  might  be  divided  as  provided  in  the  by-laws, 
sold  in  such  manner  as  the  old  com-  and  the  by-laws  were  changed,  but 
pany  thought  fit,  and  the  proceeds  such  change  was  after  the  policy  of 
paid  over  to  the  dissenting  stock-  insurance  was  issued.  Baily  v.  Brit- 
holder,  where  the  statute  provided  ish,  etc.  Co.,  [1904]  1  Ch.  374. 
that  the  interest  of  dissenting  stock-  Neither  a  by-law  nor  an  unauthor- 
holders  should  be  ascertained  by  arbi-  ized  provision  in  the  certificate  of  in- 
tration.  Payne  v.  Cork  Co.,  [1900]  1  corporation  can  provide  that  the  first 
Ch.  308.  directors    shall    continue    to    be    di- 

i  Quoted  and  approved  in  State  v.  rectors   until   they   become   incapacl- 

Anderson,  31  Ind.  App.  34  (1903).  tated,  resign  or  die.     State  v.  Ander- 


2  A     by-law     cannot     change     the 
nature    of    the    business    or    deprive 


son,  31  Ind.  App.  34   (1903). 
A  by-law  of  a  mutual  benefit  asso- 


the   members   of    their   rights.      Van  ciation    will    not    be   constructed    a3 

Atten  v.  Modern,  etc.,  131  Iowa,  232  retroactive,    unless    it    is    expressly 

(190G).  made  so,   and   it  is  then   void   if   it 

A  by-lav/  in  a  mutual  insurance  as-  impairs  an  existing  obligation.    Born- 

sociation  that  payment  of  dues  shall  stein  v.  District,  etc.,  2  Cal.  App.  624 

be  made  to  a  certain  person,  but  that  (1906). 

if  the  latter  does  not  transmit  them        It    is    legal    for   a   corporation    to 

a  member  shall   still   be   liable   and  enact  a  by-law  requiring  stockholders 

subject  to  a  forfeiture  of  his   insur-  to  pay  a  small  fee  on  making  trans- 

ance,  is  unreasonable  and  void.   Mat-  fers  of  their  stock  upon  the  corporate 

ter  of  Brown  v.  Order,  etc.,  176  N.  Y.  books.    Giesen  v.  London,  etc.  Mortg. 

132  (1903).  Co.,  102  Fed.  Rep.  584   (1900).     Even 

The  benefits  given  by  a  certificate  though    a   by-law   confers    upon    the 

issued  by  a  fraternal   benefit  or  life  general   manager,   among  other   pow- 

insu ranee  association,  cannot  be  modi-  ers,  the  "general  and  exclusive  charge 

fled   by  amendments  to  the  by-laws,  and  management  of  the  business  of 

even  though  the  certificate  provided  the   company,"   nevertheless   the   by- 

22 


CH.  l]            definitions  and  nature  op  corporations.  [§  4a. 

A  by-law,  recited  on  the  face  of  a  certificate  of  stock,  to  the 
effect  that  a  stockholder  will  not  sell  his  stock  without  first  offer- 
law  is  not  void  as  a  whole,  and  until  3  Serg.  &  R.  (Pa.)  29  (1817);  Juker 
the  general  manager  illegally  exer-  v.  Commonwealth,  20  Pa.  St.  484 
cises  power  the  courts  will  not  in-  (1853).  May  require  honds  to  be 
terfere.  Burden  v.  Burden,  159  N.  Y.  given  by  cashiers.  Bank  of  Wil- 
287    (1899).  mington  v.  Wollaston,  3  Harr.  (Del.)' 

Where  by  the  by-laws  salaries  are  90  (1840);  Hannibal  Sav.  Bank  v. 
to  be  fixed  by  the  board  of  direc-  Hunt,  72  Mo.  597  (1880).  May  pre- 
tors,  and  the  salary  of  the  president  scribe  qualifications  for  admission  to 
is  not  fixed  until  a  year  has  ex-  membership.  Regina  v.  Saddlers'  Co., 
pired,  and  is  then  reduced  from  $25,-  10  H.  L.  Cas.  404  (1863).  A  by- 
000  for  the  present  year  to  $10,500  law  is  illegal  if  it  disturbs  the  vested 
on  account  of  personal  hostility  to  property  rights  of  the  stockholders, 
him,  the  execution  of  the  by-law  was  Kent  v.  Quicksilver,  etc.  Co.,  78  N. 
unreasonable,  and  the  court  fixed  the  Y.  159  (1879),  where  preferred  stock 
amount  at  $17,500.  Banigan  v.  United  was  issued.  The  by-laws  of  a  mu- 
States,  etc.  Co.,  22  R.  I.  452  (1901).  tual  benefit  association  cannot  be 
A  by-law  or  provision  in  the  certifi-  amended  after  a  policy  has  been  is- 
cate  of  incorporation  to  the  effect  sued  so  as  to  render  the  policy  void 
that  differences  between  the  corpor-  for  suicide  while  insane  within  five 
ation  and  its  stockholders  shall  be  years,  when  the  original  policy  had 
arbitrated  is  not  binding.  State  v.  a  limit  of  only  one  year.  "Weber 
North  American,  etc.  Co.,  106  La.  621  v.  Supreme  Tent,  etc.,  172  N.  Y.  490 
(1902).  Even  though  the  by-laws  (1902).  Even  under  the  right  to 
have  to  be  recorded,  yet  if  they  are  amend  or  repeal  charters,  a  statute 
not  recorded  they  are  binding  on  the  changing  the  amount  which  a  mem- 
stockholders  if  they  have  been  ac-  ber  of  a  building  association  is  en- 
cepted  and  acted  upon  for  many  titled  to  upon  withdrawal  is  uncon- 
years.  Ho  Tung  v.  Man,  etc.  Co.,  stitutional.  Intiso  v.  State,  etc.  As- 
85   L.   T.  Rep.    617    (1902).  soc,  68  N.  J.  L.   588    (1902).     A  by- 

A    by-law    may    give    the    corpora-  law   which   provides   for    the   admin- 

tion   a   lien   on   stock   for   debts   due  istration   of  an  oath   to  stockholders 

it    from    the    stockholders.      See    ch.  who   vote  is   illegal.     People  v.   Kip, 

XXXI,    infra.     But   cannot   give   the  4  Cow.  382,  n.  (1825).     If  the  by-law 

corporation  the  right  to  forfeit  stock  is  illegal  its  effect  cannot  be  obtained 

for    non-payment   of   calls.      See    ch.  by  printing  it  upon  the  face  of  the 

VIII,    infra.      A    by-law    allowing    a  certificate   of   stock.     Conklin   v.   Os- 

stockholder    to    return    his   stock    to  wego  Nat.  Bank,  45  N.  Y.  655  (1871), 

the   corporation   at  a   fixed   value   i3  involving  a  lien  on  stock.     A  by-lav/ 

illegal.     Vercoutere   v.    Golden    State  by    the    directors    excluding    one    of 

Land    Co.,    116    Cal.    410    (1897).     A  them   from   examining  the  corporate 

by-law    cannot    release    stockholders  books  is  void.     People  v.  Throop,  li, 

from  their  statutory  liability.    Wells  Wend.    183     (1834).     A    by-law    may 

v.    Black,    117    Cal.    157    (1897).      A  authorize    stockholders    to    vote    by 

by-law  prohibiting  a  stockholder  from  proxy.    People  v.  Crossley,  69  111.  195 

applying    for    dissolution    in    accord-  (1873).      See    also    §    610,    infra.      A 

ance  with  the  statute  is  invalid.    Re  by-law   restricting  the  right  of  elec- 

Peveril,  etc.,  Ltd.,    [1898]   1  Ch.  122.  tors  in  a  town  to  vote  is  void.     Rex 

By-laws  may  regulate  the  manner  of  v.  Spencer,  3  Burr.  1827  (1766) ;  Rex 

voting.     Commonwealth  v.   Woelper,  v.  Head,  4  Burr.  2515,  2521   (1770). 

23 


4a.] 


DEFINITIONS   AND   NATURE   OF   CORPORATIONS. 


[CH.   I. 


ing  it  to  the  directors  at  the  same  price,  prevents  the  stockholder 
transferring  the  stock  to  his  principal,  he  not  having  disclosed  that 


A  by-law  restricting  the  right  of 
members  of  a  church  to  vote  as 
authorized  by  statute  is  void.  People 
v.  Phillips,  1  Denio,  388  (1845).  A 
by-law  may  be  good  in  part.  Rogers 
v.  Jones,  1  Wend.  237  (1828).  A  by- 
law of  a  bank  that  mistakes  in  pass- 
books must  be  corrected  at  once  does 
not  bind  a  depositor.  Mechanics',  etc. 
Bank  v.  Smith,  19  Johns.  115  (1821). 
A  by-law  that  any  five  of  a  board  of 
twenty-three  directors  should  be  a 
quorum  for  transacting  business  is 
valid.  This  is  equivalent  to  an  ex- 
ecutive committee,  except  that  the 
members  may  shift.  Hoyt  v.  Thomp- 
son, 19  N.  Y.  207,  216  (1859).  By- 
laws may  regulate  the  calling  of 
meetings.  Taylor  v.  Griswold,  14  N. 
J.  L.  222  (1834).  A  by-law  which 
limits  or  regulates  the  corporate 
powers  which  the  charter  confers  on 
the  directors  may  be  disregarded  by 
them.  Union  Mut.  F.  Ins.  Co.  v.  Key- 
ser,  32  N.  H.  313  (1855).  By-laws 
imposing  fines  for  non-attendance  or 
for  refusal  to  accept  office  are  valid, 
but  a  by-law  making  assessments  is 
invalid.  Tobacco  Pipe  Makers  v. 
Woodroffe,  7  B.  &  C.  838  (1828).  A 
by-law  that  voluntary  contributions 
will  be  refunded  is  a  contract  which 
a  contributor  may  enforce.  Davis  v. 
Second  Union  Meeting-house,  49  Mass. 
321  (1844).  A  by-law  imposing  pen- 
alties for  past  acts  is  void.  Pulford 
v.  Detroit  Fire  Dep't,  31  Mich.  458 
(1875).  A  by-law  that  transfers  of 
stock  are  subject  to  the  approval  of 
the  directors  is  void  as  against  the 
rights  of  third  persons.  Farmers', 
etc.  Bank  v.  Wasson,  48  Iowa,  336 
(1878).  See  also  §  622,  infra.  Or 
the  approval  of  the  president.  Sar- 
gent v.  Franklin  Ins.  Co.,  25  Mass. 
90  (1829).  It  has  been  held  that  the 
by-laws  of  a  building  association  can- 
not impose  an  unreasonable  fine  for 
non-payment   of  assessments.     Lynn 


v.  Freemansburg,  etc.  Assoc,  117  Pa. 
St.  1  (1887).  It  is  legal  for  the  by- 
laws to  provide  that  the  company 
may  sell  out  all  of  its  property  at  any 
time.  Cotton  v.  Imperial,  etc.  Corp., 
[1892]  3  Ch.  454.  The  by-laws  of  a 
voluntary  association — an  exchange — 
forbidding  the  members  from  carry- 
ing on  dealings  outside  of  the  ex- 
change is  legal.  American,  etc.  Co. 
v.  Chicago,  etc.  Exch.,  143  111.  210 
(1892).  A  corporation  may  pass  a 
by-law  prescribing  the  qualifications 
of  its  directors,  and  may  prescribe 
that  a  person  who  is  an  attorney 
against  it  in  a  suit  shall  not  be  a 
director.  Cross  v.  West  Virginia,  etc. 
Ry.,  37  W.  Va.  342  (1892).  A  by- 
law may  authorize  voting  by  proxy, 
and  such  a  by-law  may  arise  by  long 
continuation  and  unbroken  practice. 
Walker  v.  Johnson,  17  App.  Cas.  Dist. 
of  Col.,  144  (1900).  A  stockholder 
who  is  given  a  copy  of  the  by-laws 
upon  his  becoming  a  stockholder  is 
not  bound  to  know  that  there  are 
other  by-laws  not  included  in  them. 
McKenny  v.  Diamond,  etc.  Assoc,  8 
Houst.  (Del.)  557  (1889).  A  by-law 
that  the  members  of  a  news  associa- 
tion shall  not  publish  news  furnished 
by  other  associations  in  the  same 
territory  is  valid.  The  penalty  for 
violation  may  be  suspension.  Mat- 
thews v.  Associated  Press,  61  Hun, 
199  (1891);  aff'd,  136  N.  Y.  333.  A 
by-law  of  an  associated  press  associa- 
tion, organized  under  the  laws  of 
Illinois,  to  the  effect  that  its  patrons 
shall  not  receive  news  from  any  other 
associated  press  corporation  which  is 
competing  with  the  former,  is  illegal 
as  in  restraint  of  trade,  and  the 
corporation  may  be  enjoined  from  re- 
fusing to  furnish  news  to  a  patron 
who  takes  news  also  from  the  compet- 
ing corporation,  a  press  association 
organized  to  gather  and  sell  news  as 
a   quasi-public   corporation,    and   has 


24 


CH.  I.] 


DEFINITIONS  AND   NATURE   OP   CORPORATIONS. 


[§  4a. 


he  was  acting  as  agent.     Such  a  by-law  is  legal,  and  the  corpora- 
tion may  refuse  to  transfer  the  stock  in  violation  of  the  by-law.1 


no  right  to  discriminate  in  favor  of 
some  newspapers  as  against  others. 
Inter-Ocean,  etc.  Co.  v.  Associated 
Press,  184  111.  438  (1900).  A  dealer 
in  cattle  cannot  enjoin  a  voluntary- 
association  of  other  cattle  dealers 
from  expelling  one  of  its  members  for 
violating  a  by-law  prohibiting  him 
from  trading  with  the  plaintiff. 
Downs  v.  Bennett,  63  Kan.  653  (1901). 
A  by-law  of  a  plumbers'  association 
by  which  any  member  who  does  work 
in  competition  with  another  shall 
pay  a  certain  sum  to  the  association 
is  illegal.  Bailey  v.  Association  of 
Master  Plumbers,  etc.,  103  Tenn.  99 
(1899).  A  by-law  which  prohibits 
members  from  working  with  persons 
who  are  not  members  is  void. 
Thomas  v.  Mutual  Protective  Union, 
49  Hun,  171  (1888).  Cf.  s.  c,  121 
N.  Y.  45  (1890).  Where  stockholders 
in  an  apartment-house  corporation 
are  entitled  to  rent  apartments  at  a 
rental  to  be  fixed  by  a  majority  vote 
of  the  stockholders,  an  increased 
rental  so  voted  is  legal.  The  by- 
laws providing  for  such  a  vote  over- 
ride a  general  statement  in  a  pros- 
pectus to  the  contrary,  the  stock- 
holders knowing  of  the  by-law. 
Compton  v.  The  Chelsea,  125  N.  Y. 
537  (1891).  Where  a  land  company 
is  incorporated  under  the  general  act, 
and  the  general  act  does  not  provide 


for  any  statement  in  the  articles  of 
association  as  regards  the  amount  of 
debts  which  the  corporation  may 
incur,  a  provision  inserted  in  the 
articles  of  association  that  "the  in- 
debtedness of  the  company  shall  not 
exceed  $500  at  any  time"  is  not  a  part 
of  the  charter.  The  provision  is  at 
the  most  merely  a  by-law.  The  court 
said:  "We  think  that  the  limitation 
of  $500  in  the  charter  of  the  corpora- 
tion cannot  be  regarded  of  any  more 
force  than  a  by-law."  Sherman,  etc. 
Co.  v.  Morris,  43  Kan.  282  (1890). 

A  by-law  authorizing  the  corpora- 
tion to  sue  a  subscriber  for  the  dif- 
ference between  the  subscription  and 
the  price  for  which  the  stock  sold  on 
forfeiture  is  void.  Jay  Bridge  Corp. 
v.  Woodman,  31  Me.  573  (1850);  Ken- 
nebec R.  R.  v.  Kendall,  31  Me.  470 
(1850).  See  also  ch.  VIII,  infra.  The 
following  by-laws  have  been  held 
void:  compelling  members  of  an  ex- 
change to  submit  their  controversies 
to  arbitration  on  pain  of  expulsion 
or  suspension,  State  v.  Union  Mer- 
chants' Exchange,  2  Mo.  App.  96 
(1876) ;  providing  that  suits  to  collect 
insurance  shall  be  brought  in  the 
county  where  the  company  exists, 
Nute  v.  Hamilton,  Mut.  Ins.  Co.,  72 
Mass.  174  (1856);  enlarging  the  lia- 
bility of  stockholders  for  debts  of  the 
corporation,  Free   School  Trustees  v. 


i  Barrett  v.  King,  181  Mass.  476 
(1902).  See  also  §  622,  infra.  A  by-law 
that  the  stock  shall  not  be  transfera- 
ble except  to  the  corporation  itself  is 
illegal,  even  though  it  is  expressed  on 
the  face  of  the  stock  certificates,  and 
hence  a  stockholder  cannot  compel  a 
corporation  to  purchase  his  stock,  even 
though  the  corporation  has  purchased 
the  stock  of  other  members,  and  even 
though  the  corporation  is  essentially 
a  community  of  property  affair,  hav- 


ing a  capital  stock.  Herring  v.  Rus- 
kin,  etc.  Assoc,  52  S.  W.  Rep.  327 
(Tenn.  1899).  A  by-law  of  a  farmers' 
grain  and  mercantile  stock  corpora- 
tion may  provide  that  on  the  decease 
of  any  stockholder  the  corporation 
shall  buy  his  stock,  and  such  pro- 
vision may  be  enforced  where  the  cor- 
poration has  undivided  profits  suffi- 
cient to  purchase  the  stock  of  a  de- 
ceased stockholder.  Howe,  etc.  Co.  v. 
Jones,  21  Tex.  Civ.  App.  198   (1899). 


25 


§  4a.] 


DEFINITIONS   AND    NATURE    OF    CORPORATIONS. 


[CH.   I. 


A  by-law  of  a  corporation,  organized  to  own  and  maintain  a  hunt- 
ing park,  may  authorize  assessments  on  the  stock  to  pay  any  annual 
deficiency,  and  such  by-law  is  binding  on  stockholders  who  accept 
the  certificate  of  stock,  which  on  its  face  refers  to  the  by-law.  The 
by-law  is  valid  as  a  contract,  even  though  it  is  not  valid  as  a  by-law.1 

Frequently  the  by-laws  provide  that  the  contracts  of  the  corpora- 
tion shall  be  authorized  only  in  a  certain  way,  and  shall  be  signed 
by  certain  officers  in  order  to  be  valid  corporate  obligations.  Such 
a  by-law,  however,  does  not  affect  the  validity  of  a  contract  executed 
in  violation  of  the  by-law,  so  far  as  such  contract  affects  persons 


Flint,  54  Mass.  539   (1847);  certainly 
so    where    the    creditor    did    not    ex- 
pressly  rely  on   the  by-law,  Flint  v. 
Pierce,  99  Mass.  68  (1868);  or  where 
an  assignee  of  the  corporate  creditor 
seeks  to  enforce  the  liability,  Gamwell 
v.  Pomeroy,  121  Mass.  207  (1876) ;  see 
also    §  241,    infra;     authorizing    less 
tban   a  majority   of  directors  to   act 
when  the  statute  required  a  majority, 
State  v.   Curtis,   9   Nev.    325    (1874); 
compelling   stockholders    to    retire    a 
part  of   their   stock,  Bergman  v.   St. 
Paul,   etc.   Assoc.   29   Minn.    275,   282 
(1882);    prohibiting   the   use    of   the 
company's  canal  on  Sundays,  Calder, 
etc.    Nav.    Co.    v.    Pilling,    14    M.    & 
W.   76    (1845);    restricting  the  mem- 
bers   as    to    their    fishing    business, 
Adley  v.  Whitstable  Co.,  17  Ves.  Jr. 
315    (1810);   19  Ves.  Jr.  304    (1815); 
restricting  the  number  of  apprentices 
which    members    may    have,    Rex    v. 
Coopers'  Co.,  7  T.  R.  543  (1798)  ;  Rex 
v.  Tappenden,  3  East,  186  (1802)  ;  re- 
stricting the  sale  of  guns,  Gunmakers 
v.  Fell,  Willes,  384    (1742);    restrict- 
ing  the   transfer   of  seats   in   an   ex- 
change, Ritterband  v.  Baggett,  42  N. 
Y.    Super.   Ct.    556    (1877).     Railroad 
regulations  as  to  passengers,  etc.,  are 
not  by-laws.    Their  validity,  however, 
depends  on  their  reasonableness.   State 
v.   Overton,   24   N.   J.   L.   435    (1854). 
The  by-laws  of  a  city  cannot  exclude 
from  business  all  painters  who  do  not 
belong  to  a  guild.     Clark  v.  Le  Cren, 
9  B.  &  C.  52    (1829).     See,  however, 
as   to   city    by-laws,    1    Dillon,   Mun 


Corp.,  ch.  12,  etc.     If  a  by-law  is  di- 
visible,  the    invalidity    of    part    does 
not    invalidate    the    remaining    part. 
Amesbury   v.   Bowditch,    etc.    Co.,    72 
Mass.    596     (1856).      For    a    valuable 
statement  of  the  law  in  relation  to  by- 
laws,  see  Re  Long  Island  R.  R.,   19 
Wend.    37,    41    (1837);    Lumley,    By- 
laws  (English,  1877);   2  Am.  &  Eng. 
Ency.  L.  705.     By-laws  are  construed 
as  they  are  construed  by  the  corpora- 
tion, if  that  construction  be  reason- 
able.    State   v.   Conklin,   34   Wis.   21 
(1874).     By-laws  are  binding  on   all 
members.     Cummings  v.  Webster,  43 
Me.    192    (1857).      But  strangers    are 
not  bound  to  know  them.     Kingsley 
v.    New   England,    etc.    Co.;    62    Mass. 
393    (1851),    where    the    by-law    was 
printed  on  an  insurance  policy;    Wait 
v.    Smith,   92   111.    385    (1879);    Royal 
Bank,  etc.  Case,  L.  R.  4  Ch.  App.  252 
(1869).    See  also  §  725,  infra,  relative 
to  contracts  by  agents  in  violation  of 
by-laws.     A   by-law   cannot   give   the 
president  a  casting  vote  in  addition 
to  his  regular  vote.     State  v.  Curtis, 
9  Nev.   325    (1874). 

l  Blue  Mountain,  etc.  Assoc,  v.  Bor- 
rowe,  71  N.  H.  69  (1901).  The  fact 
that  the  by-laws  require  a  stockhold- 
er, in  case  he  wishes  to  sell,  to  first 
offer  the  stock  to  the  corporation  or 
other  stockholders  before  selling  to 
others,  and  that  the  validity  of  this  is 
doubtful,  does  not  affect  the  validity 
of  another  by-lav/  authorizing  assess- 
ments on  the  stock.  Farmers',  etc. 
Co.   V.   Smith,   74   Conn.   625    (1902). 


CH.   I.] 


DEFINITIONS   AND    NATURE    OF    CORPORATIONS. 


[§  4a. 


having  no  knowledge  of  the  by-law.1  A  stockholder  is  chargeable 
with  notice  of  the  by-laws.2 

A  lien  created  by  articles  of  association  of  a  bank,  being  the  same 
as  by-laws,  is  not  good  as  against  a  bona  fide  pledgee  of  the  certificate 
of  stock  where  the  certificate  does  not  refer  to  such  articles  of  asso- 
ciation nor  to  the  lien.3 

A  by-law  authorizing  the  forfeiture  of  stock  for  non-payment  of  a 
call  is  discussed  elsewhere;4  as  is  also  the  right  of  the  corporation 
to  create  a  lien  on  stock  by  by-law.5  There  are  no  particular  rules 
in  regard  to  the  method  of  enacting,  amending  or  repealing  by-laws.6 


Although  a  law  library  corporation 
has  a  capital  stock  which  is  fully 
paid,  yet  a  by-law  may  assess  annual 
dues  upon  the  members.  Omaha  L. 
L.  Assoc,  v.  Connell,  55  Neb.  396 
(1898).  A  member  of  the  club  may 
object  to  an  increase  of  the  annual 
dues  where  there  was  no  provision 
in  the  rules  authorizing  the  altera- 
tion thereof.  Harrington  v.  Sendall, 
[1903]  1  Ch.  921. 
i  See  §  725,  infra. 

2  Richardson  v.  Devine,  193  Mass. 
336  (1907). 

3  Lyman  v.  State  Bank,  etc.,  81 
N.  Y.  App.  Div.  367  (1903),  aff'd  179 
N.  Y.  577. 

4  See  §  123,  infra. 

5  See  §§  522,  524,  infra. 

g  They  need  not  be  written.  Union 
Bank  v.  Ridgely,  1  Har.  &  G.  (Md.) 
324,  413.(1827).  A  by-law  may  be 
proved  by  oral  evidence  where  there 
was  no  written  entry  of  the  same  in 
the  corporate  records.  Masonic,  etc. 
Assoc,  v.  Severson,  71  Conn.  719 
(1899).  Where  the  statutes  require 
a  corporation  to  post  its  by-laws,  a 
person  really  interested  may  compel 
such  posting  by  mandamus.  Board- 
man  v.  Marshalltown  Grocery  Co.,  105 
Iowa,  445  (1898).  Where  a  bank's 
charter  is  renewed  the  by-laws  con- 
tinue. Campbell  v.  Watson,  62  N.  J. 
Eq.  396  (1901).  A  court  will  not  take 
judicial  notice  of  the  by-laws  of  a  cor- 
poration. Simpson  v.  South  Carolina, 
etc.  Co.,  59  S.  C.  195  (1900).  The  cor- 
poration may  adopt  Cushing's  Manual. 


People  v.  American  Institute,  44  How. 
Pr.  468  (1873).  By-laws  may  be  mod- 
ified by  usage.  Henry  v.  Jackson,  37 
Vt.  431  (1865).  The  charter  may  re- 
quire by-laws  to  be  enacted  under 
seal.  Dunston  v.  Imperial,  etc.  Co., 
3  B.  &  Ad.  125  (1832).  If  amendments 
to  the  by-laws  are,  by  the  by-laws,  to 
be  made  only  after  notice,  that  notice 
is  necessary.  French  v.  O'Brien,  52 
How.  Pr.  394  (1876).  By-laws  of  mu- 
tual insurance  associations  may  be 
changed.  Supreme  Lodge,  etc.  v. 
Knight,  117  Ind.  489  (1889).  A  fund 
accumulated  by  an  exchange  under 
its  charter,  for  the  benefit  of  the 
widows  and  families  of  deceased  mem- 
bers, cannot,  by  an  amendment  of  the 
by-laws,  be  distributed  among  the 
members.  Parish  v.  New  York,  etc. 
Exchange,  169  N.  Y.  34  (1901).  Even 
though  the  by-laws  of  a  natural  gas 
company  provide  that  stockholders 
shall  have  gas  free,  yet  such  by-law 
may  be  changed  so  as  to  authorize 
the  company  to  charge  a  uniform 
price  to  the  stockholders  for  gas. 
Redkey,  etc.  Co.  v.  Orr,  27  Ind.  App.  1 
(1901).  Inasmuch  as  by  the  laws  of 
England  an  English  corporation  may 
amend  its  by-laws  so  as  to  give  it  a 
lien  on  stock  which  will  be  prior  to 
any  existing  unregistered  pledge  or 
assignment  of  the  certificates  of  stock, 
an  American  pledgee  or  holder 
of  such  certificates  of  stock  is 
bound  by  such  by-law.  Hudson,  etc. 
Co.  v.  Warner  &  Co.,  99  Fed.  Rep.  187 
(1900).    A  by-law  may  be  repealed  by 


27 


§4a.] 


DEFINITIONS  AND   NATURE   OF   CORPORATIONS. 


[CH.   I. 


Stockholders  may  at  a  meeting  called  for  that  purpose  amend  the 
by-laws  so  as  to  increase  the  number  of  directors  and  may  elect  such 
additional  directors.1  A  company  cannot  contract  not  to  alter  its 
by-laws.2  Where  a  bank's  charter  is  renewed  the  by-laws  con- 
tinue.3 Directors  in  liquidating  a  company  may  call  in  unpaid  sub- 
scriptions, even  though  the  by-laws  provide  that  no  calls  shall  be 
made  except  upon  a  two-thirds  vote  of  the  outstanding  stock.4  By- 
laws which  are  disregarded  for  a  long  time  may  be  deemed  to  have 
been  repealed.5 


a  resolution  inconsistent  with  it. 
Royal  Bank,  etc.  Case,  L.  R.  4  Ch. 
App.  252  (1869).  Power  to  make  by- 
laws implies  pov/er  to  repeal  them. 
Rex  v.  Ashwell,   12  East,  22    (1810). 

l  In  re  Griffing  Iron  Co.,  63  N.  J. 
Law,  168  (1898);  aff'd,  63  N.  J.  Law, 
357.  Stockholders  may  amend  the 
by-laws  so  as  to  increase  the  number 
of  directors,  and  may  at  the  same 
meeting  elect  the  additional  directors. 
Gold  Bluff,  etc.  Co.  v.  Whitlock,  75 
Conn.  669   (1903). 

2Malleson  v.  National,  etc.  Corp., 
[1894]  1  Ch.  200,  holding  that  a  pro- 
vision in  the  by-laws  that  the  sub- 
scriptions should  be  called  in  at  cer- 
tain times  only,  may  be  modified.  In 
New  Jersey  it  has  been  held  that  a 
provision  in  the  by-laws  that  they 
shall  not  be  changed  except  on  a  two- 
thirds  vote  is  legal  and  binding  when 
the  original  by-laws  so  provided  and 
the  enterprise  was  organized  on  that 
basis.  Loewenthal  v.  Rubber,  etc. 
Co.,  52  N.  J.  Eq.  440  (1894),  holding 
also  that  the  original  by-laws  consti- 
tuted a  contract  between  the  stock- 
holders, and  that  a  by-law  providing 
for  cumulative  voting  could  not  be 
repealed.  Although  the  by-laws  pro- 
vide for  changes  therein  only  on  a 
two-thirds  vote,  yet  a  majority  may 
make  changes.  Smith  v.  Nelson,  18 
Vt.  511  (1846).  A  company  cannot 
contract  not  to  alter  a  by-law  which 
provides  that  a  certain  vendor  of 
property  to  the  corporation  shall  be 
governing  director  and  shall  have  the 
power  to  appoint  other  directors  and 


to  remove  them  at  any  time,  even 
though  such  contract  is  contained  in 
the  by-laws  themselves.  Punt  v.  Sy- 
mons  &  Co.  Ltd.,  [1903]  2  Ch.  506. 

3  Campbell  v.  Watson,  62  N.  J.  Eq. 
396  (1901). 

4  Union,  etc.  v.  Leiter,  145  Cal. 
696    (1905). 

5  A  by-law  requiring  five  directors 
is  deemed  to  have  been  amended 
where  for  ten  years  the  corporation 
has  but  three  directors.  Buck  v.  Troy, 
etc.   Co.,   76  Vt.  75    (1903). 

Even  though  the  by-laws  require 
notice  to  be  given  by  publication  of 
assessment,  yet  if  no  attention  is  ever 
paid  to  the  by-law  and  actual  notice 
is  given  of  an  assessment  and  the 
stockholder  objects  to  the  assessment 
on  another  ground,  but  not  on  that 
ground,  he  cannot  thereafter  raise 
the  objection  on  that  ground.  Grand 
Valley,  etc.  Co.  v.  Fruita  Imp.  Co.,  86 
Pac.  Rep.  324  (Col.  1906). 

Directors  may  disregard  their  own 
by-laws.  Martino  v.  Commerce  F. 
Ins.  Co.,  47  N.  Y.  Super.  Ct.  520 
(1881).  By-laws  which  are  continu- 
ally disregarded  by  the  officers,  ac- 
quiesced in  by  the  stockholders,  may 
thereby  be  substantially  abrogated. 
Blair  v.  Metropolitan,  etc.  Bank,  27 
Wash.  192  (1902).  A  by-law  that  a 
land  company  will  accept  its  stock  in 
payment  for  land  will  not  sustain  a 
suit  for  specific  performance  brought 
by  a  purchaser  of  land  who  wishes  to 
pay  in  stock,  the  by-law  having  been 
practically  disregarded.  Kelley  v. 
York,  etc.  Co.,  94  Me.  374  (1900).  The 


28 


CH.    I.]  DEFINITIONS   AND    NATURE    OF    CORPORATIONS.  [§§    5,  6. 

§  5.  Mistakes,  irregularities,  and  illegalities  in  becoming  incor- 
porated.— Often  it  happens  that  mistakes  are  made  in  organizing 
a  corporation.  The  certificate  of  incorporation  may  be  defective, 
or  it  may  not  be  filed  or  published  as  required  by  the  statutes,  or 
the  corporation  itself  may  be  irregularly  organized  thereafter. 
Complicated  questions  then  arise  as  to  the  rights  and  liabilities  of 
the  various  parties.  Stockholders  cannot  set  up  such  irregularities 
as  a  defense  to  an  action  by  the  corporation  to  enforce  their  sub- 
scriptions to  stock.1  On  the  other  hand  corporate  creditors  cannot 
hold  the  stockholders  liable  as  partners  by  reason  of  the  irregular 
incorporation.2  Indeed,  the  general  rule  now  is,  with  few  excep- 
tions, that  no  one  can  question  the  regularity  of  the  incorporation 
except  the  state,  where  the  statutes  allow  incorporation  and  the 
company  has  endeavored  to  incorporate  and  is  acting  as  a  corpora- 
tion.3 But  where  the  purpose  for  which  the  corporation  is  organ- 
ized is  illegal  or  not  specified  in  the  act  authorizing  the  incorpora- 
tion, then  the  rule  is  different.4 

§  6.  "Dummy'7  corporations  —  Fraudulent  corporations — The 
court  will  sometimes  ignore  the  corporate  existence  in  order  to  do 
justice — Corporations  as  distinguished  from  partnerships.  — A  cor- 
poration is  an  entity  and  existence  separate  from  its  officers  and 
stockholders,  and  the  inclination  -of  some  writers  to  assimilate  a 
corporation  as  nearly  as  possible  to  a  partnership  and  to  apply  to 
the  former  the  rules  applicable  to  the  latter  leads  only  to  confusion 
and  is  contrary  to  the  law.5 

fact  that  a  by-law  of  a  bank  requiring  tery  business  in  foreign  countries  was 

the    directors    to    examine    the    bank  held  to  be  legal  in  Macnee  v.  Persian 

every   three    months    has     been    long  Investment  Corp.,  L.  R.  44  Ch.  D.  306 

disregarded  does  not  raise  a  presump-  (1890). 

tion   of  repeal   and   does  not  release  5  The  House  of  Lords  in  England 

the  directors  from  liability  for  negli-  has  pointed  out  the  fact  that  there  is 

gence  leading  to  a  defalcation.  Camp-  no  real  analogy  between  an  ordinary 

bell  v.  Watson,  62  N.  J.  Eq.  396  (1901).  partnership  and  a  corporation.    Birch 

1  See  §  183,  infra.  v.   Cropper,    L.   R.    14   App.    Cas.    525 

2  See  §§  231-239,  infra.  (18S9)      (reversing    Re    Bridgewater 

3  See  §  637,  infra.  For  a  detailed  Nav.  Co.,  L.  R.  39  Ch.  D.  1),  refusing 
digest  of  the  decisions  on  what  may  to  apply  the  analogy,  and  saying  that 
and  what  must  be  stated  in  certifi-  to  apply  it  would  in  the  case  before 
cates  of  incorporation  and  what  in-  it  "work  inequality  and  injustice  and 
formalities   will    be   fatal,   and    what  not  equity." 

meaning   is   given   tq   the   usual   pro-  A  trading  corporation  is  governed 

visions  of  general  statutes  for  incor-  by  the  ordinary  rules  of  partnership, 

porations,   see   also  12  Am.  R.  R.   &  except   so    far    as    special    conditions 

Corp.  Cases,  pp.  474-522.  may  be  inserted   into  their  constitu- 

4  See  §  236,  infra.  The  organiza-  tion  by  the  legislature  or  by  their  own 
tion  of  a  company  to  carry  on  the  lot-  articles  of  association.    Oakes  v.  Tur- 

29 


§6.] 


DEFINITIONS    AND    NATURE    OF    CORPORATIONS. 


[CH.    I. 


The  difference  between  a  corporation  and  a  partnership  and  the 
advantages  of  a  corporation  over  a  partnership  as  a  means  of  doing 
business  are  very  marked  and  should  not  be  limited  by  construction.1 


quand,  L.  R.  2  H.  L.  325  (1867),  as 
referred  to  in  Whiting  v.  Hovey,  13 
Ont.  App.  7   (1886). 

In  speaking  of  the  fact  that  de- 
cisions concerning  municipal  corpora- 
tions and  the  powers  of  their  officers 
are  not  at  all  applicable  to  private 
corporations,  Ruger,  C.  J.,  in  Wallace 
v.  Walsh,  125  N.  Y.  26,  36  (1890) ,  said: 
"It  is  manifest  that  no  analogy  exists 
between  the  action  of  a  body  of  men 
invested  with  the  exercise  of  political 
power  under  special  conditions  and 
the  action  of  the  trustees  of  a  private 
corporation  in  the  conduct  of  its  ordi- 
nary business  operations.  The  one  re- 
lates to  the  execution  of  powers  and 
the  other  to  the  performance  of  du- 
ties and  the  enjoyment  of  privileges. 
The  one  is  controlled  by  the  princi- 
ples governing  the  relations  of  princi- 
pal and  agent,  and  the  other  to  the 
general  rules  regulating  the  conse- 
quences following  a  neglect  or  dis- 
obedience of  the  requirements  of  stat- 
utes affecting  private  relations.  In 
the  one  case  the  question  as  to  what 
is  a  good  execution  of  a  power  is  in- 
volved, and  in  the  other  as  to  what 
may  be  considered  an  adequate  per- 
formance of  a  duty.  These  questions 
are  manifestly  controlled  by  different 
rules,  and  that  v/hich  is  required  in 
one  is  not  an  authority  for  the  re- 
quirements of  the  other." 

i  There  are  certain  advantages 
which  a  corporation  presents  as  com- 
pared with  a  copartnership. 

In  large  enterprises  the  partnership 
has  been  found  to  be  clumsy,  danger- 
ous and  insufficient.  If  unsuccessful 
it  brings  ruin  upon  all  of  its  members, 
because  each  partner  is  liable  abso- 
lutely for  all  debts.  Any  member 
may  bind  the  firm  by  his  contract 
and  each  one  has  an  equal  voice  in 
deciding  its  policy.  Its  capital  and 
credit,  and  consequently  its  amount 


of  business,  are  limited  necessarily  by 
the  capital  and  credit  of  a  very  few 
men — the  members  themselves.  The 
death  of  a  member  or  the  transfer  of 
his  interest  dissolves  the  firm.  Any 
member  may  arbitrarily  cause  a  dis- 
solution at  any  time,  and  the  insolv- 
ency of  a  member  renders  the  part- 
nership property  subject  to  levy  of 
execution  for  his  debt.  Upon  the 
death  of  a  partner  the  surviving  part- 
ners have  the  sole  charge  of  winding 
up  the  business,  and  the  executor  of 
the  deceased  partner  is  not  allowed 
to  come  in.  A  partner  may  withdraw 
his  money  only  at  a  sacrifice,  or  by 
long  and  expensive  proceedings.  He 
cannot  conveniently  sell  his  interest 
or  borrow  money  upon  it.  New  part- 
ners cannot  readily  or  safely  be  ad- 
mitted. 

The  partnership  is  restricted  in  its 
capital,  dangerous  in  its  liabilities, 
narrow  in  its  exclusion  of  new  mem- 
bers, too  free  in  its  mode  of  making 
contracts,  and  too  contracted  in  its 
opportunities  for  withdrawal.  It  is 
becoming  obsolete  as  a  mode  of  doing 
business  on  a  large  scale. 

In  a  corporation  all  this  is  changed. 
The  members  are  not  liable  for  the 
debts.  The  amount  already  invested 
may  be  lost,  but  the  private  fortunes 
of  the  stockholders  are  not  involved. 
The  business  is  done  and  contracts 
made  not  by  all,  but  by  a  select  few, 
called  directors.  A  large  capital  is 
created  by  the  union  of  funds  from 
many  sources.  A  person  may  safely 
invest  in  many  enterprises  and  yet 
not  take  part  in  the  management  nor 
watch  the  business  of  any  one  of 
them.  The  leading  spirit  in  an  enter- 
prise may  hold  a  majority  of  the 
stock  and  may  admit  associates,  em- 
ployees, or  strangers  as  holders  of  a 
minority  of  the  stock,  and  yet  he  will 
retain  the  management  as  though  he 


30 


CH.   I.] 


DEFINITIONS  AND   NATUKE   OF   CORPORATIONS. 


[§6. 


A  corporation  is  an  entity,  an  existence,  irrespective  of  the  per- 
sons who  own  all  its  stock.  The  fact  that  one  person  owns  all  the 
stock  does  not  make  him  and  the  corporation  one  and  the  same 
person.1  Although  one  railroad  corporation  owns  all  the  stock  of 
another  railroad  corporation,  yet  the  separate  existence  of  the  two 
corporations  continues  and  they  are  not  thereby  merged.2 

Not  only  is  the  identity  of  the  corporation  preserved  as  distinct 
from  its  stockholders,  but  it  is  also  distinct  from  its  promoters,  in- 
corporators and  antecedents.  It  is  not  liable  on  the  contracts  and 
obligations  of  its  promoters.3  Nor  is  it  liable  for  the  debts  of  a 
prior  corporation  to  whose  property  it  succeeds  by  foreclosure  sale.4 
Where  a  partnership  or  a  corporation  is  merged  into  another  cor- 
poration, the  creditors  of  the  former  may  pursue  the  property,  but 
they  cannot  hold  the  latter  corporation  liable  for  the  debt,5  unless 
the  latter  took  with  such  notice  that  it  may  be  held  to  account.6 

But  there  are  occasions  where  the  courts  will  ignore  the  corpo- 
rate existence  and  will  hold  that  its  acts  are  the  acts  of  its  stock- 
holders and  vice  versa  the  same  as  in  a  partnership.     Thus,  where 


were  the  single  owner  of  the  concern. 
Persons  may  easily  buy  into  or  retire 
from  the  enterprise.  Dissolution  is 
not  brought  about  by  the  death  or 
withdrawal  or  dissatisfaction  of  a 
stockholder.  The  insolvency  of  a 
stockholder  does  not  affect  the  busi- 
ness of  the  corporation.  Upon  the 
death  of  a  stockholder  his  executor 
votes  his  stock  and  has  a  voice  in  the 
continuation  of  the  business.  A  stock- 
holder may  sell  or  pledge  his  interest 
readily  .and  intelligibly  by  reason  of 
the  reports,  dividends,  and  market 
quotations  of  his  stock.  The  corpora- 
tion is  a  protection  in  that  the  lia- 
bility is  limited;  it  is  capable  in  that 
it  renders  possible  the  collection  of  a 
great  capital;  it  is  efficient  because 
the  directors  and  they  alone  govern 
its  policy  and  its  contracts;  and  it 
is  convenient  because  it  is  easy  to 
sell  or  buy  or  pledge  or  bequeath 
one's  interest  in  the  concern. 

The  advantages  of  incorporation  are 
set  forth  in  the  Law  Quarterly  Re- 
view for  April,  1895  (p.  185),  as  fol- 
lows: "Incorporation  secures  first  of 
all  the  benefit  of  limited  liability.  It 
further   preserves   the   continuity   of 


the  partnership  unaffected  by  the 
death,  lunacy,  or  bankruptcy  of  the 
members  or  by  other  contingencies. 
It  minimizes  the  dangers  of  a  dis- 
honest partner  by  restricting  the 
agency  of  the  directors  in  articles  of 
which  all  persons  dealing  with  the 
company  have  constructive  notice. 
It  facilitates  dealing  with  the  shares 
of  the  partners  by  sale,  mortgage,  or 
settlement.  It  affords  greater  facili- 
ties for  borrowing,  more  particularly 
for  raising  money  on  debentures.  A 
stockholder  who  lends  money  to  the 
company  is  not  at  the  disadvantage  of 
being  postponed  to  other  creditors  as 
an  ordinary  partner  is  who  lends  to 
the  firm." 

i  Quoted  and  approved  in  Monon- 
gahela,  etc.  Co.  v.  Pittsburg,  etc.  Co., 
196  Pa.  St.  25  (1900).  Also  in  Rhawn 
v.  Edge  Hill,  etc.  Co.,  201  Pa.  St.  637 
(1902).     See  also  §  709,  infra. 

2  Quoted  and  approved  in  Exchange 
Bank  v.  Macon,  etc.  Co.,  97  Ga.  1 
(1895).     See  also  §663,  infra. 

3  See  §  707,  infra. 

4  See  §  890,  infra. 

5  See  §  673,  infra. 

6  See  §  673,  infra. 


31 


§   6.]  DEFINITIONS   AND   NATURE   OF   CORPORATIONS.  [CH.   I. 

an  individual  organizes  a  corporation  to  violate  a  contract  which 
he  himself  would  not  be  allowed  to  violate,  the  court  will  enjoin 
the  corporation  as  though  it  were  the  person  himself.1  So,  also, 
where  a  director  causes  the  corporation  to  give  a  valuable  contract 
to  a  corporation  in  which  he  is  secretly  interested,  this  may  be  the 
same  as  though  he  were  interested  in  a  firm  which  received  that 
contract.2  Property  acquired  by  and  in  the  name  of  a  "dummy" 
corporation  may  be  held  to  be  subject  to  a  mortgage  executed  by 
the  owner  of  such  "dummy"  corporation.3  A  contract  between 
three  local  companies  by  which  one  runs  over  the  tracks  of  another 
for  a  consideration  paid  to  the  third  is  legal  as  to  the  second  cor- 
poration where  such  second  corporation  is  a  mere  dummy  of  the 
third  corporation  and  the  earnings  of  both  corporations  go  to- 
gether.4 Where  one  family  own  all  the  stock  of  a  mercantile  cor- 
poration and  one  of  them  is  president  and  has  entire  control  and 
management  of  its  affairs  and  he  wilfully  fires  the  property  in  order 
that  the  insurance  may  be  collected,  the  insurance  company  is  not 
liable.5 

Where  one  corporation  owns  all  the  stock  and  purchases  all  the 
property  for  another  corporation,  and  employs  a  person  to  do  work 
for  the  latter,  it  is  liable  for  his  wages  on  the  ground  that  the  subor- 
dinate company  was  merely  an  agency  or  instrumentality  for  car- 
rying out  the  purposes  of  the  former.6  A  corporation  may  be  held 
liable  for  the  fraud  of  its  board  of  directors  against  another  corpora- 
tion which  the  same  board  controlled.7  The  New  York  court  of  ap- 
peals have  said :  "We  have  of  late  refused  to  be  always  and  utterly 
trammeled  by  the  logic  derived  from  corporate  existence  where  it 
only  serves  to  distort  or  hide  the  truth."  8 

This  same  principle  applies  to  trade  combinations  of  corporations 
called  "Trusts."  9  The  corporate  existence  will  be  disregarded  and 
the  acts  and  contracts  of  the  persons  holding  all  the  stock  will  be 
considered  the  acts  and  contracts  of  the  corporation  itself,  where 
the  effect  is  the  same  as  though  the  corporation  had  acted  or  con- 

1  See  §  663,  infra.  7  Fitzgerald  v.  Fitzgerald,  etc.  Co., 

2  See  §649,  infra.  41  Neb.  374   (1894). 

3  See  §  857,  infra.  8  Anthony     v.     American     Glucose 

4  Union  Pac.  Ry.  v.  Chicago,  etc.  Co.,  146  N.  Y.  407  (1895),  holding 
Ry.,  163  U.  S.  564,  592  (1896).  that,  where  one  corporation  sells  out 

5  Meily  Co.  v.  London,  etc.  Co.,  142  to  another  for  stock  of  the  latter,  a 
Fed.  Rep.  873  (1906),  aff'd  148  Fed.  stockholder  in  the  former  may  sue 
Rep.  683.  the    purchasing    corporation    for    his 

c  Kelly  v.  Ning,  etc.  Assoc,  2  Cal.  part  of  such  stock,  it  not  having  be&n 
App.  460   (1905).  delivered. 


9  See  ch.  XXIX,  infra. 


32 


CH.   I.]  DEFINITIONS   AND   NATURE    OP   CORPORATIONS.  [§   7. 

tracted  as  a  corporation.  Hence,  where  all  the  stock  is  combined 
with  all  the  stock  of  other  companies  in  order  to  form  a  combina- 
tion which  is  illegal,  the  state  will  forfeit  the  charter  of  the  corpo- 
ration, although  technically  it  is  not  a  party  to  the  agreement.1 

It  was  held  by  the  lower  courts  in  England  that  where  a  mer- 
chant incorporates  a  company  to  take  over  the  business,  he  being 
practically  the  only  stockholder,  he  is  liable  personally  for  all  the 
corporate  debts,  on  the  theory  that  the  corporation  was  a  fraud  or 
a  mere  "dummy."  The  House  of  Lords,  however,  very  properly 
reversed  this  decision.2 

§  7.  Classes  of  corporations,  and  the  class  considered  herein. — 
For  the  better  understanding  of  the  law  of  corporations,  and  for 
the  treatment  of  special  branches  of  that  law,  the  early  writers, 
like  Kyd,  Blackstone,  Kent,  Angell  and  Ames,  and  many  subsequent 
authors,  subdivided  corporations  into  distinct  classes.  These  subdi- 
visions have  been  made  on  various  principles  of  classification. 
"When  divided  with  respect  to  the  members  of  corporations  they 
are  aggregate  and  sole.  As  regards  their  functions  they  are  pub- 
lic, such  as  cities  and  towns;  quasi-public,  such  as  counties  and 
school  districts ;  and  private ;  and  again  private  corporations  are, 
divided  into  ecclesiastical  and  lay ;  and  still  further,  lay  corporations 
are  divided  into  eleemosynary  or  charitable,3  and  civil,  the  latter  of 
which  include  all  private  corporations  that  are  created  for  temporal 
purposes,  such  as  banking,  insurance,  trading,  railroad,  manu- 
facturing, turnpike,  bridge  and  canal  corporations,  and  certain  edu- 
cational institutions.  There  has  been  much  discussion  as  to  whether 
a  railroad  company  is  a  public  corporation  or  a  quasi-public  corpora- 
tion  or   a  private  corporation.4      It   seems   clear   that   as  regards 

1  See  -ch.  XXIX,  infra;  also  State  such  a  case  the  corporate  existence 
v.  Standard  Oil  Co.,  49  Ohio  St.  137  will  be  ignored.  Samuel,  etc.  Co.  v. 
(1892).  Illinois,    etc.    Co.,    51    La.    Ann.    64 

2  Salomon    v.     Salomon,     etc.     Co.,  (1898). 

[1897]  A.  C.  22,  reversing  Broderip  v.  3  A  library  association  is  a  public 
Salomon,  [189*5]  2  Ch.  323.  Sfee  also  charity  and  hence  its  property  cannot 
Munkittrick  v.  Perryman,  74  L.  T.  be  sold  under  levy  of  execution.  For- 
Rep.  149  (1S9G),  where  the  court  held  dyce,  etc.  v.  Woman's,  etc.  Ass'n,  79 
that  two  partners  might  incorporate  Ark.  550  (1906). 
and  that  they  would  not  thereafter  4  in  United  States  v.  Tsans-Mis- 
be  personally  liable  on  the  contracts  souri  Freight  Assoc,  166  U.  S.  290, 
of  the  company.  The  court,  however,  321  (1897),  the  court  said:  "It  can- 
intimated  that  if  both  of  the  partners  not  be  disputed  that  a  railroad  is  a 
and  the  corporation  had  been  before  public  corporation,  and  its  business 
the  court  a  different  conclusion  might  pertains  to  and  greatly  affects  the 
have  been  reached.  The  supreme  public,  and  that  it  is  of  a  public  na- 
court  of  Louisiana  has  held  that  in  ture."  "Though  the  corporation  was 
(3)                                                     33 


7.] 


DEFINITIONS   AND   NATURE    OF    CORPORATIONS. 


[cn.  i. 


its  stockholders  it  is  a  private  corporation,  and  as  regards  its  duties 
towards  the  public  it  is  a  public  corporation,  and  hence  it  may  well 
be  called  a  "quasi  public"  corporation.  The  term,  quasi  public 
corporation,  may  well  be  applied  to  a  steam  railroad,  street  railway, 
telegraph,  telephone,  cable,  gas,  electric  light,  subway  or  water 
works  corporation,  and  in  fact  to  every  other  corporation,  which  is 
authorized  to  exercise  the  power  of  eminent  domain  or  to  occupy 
the  public  streets. 


private,  its  work  was  public,  as  much  porations  technically  private,  but  yet 
so  as  if  it  were  to  be  constructed  by  of   a   quasi   public   character,   having 
the  State."     Township  of  Pine  Grove  in  view  some  great  public  enterprise, 
v.  Talcott,   19  Wall,  6G6,  676    (1873).  in  which  the  public  interests  are  di- 
"The  corporations  referred  to  in  the  rectly  involved  to  such  an  extent  as 
statute  were  not  in  any  sense,  here  to  justify  conferring  upon  them  im- 
involved,   'strictly   private.'     Authors  portant  governmental  powers,  such  as 
who  class  these  corporations  as  such,  an   exercise  of  the  right  of  eminent 
because  individuals  own  their  shares,  domain.     Of  this  class  are  railroad, 
warn  the   reader  against  the   use  of  turnpike,  and  canal  companies;    and 
this  classification  made  in  People  v.  corporations  strictly  private,   the   di- 
Salem.      They    say    most    fully    that  rect   object   of   which    is   to   promote 
when  they  are  created  for  public  pur-  private   interests,   and   in   which  the 
poses,  perform  public  duties  and  ex-  public  has  no  concern,  except  the  in- 
ercise  delegated  sovereign  rights  for  direct  benefits  resulting  from  the  pro- 
that  purpose,  they  are  public  in  their  motion  of  trade,  and  the  development 
nature.    As  said  in  Swan  v.  Williams  of  the  general  resources  of  the  coun- 
(2  Mich.  427),  a  fourth  of  a  century  try."    Miners'  Ditch  Company  v.  Zel- 
since  in  Michigan,  they  are  quasi  pub-  lerbach,    37     Cal.     543,     577     (1869). 
lie,  and  stand  in  a  distinct  class,  by  "Railroad  companies  are  held  to  be 
themselves."     Talcott  v.  Pine  Grove,  quasi   public   corporations   and   agen- 
23  Fed.  Cas.  652   (1872).     "Railroads  cies."     Pueblo,  etc.  R.  R.  v.  Taylor,  6 
are  quasi  public  corporations."    Dins-  Colo.  1,  8    (1881).     "A  railroad  corn- 
more   v.   Louisville,   etc.   Ry.,   2   Fed.  pany  is  a  quasi  public  corporation." 
Rep.  465   (1880).     That  a  railroad  is  Board    Commissioners    v.    Lafayette, 
a  quasi   public   corporation,   see   Chi-  etc.  R.  R.,  50  Ind.  85,  108  (1875).    "A 
cago,  etc.  Ry.  v.  Wabash,  etc.  Ry.,  61  railroad   corporation   differs   in   some 
Fed.  Rep.  993  (1894).    See  209  U.  S.  118  important  respects  from  private  cor- 
"Railway  companies  are  more  than  porations  in  general."     State  v.  Cen- 
mere   private  corporations— they   are  tral  Iowa  Ry.,  71  Iowa  410,  415  (1887). 
in  many  respects,  and  for  many  pur-  "Railroad  companies  are  private  cor- 
poses,    quasi    public   bodies,    invested  porations;     yet  they  are  declared  to 
with    large    and    peculiar    franchises  be   quasi   public   agencies,   and   their 
and  privileges,  and  owing  important  roads  to  subserve  to  a  certain  extent 
duties,  and  under  varied  responsibili-  public  purposes,  so  much  so  that  the 
ties  to  the  public."  Kelley  v.  Trustees,  public  may  be  taxed  to  aid  in  their 


etc.  R.  R.,  58  Ala.  489,  501  (1877). 
"There  are  several  classes  of  corpora- 
tions,  such  as  public  municipal  cor- 


construction."  St.  Joseph,  etc.  R.  R. 
v.  Ryan,  11  Kan.  602,  608  (1873). 
"Railroads,  like  all  other  public  thor- 


porations,  the  leading  object  of  which    oughfares,    are   public    instrumentali- 
is  to  promote  the  public  interest;  cor-    ties.      The    power    to    construct   and 

34 


CH.   I.] 


DEFINITIONS   AND    NATURE    OP    CORPORATIONS. 


[§7. 


A  domestic  corporation  is  one  that  lias  been  organized  under  the 
laws  of  the  state  referred  to.  A  foreign  corporation  is  one  that  has 


maintain  railroads  is  granted  to  cor- 
porations for  a  public  purpose.  The 
right  to  exercise  the  very  high  attri- 
butes of  sovereignty,  the  power  of 
eminent  domain  and  of  taxation,  to 
further  the  construction  of  railways, 
could  not  be  granted  to  aid  a  purely 
private  enterprise."  State  v.  Dodge 
City,  etc.  Ry.,  53  Kan.  377,  378  (1894). 
"Most  certain  it  is,  that  as  to  all 
their  rights,  powers,  and  responsibil- 
ities, three  grand  classes  of  corpora- 
tions exist.  1st:  Political  or  munici- 
pal corporations,  such  as  counties, 
towns,  cities  and  villages,  which,  from 
their  nature,  are  subject  to  the  un- 
limited control  of  the  Legislature; 
2nd:  Those  associations  which  are 
created  for  public  benefit,  and  to 
which  the  government  delegates  a 
portion  of  its  sovereign  power,  to  be 
exercised  for  public  utility,  such  as 
turnpike,  bridge,  canal,  and  railroad 
companies;  and  3d:  Strictly  private 
corporations,  where  the  private  inter- 
est of  the  corporators  is  the  primary 
object  of  the  association,  such  as 
banking,  insurance,  manufacturing 
and  trading  companies.  .  .  .  But 
the  object  and  the  origin  of  that  class 
of  corporations  represented  by  the  de- 
fendants in  this  case,  and  which 
might  with  far  more  propriety  be 
styled  public  than  private  corpora- 
tions, are  of  an  altogether  different 
nature  and  character.  Their  very  ex- 
istence is  based  upon  the  delegation 
to  them  of  the  sovereign  power  to 
take  private  property  for  public  use, 
and  upon  the  continued  exercise  of 
that  power  in  the  use  of  the  property 
for  the  purposes  for  which  it  was 
condemned.  They  are  the  means  em- 
ployed to  carry  into  execution  a  given 
power.  That  private  property  can  be 
taken  by  the  government  from  one 
and  bestowed  upon  another  for  pri- 
vate use,  will  not  for  a  moment  be 
contended,  and  these  corporations  can 


only  be  sustained  upon  the  assump- 
tion that  the  powers  delegated,  are  to 
a  public  agent,  to  work  out  a  public 
use."  Swan  v.  Williams,  2  Mich.  427, 
434,  435  (1852).  "A  corporation  like 
the  Lake  Superior  and  Mississippi 
Railroad  Company,  though  denomi- 
nated a  private  corporation,  is  a  quasi 
public  corporation,  from  the  nature 
of  the  purpose  for  which  it  is  created, 
of  the  powers  with  which  it  is  en- 
dowed, and  of  the  functions  which  it 
performs."  Stewart  v.  Erie,  etc.  Com- 
pany, 17  Minn.  372,  395  (1871).  "The 
individual  corporators,  in  the  antici- 
pated pecuniary  benefit  which  may 
result  to  them,  have  an  object  and 
an  interest  distinct  from  that  of  the 
public.  In  that  respect  the  enterprise 
is  individual,  and  the  corporation 
private.  But  the  object  and  purpose 
of  the  incorporation  are  the  public 
advantage.  This  gives  to  the  work 
its  public  character."  Brown  v.  Beat- 
ty,  34  Miss.  227,  240  (1857).  "A  rail- 
road company  is  a  private  corpora- 
tion, within  the  meaning  of  a  con- 
stitutional prohibition  against  gen- 
eral laws  being  suspended  for  the 
benefit  of  a  private  corporation." 
Yazoo,  etc.  R.  R.  v.  Southern  Ry.,  83 
Miss.  746  (1904).  "But  the  broad 
position  is  taken  that  the  company 
is  a  private  corporation,  and  has  the 
right  to  buy  and  hold  all  kinds  of 
property  the  same  as  an  individual. 
This  position  is  wholly  indefensible. 
Whilst  it  is  true,  in  one  sense,  that 
it  is  a  private  corporation,  yet  the 
public  is  deeply  interested  in  it.  Its 
chartered  privileges  and  franchises 
were  not  granted  solely  and  exclusive- 
ly for  private  benefit  and  emolument, 
but  to  subserve  a  great  public  inter- 
est." Pacific  R.  R.  v.  Seely,  45  Mo. 
212,  217  (1870).  "It  is  a  radical  error 
to  regard  these  corporations  as  simply 
private.  They  have  a  public  as  well 
as  a  private  aspect,  and  it  is  on  this 


35 


7.] 


DEFINITIONS   AND   NATURE    OF    CORPORATIONS. 


[cil.    I. 


been  organized  under  the  laws  of  another  state  or  of  a  foreign  gov- 
ernment An  alien  corporation  is  one  that  has  been  organized  under 
the  laws  of  a  foreign  government.1 


account  that   the   immunity  in   ques- 
tion belongs  to  them.    That  they  pos- 
sess,  in  some  degree,   the  nature  of 
a  public  corporation  cannot,  and  will 
not,    be   denied,    for   they   could   not 
otherwise  acquire  a  foot  of  land  for 
their   roadway   in  this  state  by  con- 
demnation."     Beseman    v.    Pennsyl- 
vania   R.    R.,    50    N.    J.    L.    235,    240 
(1888).     "I    entirely   agree  with   the 
Chief  Justice  that,  in  the  grant  of  a 
franchise    of    building    and    using    a 
public  railway,  that  there  is  an  im- 
plied condition  that  it  is  held  as  a 
quasi  public  trust,  for  the  benefit  of 
all  the  public,  and  that  the  company 
possessed  of  the  grant  must  exercise 
a  perfect  impartiality  to  all  who  seek 
the  benefit  of  the  trust.     It   is  true 
that  these  railroad   corporations  are 
private,   and,   in  the  nature   of  their 
business,   are  subject   to,   and   bound 
by  the  doctrine  of  common  carriers, 
yet,   beyond   that,  and    in   a  peculiar 
sense,  they  are  entrusted  with  certain 
functions  of  the  government,  in  order 
to  afford  the  public  necessary  means 
of     transportation."      Messenger     v. 
Pennsylvania    R.    R.,    37    N.    J.    L. 
531,   536    (1874).     "The  United   Com- 
panies are  quasi-public  corporations." 
Black  v.  Delaware,  etc.  Canal  Co.  24 
N.  J.  Eq.  455,  469   (1873).     "It  is  set- 
tled  law   in  this   State  that   railway 
companies    are    private,    as    disting- 
guished  from  public  corporations.  But 
when  the  power  of  eminent  domain  is 
delegated  for  the  purpose  of  enabling 
these  companies   to   discharge  duties 
for  the  public  benefit  they  occupy  a 
different    relation    to    the    State   and 
the  people  from  that  of  ordinary  pri- 


vate    corporations,     the     powers     of 
which  are  given  and  exercised  exclu- 
sively for  the  profit  or  advantage  of 
their  stockholders,  and  are  therefore 
called   quasi-public,   though   they   fall 
within    the    classification    of    private 
corporations."   Logan  v.  Railroad,  116 
N.  C.  940,  944  (1895).    "It  is  because 
of  the  fact  that  such  corporations  are 
public  corporations,  being  vested  with 
a   portion    of   sovereign    power   dele- 
gated to  them  by  the  state,  and  owing 
duties  to  the  public,  that  they  have 
been    held    subject    to    the    right   of 
mandamus   to   oblige   them   to   fairly 
and  fully  carry  out  the  public  object 
of  their   creation."     Scofield  v.  Rail- 
way Company,   43  Ohio  St.,  571,  594 
(1885).     Concerning  the   question  of 
whether  a  railroad  company  is  a  pri- 
vate   corporation,    the    court   said    in 
Pierce  v.  Commonwealth,  104  Pa.  St. 
155     (1883):      "Railroad    and    canal 
companies    are    private    corporations. 
This  we  have  decided  in  point  twice 
within  the  last  two  years;  once  in  the 
case  of  Timlow  v.  Philadelphia,  etc.  R. 
R.,  99  Pa.  St.  284   (1882),  and  again 
in  the  case  of  Pittsburgh,  etc.  R.  R.  v. 
Bruce,  102  Pa.  St.  23   (1882).     .     .     . 
So  in  the  case  of  Presbyterian  Soc.  v. 
Auburn,  etc.  R.  R.,  3  Hill,  567  (1842), 
it  is  said  that  a  railroad  company  is 
not  public  nor  does  it  stand  in  the 
place  of  the  public;  it  is  but  a  private 
corporation  over  whose  rails  the  pub- 
lic may  travel  if  they  choose  to  ride 
in  its  cars.     Indeed,  we  regard  it  as 
a  misnomer  to  attach  even  the  name 
'quasi-public  corporation'  to  a  railroad 
company,  for  it  has  none  of  the  fea- 
tures of  such  corporation,   if  we  ex- 


i  An  English  corporation  is  an  town  or  city  specified  in  its  articles 
alien  corporation.  Eureka,  etc.  Co.  v.  of  incorporation.  Rossie  Iron  Works 
Richmond,  etc.  Co.,  2  Fed.  Rep.  829  v.  Westbrook,  59  Hun,  345  (1891). 
(1880).  See  also  §1,  supra. 

The  residence  of  a  corporation  is  the 

'     36 


CH.   I.] 


DEFINITIONS    AND    NATURE    OP    CORPORATIONS. 


[§7. 


At  an  early  day  private  corporations  for  business  purposes  were 
few  in  number  and  of  little  importance  in  the  law.  The  English 
East  India  Company  was  organized  in  1600  and  the  Dutch  East 
India  Company  in  1602.  The  latter  was  "the  first  great  joint- 
stock  company  whose  shares  were  bought  and  sold  from  hand  to 
hand."1  As  Fiske  well  says,2  "those  events  mark  the  beginning  of 
a  new  era  in  European  commerce."  Chancellor  Bland,  of  Mary- 
land, believed  that  no  instance  of  such  a  corporation  in  the  colo- 
nial times  of  America  could  be  found.3  Judge  Baldwin,  of  Con- 
necticut, however,  calls  attention  to  the  fact  that  the  "Xew  London 
Society  for  Trade  and  Commerce  United"  was  incorporated  by  the 
Colony  of  Connecticut  in  1731,  and  that  it  not  only  had  a  capital 
stock  but  issued  circulating  bills  as  currency.  The  Connecticut  Land 
Company  was  organized  in  Connecticut  in  1T'.».">  and  owned  the  en- 
tire Connecticut  "Western  Reserve."     This  land  was  held  in  the 


cept  Its  qualified  right  of  eminent  do- 
main, and  this  it  has  because  of  the 
right  reserved  to  the  public  to  use  its 
way  for  travel  and  transportation.  Its 
officers  are  not  public  officers,  and  its 
business  transactions  are  as  private 
as  those  of  a  banking-house.  Its  road 
may  be  called  a  quasi-public  highway, 
but  the  company  itself  is  a  private 
corporation  and  nothing  more."  "That 
railroads  are  quasi-public  corpora- 
tions is  admitted  on  all  hands." 
Moore  v.  Railroad  Company,  38  S.  C. 
1,  24  (1S92).  'Until  a  comparatively 
recent  period  corporations  aggregate 
were  divided  by  text-writers  as  well 
as  by  judges  into  but  two  classes,  pri- 
vate corporations  created  for  private 
purposes  as  distinguished  from  gov- 
ernmental purposes  and  public  cor- 
porations created  for  public  purposes 
exclusively.  This  division  really  in- 
cluded almost  all  corporations  which 


R.  R.  v.  West  Va.  etc.  Co.,  25  W.  Va. 
324,  358  (1884).  "A  railroad  company 
may  be,  as  to  its  capacity  to  assume 
and  exercise  in  the  name  of  the  state 
the  power  of  eminent  domain  dele- 
gated to  it;  so  far  a  public  or  quasi 
public  corporation,  yet  in  all  its  other 
powers,  functions  and  capacities  it  is 
essentially  a  private  corporation,  not 
distinguishable  from  any  other  of 
that  name  or  character."  Whiting  v. 
Sheboygan,  etc.  R.  R.,  25  Wis.  167, 
181  (1870).  See  also  §  891,  infra,  and 
the  various  sections  of  ch.  LV.  Rail- 
roads in  some  respects  may  be  private 
carriers.  See  Elliott  on  Railroads, 
p.  2172,  and  209  U.  S.  108,  118. 

1  Payne,  European  Colonies,  p.  55. 

2  Writings  of  John  Fiske,  vol.  IV, 
p.  60. 

3  McKim  v.  Odom,  3  Bland,  Ch. 
(Md.)  407,  418  (1S29).  For  a  list  of 
the  first  incorporated  business  corn- 


had  any  actual  existence  until  a  com-    panies  in  America,  see  Harvard  Law 
paratively  recent  period.    Sixty  years    Review,  vol.  2,  p.  165. 


ago  there  were  actually  in  existence 
scarcely  any  of  the  corporations 
which  I  have  called  quasi  public  cor- 
porations;    and    therefore    it   is   not 


In  the  case  of  McKean  v.  Biddle, 
181  Pa.  St.  361  (1S97),  it  appears  that 
a  mutual  insurance  company  had  not 
paid  dividends  for  one  hundred  and 


strange,  that  text-writers  and  judges  thirty  years,  but  had  gradually  ac- 
spoke  of  corporations  being  divided  cumulated  a  surplus  of  over  $4,000,- 
into  but  two  classes,  private  and  pub-  000.  The  court  held  that  it  might 
lie  corporations."     Laurel  Fork,   etc.    resume  the  payment  of  dividends. 

37 


7.] 


DEFINITIONS   AND    NATURE    OF   CORPORATIONS. 


[CH.    I. 


names  of  trustees  for  tlie  benefit  of  the  stockholders  of  the  company 
until  1809,  when  the  company  partitioned  the  land  among  its  stock- 
holders and  divided  its  assets  and  was  dissolved.1 

Nevertheless,  during  the  eighteenth  century,  private  corporations 
for  profit  were  of  small  consequence,  and  it  has  only  been  during 
(lie  past  fifty  years  that  the  relative  importance  of  the  different 
classes  of  corporations  has  changed,  and  that  private  corporations 
for  business  purposes  have  overshadowed  all  other  kinds.  This  has 
been  duo  chieliy  to  the  limited  liability  feature  of  modern  businesa 
corporations,  a  feature  that  has  rendered  possible  the  union  of  many 
persons  and  many  contributions  of  capital,  with  a  limit  to  their 
risks.  President  Eliot  of  Harvard  University  has  pointed  out  this 
distinguishing  characteristic.2  Strange  to  say  this  feature  of  business 
corporations  has  been  of  slow  growth,  both  in  England  and  the 
United  States.3 


1  Holmes  v.  Cleveland  R.  R.,  93 
Fed.  Rep.  100  (1861),  where  the  court 
held  that  a  small  parcel  of  land  which 
accidentally  was  omitted  in  making 
such  division  of  the  assets  could  not 
be  claimed  by  the  heirs  of  the  stock- 
holders fifty  years  after  the  division 
was  made. 

2  In  an  address  at  Chicago,  March 
10th,  1906,  President  Eliot  said: 

"A  large  part  of  the  work  of  the 
world  is  still  done  by  individuals  and 
partnerships;  but  the  corporation  is 
the  great  new  factor  in  modern  busi- 
ness, the  privilege  of  limited  liability 
being  the  corporation's  most  precious 
characteristic.  The  principle  of  lim- 
ited liability  is  by  far  the  most  ef- 
fective legal  invention  for  business 
purposes  made  in  the  nineteenth  cen- 
tury— not  that  corporations  have  not 
other  advantages  over  partnerships, 
such  as  the  advantageous  holding  of 
real  estate,  the  easy  transference  of 
a  stockholder's  interest  and  conven- 
ience as  to  suing  and  being  sued;  but 
the  fundamental  advantage  of  a  cor- 
poration, the  advantage  which  ena- 
bles it  to  mass  and  direct  capital,  is 
the  privilege  of  limited  liability. 
Therefore,  corporations  multiply  and 
have  become  indispensable. 

"It  is  no  wonder  that  the  ethics  of 
corporation  management  are  in  some 


respects  indeterminate,  and  are  there- 
fore an  urgent  subject  of  public  dis- 
cussion; for  the  invention  of  the 
business  corporation  itself  is  hardly 
more  than  fifty  years  old,  and  this 
new  creation  deals  with  forms  of 
property  which  are  highly  novel." 

3  In  England,  before  1855,  stockhold- 
ers in  business  and  manufacturing 
corporations  were  liable  for  all  the 
debts  of  the  concern  the  same  as  a 
partner.  This  was  because  the  acts 
of  parliament  authorizing  incorpora- 
tion for  manufacturing  and  business 
purposes  expressly  provided  for  such 
full  liability.  See  8  Vict.  Ch.  110.  In 
1855,  however,  by  18  and  19  Vict.  Ch. 
133,  the  liability  of  such  stockholders 
might  be  limited  by  papers  to  that 
effect  being  filed  in  accordance  with 
the  terms  of  the  statute. 

In  1811  New  York  enacted  a  stat- 
ute, authorizing  incorporation  for  cer- 
tain manufacturing  purposes,  and  the 
stockholders  were  to  be  liable  for 
corporate  debts  only  "to  the  extent 
of  their  respective  shares  of  stock.-' 
L.  1811,  Ch.  67.  In  Massachusetts  by 
statute  enacted  in  1809  (L.  1809,  Ch. 
65)  stockholders  in  manufacturing 
corporations  were  liable  individually 
for  all  the  debts  of  the  company. 
But  by  the  Act  of  1830  (L.  1830,  Ch. 
53)     stockholders    in    manufacturing 


38 


CH.    I.]  DEFINITIONS   AND   NATURE    OF   CORPORATIONS.  [§   8. 

The  modern  text-books  on  corporations  treat  very  little  of  the  older 
classes  of  corporations  and  the  principles  which  govern  them,  but 
fully  and  explicitly  of  corporations  having  a  capital  stock.  Corpo- 
rations without  a  capital  stock  are  governed  largely  by  principles  of 
law  that  have-  changed  little  since  the  days  of  Hlackstone,  Kyd,  and 
Kent.  It  is  with  this  feature  of  modern  corporations,  as  distin- 
guished from  the  characteristics  of  the  early  corporations,  which 
have  sunk  into  comparative  unimportance,1  that  this  work  is  chiefly 
concerned. 

§  8.  Corporations  having  a  capital  stock— Definition  of  capital 
stock. — The  questions  which  arise  in  connection  with  corporations 
having  a  capital  stock  may  be  divided  into  two  groups.  The  first 
includes  those  principles  of  law  which  affect  all  corporations, 
whether  they  have  a  capital  stock  or  not.  Of  such  a  kind  are  the 
old  questions  of  how  a  corporation  shall  contract;  whether  a  seal 
is  necessary;  whether  and  how  it  may  act  through  an  agent;  the 
right  to  sue  and  he  sued  in  various  courts;  and  to  hold  and  dispose 
of  property.  These  questions,  capacities  and  incidents,  for  the  most 
part,  have  become  so  well  settled  as  to  give  rise  to  comparatively 
little  litigation  at  the  present  • 

Oil  the  cither  hand,  it  is  believed  that  the  modern  law  of  corpo- 
rations, a-  regards  its  litigated  questions,  its  unsettled  principles,  its 
new  problems  and  its  rapidly  crystallizing  results,  is  the  law  of 
corporations  having  n  capital  stock. 

Capita]  stock  is  the  sum  fixed  by  the  corporate  charter  as  the 
amount  paid  in  or  to  be  paid  in  by  the  stockholders,  for  the  prose- 
cution of  the  business  of  the  corporation  and  for  the  benefit  of  cor- 
porate creditor-.-      The  capital  stock   is  to  be  (dearly  distinguished 

corporations   were  not   to  be  further  95  Tenn.  634  (1895),  and  in  Commer- 

liable   after   the   whole   capital   stock  cial  F.  Ins.  Co.  v.  Board  of  Revenue, 

had  been  paid  in  and  a  certificate  to  99  Ala.  1   (1892).     For  various  defini- 

that  effect  filed.  tions  see  Barry  v.  Merchants'  Ex.  Co., 

i  The  subject  of  municipal  corpo-  1  Sandf.  Ch.  280,  305  (1844);  Christ- 
rations  forms  an  exception  to  this  ensen  v.  Eno,  106  N.  Y.  97,  100 
statement,  but  the  great  work  of  (1887);  High  tower  v.  Thornton,  S 
Judge  Dillon  on  Municipal  Corpora-  Ga.  486,  500  (1850);  Hannibal,  etc. 
tions  has  clearly  stated,  and  thereby  R.  R.  v.  Shacklett,  30  Mo.  550,  558 
settled,  most  of  the  difficult  subjects  (1SC0);  St.  Louis,  etc.  R.  R.  v.  Lof- 
connected  with  that  branch  of  the  tin,  30  Ark.  693,  709  (1875);  Bent  v. 
law.  Hart,   10  Mo.  App.   143,   146    (1S81) ; 

-  Quoted  and  approved  in  Cooke  v.  Mutual  Ins.  Co.  v.  Erie  County,  4  N. 

Marshall,  191  Pa.  St.  315  (1899),  s.  c.  Y.    442    (1S51);     Bailey   v.   Clark,    21 

196  Pa.   St.   200;     American,  etc.   Co.  Wall,    284     (1874),    where    Field,    J., 

r.  State  Board,  56  N.  J.  L.  389  (1894) ;  says  "it  applies  only  to  the  property 

Tradesman  Pub.  Co.  v.  Car  Wheel  Co.,  or   means   contributed   by   the  stock- 

39 


§8.] 


DEFINITIONS    AND    NATURE    OP    CORPORATIONS. 


[cn.  I. 


from  the  amount  of  property  possessed  by  the  corporation.  Oc- 
casionally it  happens  that,  under  the  terms  of  statutes  relating  to 
taxation  which  have  been  drawn  without  regard  to  the  technical 
meaning  of  words,  the  courts  will  construe  the  capital  stock  to  mean 
all  the  actual  property  of  the  corporation. *  Lut  this  is  for  tho 
purpose  of  carrying  out  the  intent  of  the  statute,  and  is  not  the 
real  meaning  of  the  term.  Capital  stock  as  used  in  a  taxation  stat- 
ute may  be  construed  to  mean  property  contributed  by  the  stockhold- 


holders  as  the  fund  or  basis  for  the 
business     or     enterprise     for     which 
the    corporation    or    association    was 
formed;"  Jones  v.  Davis,  35  Ohio  St. 
474,  476  (1880);  Railway  Co.  v.  Fur- 
nace   Co.,    49    Ohio    St.    102    (1S92); 
Burrall  v.  Bushwick  R.  R.,  75  N.  Y. 
211   (1878),  where  Folger,  J.,  defines 
it  as  "that  money  or  property  which 
is  put  into  a  single  corporate  fund 
by  those  who,  by  subscription  there- 
for, become  members  of  the  corporate 
body;"    Williams   v.   Western   Union 
Tel.    Co.,    93    N.   Y.    162,    188    (1883), 
where  Earl,  J.,  tersely  says  it  is  "the 
property  of  the  corporation  contrib- 
uted by  its  stockholders  or  otherwise 
obtained  by  it,  to  the  extent  required 
by  its  charter;"  Sanger  v.  Upton,  91 
U.  S.  56,  60  (1875);  State  v.  Morris- 
town   Fire   Assoc,    23    N.    J.    L.    195 
(1851) ;  State  v.  Cheraw,  etc.  R.  R.,  16 
S.  C.  524   (1881).     "The  capital  of  a 
corporation  is  the  property  or  means 
which  the  corporation   owns,  and  it 
may  vary  in  amount,  while  the  capi- 
tal stock  is  fixed,  and  represents  the 
interests  of  the  stockholders,  and  is 
their  property."    Wells  v.  Green  Bay, 
etc.  Co.,  90  Wis.  442   (1895).     A  sav- 
ings bank  corporation  may  be  formed 
without  any  capital  stock,  the  profits 
going  to  depositors.     Huntington   v. 
Savings  Bank,  96  U.  S.  388   (1877). 
Such  is  the  statute  law  of  New  York. 

For  a  definition  of  capital  stock, 
see  People  v.  Coleman,  126  N.  Y.  433 
(1891). 

"Capital  stock  of  a  corporation  is 
a  different  thing  from  shares  of  stock. 
Lycoming  Co.  v.  Gamble,  47  Pa.  St. 
106,   110    (1864).     The  capital  stock 


represents  the  property  and  assets  of 
the  company,  which  may  consist  in 
whole  or  in  part  of  real  estate.  The 
certificates  or  shares  of  stock  are  the 
evidence  of  an  interest  which  the 
holder  has  in  the  corporation,  and  it 
is  well  settled  that  this  interest  is 
personal  property."  Wilkes  Barre, 
etc.  Bank  v.  Wilkes  Barre,  148  Pa.  St 
601  (1892). 

Where  the  charter  gives  power  to 
borrow  not  exceeding  one-half  of  the 
capital  stock,  capital  stock  means  the 
paid-in  capital  stock  and  not  the  capi- 
tal stock  as  stated  in  the  charter. 
Commonwealth  v.  Lehigh  Avenue  Ry., 
129  Pa.  St.  405   (1889). 

i  Quoted  and  approved  in  Hender- 
son Bridge  Co.  v.  Commonwealth,  99 
Ky.  623  (1895);  aff'd,  166  U.  S.  150; 
Ohio,  etc.  R.  R.  v.  Weber,  96  111.  443 
(1880);  Philadelphia  v.  Ridge  Ave. 
etc.  Ry.,  102  Pa.  St.  190  (1883);  Se- 
curity Co.  v.  Hartford,  61  Conn.  89 
(1891).  In  New  York  the  words 
"capital  stock"  as  used  in  the  tax 
laws  are  construed  to  mean  actual 
property  and  not  share  capital.  Peo- 
ple v.  Coleman,  126  N.  Y.  433  (1891) ; 
People  v.  Wemple,  150  N.  Y.  46,  50 
(1896). 

An  exemption  of  "stock"  from  tax- 
ation does  not  exempt  shares  of 
stock.  Georgia,  etc.  Co.  v.  Wright, 
132  Fed.  Rep.  912  (1904). 

In  a  tax  on  the  market  value  of 
stock  less  a  proportion  of  the  "capi- 
tal" invested  in  real  estate,  the  word 
"capital"  means  the  excess  of  assets 
over  liabilities.  Appeal  of  Bulkeley, 
77  Conn.  45   (1904). 


40 


CH.   I.]  DEFINITIONS   AND   NATURE   OF   CORPORATIONS.  [§  8. 

ers  or  otherwise  obtained  to  the  extent  required  by  the  charter.1 
For  taxation  purposes  stock  may  be  located  in  the  state  where  the 
company  is  incorporated.2  A  tax  on  the  value  of  the  capital  stock 
is  a  tax  on  the  property  in  which  that  capital  is  invested,  and  hence 
if  a  portion  of  the  property  is  beyond  the  limits  of  the  state,  and 
thus  exempt  from  taxation  in  the  state,  that  portion  of  the  capital 
stock  cannot  be  taxed.3  Bonds  in  which  an  insurance  company  has 
invested  its  money  may  be  considered  a  part  of  the  capital  stock, 
within  the  meaning  of  a  tax  statute.4  The  capital  stock  of  a  cor- 
poration remains  fixed,  although  the  actual  property  of  the  corpora- 
tion may  fluctuate  widely  in  value,  and  may  be  diminished  by  losses 
or  increased  by  gains.  The  term  "stock"  has  been  used  at  times  to 
indicate  the  same  thing  as  capital  stock.5  Generally,  however,  it 
means  shares  of  stock,  and  in  this  sense  it  is  used  in  this  treatise. 
The  words  capital  and  profits,  as  used  in  connection  with  life  estates 
and  remainders  in  stocks,  have  a  different  meaning  from  what  they 
have  in  determining  the  right  of  a  corporation  to  declare  dividends. 
In  passing  upon  the  relative  interests  of  a  remainderman  and  life 
tenant  in  shares  of  stock  and  the  dividends  therefrom,  the  courts 
will  sometimes  include  in  capital  stock,  extensions,  improvements, 
plant  and  working  capital  which  have  been  obtained  from  past  prof- 
it- and  not  from  subscriptions  to  the  capital  stock.6  Where  a  stock 
corporation  has  received  no  stock  subscription  and  issued  no  stock 
it  cannot  maintain  a  suit.7     A  corporation  has  no  power  to  issue 

i  People,  etc.  v.  Morgan,  ITS  N.  Y.  this  company.    After  the  plant  there 

433   (1904).  arises   a  necessity  for   raw   material 

2  Corry  v.  Baltimore,  196  U.  S.  466  and  labor  to  manufacture  it.    This  re- 
(1905).  quires  what  is  usually  termed  a  work- 

3  Delaware,   etc.   R.   R.    v.   Pennsyl-  ing  capital,  and  it,  of  necessity,  varies 
vania,*198  U.  S.  341   (1905).  in  amount  depending  upon  the  mag- 

■t  Scottish,  etc.  Co.  r.  Bowland,  196  nitude  of  the  business.  It  must, 
U.  S.  611  (1905).  therefore,  also  have  been  within  the 
5  See  §  12,  infra.  contemplation  of  the  testator  that  a 
c  Matter  of  Rogers,  161  N.  Y.  108  reasonable  amount  would  be  retained 
(1899),  the  court  saying:  "What  then  by  the  directors  for  this  purpose." 
is  capital  and  what  is  profits?  In  a  7  Aspen,  etc.  Co.  v.  Aspen,  5  Colo, 
manufacturing  business  a  plant  is  of  App.  12  (1894).  Even  though  a  gas 
first  importance,  and  as  the  business  company  issues  stock  without  the  con- 
increases  an  enlargement  thereof,  sent  of  a  state  board,  as  required  by 
with  the  necessary  tools,  fixtures  and  statute,  yet  this  is  no  defense  to  a 
machinery,  is  one  of  the  things  to  tax  levied  on  the  corporation  based 
which  the  earnings  of  the  company  on  the  amount  of  its  capital  stock, 
may  properly  be  devoted.  This  must  including  such  stock.  Attorney-Gen- 
be  deemed  to  be  fairly  within  the  con-  eral  v.  Massachusetts,  etc.  Co.,  179 
templation  of  the  testator  in  creating  Mass.  15  (1901).  Under  the  Montana 
the  trusts  with  the  capital  stock  of  statutes,  even  though  no  organization 

41 


§  9.]  DEFINITIONS   AND   NATURE   OF   CORPORATIONS.  [OH.   I. 

stock  unless  expressly  authorized  so  to  do.1  And  authority  in  a 
charter  to  a  cemetery  corporation  to  do  all  things  incident  to  a  cor- 
poration does  not  give  power  to  issue  stock.  Hence  an  election  by 
so-called  stockholders  is  not  Legal.2  A  stock  corporation  cannol  be 
formed  under  the  laws  of  West  Virginia  to  promote  religion  by 
aiding  in  the  support  of  Baptist  ministers  and  in  the  erection  of 
churches.3  It  is  legal  for  a  corporation  to  hold  property  in  excess 
of  the  amount  of  its  capital  stock. ' 

§  9.  Is  the  capital  stock  a  trust  fund  for  the  benefit  of  corporate 
creditors? — In  1824  Mr.  Justice  Story,  in  a  celebrated  case,5  origi- 
nated and  announced  the  doctrine  that  the  capital  stock  of  a  corpo- 
ration is  a  trust  fund,  so  far  as  corporate  creditors  are  concerned, 
and  should  be  protected  and  administered  as  a  trust  fund  by  courts 
of  equity.  This  doctrine  was  supposed  to  have  been  adopted  by  the 
supreme  court  of  the  United  States,6  and  by  the  courts  of  nearly 
every  state  of  the  Union.  On  this  doctrine  rest  the  decisions  that 
unpaid  subscriptions  for  stock  cannot  be  evaded  by  release,  cancel- 
lation, or  fraudulent  transfer  ;7  that  the  holders  of  "watered"  stock 
issued  for  cash,  at  less  than  par  or  for  property  at  an  overvaluation 
are  liable  to  corporate  creditors;8  that  dividends  paid  from  the  capi- 
tal stock  may  be  recovered  back;9  and  that  a  corporation  cannot  use 
its  capital  stock  to  purchase  outstanding  shares  of  its  capital  stock.10 

In  1893,  however,  the  supreme  court  of  the  United  States  passed 
again  upon  this  theory  of  the  capital  stock  being  a  trust  fund,  and 

meetings  of  the  stockholders  and  di-  which  is  incorporated  and  has  a  capi- 

rectors  are  held,  yet  a  deed  of  prop-  tal  stock,  may  sell  all  its  property  to 

erty  to  the  corporation  may  be  valid,  another    corporation,    see   McLeod    v. 

Morrison    v.    Clark,     24    Mont.    515  Lincoln,  etc.  Co.,  69  Neb.  555  (1904), 

(1900).  rev'g  69  Neb.  550. 

i  Cooke    v.    Marshall,    191    Pa.    St.        4  Barry     v.     Merchants'     Exchange 

315  (1S99),  involving  a  cemetery  cor-  Co.,  1  Sandf.  Ch.  280  (1844).    Where 

poration.  a  corporation    owns    property   in   ex- 

2  Cooke  v.  Marshall,  196  Pa.  St.  cess  of  an  amount  specified  and  lim- 
200  (1900).  Under  a  general  act  ited  by  the  charter,  an  exemption 
authorizing  incorporation  for  pur-  from  taxation  does  not  apply  to  such 
poses  other  than  profit,  a  cemetery  excess.  Seashore  House,  etc.  v.  City 
cannot  be  organized  for  profit,  and  of  Atlantic  City,  48  Atl.  Rep.  242  (N. 
hence  the   incorporators  are  not  en-  J.  1900). 

titled   to   moneys    received   from   the  5  Wood  v.   Dummer,   3   Mason,   308 

sale   of   lots,    but   are   bound   to   use  (1824);   s.  c,  30  Fed.  Cas.  435. 

such  moneys  to  improve  the  property.  e  Sawyer    v.    Hoag,    17    Wall.    610, 

Brown  v.  Maplewood,  etc.  Assoc,  85  620    (1873). 

Minn.  498   (1902).  7  See  §§199,  253,  263,  infra. 

3  Powell  v.  Dawson,  45  W.  Va.  7S0  s  See  §§  42,   46,   infra. 
(1899).  9  See   §548,  infra. 

As   to    whether   a   medical   school,      io  See  §  312,  infra. 

42 


CH.    L] 


DEFINITIONS   AND    NATURE    OF    CORPORATIONS. 


[§9. 


decided  that,  if  there  be  any  trust  at  all,  it  is  rather  a  trust  in  the 
administration  after  possession  by  the  court  than  a  trust  attaching 
to  the  property  itself.1  This  conclusion  docs  not  change  the  law  as 
to  subscriptions,  "watered  stock,"  dividends  and  purchases  of  stock, 
as  mentioned  above.     It  changes  only  the  theory  or  reasoning  upon 


i  The  court  said:  "While  it  is 
true  language  has  been  frequently 
used  to  the  effect  that  the  assets  of 
a  corporation  are  a  trust  fund  held 
by  a  corporation  for  the  benefit  of 
creditors,  this  has  not  been  to  convey 
the  idea  that  there  is  a  direct  and  ex- 
press trust  attached  to  the  property. 
...  In  other  words,  and  that  is  the 
idea  which  underlies  all  these  ex- 
pressions in  reference  to  'trust'  in 
connection  with  the  property  of  a  cor- 
poration, the  corporation  is  an  entity, 
distinct  from  its  stockholders  as  from 
its  creditors.  Solvent,  it  holds  its 
property  as  any  individual  holds  his, 
free  from  the  touch  of  a  creditor  who 
has  acquired  no  lien;  free  also  from 
the  touch  of  a  stockholder  who, 
though  equitably  interested  in,  has 
no  legal  right  to,  the  property.  Be- 
coming insolvent,  the  equitable  inter- 
est of  the  stockholders  in  the  prop- 
erty, together  with  their  conditional 
liability  to  the  creditors,  places  the 
property  in  a  condition  of  trust,  first, 
for  the  creditors,  and  then  for  the 
stockholders.  Whatever  of  trust 
there  is  arises  from  the  peculiar  and 
diverse  equitable  rights  of  the  stock- 
holders as  against  the  corporation  in 
its  property  and  their  conditional  lia- 
bility to  its  creditors.  It  is  rather  a 
trust  in  the  administration  of  the  as- 
sets after  possession  by  a  court  of 
equity  than  a  trust  attaching  to  the 
property,  as  such,  for  the  direct  bene- 
fit of  either  creditor  or  stockholder." 
Hollins  v.  Brierfield,  etc.  Co.,  150  U. 
S.  371,  381,  383  (1S93).  To  the  same 
effect,  see  O'Bear  Jewelry  Co.  v.  Vol- 
fer,  106  Ala.  205,  227  (1S94)  ;  Hospes 
v.  Northwestern,  etc.  Co.,  48  Minn. 
174   (1892). 

"When  a  corporation  is  solvent,  the 
theory  that  its  capital  is  a  trust  fund 


upon  which  there  is  any  lien  for  the 
payment  of  its  debts  has  in  fact  very 
little  foundation.  No  general  creditor 
has  any  lien  upon  the  fund  under 
such  circumstances,  and  the  right  of 
the  corporation  to  deal  with  its  prop- 
erty is  absolute  so  long  as  it  does  not 
violate  its  charter  or  the  law  applica- 
ble to  such  corporation."  McDonald 
v.  Williams,  174  U.  S.  397,  401  (1899). 

A  solvent  corporation  does  not  hold 
its  property  in  trust  for  its  creditors, 
even  though  it  is  in  process  of  liquida- 
tion, and  hence  a  partial  distribution 
of  the  assets  of  a  bank  to  the  stock- 
holders during  liquidation,  when  the 
bank  was  solvent  and  retained  suffi- 
cient assets  to  pay  its  liabilities,  can- 
not be  recovered  back  subsequently 
by  the  receiver  in  an  action  at  law, 
although  it  turned  out  that  the  re- 
maining assets  were  not  sufficient  to 
pay  all  liabilities,  no  bad  faith  being 
involved.  Lawrence  v.  Greenup,  97 
Fed.  Rep.  906   (1899). 

"As  between  the  corporation  and  its 
creditors,  the  corporation  does  not 
hold  its  property  in  trust  for  its  cred- 
itors in  any  other  sense  than  does  an 
individual  debtor,  and  that,  until  a 
court  takes  charge  of  the  property  of 
an  insolvent  corporation,  it  has  the 
same  control  over  its  property  that 
an  individual  would  have  over  its 
property  under  like  circumstances." 
Nappanee,  etc.  Co.  v.  Reid,  etc.  Co., 
60  N.  E.  Rep.  1068  (Ind.  1901);  rev'd 
on  another  point  in  s.  c.  159  Ind.  614. 

The  agreement  of  a  corporation  to 
pay  a  specified  sum  of  money,  with 
the  provision  that  it  shall  not  be 
chargeable  against  a  certain  part  of 
the  capital  stock,  can  be  enforced  in 
equity  only,  inasmuch  as  an  account- 
ing is  involved.  Heflin,  etc.  Co.  v. 
Hilton,  124  Ala.  365  (1899). 


43 


§    10.]  DEFINITIONS   AND    NATURE    OF    CORPORATIONS.  [CH.   I. 

which  that  law  is  based.  In  this  respect  the  supreme  court  is  in 
harmony  with  the  English  decisions.  The  trust-fund  theory  does 
not  exist  in  England.  It  is  purely  an  American  doctrine.  The 
fact  is  that  the  trust-fund  theory  has  beclouded  rather  than  clari- 
fied the  subject.  For  instance,  on  account  of  this  theory  some  of 
the  courts  have  fallen  into  error  and  hell  that  when  a  corporation 
is  insolvent  it  cannot  prefer  one  creditor  as  against  another.  The 
trust-fund  theory  may  well  be  superseded  by  the  fact  that  the  capi- 
tal stock  of  a  corporation  is  like  the  capital  of  a  business  man,  and 
that  just  as  he  cannot,  as  against  his  creditors,  give  it  away  or  for- 
give the  debts  of  those  who  owe  him,  so  a  corporation  cannot,  as 
against  its  creditors,  release  subscriptions,  give  away  its  assets  to  its 
stockholders  by  way  of  dividends,  or  buy  its  own  stock  with  funds 
which,  upon  insolvency,  belong  to  its  creditors  instead  of  its  stock- 
holders. 

§  10.  Definitions  of  corporator,  subscriber,  shareholder,  stock- 
holder, and  officer. — A  corporator  is  one  of  those  to  whom  a  char- 
ter is  granted,  or  of  those  who  file  a  certificate  of  incorporation 
under  a  general  incorporating  statute.1  A  subscriber  is  one  who 
has  agreed  to  take  stock  from  the  corporation  on  the  original  issue 
of   such   stock.2      A   shareholder   in   this   country   means   the   same 

i  Chase    v.    Lord,    77    N.    Y.    1,    11  corporator.     Good  Land   Co.   v.  Cole, 

(1879),    the    court    saying:      "Corpo-  110  N.  W.  Rep.  895    (Wis.  1907). 

rators  exist  before  stockholders,  and  A  corporation   is  legally  organized 

do  not  exist  with  them.    When  stock-  although    the    incorporators    are    not 

holders  come  in,  corporators  cease  to  stockholders   as   required   by   statute, 

be."    Cf.  Re  Lady  Bryan,  1  Sawy.  349  Welch  v.   Importers',   etc.   Bank,    122 

(1870);    s.  c,  14  Fed.   Cas.   926.     In  N.  Y.   177   (1890). 

Pennsylvania,   under  a  peculiar  stat-  An    incorporator    need    not    be    a 

ute,  it  has  been  held  that  the  incor-  stockholder  unless  the  statutes  so  re- 

porators    thereof    need    not    be    sub-  quire.    Bristol,  etc.  Trust  Co.  v.  Jones- 

scribers.      See    Densmore    Oil    Co.    v.  boro,   etc.    Trust   Co.,    101   Tenn.   545 

Densmore,  64  Pa.  St.  43,  54  (1870).  (1898). 

It   has   frequently    been    held    that  2  Busey     v.     Hooper,     35     Md.     15 

where  a  statute  authorizes  persons  to  (1871);   Spear  v.  Crawford,  14  Wend. 

form  a  corporation,  although  the  stat-  20,  23  (1835).    In  the  Thames  Tunnel 

ute   does   not,   in   express   terms,   say  Co.  v.  Sheldon,  6  B.  &  C.  341  (1827), 

that  they  must  be  of  full  age,  yet  it  the  word   "subscriber"   is  elaborately 

is  implied  that  they  shall  be  of  full  defined,  and  it  is  held  to  mean  only 

age.     Re  Globe,   etc.   Assoc,  63  Hun,  such  persons  as  have  entered  into  an 

263   (1892);  aff'd,  135  N.  Y.  280.     Cf.  express  contract  to  take  up  a  certain 

Re  Laxon,  [1893]  1  Ch.  210  (1892).  definite  number  of  shares.     See  also 

A  married  woman   is  not  at  com-  a  definition  at  some  length  by  Cooley, 

mon   law   qualified   to   act  as   an    in-  J.,   in   Peninsular  Ry.  v.  Duncan,   28 

corporator  nor  as  treasurer.    9  Ry.  &  Mich.  130  (1873). 

Corp.  L.  J.  197.  Subscribers    are    stockholders,    al- 

A  married  woman  may  be  an  in-  though  no  certificates  have  beon  ie- 

44 


CH.   I.] 


DEFINITIONS   AND   NATURE    OF   CORPORATIONS. 


[§11. 


thing  as  a  stockholder,  and  the  terms  are  used  interchangeably  to 
indicate  one  who  owns  stock  in  a  corporation  and  has  been  accepted 
as  a  stockholder  by  the  corporation.1  "The  stockholders  are  the 
equitable  owners  of  the  corporate  property."2  A  stockholder  does 
not  stand  in  the  attitude  of  a  partner  towards  the  corporation.  A 
director  is  an  "officer,"  and  a  paying  teller  may  be  one  within  the 
meaning  of  a  criminal  statute.3  An  attorney  is  an  officer  of  the 
company  and  may  verify  a  petition  in  condemnation  proceedings.4 
In  England,  the  auditors  of  a  company  are  officials,  and  are  liable 
for  dividends  improperly  paid,  based  on  balance  sheets  improperly 
made  up  by  the  auditors,  especially  where  the  auditors  included  as 
regular  investments  loans  for  which  there  was  no  proper  security.5 
§  11.  Relation  of  stockholders  towards  the  corporation. — A  cor- 
poration may  contract  with  its  stockholders  to  the  same  extent  and 
in  the  same  manner  that  it  may  with  any  other  persons.8     Where 

sued  to  them  and  no  payments  made.         A    director    is    an   officer    under   a 
McComb  p.  Barcelona,  etc.  Assoc,  10     statute    making    officers     liable    for 


N.  Y.  Supp.  546   (1890);  aff'd,  134  X. 
Y.  598. 

A   "subscription"    for   stock   is   dif- 


debts  in  certain  cases.  Brand  v.  God- 
win, 8  N.  Y.  Supp.  339  (1890).  The 
president  and  directors  are  "officers" 


ferent   from   a   "sale."     A   "subscrip-  within  the  meaning  of  a  criminal  stat- 

tion"    applies    to    an    original    issue,  ute.      Commonwealth   v.    Wyman,    49 

Bates  v.  Great  Western  Tel.  Co.,  134  Mass.    247    (1844).     So,   also,  of  the 

111.  536  (1890).  treasurer.     Commonwealth  v.  Tucker- 

i  See  Rosevelt  r.  Brown,  11  N.  Y.  man,  76  Mass.  173  (1857).    In  certain 

148,   152    (1S54);    State  v.  Ferris,   42  cases  an  "officer"  is  construed  to  mean 

Conn.  560   (1S75);   Adderly  v.  Storm,  merely  an  agent  and  not  a  director. 

6  Hill,  624  (1S44);  Worrall  /•.  Judson,  So    held    in   regard   to   appointing   a 

5  Barb.  210  (1849).    Where  the  regis-  receiver    of    a    foreign    corporation, 

tered    holder    is    merely    a    nominal  Moran  v.  Alvas,  etc.  Co.,  N.  Y.  Law 

holder  he  will  not  be  entitled  to  spe-  J.,  Dec.  5,  1891. 

cia'l    privileges,    such    as   free   admis-  4  Matter   of    St.    Lawrence,    etc.  R. 

sion  to  a  place  of  amusement.     Acad-  R.,  133  N.  Y.  270,  278   (1892). 


emy   of   Music's  Appeal,   10S   Pa.   St. 
510   (18S5). 


•"  Re   London    &   Gen.    Bank,    72    L. 
T.  Rep.  227    (1894);     aff'd,    (1895)    2 


A    person    is   held   to   be   a   stock-  Ch.  166,  673.     Auditors     are  not  offi- 

holder,    although    no    certificate    has  cers   in   the  true  sense  of  the  word, 

been  issued  to  him.     See  §  192,  infra.  Re  Western,    etc.    Co.,    [1897]    1   Ch. 

Moreover,   he   may   be   held   to   be  a  617,  rev'g  75  L.  T.  Rep.  648. 

stockholder,  although  he  has  sold  and  6  Hartford,   etc.  R.  R.  v.  Kennedy, 

transferred  his  certificate  of  stock,  if  12  Conn.  499,  509   (1838);   Gordon  v. 

such  transfer  has  not  been  recorded  Preston,  1  Watts   (Pa.),  385   (1833); 

on  the  corporate  stock-book.     See  ch.  Central  R.  R.  v.  Claghorn,  1  Speers' 

XV,  infra.  Eq.     (S.    C.)     545,    562     (1844).      Al- 

2  Martin    v.   Niagara,   etc.    Co.,    122  though  a  stockholder  purchases  cor- 
N.  Y.   165    (1890).  porate   property   at   a   tax  sale,   this 

3  United    States  v.  Means,   42   Fed.  does   not  constitute   payment   of   the 
Rep.   599    (1890).  taxes   in   favor  of  the   mortgagee  of 

45 


§11.] 


DEFINITIONS   AND   NATURE   OP   CORPoKATloNS. 


[CH.    I. 


a  state  is  a  stockholder  in  a  railroad  corporation,  its  rights  are  no 
different  from  those  of  a  private  individual  who  is  a  stockholder.1 

A  stockholder,  as  a  creditor  of  the  corporation,  may  obtain  secu- 
rity for  his  debt  to  the  exclusion  of  other  creditors.2 

A  stockholder  lias  no  legal  title  to  the  property  or  profits  of  the 
corporation  until  a  dividend  is  declared,  or  a  division  made  on  the 
dissolution  of  the  corporation.8     Although  a  deed  of  a  corporation 


the  property.  Jenks  v.  Brewster,  9G 
Fed.  Rep.  625  (1899).  An  insolvent 
individual  who  owes  a  bank  may  con- 
vey land  to  the  bank  for  the  benefit 
of  its  depositors;  and  the  doctrine 
that  individual  assets  must  be  ap- 
plied to  individual  debts  before  being 
applied  to  partnership  debts  does  not 
apply,  even  though  he  owns  one-half 
of  the  stock  of  the  bank.  Stelnke  v. 
Yetzer,  108  Iowa,  512  (1S99). 

Where  one  subscribed  for  stock  and 
paid  for  it  by  mortgages  payable  at 
times  mutually  agreed  upon  between 
the  parties,  "this  was  merely  a  mode 
of  payment.  ...  He  stands  in  two 
capacities;  one  as  debtor  to  the  as- 
sociation, one  as  stockholder  in  it. 
These  capacities  are  independent  of 
each  other."  Ely  v.  Sprague,  1 
Clarke,  Ch.  (N.  Y.)  351  (1S40); 
Longley  v.  Longley  Stage  Co.,  23  Me. 
39  (1843),  holding  that  where  a  cred- 
itor consented,  as  a  stockholder,  to 
the  reorganization  of  the  company 
which  had  become  indebted  to  him  un- 
der the  former  organization,  he  had 
not  thereby  forfeited  his  right  to  re- 
cover from  the  newly-organized  cor- 
poration, to  which  he  had  become  a 
subscriber;  American  Bank  v.  Baker, 
45  Mass.  164,  176  (1842),  holding  that 
a  corporation  vote  to  compromise  cer- 
tain securities  to  the  detriment  of  a 
member  who  was  also  a  creditor 
could  not  be  regarded  as  consented  to 
by  him  in  his  absence. 

A  stockholder  may  contract  with 
the  corporation  .  the  same  as  a 
stranger.  Bramblet  v.  Common- 
wealth, etc.  Co.,  83  S.  W.  Rep.  599 
(Ky.  1904). 
A   contract   between   a   corporation 


and  all  its  stockholders  cannot  be  at- 
tacked by  the  corporation  or  its  re- 
ceiver, and  can  be  attacked  only  by 
cn  ditors  who  have  been  actually  de- 
frauded thereby.  Great  Western,  etc. 
Co.  v.  Harris,  128  Fed.  Rep.  321 
(1903);   aff'd,  19S  U.  S.  561. 

i  Southern  Ry.  v.  North  Carolina 
R.  R.,  81  Fed.  Rep.  595  (1897).  See 
also   §  99,  infra. 

2  Reichwald  v.  Commercial  Hotel 
Co.,  106  111.  439  (1883).  See  also 
§  692,  infra.  A  stockholder  may  also 
be  a  creditor  and  may  take  security 
the  same  as  any  other  creditor,  but 
the  transaction  must  be  free  from 
fraud,  actual  or  constructive.  Moore 
v.  Universal,  etc.  Co.,  122  Mich.  48 
(1899).  A  stockholder  in  a  bank 
may  recover  back  a  deposit  fraudu- 
lently received  by  the  bank  from  him, 
the  same  as  any  other  creditor, 
where  he  did  not  know  of  the  in- 
solvency. Richardson  v.  Olivier,  105 
Fed.  Rep.  277  (1900).  A  stockholder 
having  a  claim  on  real  estate  owned 
by  the  corporation  may  maintain  his 
rights  as  against  a  mortgagee  of  the 
corporation,  where  the  stockholder 
took  no  part  in  authorizing  the  mort- 
gage, and  the  mortgagee  took  with  no- 
tice. Martin  v.  Eagle,  etc.  Co.,  41  Or. 
448    (1902). 

3  Hyatt  v.  Allen,  56  N.  Y.  553 
(1874);  Jones  v.  Terre  Haute,  etc. 
R.  R.,  57  N.  Y.  196  (1874)  ;  Brundage 
v.  Brundage,  1  Thomp.  &  C.  (N.  Y.) 
82  (1873);  aff'd,  60  N.  Y.  544;  Good- 
win v.  Hardy,  57  Me.  143  (1869); 
Minot  v.  Paine,  99  Mass.  101  (1868); 
Granger  v.  Bassett,  98  Mass.  462 
(1868);  Phelps  v.  Farmers',  etc.  Bank, 
26   Conn.   269    (1857);    Burroughs   v. 

46 


en.  i.] 


DEFINITIONS   AND    NATURE    OP    CORPORATIONS. 


[§    11. 


provides  that  in  a  certain  contingency  the  land  "should  revert  to 
the  stockholders,  their  heirs  and  assigns,"  yet  such  reversion  is  to 
the  corporation  and  not  to  the  stockholders.1  A  stockholder  may 
sue  the  corporation  or  be  sued  by  it,  both  at  law  and  in  equity.2 

The  stockholder  is  not  liable  for  the  debts  of  the  corporation,3 
except  so  far  as  his  subscription  price  is  unpaid,4  and  except  where 


North  Carolina  R.  R.,  67  N.  C.  376 
(1872);  Curry  v.  Woodward,  44  Ala. 
305  (1S70);  s.  c,  53  Ala.  371;  Lock- 
hart  r.  Van  Alstyne,  31  Mich.  76,  7> 
(1S75).     See  also  eh.  XXXII. 

A  statute  taxing  property  in  the 
hands  of  a  bailee  does  not  make  a 
corporation  liable  for  the  tax  upon 
shares  of  stock,  inasmuch  as  the  cor- 
poration is  not  a  bailee  of  such  stock. 
Commonwealth  r.  Chesapeake,  etc. 
Ry.,  116  Ky.  951   (1903). 

The  right  of  one  of  the  owners  of 
a  mining  claim  to  forfeit  the  interest 
of  his  co-owners  for  failure  to  con- 
tribute to  certain  work  is  not  lost, 
even  though  the  former  convoys  the 
property  to  a  corporation  for  stock, 
it  appearing  that  the  corporation 
joined  with  him  in  signing  and  serv- 
ing the  notice.  Badger,  etc.  Co.  v. 
Stockton,  etc.  Co.,  139  Fed.  Rep.  S38 
(190:.). 

i  Pettit  v.  Stuttgart,  etc.  Institute, 
67  Ark.  430   (1900). 

-'  Waring  r.  Cahawba  Co.,  2  Bay 
(S.  C.)  109  (1797),  where  this  right 
of  a  stockholder  was  the  question  di- 
rectly in  litigation;  Rogers  v.  Danby 
Univ.  Soc,  19  Vt.  187  (1847);  Cul- 
bertson  r.  Wabash  Nav.  Co.,  4  Mc- 
Lean, 544;  s.  c,  6  Fed.  Cas.  944 
(1849);  Peirce  v.  Partridge,  44  Mass. 
44  (1S41);  Barnstead  r.  Empire  Min. 
Co.,  5  Cal.  299  (1855);  Ex  parte 
Booker,  IS  Ark.  33S  (1S57) ;  Sanborn 
r.  Lefferts,  58  N.  Y.  179  (1874);  Cary 
P.  Schoharie,  etc.  Co.,  2  Hun,  110 
(1874);  Wausau,  etc.  Co.  v.  Plumer, 
35  Wis.  274  (1874);  Sawyer  V.  Meth- 
odist Ep.  Soc,  IS  Vt.  405  (1S46); 
Dunstan  v.  Imperial,  etc.  Co.,  3  B.  & 


Ad.  125  (1S32);  Gifford  v.  New  Jer- 
sey, etc.  Co.,  10  N.  J.  Eq.  171  (1854)  ; 
Samuel  v.  Holladay,  1  Woolw.  400, 
41S;  s.  c,  21  Fed.  Cas.  306  (1869). 
A  stockholder  may  collect  his  debt 
the  same  as  other  creditors.  Lang  v. 
Dougherty,  74  Tex.  226  (1889).  See 
also  O'Connor  v.  North  Truckee  Ditch 
Co.,  17  Nev.  245  (1SS3).  A  grantor 
of  land  to  a  corporation  may  insist  on 
his  vendor's  lien  even  though  he  is 
also  a  stockholder.  Biggs  v.  Elliston 
Dev.  Co.,  93  Va.  404   (1896). 

A  stockholder'  who  is  also  a  di- 
rector may  nevertheless  sue  to  compel 
his  corporation  to  abate  a  nuisance. 
Leonard  V.  Spencer,  10S  N.  Y.  33S 
(1SSS).  A  stockholder  may  sue  the 
corporation  for  an  injury  done  to  him 
by  the  company  by  reason  of  the  acts 
of  other  stockholders,  such  as  divert- 
ing the  water  from  an  irrigation 
canal.  O'Connor  v.  North  Truckee 
Ditch  Co.,   17   Nev.   245    (1883). 

3  See  §§241,  242,  infra.  Stockhold- 
ers are  not  personally  liable  for  cor- 
porate debts.  Gorder  v.  Connor,  56 
Neb.  781  (1898).  A  stockholder  is 
not  personally  liable  for  a  tort  of 
the  corporation  in  diverting  water. 
Poley  v.  Lacert,  35  Oreg.  166   (1S99). 

Even  though  the  stockholders  and 
officers  of  a  lumber  company  and  a 
railroad  company  are  substantially 
the  same,  and  even  though  the  lum- 
ber company  has  sold  its  railroad  to 
the  railroad  company,  yet  the  lumber 
company  is  not  liable  for  the  negli- 
gence of  the  railroad  company.  Good- 
win 17.  Bodcaw  Lumber  Co.,  109  La. 
1050    (1902).     Cf.  §663,  infra. 

4  See  chs.  XI  and  III,  infra. 


47 


§11.] 


DEFINITIONS   AND   NATURE    OP   CORPORATIONS. 


[CH.    I. 


a  statute  renders  him  liable.1  Neither  is  he  liable  for  the  criminal 
acts  of  the  corporation,  unless  he  was  a  part  ice ps  criminis.2 

The  admissions  or  declarations  of  stockholders  do  not  bind  the 
corporation;3  nor  do  the  admissions  of  one  stockholder  bind  another 
stockholder;4  nor  do  the  admissions  of  the  corporation  always  bind 
a  stockholder.5 

Notice  to  individual  stockholders  is  not  notice  to  the  corporation, 
and  their  knowledge  of  facts  is  not  notice  of  those  facts  to  the  cor- 
poration.6 Service  of  process  on  a  stockholder  is  not  service  on  the 
corporation.7  A  judgment  against  a  corporation  as  to  the  infringe- 
ment of  a  patent  is  not  binding  on  the  stockholders  in  subsequent 
suits  against  them,  even  though  they  were  present  at  the  trial  and 
testified.8 


1  See  ch.  XH,  infra.  The  charter 
of  a  stock  corporation  organized  un- 
der the  general  act  in  Minnesota  may 
limit  the  stockholders  to  Norwegians, 
but  if  the  corporation  allows  other 
persons  to  become  members,  such 
other  persons  cannot  avoid  the  statu- 
tory liability  by  that  defense.  Blien 
v.  Rand,  77  Minn.  110   (1899). 

2  Even  though  the  stockholders  of 
a  newspaper  company  may  be  held 
liable  criminally  for  its  publication 
of  an  illegal  liquor  advertisement,  if 
they  knew  of  the  publication,  yet  it 
must  be  shown  that  they  were  stock- 
holders at  the  time.  State  v.  Bass, 
101  Me.  481  (1906). 

The  president  of  a  newspaper  cor- 
poration is  not  personally  liable  in 
damages  for  a  libel  published  in  the 
newspaper,  even  though  he  was  edi- 
tor in  chief  and  the  principal  stock- 
holder, it  appearing  that  he  had  no 
personal  knowledge  of  the  publication 
before  it  was  made.  Folwell  v.  Mil- 
ler, 145   Fed.  Rep.  495    (1906). 

A  criminal  prosecution  by  a  gov- 
ernment against  persons  for  illegally 
receiving  rebates  from  a  railroad 
fails,  if  they  were  merely  stockhold- 
ers in  a  corporation  that  received  the 
rebate.  United  States  v.  Wood,  145 
Fed.  Rep.   405    (1906). 

A  majority  stockholder  who  pur- 
chases property  from  a  corporation  is 


not  liable  on  a  claim  that  the  cor- 
poration acquired  such  property  by 
conversion,  he  having  no  knowledge 
of  such  conversion.  Liebhardt  v. 
Wilson,  88  Pac.  Rep.  173  (Colo.  1906). 

3  See   §  726,  infra. 

4  Simmons  v.  Sisson,  26  N.  Y.  264 
(1863). 

5  A  stockholder  in  a  corporation 
that  is  carrying  on  a  patent  litigation 
is  not  bound  by  its  admissions  as  af- 
fecting subsequent  litigations.  Amer- 
ican, etc.  Co.  v.  Phoenix,  etc.  Co.,  113 
Fed.  Rep.  629   (1902). 

The  owners  of  goods  in  a  ware- 
house may  hold  a  railroad  liable  for  a 
fire  burning  the  goods,  even  though 
they  are  stockholders  in  the  corpora- 
tion that  owns  the  warehouse  and 
such  corporation  has  released  the 
railroad  from  liability.  Orient  Ins. 
Co.  v.  Northern,  etc.  Ry.,  31  Mont.  502 
(1905). 

A  stockholder  having  a  claim  on 
real  estate  owned  by  the  corporation 
may  maintain  his  rights  as  against  a 
mortgagee  of  the  corporation,  where 
the  stockholder  took  no  part  in 
authorizing  the  mortgage,  and  the 
mortgagee  took  with  notice.  Martin 
v.  Eagle,  etc.  Co.,  41  Or.  448  (1902). 

6  See  §  727,  infra. 
1  See  §  752,  infra. 

8  Wilgus  v.  Germain,  72  Fed.  Rep. 
773   (1896). 


48 


CH.   I.] 


DEFINITIONS    AND    NATURE    OF    CORPORATIONS. 


[§H. 


A  stockholder  in  an  insurance  company  has  the  same  rights  as 
has  a  stockholder  in  any  other  corporation.1 

The  stockholder  is  an  individual,  distinct  from  the  corporation 
in  its  contracts  and  transaction  of  business.2  The  mere  fact  that 
he  is  a  stockholder  does  not  make  him  an  agent  to  contract  for  it 
or  bind  it  by  his  acts.3  It  is  legal  for  a  person  who  is  endeavoring 
to  purchase  all  the  property  of  a  corporation  to  pay  a  stockholder 
for  consenting  thereto.4 

One  person  may  own  all  the  stock,  and  yet  the  existence,  rela- 
tions and  business  methods  of  the  corporation  continue.5 


1  Thus  a  stockholder  in  an  insur- 
ance company,  conducted  on  both  the 
stock  and  the  mutual-insurance  plan, 
is  entitled  to  all  the  rights  in  the 
guaranty  accumulations  that  a  stock- 
holder in  any  other  corporation  has 
in  the  corporate  assets.  Traders',  etc. 
Ins.  Co.  v.  Brown,  142  Mass.  403 
(1886). 

A  holder  of  a  contract  of  a  corpora- 
tion, whereby  he  is  to  be  entitled  to 
a  diamond  on  payment  of  certain 
money,  is  not  a  stockholder  and  can- 
not have  a  receiver  appointed  because 
of  mismanagement.  Mann  v.  Ger- 
man, etc.  Co.,  70  Neb.  454    (1903). 

2  Where  a  statute  forbids  contracts 
in  restraint  of  a  person  carrying  on  a 
trade  or  business  except  where  he 
sells  a  good  will,  a  contract  for  the 
sale  of  stock  with  an  agreement  not 
to  engage  in  the  business  carried  on 
by  the  corporation  is  not  enforcible 
as  to  the  latter  part  of  the  contract. 
Merchants',  etc.  Co.  v.  Sterling,  124 
Cal.  429   (1S99). 

An  officer  of  a  corporation  is  not 
entitled  to  claim  administratorship, 
even  though  the  corporation  is  a 
creditor  of  an  estate  and  a  statute 
states  that  a  creditor  may  be  entitled 
to  letters  of  administration.  Re 
Owens'  Estate,   30  Utah,   351    (1906). 

A  stockholder  in  a  corporation  own- 
ing farm  lands  is  not  an  owner  en- 
titling him  to  hunt  without  a  license 
under  a  statute  requiring  such  li- 
cense, except  from  the  owners  of 
farm  lands.  Cummings  v.  People, 
211  111.  392  (1904). 
(4) 


Where  on  foreclosure  sale  of  prop- 
erty purchased  by  a  corporation  sub- 
ject to  a  mortgage,  there  is  a  surplus 
it  belongs  to  the  corporation  without 
deduction  for  debts  of  its  stockhold- 
ers to  the  purchaser,  even  though 
such  stockholders  are  the  only  stock- 
holders in  the  company.  Hardy  v. 
Pecot,  113  La.  350  (1904). 
:«  See  §§708,  etc.,  infra. 
Where  the  law  permits  punishment 
or  confiscation  of  property,  but  not 
both,  the  conviction  of  a  stockholder 
for  violation  of  the  internal  revenue 
law  prevents  a  confiscation  of  the 
corporation  property.  U.  S.  v.  Dis- 
tillery, 43  Fed.  Rep.  846    (1890). 

Damages  may  be  recovered  by  a 
corporation  for  a  fraud  practiced 
upon  it,  even  though  an  agent  of  the 
corporation,  who  aided  in  the  perpe- 
tration of  the  fraud,  was  a  stock- 
holder in  the  corporation.  Grand 
Rapids,  etc.  Co.  v.  Cincinnati,  etc. 
Co.,  45  Fed.  Rep.  671  (1891).  A 
company  is  not  liable  for  the  contract 
of  a  person  who  makes  a  construc- 
tion contract  with  it,  even  though 
that  person  is  the  principal  stock- 
holder and  dominates  and  controls 
the  action  of  the  corporation.  Al- 
though other  stockholders,  bondhold- 
ers or  the  corporation  itself  might 
question  such  a  contract,  yet  subcon- 
tractors cannot.  Central  Trust  Co.  v. 
Bridges,  57  Fed.  Rep.  753   (1893). 

4  Lamkin  v.  Palmer,  24  N.  Y.  App. 
Div.  255   (1897);  aff'd,  164  N.  Y.  201. 

5  See  §§  709,  etc.,  infra. 


49 


§   11.]  DEFINITIONS   AND   NATURE    OF   CORPORATIONS.  [CII.    I. 


• 


The  stockholders,  assembled  together  in  a  corporate  meeting 
have  the  powers  to  elect  officers;  make  by-laws;  increase  or  reduce 
the  capital  stock,  if  the  statute  permits;  authorize  auxiliary  or  fun- 
damental changes  in  the  charter,  if  constitutional;  ami  perform  ;i  few 
other  acts  for  and  in  behalf  of  the  corporation.  But  there  their 
powers  cease.  The  making  of  corporate  contracts;  tin-  management 
of  corporate  business;  the  employment  and  direction  of  agents;  the 
bringing  or  defending  of  suits,  and  all  the  infinite  details  of  cor- 
porate management,  are  under  the  control  of  the  directors  and  their 
agents.  The  stockholders  have  no  power  herein,  either  individually 
or  in  meeting  assembled.1 

A  stockholder  is  chargeable  with  notice  of  entries  mad<'  upon  the 
corporate  books,  if  they  were  made  in  his  presence  and  he  presum- 
ably assented  thereto.2  A  stockholder  is  bound  to  take  notice  of  the 
charter  and  by-laws,3  but  a  purchaser  of  stock  is  not  unless  they  ap- 
pear on  the  face  of  the  certificate  of  stock.4 

A  stockholder  in  a  corporation  which  does  not  properly  insure  its 
property  has  an  insurable  interest  in  the  property,  and  he  may 
recover  upon  a  policy  thereon,  taken  in  his  own  name,  for  an  amount 
which,  added  to  the  company's  insurance,  would  cover  his  interest.5 

At  common  law  the  stockholder,  on  account  of  his  interest  in  the 
corporation,  was  not  a  competent  witness  for  the  corporation  in  a 
suit  in  which  the  corporation  was  a  party.0     In  some  states,  how- 

i  See  §  712,  infra.  cate  of  stock  is  not  bound  to  take  no- 
"The  property  of  a  corporation  is  tice  of  a  by-law  giving  the  corpora- 
not  subject  to  the  control  of  indi-  tion  a  lien  on  the  stock  unless  the 
vidual  members,  whether  acting  sep-  by-law  appears  on  the  face  of  the 
arately  or  jointly.  They  can  neither  certificate.  Bank  of  Culloden  v. 
incumber  nor  transfer  that  property,  Bank  of  Forsyth,  120  Ga.  575  (1904). 
nor  authorize  others  to  do  so.  The  5  Warren  v.  Davenport  F.  Ins.  Co., 
corporation — the  artificial  being  ere-  31  Iowa,  464  (1871),  distinguishing 
ated — holds  the  property,  and  alone  Phillips  v.  Knox  County  Ins.  Co.,  20 
can  mortgage  or  transfer  it;  and  the  Ohio,  174  (1851).  Cf.  Seaman  v.  En- 
corporation  acts  only  through  its  of-  terprise  F.  &  M.  Ins.  Co.,  18  Fed.  Rep. 
fleers,  subject  to  the  conditions  pre-  250  (18S3).  See  Greenhood,  Pub.  Pol- 
scribed  by  law."  Humphreys  v.  Mc-  icy,  255;  Angell,  Fire  &  L.  Ins.,  ch. 
Kissock,   140  U.   S.   304    (1891).  XI,  and  cases  cited. 

2  See  §  727,  infra.  A  stockholder  has  an  insurable  in- 

3  See  §  4a,  supra.  terest    in    the    property    of    the    cor- 

4  See   §  727,  infra.  poration.     Riggs  v.  Commercial,   etc. 
A  purchaser  of  stock  in  a  corpora-  Ins.    Co.,    125    N.    Y.    7     (1890).      A 

tion  is  bound  to  take  notice  of  spe-  stockholder  may  insure  his  interest. 
cial  provisions  in  its  charter  relative  Wilson  v.  Jones,  L.  R.  2  Ex.  129 
to  liability.     Brown  v.  Morton,  71  N.     (1867). 

J.  L.  26  (1904).  6  Porter  v.  Bank  of  Rutland,  19  Vt. 

A  pledgee  or  transferee  of  a  certifi-    410    (1S47);    McAuley  v.   York  Min. 

50 


CH.    I.] 


DEFINITIONS   AND   NATURE    OF   CORPORATIONS. 


[§    11. 


ever,  this  rule  has  been  changed  by  statute ;  and  in  others  it  is  easily 
evaded  by  a  sale  and  transfer  of  the  certificate  of  stock  to  another 


Co.,  6  Cal.  80   (1856).     See  cases  in 
next  note. 

In  Pierce  v.  Kearney,  5  Hill,  82 
(1843),  a  stockholder  was  held  in- 
competent to  testify  that  the  defend- 
ant, in  an  action  to  enforce  a  statu- 
tory liability  of  stockholders,  was  a 
stockholder.  Compare,  however,  Re 
Kip,  1  Paige,  601  (1829),  involving 
the  testimony  of  a  corporator  and 
pew-holder  in  a  church  corporation; 
Mokelumne,  etc.  Co.  v.  Woodbury,  14 
Cal.  265  (1S59),  in  which,  in  passing 
upon  the  competency  of  a  stockholder 
as  a  witness,  the  court  held  that 
"members  of  a  corporation  who  are 
answerable  personally  for  the  corpo- 
rate debts  and  liabilities  stand  in  the 
same  position,  in  relation  to  the  cred- 
itors of  the  corporation,  as  if  they 
were  conducting  their  business  as  a 
common  partnership."  To  same  ef- 
fect, Mitchell  v.  Beckman,  64  Cal. 
117   (18S3). 

A  stockholder  is  an  interested  wit- 
ness, and  under  the  New  York  code 
cannot  testify  in  behalf  of  the  cor- 
poration in  a  suit  against  it  by  the 
representatives  of  a  deceased  person 
for  damages  for  negligence  causing 
death.  Andrews  v.  Reiners,  112  X. 
Y.  App.  Div.  378  (1906),  stating  that 
Montgomery,  etc.  Bank  r.  .Marsh,  7 
N.  Y.  4S1,  and  Washington  Bank  v. 
Palmer,  2  Sandf.  6S6,  were  under  a 
statute  which  has  been  repealed. 

The  president,  though  a  stockhold- 
er, is  a  competent  witness  for  the 
company  if  he  is  willing  to  testify, 
where  his  private  interest  is  greater 
than  his  stockholder  interest.  Church 
v.  Sterling,  16  Conn.  3S8  (1844). 

A  stockholder  who  knowingly  trans- 
fers his  stock  but  expects  to  get  it 
back  is  not  a  competent  witness  for  a 
corporation.  Bank  of  Michigan  r. 
Gray,  1  Q.  B.  Rep.  (Can.)  422  (mi) 

A  stockholder  in  a  company  which 
is  a  creditor  of  a  party  to  a  suit  may 


testify  in  behalf  of  the  latter.  Simons 
v.  Vulcan,  etc.  Co.,  61  Pa.  St.  202 
(1869). 

The  purchase  by  a  bank  of  its  own 
stock,  in  order  to  enable  the  stock- 
holder to  testify  for  it,  was  upheld, 
though  its  charter  prohibited  it  from 
purchasing  goods,  etc.  Farmers',  etc. 
Bank  v.  Champlain  Transp.  Co.,  18 
Vt.    131    (1846). 

A  stockholder  who  has  nothing  to 
do  with  the  negotiation  of  a  corpo- 
rate contract  may  testify  although 
the  other  party  is  dead  and  the  stat- 
ute prohibits  the  living  party  in  in- 
terest from  testifying.  Banking,  etc. 
Co.  r.  Rood,  132  Mo.  256  (1896). 

The  officers  or  directors  of  a  cor- 
poration may  testify  in  its  behalf  al- 
though a  statute  says  that  in  actions 
where  one  party  is  dead  the  other 
party  shall  not  testify.  New  Jersey, 
etc.  Co.  v.  Camden,  etc.  Co.,  58  N.  J. 
L.  196  (1895). 

A  stockholder  need  not  testify 
against  his  corporation.  Bank  of  Old- 
town  v.  Houlton,  21  Me.  501  (1842). 
A  stockholder,  under  the  New  York 
statute,  cannot  testify  to  a  personal 
communication  between  the  corpora- 
tion and  a  deceased  person.  Keller  v. 
West,  etc.  Co.,  39  Hun,  348  (1886). 
A  party  dealing  with  a  corporation 
cannot  testify  as  to  what  was  said 
between  him  and  the  agent  of  the 
corporation,  where  the  agent  is  dead. 
Hoskins  v.  Rochester,  etc.  Assoc,  133 
Mich.  505  (1903). 

A  witness  who  is  agent  of  a  cor- 
poration, the  latter  being  a  party  to 
the  suit,  is  entitled  to  the  same  priv- 
ilege as  to  libelous  statements  made 
by  him  as  witness  that  a  party  has. 
Nissen  v.  Cramer,  104  N.  C.  574 
(1889).  The  secretary  of  a  corpora- 
tion is  not  an  interested  witness  in  a 
suit  brought  by  a  corporation.  Uni- 
versity, etc.  v.  Emmert,  108  Iowa,  500 
(1899). 
51 


11.] 


DEFINITIONS   AND   NATURE    OP   CORPORATIONS. 


[cn.  I. 


person.1  An  officer  of  the  bank  who  was  present  at  the  time  a  de- 
posit was  made,  but  who  sold  his  stock  and  severed  his  connection 
with  the  bank  long  before  litigation  arose  thereon,  may  be  a  witness 
in  the  case  as  to  the  transaction  with  the  deceased  depositary.2  A 
party  claiming  a  contract  with  a  corporation  cannot  testify  that  he 
made  it  with  the  agent  of  the  corporation,  if  the  agent  is  dead  at  the 
time  of  the  trial.3  A  stockholder  is  incompetent  to  servo  as  a 
judge  in  a  case  where  the  corporation  is  a  party,4  neither  is  he 

The  plaintiff  in  a  suit  against  a  after  the  latter's  death.  Central 
corporation  may  offer  a  stockholder  Bank,  etc.  v.  Thayer,  184  Mo.  CI 
as  a  witness.  Hart  v.  New  Orleans,  (1904).  As  to  a  lost  deed  to  a  cor- 
etc.  R.  R.,  1  Am.  St.  Ry.  Dec.  4  (La.  poration,  a  stockholder  may  testify 
1841),  that  he  saw  it,  although  he  may  not 
i  That  a  transfer  will  render  the  he  allowed  to  testify  as  to  what  the 
transferrer  competent,  see  Illinois  grantor  did,  the  latter  being  dead. 
Mut.  F.  Ins.  Co.  v.  Marseilles  Mfg.  Kendall  v.  Hillsboro,  etc.  Road,  G7  S. 
Co.,  6  111.  236  (1844);  Union  Bank  v.  W.  Rep.  376  (Ky.  1902).  A  parol  con- 
Owen,  4  Humph.  (Tenn.)  338  (1843) ;  tract  with  a  corporation  may  be 
Bell  v.  Hull,  etc.  Ry.,  6  M.  &  W.  699  proved  although  the  director  with 
(1840);  1  Greenleaf's  Evidence,  §429.  whom  it  was  made  is  dead.  South 
He  is  comoetent  though  the  transfer  Baltimore  Co.  v.  Muhlbach,  69  Md.  395 
has    not    been,   registered.      Bank    of  (18S8). 

Utica  v.  Smalley,  2  Cow.  770   (1824);  4  Dimes   u.    Grand   Junction   Canal, 

Gilbert    v.    Manchester,    etc.    Co.,    11  3   H.  L.  Cas.  759    (1852),   where  the 

Wend.  627    (1S34);   Delaware,  etc.  R.  lord  chancellor  was  a  stockholder  in 

R.  v.  Irick,  23  N.  J.  L.  321    (1852);  the  defendant  company,  and  had  af- 

and    although   he   expects   to   buy    it  firmed  a  decree  by  the  vice-chancellor 

back;    but   there    must   be   no   agree-  in  the  case.     The  House  of  Lords  re- 

ment  expressly  to  that  effect.     Utica  versed   the   decision   on  this   ground. 

Ins".    Co.    v.    Cadwell,    3    Wend.    296  Cooley,   Const.   Lim.,   pp.   *410,   *411; 

(1829);     Stall    v.    Catskill    Bank,    18  Washington  Ins.  Co.  v.  Price,  1  Hopk. 

Wend.  466   (1837).     Contra,  Carver  v.  Ch.    1     (1823),    Chancellor    Sandford 

Braintree    Mfg.     Co.,     2     Story,     432  therein  refusing  to  follow  Chancellor 

(1843);    s.  c,   5  Fed.  Cas.   235.  Kent    in    Stuart    v.    Mechanics',    etc. 

2Tecumseh,    etc.    Bank    v.    McGee,  Bank,  19  Johns.  496,  501   (1822).     In 

61  Neb.  709  (1901).    Under  the  West  Peninsular  Ry.  v.   Howard,   20  Mich. 

Virginia    statute    the    directors    and  IS  (1870),  the  court  said:     "It  is  not 

stockholders  of  a  corporation  cannot  a  matter  of  discretion  with  the  judge 

testify   as   to   a  personal   transaction  or  other  person  acting  in  a  judicial 

between  a   deceased   person   and   the  capacity,   nor    is    it   left   to   his   own 

corporation,    unless    the    representa-  sense    of   propriety   or   decency;    but 

tives  and  heirs  testify  as  to  the  same,  the   principle   forbids   him   to   act   in 

Huntington,  etc.  Co.  v.  Thornburg,  46  such  capacity  at  all  when  he  is  thus 

W.  Va.  99   (1899).  interested,  or  when  he  may  possibly 

3  Florida,    etc.    Co.    v.    Usina,    111  be  subject  to  this  limitation."     Even 

Ga.   697    (1900).     One  who  contracts  though  a  judge  is  related  to  some  of 

with  the  authorized   agent  of  a  cor-  the   stockholders,   yet   if   the    parties 

poration  is  not  a  competent  witness  know  the  fact  and  do  not  promptly 

as  to  the  contract,  or  of  the  admis-  object  they  cannot  afterwards  object. 

sions  and  declarations  of  the  agent,  Buena  Vista,  etc.  Bank  v.  Grier,  114 

52 


en.  i.] 


DEFINITIONS   AND   NATURE   OF   CORPORATIONS. 


[§H. 


qualified  to  act  as  a  juror.1     He  should  not  act  as  a  notary  public  in 
taking  an  acknowledgment  by  the  corporation.2      A      contract    be- 


Ga.  39S  (1901).  A  judge  cannot  sit 
in  a  case  involving  the  validity  of 
bonds  owned  by  a  bank  in  which  he 
is  a  stockholder.  Adams  v.  Minor, 
121  Cal.  372  (1898).  After  a  judge 
has  sold  his  stock  in  a  corporation  he 
is  competent  to  sit  in  a  case  in  which 
that  corporation  is  a  party.  Matter 
of  Brooklyn  El.  R.  R.,  32  N.  Y.  App. 
Div.  221  (1898).  The  fact  that  both 
the  judge  and  the  plaintiff  are  stock- 
holders in  an  outside  company  does 
not  disqualify  the  judge.  Hyde,  etc. 
Co.  v.  Shepardson,  72  Vt.  1S8  (1900). 
A  judge  is  not  incompetent  by  rea- 
son of  the  fact  that  he  is  a  stock- 
holder in  a  trust  company  that  is 
guardian  of  a  party  whose  sanity  Is 
being  tried.  In  re  Leonard's  Estate, 
95  Mich.  295  (1S93).  In  New  York 
the  statute  prevents  an  interested 
judge  from  sitting.  See  Cregin  v. 
Brooklyn,  etc.  R.  R.,  19  Hun,  349 
(1879).  Being  related  to  a  stock- 
holder does  not  disqualify.  Sears- 
burgh  Turnp.  Co.  v.  Cutler,  6  Vt.  315 
(1834).  A  judge  may  hear  a  case 
although  he  is  a  cousin  of  one  of 
the  stockholders  of  one  of  the  par- 
ties. Robinson  p.  Southern  Pac.  Co., 
105  Cal.  526   (1S95). 

A  judge  is  not  disqualified  merely 
because  he  formerly  owned  stock. 
Nicholson  v.  Showalter,  83  Tex.  99 
(1892).  A  judge  who  is  a  brother-in- 
law  of  a  stockholder  and  president 
of  a  corporation  is  qualified  to  try  a 
case  in  which  the  corporation  is  a 
party.  Lewis  v.  Hillsboro,  etc.  Co., 
23  S.  W.  Rep.  338  (Tex.  1893).  A 
commissioner,  appointed  by  the  court 
to  sell  the  assets  of  a  company,  can- 
not sell  to  a  bank  in  which  he  is  a 
stockholder  and  director,  irrespective 


157  (1867);  Silvis  v.  Ely,  3  Watts 
&  S.  (Pa.)  420  (1842);  McLaughlin 
v.  Louisville,  etc.  Co.,  100  Ky.  173 
(1896).  Cf.  Williams  v.  Smith,  6  Cow. 
166  (1826).  The  incompetency  ex- 
tends to  the  son  of  a  stockholder. 
Georgia  R.  R.  v.  Hart,  60  Ga.  550 
(1878).  A  person  donating  to  the 
railroad  is  incompetent  to  serve  in 
condemnation  proceedings.  Michigan 
Air  Line  Ry.  v.  Barnes,  40  Mich.  383 
(1S79).  But  the  fact  that  the  cor- 
poration is  interested  in  a  subsequent 
case  on  the  same  facts  does  not  ren- 
der the  stockholder  incompetent. 
Commonwealth  v.  Boston,  etc.  R.  R., 
57  Mass.  25  (1849). 

Objection  to  competency  must  be 
raised  at  the  trial.  It  cannot  be 
raised  for  the  first  time  by  motion 
for  a  new  trial.  Williams  v.  Great 
Western  Ry.,  3  H.  &  N.  869    (1858). 

The  fact  that  a  juror  and  plaintiff 
are  both  stockholders  in  the  same 
corporation  is  no  cause  for  challenge 
in  a  suit  not  involving  the  corpora- 
tion. Brittain  v.  Allen,  1  Dev.  L.  (N. 
C.)    120    (1829). 

A  juror  is  qualified  although  his 
wife  is  related  to  a  stockholder.  But- 
ler v.  Glens  Falls,  etc.  R.  R.,  121  N. 
Y.  112  (1S90).  In  Ohio  a  person  liti- 
gating with  a  corporation  may  have 
a  change  of  venue  when  the  corpora- 
tion has  more  than  fifty  stockholders 
at  its  principal  office  in  the  county 
where  the  litigation  is  pending,  if  the 
party  swears  that  he  does  not  think 
he  can  obtain  a  fair  and  impartial 
trial  in  that  county,  and  five  credible 
persons  residing  in  the  county  sus- 
tain his  application.  Snell  v.  Cincin- 
nati, etc.  Ry.,  60  Ohio  St.  256  (1899). 

Even    though    the    foreman    of    a 


of  whether  the  sale  and  price  were  grand  jury  is  a  stockholder  in  a  cor- 
poration and  another  member  is  a 
stockholder  and  director,  yet  an  in- 
dictment for  an  attempt  to  defraud 
it  will  not  be  quashed.  State  v.  Tur- 
ner, 72  N.  J.  L.  404  (1905). 
2  See  §722,  infra. 


fair.      McCullough,    etc.    Co.    v.    Nat. 
Bank,  etc.  111  Ga.  132    (1900). 

l  Page  v.  Contoocook  Valley  R.  R, 
21  N.  H.  438  (1850);  Peninsular  R. 
R.  v.  Howard,  20  Mich.  18  (1870); 
Fleeson  v.  Savage  S.  M.  Co,  3  Nev. 


K3 


§   12.]  DEFINITIONS   AND   NATURE   OF   CORPORATIONS.  [CII.    I. 

tween  a  corporation  and  a  city  may  be  illegal  by  reason  of  the  fad 
that  the  aldermen  who  voted  for  the  contract  arc  stockholders.1  A 
stockholder  cannot  bring  suit  to  enforce  the  ordinary  claims  of  the 
corporation.2  The  directors  control  such  matters  ami  decide  whether 
a  suit  shall  be  brought,  prosecuted  or  compromised.3  Sometimes  the 
stockholder  is  allowed  to  intervene  in  the  suit,  however,4  and  there 
arc  certain  cases  involving  fraud  on  the  part  of  the  directors  or  ultra 
vires  acts  where  the  stockholder  may  sue  in  behalf  of  the  corpora- 
tion.5 A  stockholder  or  director  of  an  insolvent  corporation  is  com- 
petent and  qualified  to  act  as  its  receiver  or  assignee.6  A  director 
need  not  necessarily  be  a  stockholder,  unless  a  statute  or  the  charter 
expressly  so  provides.7  In  the  sale  of  the  corporate  property  the 
stockholders  may  legally  agree  not  to  engage  in  the  same  business 
for  the  term  of  ten  years.8 

In  corporations  having  a  capital  stock  no  power  of  expulsion  can 
bo  exercised  unless  expressly  conferred  by  the  charter  or  by  statute.9 
It  is  doubtful  whether  a  stock  corporation  can  impose  a  fine  upon  the 
stockholders  for  a  violation  of  its  by-laws.10 

§  12.  Shares  of  stock  defined  —  What  laiv  governs — Common 
stock — Preferred  stock — Deferred  stock — Overissued  stock — Spe- 
cial stock. — A  share  of  stock  may  be  defined  as  a  right  which  its 
owner  has  in  the  management,  profits  and  ultimate  assets  of  the 
corporation.11     By  the  court  of  appeals  of  New  York  it  is  said  that 

i  See  §  913,  infra.  v.  Herring,  etc.  Co.,  146  Fed.  Rep.  37 

2  See  §750.  (1906). 

3  See  §  750.  The  vendor  of  stock  in  a  California 

4  See  §  750.  corporation    cannot    legally    contract 

5  See  chs.  XXXIX,  XL  and  XLV.  not  to  engage  in  the  line  of  business 
c  See  §  864,  infra.  conducted  by  the  corporation,  because 
7  See  §  623,  infra.  the  California  statutes  prohibit  such 
s  Davis   v.   Booth  &   Co.,    131    Fed.     a    contract,    unless    the    vendor    sells 

Rep.  31    (1904).  the  good  will  of  the  business.     Dodge 

The  agreement  of  the  stockholders  Stationery  Co.  v.  Dodge,  145  Cal.  380 

upon  a  sale  of  the  corporate  property  (1904). 

not  to  engage  in  that  line  of  business  9  See  §§  504,  710,  infra. 

in  a  certain  county  is  binding  upon  io  Monroe,  etc.  Assoc,  v.  Webb,  40 

them.     Union  Mills  v.  Harder,  116  N.  N.  Y.  App.  Div.  49  (1899).     See  §  4a, 

Y.  App.   Div.  22    (1906).  supra. 

The  agreement  of  a  corporation  on  1 1  Quoted    and    approved    in    Cum- 

selling  its  property  not  to  engage  in  mings  v.  People,  211  111.  392   (1904); 

the  same  business,  does  not  prevent  Mann  v.  German,  etc.  Co.,  70  Neb.  454 

one   of   its   officers    and   stockholders  (1903);   Jones  v.  Concord,  etc.  R.  R., 

engaging    in    that    business,    and    the  67  N.  H.  119    (1891);   s.  c,  67  N.  H. 

stockholders  are  not  individually  lia-  234   (1892);  Lamkin  v.  Palmer,  24  N. 

ble   or  subject  to    an    injunction   be-  Y.   App.   Div.    255    (1897);    aff'd,   164 

cause  of  unfair  competition  practiced  N.  Y.  201;  and  in  American,  etc.  Co. 

by  the  corporation.     Hall's,  etc.   Co.  v.  State  Board,  56  N.  J.  L.  389  (1894). 

54 


Cn.   I.]  DEFINITIONS   AND   NATURE    OF   CORPORATIONS.  [§    12. 

"the  right  which  a  shareholder  in  a  corporation  has,  by  reason  of 
his  ownership  of  shares,  is  a  right  to  participate  according  to  the 
amount  of  his  stock  in  the  surplus  profits  of  the  corporation  on  a 
division,  and  ultimately,  on  its  dissolution,  in  the  assets  remaining 
after  payment  of  its  debts."1 

It  is  said  that  the  rights  which  a  share  of  stock  secures  to  its 
owner  are  the  rights  "to  meet  at  stockholders'  meetings,  to  partici- 
pate in  the  profits  of  the  business,  and  to  require  that  the  corporate 
property  and  funds  shall  not  be  diverted  from  their  original  pur- 
.... 

In  England  a  share  means  the  same  as  it  does  in  this  country; 
l,u,  the  word  "stock"  there  signifies  paid-up  shares,  or  a  debt,  so 
united  that  the  owner  may  divide  it  and  transfer  it  in  large  or  small 

See  also  Oatbank  Oil  Co.  v.  Crum,  L.  Gibbons    v.    Mahon,    136    U.    S.    549 

R    8   App.   Cas.   65    (1882) ;    State  v.  (1890). 

Mitchell    104  Tenn.  336    (1899).  Chief   Justice   Shaw,   by   way  of  a 
i  Plimpton    v.    Bigelow,    93    N.    Y.  definition   of  a  share  of  stock,  says: 
59'    599    (1883);    Hall  v.   Henderson,  "The   right    is,    strictly    speaking,   a 
1  '"•'  Ala    449    <  1^'9)       To   the   same  right  to  participate,  in  a  certain  pro- 
effect  see  Burrall  v.  Bushwick  R.  R.,  portion,  in  the  immunities  and  bene- 
75   N     Y     "11     216    (1878);    Kent  v.  fits  of  the  corporation;  to  vote  in  the 
Quicksilver   Itln.    Co.,   78    N.    Y.    159  choice  of  their  officers,  and  the  man- 
(1879);   JermalB   v.  Lake  Shore,  etc.  agement  of  their  concerns;   to  share 
R     R      91    N     Y     4S3     492     (1883);  in  the  dividends  of  profits,  and  to  re- 
Tubh  v  '  Fowier  '99   S.  W.  Rep.   988  ceive  an  aliquot  part  of  the  proceeds 
(Tenn'l9H7,;    Field    V.    Pierce,    102  of  the  capital  on  winding  up  and  ter- 
Mass  253   26    (1869) ;  Jones  v.  Davis,  minating    the    active    existence    and 
35  Ohifst.  474.  477  '(1880);   Bradley  operations  of  the  corporaUon . ish er 
V    Dander    36  Ohio  St.  28,  35   (1880);  v.    Essex    Bank,    71    Mass.    373,    „7* 
Bent  r.  Hart.  10  Mo.  AP1>.  143  (1881);  (1855).     Of .Arnold  v.  Ruggles,  1  R. 
Harrison    r.    Vines,    46    Tex.    15,    21  I.  16o   d837)- 

(1876);     BrigktweU     ,     Mallory,    10  ■^%M*S*^€ *  ™- 

Yt;rg:  (Tenn.)  196  M >i  B  arksda*  ^»  »^i££M  Cal. 

r.    Finney,    14   Gratt.    (Va.)    3o8,   357  uas.                                           Sharswood 

M»^<n-    Van    Allen    P.    Assessors,    3  o6\)    U*»^'     *"■   JU01-          . 

consists    in    the    right    to    a   propor  J                                     h     dissolution 

tionate  part  of  the  profits  whenever  realized  except  upon                   tlon_. 

dividends  are  declared  by  the  corpora-  an ^wind £*  ^^ ™£  ^ 

tion    during   its    existence   under    its  with  the  ngnt .w  r          ^ 

charter,  and  to  a  like  proportion  of  tune    ^   pr  Ms .»  ^  ^   ^ 

the     property    remaining,    upon    the  and    dec larea                                        gt 

termination  or  dissolution  of  the  cor-  dends        Neiler  i.  Kelley                  ^ 

poration,  after  payment  of  its  debts."  403 ^^"^  42   (1887). 

55 


§12.] 


DEFINITIONS   AND   NATURE   OP    CORPORATIONS. 


[CII.    I. 


quantities,  irrespective  of  the  number  and  par  value  of  the  shares 
or  debt  which  have  been  thus  merged  into  "stock/'1 

The  term  "stock"  has  also  been  used  at  times  to  indicate  the  same 
thing  as  capital  stock.2 

It  is  well  settled  that  shares  of  stock  are  personalty  and  not  realty. 
A  share  of  stock  is  not  real  estate,  has  nothing  to  give  it  the  character 
of  real  estate,  is  not  land,  nor  an  hereditament,  nor  an  interest  in 
any  of  them.3 


1  Morrice  v.  Aylmer,  L.  R.  7  H.  L. 
717  (1875),  says:  "Shares  are  not 
necessarily  converted  into  stock  as 
soon  as  they  are  paid  up;  they  may 
exist  either  as  paid-up  or  as  not 
paid-up  shares.  But,  as  regards  stock, 
that  can  only  exist  in  the  paid-up 
state.  .  .  .  There  is  a  certain 
extent  of  change,  as  well  as  consolida- 
tion, in  these  paid-up  shares.  They 
are  changed  from  ordinary  shares  in 
this  respect,  that  they  are  no  longer 
incapable  of  being  subdivided." 

Stock  is  "a  fund  or  capital  which 
is  capable  of  being  divided  into  and 
held  in  any  irregular  amount.  Thus, 
the  ordinary  government  funds  (con- 
sols, new  threes,  etc.)  are  called 
'stocks'  because  a  person  can  buy 
them  in  any  amount  (such  as  £99  19s. 
lid.  as  well  as  £100).  A  share  or 
debenture,  on  the  other  hand,  is  of  a 
fixed  amount  (such  as  £10,  £50,  £100), 
and  is  incapable  of  subdivision  or 
consolidation."  Rapalje  &  L.  Law 
Diet.  1224.  Shares  may  be  converted 
by  the  company  into  stock,  so  as  to 
enable  their  holders  to  dispose  of 
them  in  small  or  irregular  amounts. 
Hurrell  &  Hyde,  Joint-Stock  Com- 
panies, 47. 

2  Burr  v.  Wilcox,  22  N.  Y.  551, 
556  (1860);  People  v.  Tax  Commis- 
sioners, etc.,  23  N.  Y.  192,  220  (1861); 
Bailey  v.  Railroad  Co.,  22  Wall.  604, 
637  (1874).  Formerly  government 
bonds  were  called  "stock,"  both  in 
England  and  in  this  country.  People 
v.  Tax  Commissioners,  2  Black,  620 
(1862);  Weston  v.  Charleston,  2  Pet. 
449  (1829) ;  Cavanagh,  Law  of 
Money  Securities    (2d   ed.),   488-494. 


This  use  of  the  term  still  prevails  in 
England,  but  is  generally  obsolete  in 
this  country,  although  the  securities 
of  the  city  of  New  York  are  still 
called   "stock." 

In  Ehrlich  p.  Jennings,  58  S.  E.  Rep. 
922  (S.  C.  1907),  stock  issued  by  the 
state  was  exchangeable  into  coupon 
bonds. 

In  tax  statutes,  "stock"  may  be  de- 
fined to  mean  shares  of  stock.  Lock- 
wood  V.  Weston,  61  Conn.  211  (1891). 
See  also  §  8,  supra. 

3  Quoted  and  approved  in  Cum- 
mings  v.  People,  211  111.  392  (1904); 
and  McKane  v.  Burke,  132  Fed.  Rep. 
688  (1904);  Putnam  v.  Lincoln,  etc. 
Co.,  118  N.  Y.  App.  Div.  469  (1907); 
Judy  v.  Beckwith,  114  N.  W.  Rep.  565 
(Iowa  1908) ;  Bligh  v.  Brent,  2  Younge 
&  C.  (Exch.)  268  (1837);  Edwards 
v.  Hall,  6  De  G.,  M.  &  G.  74  (1855)  ; 
Bradley  v.  Holdsworth,  3  M.  &  W. 
422  (1838) ;  Ex  parte  Lancaster  Canal 
Nav.  Co.,  1  Dea.  &  Ch.  411  (1832); 
Watson  v.  Spratley,  10  Exch.  222.  In 
Allen  v.  Pegram,  16  Iowa,  163,  173 
(1864),  Mr.  Justice  Dillon  says:  "Mr. 
Williams  treats  of  shares  in  corpora- 
tions as  'incorporeal,  personal  prop- 
erty'— a  very  neat  and  accurate  desig- 
nation. Wms.  Pers.  Prop.  [*191]." 
See  also  Johns  v.  Johns,  1  Ohio  St. 
350  (1853),  Thurman,  J.;  Arnold  v. 
Ruggles,  1  R.  I.  165  (1837);  Dyer  v. 
Osborne,  11  R.  I.  321,  325  (1876); 
Tippets  v.  Walker,  4  Mass.  595,  596 
(1808),  Parsons,  C.  J.;  Sargent  v. 
Franklin  Ins.  Co.,  25  Mass.  90  (1829) : 
Weyer  v.  Second  Nat.  Bank,  57  Ind. 
198  (1877);  Manns  v.  Brookville  Nat. 
Bank,  73  Ind.  243  (1881);  Seward  v. 


56 


CH.   I.] 


DEFINITIONS   AND   NATURE   OP   CORPORATIONS. 


[§  12. 


In  some  of  the  earlier  cases,  upon  the  theory,  perhaps,  that  the 
shareholders  had  a  direct  interest  in  the  tangible  property  of  the 
corporation,  shares  were  held  to  be  real  estate  where  the  corporate 
property  consisted  wholly  or  chiefly  of  realty.1 

But  as  a  result  of  all  the  authorities  it  is  clearly  settled  that 
shares  of  stock  are  to  be  regarded  as  personalty,2  a  view  which  has 
frequently  found  expression  in  declaratory  statutes  both  in  Eng- 
land3 and  the  various  states  of  the  Union. 

Stock,  though  personalty,  is  not  a  chattel;4  it  is  rather  a  chose  in 
action,0  or,  as  some  older  authorities  declare,  property  in  the  nature 


Rising  Sun,  79  Ind.  351  (1881); 
Southwestern  R.  R.  v.  Thomason,  40 
Ga.  408  (1869).  Cf.  Wheelock  «. 
Moulton,  15  Vt.  519  (1843);  Russell 
v.  Temple  (Mass.  179S),  3  Dane,  Abr. 
108,  110.  Water  rights  represented 
by  shares  of  stock  in  a  water  com- 
pany are  personal  property.  George 
v.  Robison,  23  Utah,  79  (1901).  Stock 
is  personal  property,  although  the 
property  of  the  corporation  is  mostly 
real  estate.  Champollion  v.  Corbin, 
71  N.  H.  78   (1901). 

i  Price  v.  Price,  6  Dana  (Ky.),  107 
(1838);  Copeland  r.  Copeland,  7  Bush, 
349  (1870).  But  as  soon  as  this  lat- 
ter decision  was  handed  down,  the 
legislature  passed  an  act  declaring 
shares  of  stock  in  Kentucky  to  be  per- 
sonal property.  In  Meason's  Estate, 
4  Watts  (Pa.),  341  (1835),  there  is  to 
be  found  a  tendency  to  hold  shares 
in  a  toll-bridge,  real  estate.  Turnpike 
stock  was  held  to  be  realty  in  Welles 
v.  Cowels,  2  Conn.  567  (1818);  S.  P., 
Knapp  v.  Williams,  4  Ves.  Jr.  430, 
note  (179S).  So  of  canal  shares. 
Tomlinson  v.  Tomlinson,  9  Beav.  459 
(1823).  Cf.  Buckeridge  r.  Ingram,  2 
Ves.  Jr.  652  (1795);  Drybutter  v. 
Bartholomew,  2  P.  Wms.  127  (1723); 
Rex  r.  Winstanley,  8  Price,  180 
(1820).  Contra,  Walker  v.  Milne,  11 
Beav.  507  (1849).  See  also  Sparling 
v.  Parker,  9  Beav.  450  (1846);  Myers 
u.  Perrigal,  18  L.  J.  (Ch.)  185  (1849)  ; 
s.  c,  21  L.  J.  (C.  P.)  217  (1852); 
Ashton  v.  Langdale,  4  Eng.  L.  &  Eq. 


80  (1851),  and  an  interesting  discus- 
sion of  the  question  in  3  Dane,  Abr. 
108  et  seq. 

2  See  cases  cited  supra.  Also  an 
essay  on  Stock,  its  Nature  and  Trans- 
fer, 7  South.  L.  Rev.  (N.  S.)  430 
(1881). 

Shares  of  stock  in  a  joint  stock  as- 
sociation are  personal  property,  even 
though  the  property  of  the  association 
consists  of  real  estate,  so  far  as  the 
question  of  inheritance  taxes  is  con- 
cerned. Matter  of  Jones,  172  N.  Y. 
575   (1902). 

Even  though  the  property  of  an  un- 
incorporated joint  stock  association 
consists  of  real  estate,  yet  the  stock 
is  personal  property  and  cannot  be 
sold  under  an  execution  as  real  es- 
tate. In  re  Pittsburg,  etc.,  204  Pa. 
St.   432    (1903). 

Stock  is  personal  property.  Elk- 
horn,  etc.  Co.  v.  Childers,  100  S.  W. 
Rep.  222    (Ky.  1907). 

Stock  in  a  canal  or  ditch  company 
Is  personal  property.  Watson  v. 
Molden,  10  Idaho,  570  (1905). 

3  41  Geo.  III.,  ch.  3;  Watson  v. 
Spratley,  10  Exch.  222  (1854);  Ex 
parte  Vallance,  2  Deacon,  354  (1837); 
Ex  parte  Lancaster  Canal  Nav.  Co., 
1  Dea.  &  Ch.  411  (1832). 

4  Rex  v.  Capper,  5  Price  (Exch.), 
217    (1817). 

s  A  share  of  stock  is  a  chose  in 
action.  Attorney-General  v.  New  York, 
etc.  Co.,  [1898]  1  Q.  B.  205;  aff'd,  H. 
of  L.,    [1899]    A.   C.   62;    Harrold  v. 


57 


§  12.] 


DEFINITIONS   AND    NATURE    OF    CORPORATIONS. 


[CH.    I. 


of  a  c1k.sc  in  action.1     It  is,  moreover,  of  such  a  nature  thai  it  can- 
not ordinarily,  cither  by  act  of  the  law,  or  act  of  its  owner,  be  tal 
into  tangible  possession,  although,  of  course,  its  representative— the 
certificate  of  stock — may  be.2 

It  is  an  English  doctrine  that  shares  of  stock  arc  not  "goods,  w:u 
or  merchandise,"  as  those  terms  are  to  be  understood  in  construing 
that  section  of  the  statute  of  frauds  which  requires  delivery,  pay- 
ment or  memorandum  in  writing  of  a  sale  thereof.8  In  thiscountry, 
however,  the  courts  have  taken  the  opposite  view.'  Furthermore,  it 
is  said  that  shares  are  not  money/'  nor  are  they  security  for 
money,6  nor  a  credit.' 

Shares  of  stock,  being  in  the  nature  of  a  chose  in  action,  are,  at 
common  law,  not  subjeel  to  attachment  or  levy  of  execution;8  but 
most  of  the  states  have  enacted  statutes  which  have  changed  this 
rule.   This  species  of  property  may  be  made  subject  to  taxation;9 

Plenty,  [1901]  2  Ch.  314;  Lipscomb's    Payne    v.    Elliot,    54    Cal.    339,    341 

(1880). 

3  See   §§  339,  340,  infra. 

4  See  §§  339,  340,  infra. 
•r>  Nightingal    v.    Devisme,    5    Burr. 

2589;  s.  c,  2  W.  Bl.  G84  (1770); 
Jones  v.  Brinley,  1  East,  1  (1800); 
Douglas  v.  Congreve,  1  Keen,  410 
(1836);  Gosden  v.  Dotterill,  1  My.  & 
K.  56  (1S32);  Lowe  v.  Thomas,  5 
De  G.,  M.  &  G.  315  (1854);  Hotham 
v.  Sutton,  15  Ves.  319   (1S0S). 

c  Ogle  v.  Knipe,  L.  R.  8  Eq.  434 
(1869);  Atkins  v.  Gamble,  42  Cal.  86 
(1871);  Wilson  v.  Little,  2  N.  Y.  443 
(1849);  Mechanics'  Bank  v.  New 
York,  etc.  R.  R.,  13  N.  Y.  599,  626 
(1856). 

A  certificate  of  stock  is  not  a  se- 
curity in  the  proper  signification  of 
that  term.  Culp  v.  Mulvane,  66  Kan. 
143   (1903). 

7  New  Orleans,  etc.  Assoc,  v. 
Wiltz,  10  Fed.  Rep.  330  (1881).  See 
also  Smith  v.  Crescent  City,  etc.  Co., 
30  La.  Ann.  1378   (1878). 

An  obligation  to  pay  is  a  note,  even 
though  it  is  called  stock.  Greenwood, 
etc.  v.  Priebatseh,  83  Miss.  120 
(1903). 

8  See  ch.  XXVII. 
o  See  ch.  XXXIV. 


Adm'r  v.  Condon,  49   S.  E.  Rep.  392 
(W.  Va.   1904). 

i  Quoted  and  approved  in  Mayor,  etc. 
v.  Allegany,  etc.  Com'rs,  99  Md.  1 
(1904);  Wildman  v.  Wildman,  9  Ves. 
174  (1803);  Howe  v.  Starkweather, 
17  Mass.  240,  243  (1821);  Hutchins 
v.  State  Bank,  53  Mass.  421,  426 
(1847);  Union  Bank  v.  State,  9  Yerg. 
(Tenn.)  490,  500  (1836);  Allen  v. 
Pegram,  16  Iowa,  163,  173  (1864); 
Arnold  v.  Ruggles,  1  R.  I.  165  (1837) ; 
Slaymaker  v.  Bank  of  Gettysburg,  10 
Pa.  St.  373  (1849);  Denton  v.  Liv- 
ingston, 9  Johns.  96  (1812);  Chesa- 
peake, etc.  R.  R.  v.  Paine,  29  Gratt. 
(Va.)  502,  506  (1877);  Barksdale  v. 
Finney,  14  Gratt.  (Va.)  338,  357 
(1858);  Fisher  v.  Essex  Bank,  71 
Mass.  373,  377  (1855);  People's  Bank 
v.  Kurtz,  99  Pa.  St.  344,  349  (18S2)  ; 
Humble  v.  Mitchell,  11  Ad.  &  El.  205, 
208  (1839).  Cf.  Kellogg  v.  Stockwell, 
75  111.  68  (1874);  In  re  Jackson,  L. 
R.  12  Eq.  354  (1871).  See  also  Atty. 
Gen.  v.  New  York,  etc.  Co.  [1S98]  1 
Q.  B.  205;  aff'd,   [1899]   A.  C.  62 

2  Jermain  v.  Lake  Shore,  etc.  R. 
R.,  91  N.  Y.  483,  492  (1883);  Neiler 
v.  Kelley,  69  Pa.  St.  403,  407   (1871); 


58 


en.  i.] 


DEFINITIONS   AND   NATURE   OF   CORPORATIONS. 


[§12. 


and  for  purposes  of  taxation  it  exists  apart  from  the  corporation,  the 
corporate  properly,  the  corporate  franchises  and  the  capital  stock. 
The  situs  of  stock  held  by  non-residents  is  at  the  domicile  of  such 
non-residents,  unless  the  statute  requires  the  corporation  to  report 
tin-  st<K-k  as  the  agent  of  the  owners.1 

The  issue  of  stock  generally  means  the  issue  of  the  certificates-.2 
In  most  <>f  the  Btates,  and  in  the  federal  courts,  trover  lies  for  the 
conversion  of  >t"ck.  In  Pennsylvania,  however,  a  contrary  rule 
prevails,  although  conversion  is  held  to  lie  in  reference  to  certificates 
of  Btock.8 

Justice  Story,  in  his  <  'onflict  of  Laws,  says  that  questions  relating 
to  shares  of  -  are  to  be  determined  by  the  law  of  the  state  of 

the  corporation.4  A-  regards  the  taxation  of  stock,  however,  the 
stock  may  follow  the  domicile  of  the  stockholder,  and  may  be 
taxed  in  accordance  with  the  law  of  the  domicile  of  such  stock- 
holder;:'  or  for  pur;  of  taxation,  and  especially  inheritance 
taxes,  it  may  exist  win  re  the  corporation  is  incorporated.6  In  ref- 


1  Covington  r.  First  Nat.  Bank, 
198  U.  S.  100  (1905). 

A  will  giving  all  personal  property 
in  the  United  Kingdom  to  one  party 
and  all  personal  property  in  South 
Africa  to  another  part]  to  the 

former  Legatee  shares  of  stock  in  a 
South  African  corporation,  where 
such  corporation  has  a  transfer  office 
in  London  as  well  as  in  South  Africa, 
and  the  certificates  themselves  are 
on  deposit  in  London.  But  honds  is- 
sued by  a  South  African  Company 
will  not  pass  to  the  London  legatee, 
even  though  such  bonds  are  on  de- 
posit in  London.  He  Clark,  [1904]  1 
Ch.   294. 

2  See  §  13,  infra. 

3  See  ch.  XXXV. 

4  Story,  Confl.  Laws  (Sth  ed.), 
§  3S3.  And  see  the  discussion  of  this 
subject  in   Bla  k   r.  Zacharie,  3  How. 

».  As  to  the  situs  of  stock 
see  article  in  45  Alb.  L.  J.  330; 
Glenn  r.  Garth,  147  V.  S.  360  (1892); 
an  r.  Liggett.  133  U.  S.  ",33  (189"  I  ; 
Morris  v.  Glenn,  S7  Ala.  628  (1888); 
also  Lowndes  p.  Cooch.  s7  Md.  47S 
(1S98);  Atty.  Gen.  v.  New  York,  etc. 

|  1  Q.  B.  205;  aff'd,  H.  of  L. 
[1S99]  A.  C.  G2. 


5  See  ch.  XXXIV.  The  situs  of 
stock  for  the  purposes  of  taxation 
may  be  where  the  owner  of  the  stock 
resides.  Stanford  v.  City,  etc.,  131 
Cal.  34  (1900).  The  case  of  Glenn  v. 
Clabaugh,  65  Md.  65  (1S86),  holds 
that  the  insolvent  laws  of  Maryland 
cannot  discharge  a  Maryland  sub- 
scriber to  a  Virginia  corporation. 

•e  ch.  XXXIV,  infra.  In  the 
case  of  Attorney-General  v.  N.  Y. 
Breweries  Co.,  [1898]  1  Q.  B.  205; 
aff'd,  H.  of  L.  [1899]  A.  C.  62,  the 
court,  in  holding  that  an  English 
corporation  was  liable  for  an  inheri- 
tance tax  on  shares  of  stock  which 
it  had  allowed  to  be  transferred  on 
its  books  by  American  executors  of 
the  estate  of  a  deceased  American 
owning  such  stock,  said:  "The  Amer- 
ican will,  as  regards  these  English  as- 
sets, had  no  validity  whatever  in  this 
country,  nor  had  the  American  ex- 
ecutors any  right  under  it  to  receive 
the  testator's  assets  here.  Until  they 
had  taken  out  representation  to  their 
testator  in  this  country,  they  were 
pure  strangers  to  the  English  assets. 
This  American  will,  to  the  knowledge 
of  all  parties,  was  never  to  come 
into  operation  as  a  will  in  this  coun- 


59 


§   12.]  DEFINITIONS  AND   NATURE   OP   CORPORATIONS.  [cil.    I. 

erence  to  sales  of  stock  it  would  seem  that  the  law  of  the  forum 
or  of  the  place  of  making  or  the  place  of  performing  the  contract 
should  govern  as  between  the  parties  to  the  contract,  but  as  to  the 
duty  of  the  corporation  relative  to  transfers,  the  law  of  the  stain 
wherein  the  corporation  was  organized  should  govern.1  Legal  pro- 
ceedings against  the  stock  may  be  initiated  at  the  domicile  of  the 
corporation.2  A  claimant  of  stock  in  a  corporation  may  institute 
suit  at  the  place  where  the  company  is  incorporated  for  the  pur- 
pose of  obtaining  possession  of  the  stock,  even  though  the  holders 
of  the  stock  are  non-residents  and  are  brought  into  the  case  only 
by  publication  and  substituted  service.  The  court  acquires  juris- 
diction over  the  defendants.3  Especially  is  this  the  case  where  the 
certificates  are  within  the  jurisdiction.4  A  person  to  whom  a  cor- 
poration issues  stock  is  not  bound  by  any  prior  contracts  of  tho 

try;  the  American  executors  were  v.  Eliot  Nat.  Bank,  12  Rep.  351 
never  to  become  executors  in  this  (1881);  s.  c,  7  Fed.  Rep.  369;  Dick- 
country,  it  being  the  express  inten-  inson  v.  Central  Nat.  Bank,  129  Mass. 
tion  of  all  parties  that  they  should  279  (18S0);  Sibley  v.  Quinsigamond 
not."  Nat.    Bank,    133    Mass.    515    (1882); 

i  See    ch.  XXII.      An    executor    is  State  v.  First  Nat.  Bank,  89  Ind.  302 

entitled   to   have   stock   belonging  to  (1S83). 

the  estate  transferred   into  his  own  3  Stock   is   located   where   the   cor- 

name   as   executor,  and  the  corpora-  poration  is  incorporated,  and  a  non- 

tion  is  liable  in  damages  for  refusal  resident   stockholder   may   file  a   bill 

to  make  such  transfer,  even  though  in  the  United  States  court  in  the  dis- 

the    corporation    has    a    lien    on    the  trict  where  the  corporation   was  or- 

stock  for  a  debt  owed  it  by  the  de-  ganized   to  set  aside   an   illegal   for- 

cedent.     Under  the  statutes  of   Cali-  feiture  of  the  stock  for  non-payment 

fornia  this   rule  applies  to  an  alien  of  assessments,  and  in   such  suit  he 

corporation    doing   business    in    that  may  bring  in  non-resident  defendants 

state,  the  statutes  of  the  state  requir-  by    substituted    service.      Jellenik   v. 

ing  such  corporations  to  make  trans-  Huron,  etc.  Co.,  177  U.  S.  1  (1899).  A 

fers  in  that  state.     It  applies  even  careful  discussion  of  the  situs  of  stock 

though  the  statutes  of  Great  Britain  will  be  found  in  the  case  of  Matter 

forbid  transfers  of  stock  "without  ad-  of  Bronson,  150  N.  Y.  1,  17,  24  (189G). 

ministration  upon  such  property  un-  A  suit  in  equity  does  not  lie  in  tho 

der  the  laws  of  England  and  Great  United  States  court  in  Nevada,  at  the 

Britain."    London,  etc.  Bank  v.  Aron-  instance  of  a  resident  of  that  state, 

stein,  117  Fed.  Rep.  601   (1902).  to   recover   stock  owned  by  non-resi- 

2  See   ch.   XXVII,   and    §§363,   364,  dents  in  an  Arizona  corporation  where 

infra;  and,  in  general,  see  Richmond-  service  upon  them  is  made  only  upon 

ville  Mfg.   Co.  v.  Prall,  9   Conn.  487  the    publication.     The    stock    is    not 

(1833);    Black   v.   Zacharie,    3   How.  within  that  district,  within  the  mean- 

483   (1845);  Holbrook  v.  New  Jersey  ing  of  the  federal  statute.    McKane  v. 

Zinc  Co.,  57  N.  Y.  616  (1874).    As  re-  Burke,  132  Fed.  Rep.  688  (1904).    Ses 

gards    national    banks,    see    Scott   v.  also  §§  363,  485,  infra. 

Pequonnock  Nat.  Bank,  15  Fed.  Rep.  4  See  §  363,  infra. 
494    (1883);    Continental    Nat.   Bank 

60 


en.  i.] 


DEFINITIONS   AND    NATURE    OP    CORPORATIONS. 


[§  12. 


corporation  in  regard  to  that  stock  where  he  took  the  stock  without 
notice  of  such  contracts.1 

In  regard  to  shares  of  stock  owned  by  married  women,  the  pay- 
ment of  dividends  is  governed  by  the  law  of  the  domicile  of  the 
corporation.2  It  would  seem  that  as  to  transfers  of  stock  by  her 
the  law  of  her  domicile  should  govern  as  between  her  and  the  party 
with  whom  she  deals,  but  that  the  duty  of  the  corporation  as  to 
transfers  is  according  to  the  law  of  the  state  wherein  the  corpora- 
tion is  organized.8  A  Legacy  of  stock  may  be  governed  by  the  law 
of  the  state  where  the  testator  resided.4  A  transfer  of  stock  belong:- 
ing  to  an  estate  niu-t,  e.miplv  with  the  laws  of  the  state  wherein 
th rporatiou  is  incorporated.5 

A  guardian's  Bale  of  stock  is  governed  by  the  law  of  the  state  of 
the  guardianship,6  so  far  as  the  party  dealing  with  the  guardian  is 
concerned,  bul  as  to  the  corporation  the  same  rule  should  apply  as 
in  the  case  of  transfers  by  married  women.  Stock  held  in  pledge 
may  be  sold  in  accordance  with  the  law  of  the  state  where  the  pledge 
exists.11 

As  regards  the  common-law  and  statutory  liability  of  a  stockholder 


i  Angle  V.  Clilrago,  etc.  Ry.,  94 
Fed.  Rep.  717  (1899).  See  also  §  766c, 
infra. 

a  See   §  538,   infra. 

3  See  on  this  subject  Story  on  Con- 
fli<  t  of  Laws.  Mli  ,-.!..  g{  1 16,  i  be.,  and 

123,  169  and  l-;.  Win  re  the  hus- 
*  band  and  wife  reside  in  Tennessee 
and  the  wife  holds  stock  in  an  Ala- 
bama corporation,  the  law  of  Ten- 
nessee governs  as  to  the  right  of  the 
husband  to  appropriate  to  his  own 
use  the  stock  so  owned  by  the  wife. 
Birmingham,  etc.  Co.  v.  Hume,  121 
Ala.  168  (1S99).  See  also  §319, 
infra.  The  question  of  whether  a 
married  woman  may  assign  a  life  in- 
surance policy  is  governed  by  the  law 
of  the  state  where  the  woman  re- 
sides, and  not  by  the  law  of  the  state 
where  the  insurance  company  is  in- 
corporated. Mutual,  etc.  Co.  of  New 
York  v.  Allen,  138  Mass.  24  (1884). 
See  also  Brick  v.  Campbell,  122  N. 
Y.  337,  345   (1890). 

4  Where  stock  in  a  Maryland  bank 
Is  owned   by  a  citizen   of  Delaware, 


the  law  of  Delaware  governs  a  legacy 
of  such  stock.  Lowndes  v.  Cooch,  87 
Md.  478  (1898). 

c  See  §§  327,  330,  infra.  Even 
though  a  Minnesota  executor  of  a 
deceased  Minnesota  stockholder  in  a 
California  corporation  sells  the  stock, 
yet  if  a  local  administrator  has  been 
appointed  in  California  the  sale  and 
transfer  by  the  Minnesota  executor 
is  not  good,  inasmuch  as  by  the  Cali- 
fornia statutes  personal  property  de- 
scends to  the  heirs  the  same  as  real 
estate.  Moreover,  the  situs  of  the 
stock  is  where  the  corporation  ex- 
ists. Murphy  v.  Crouse,  135  Cal.  14 
(1901). 

c  See  §  328,  infra. 

i  Where  an  Oregon  corporation 
pledges  its  bonds  in  California  to  se- 
cure notes  payable  in  Califoria,  the 
law  of  California  applies  as  to  the 
mode  of  selling  such  bonds  on  default 
of  the  pledgor.  Morris,  etc.  v.  East 
Side  Ry.,  104  Fed.  Rep.  409  (1900), 
revg.  95  Fed.  Rep.  13. 


61 


§   12.]  DEFINITIONS   AND   NATURE    01  (RATIONS.  [CH.   I. 

on  his  stock,  the  law  of  the  ["rum  as  well  as  the  law  of  the  domicile 
of  the  corporation  has  to  be  considered.1 

The  capita]  stock  of  a  corporation  may  be  either  common  or  pre- 
ferred. P>y  common  stock  is  meant  that  stuck  which  entitles 
the  owners  of  it  to  an  equal  pro  rata  division  of  profits,  if  any  there 
be;  one  stockholder  or  class  of  stockholders  having  no  advantage,  pri- 
ority or  preference  over  any  other  shareholder  or  class  of  stock- 
holders in  the  division.  By  preferred  stock  is  meant  Btock  which 
entitles  its  owners  to  dividends  oul  of  the  net  profits  before  or  in 
preference  to  the  holders  of  the  common  stock.  Common  stock 
entitles  the  owner  to  pro  rata  dividends  equally  with  all  other 
holders  of  the  stock  except  preferred  stockholders;  while  preferred 
stock  entitles  the  owner  to  :(  priority  in  dividends.2 

By  deferred  stock  or  bonds  is  meant  stock  or  bonds  the  payment 
of  dividends  or  interest  upon  which  is  expressly  postponed  until 
some  other  class  of  stockholders  are  paid  a  dividend,  or  until  sonic 
certain  obligation  or  liability  of  the  corporation  is  satisfied.8 

By  overissued  or  spurious  stock  is  meant  stock  issued  in  exec--;  of 
the  full  amount  of  capital  stock  authorized  by  the  charter  of  the 
corporation.4     Such  stock   i-  void  even  though  issued  in  g 1   faith. 

In  Massachusetts  some  classes  of  corporations  issue  what  is  there 
known  as  special  stock.  This  is  a  peculiar  kind,  of  stock,  essentially 
local  in  character,  provided  for  by  statute,  and  unknown  before 
the  year  1855.  Its  characteristics  are  that  it  is  limited  in  amount 
to  two-fifths  of  the  actual  capital;  it  is  subject  to  redemption  by 
the  corporation  at  par  after  a  fixed  time,  to  lie  specified  in  the  cer- 
tificate; the  corporation  is  bound  to  pay  a  fixed  half-yearly  sum  or 
dividend  upon  it  as  a  debt;  the  holders  of  it  are  in  no  event  liable 
for  the  debts  of  the  corporation  beyond  the  amount  of  their  stock, 
and  the  issue  of  special  stock  makes  all  the  general  stockholders 
liable  for  all  debts  and  contracts  of  the  corporation  until  the  special 
stock  is  fully  redeemed.5 

In  England  the  word  "stock"  has  a  very  different  meaning  from 
what  it  has  in  the  United  States.6 

The  "flotation"  of  a  property  means  a  sale  thereof  at  a  profit  to 
a  substantial  company.7 

i  See  chs.  XI  and  XII,  infra.  stock.     People   v.   Miller,   180   N.   Y. 

2  See  ch.  XVI,  infra.    Stock  issued  16    (1904). 

as  "preferred  debenture  shares  of  the  3  See  §§  267,  773,  infra. 

capital   stock"   under   the   New  York  4  See  §§  291-298,  infra. 

statute    is    a    legal    contradiction    on  5  See  ch.  XVI,  infra. 

its   face,   and   in   regard   to  taxation  6  See  §  14,  infra. 

will  be  construed  as  being  preferred  "  Torva,    etc.    Syndicate    v.    Kelly, 


[1900]   A.  C.  612. 


62 


CH.   I.]  DEFINITIONS   AND   NATURE   OF   CORPORATIONS.  [§   13. 

§  13 .  Certificates  of  stock.  — A  certificate  of  stock  is  from  one 
point  of  view  a  mere  muniment  of  title,  like  a  title  deed.  It  is  not 
the  stock  itself,  but  evidence  of  the  ownership  of  the  stock;  that  is 
to  say,  it  is  a  written  acknowledgment  by  the  corporation  of  the 
interest  of  the  stockholder  in  the  corporate  property  and  fran- 
chises:1 it  operates  to  transfer  nothing  from  the  corporation  to  the 

ekholder,  \m\  merely  affords  to  the  latter  evidence  of  his  rights.2 
It  should  bo  clearly  understood  that  the  certificate  is  not  the  stock, 
but   merely   written  evidence  of   the  ownership  of  stock.3     Accord- 

1  Higgins  V.  Lansingh,  lot   111.  301    issue  of  stock  as  to  which  see  §  8, 

(1895).  P-    42'    Si^ra- 

An  American  form  of  a  certificate  u  Quoted    and    approved   in   Nelson 

of  stock  is  so  common  it  need  not  be  r.    Owen,    113    Ala.    372     (1896).      A 

given  here.    The  English  form  is  dif-  certificate  of  stock  is  the  written  evi- 

ferent    The  following  la  a  Bpeclmen:  dence  of  the  right  of  a  party  to  a 

pro  rata  share  of  the  net  profits  of 

No.  2007.    1000  fully  paid  ordinary  shares.  a  coporation  when  declared,  or  to  a 

Tho  Company,  Limited.  ince  share  of  all  its  property,  after 

Incorporated    under    the    Companies    Acts,  the  payment  of  its  debts,  in  case  of  a 

2  to  1890.  dissolution    of    the    artificial    being. 

CAPITAL*    £200,000.  Beckwith  v.  Galice,  etc.  Co.,  93  Pac. 

Divided  into  Rep.  453    (Ore.  1908). 

112,000   "v.  n   ;                          ence  shares  o  Williams  v.  Ashurst  Oil,  etc.  Co., 

ordlnarj               of  lit    Cal.    619     (1904);    Clevenger    v. 

U    each,    and   400    foui.  ires   of      MoorG)   71    x.   J.  L.   148    (1904);    HaW- 

'  '""•  r.  Brumagim,  33  Cal.  394  (1867); 

THIS  IS  TO  CERTIFY  that of 1    Campbell  v.  Morgan,  4  Bradw.   (111.) 

0    (1879);   People's  Bank  v.  Kurtz, 
Hold  r  of  One  Ti.  qq    p       gt     344    (1882)-    Hubbell    v. 

of  11  each.  No*  118.761  to  114,750.  inolu-     »»       '•         _  iik'mrojm.  Van 

Company.  Li,..  Ject     Drexel,  11  Fed.  Rep.  115  (1882 )     Van 

t0   •  of   the   Bald   Company,     Allen   v.  Assessors,  3  Wall.   57-.    t>yo 

and  that  the  said  Shan     are  fully  paid  up.      (1865);  Burr  v.  Wilcox,  22  N.  Y.  551 

CIVKN    under   the   Common    Seal    of    the       (1SC0).      Birmingham    Nat.    Bank    V. 

Roden,'97  Ala.  404  (1892).  "Stock  is 
one  thing,  and  certificates  another. 
The  former  is  the  substance,  and  the 


1! 


(Seal.)                                                    5  latter  is   the  evidence  of  it."     Haw- 

,    Secretary.  ley  Vm  Brumagim,  33  Cal.  394   (1867). 

of    all    or   any   portion    of  The  fact  that  certificates  of  stock  in 

can  be  registered  without  the  forei       corp0rations  are  in  New  York 

production  of  this  certificate.  ^^    ^    ^    ^^    them    gubject 

In    the   case   of   Reno,    etc.   Co.    r.  to  taxation  in  that  state.    Re  James 

Culver   60  X.  Y.  App.  Div.  129  (1901),  144   N.   Y.   6    (1894).     Certificates   of 

it  was  held  that  a  corporation  does  stock  issued  in  contemplation  of  In- 

not  have   any  common-law   power  to  corporation    may    be    accepted    and 

issue   certificates   of   stock,   but  that  adopted  by  the  corporation  after  or- 

such  right  must  be  statutory.     This  ganization  and  will  be  good.    Thorpe 

can   hardly   be  said   to   be  good  law,  v.    Pennock,    etc.    Co      99    Mi nn     22 

unless  the  court  was  referring  to  the  (1906).  See  also  209  U.  S.  365  (1908). 

63 


§13.] 


DEFINITIONS   AND   NATUKE    OF   CORPORATIONS. 


[cn.  I. 


ingly  it  follows  that  shares  of  stock  have  no  "ear-marks" — that  one 
share  cannot  be  distinguished  from  another  share, — but  that  it  is 
only  the  certificates  which  are  distinguishable  one  from  the  other 
by  their  numbers  and  in  other  ways.1  The  certificate,  therefore, 
has  value  in  itself  as  evidence,  but  apart  from  the  Bhares  which  it 
represents  it  is  utterly  worthless.-  It  is  a  convenient  voucher, 
which  the  stockholder  has  a  right  to  receive  it'  he  asks  for  it.8  Not- 
withstanding all  this  a  certificate  of  stock  has  almost  as  much  nego- 
tiability as  a  promissory  note.  The  New  York  court,  of  appeals 
well  says  that  "certificates  of  stock  may  be  treated  as  property  from 
the  function  they  perform  and  the  use  that  is  made  of  them.  They 
may  well  be  regarded  as  a  distinct  species  of  property,  for  they  aow 
represent  the  bulk  of  property  in  the  Btate  and  are  the  universal 
medium  of  transfer."4  Such  a  certificate  may  represent  the  Btock 
sufficiently  to  carry  the  stock  when  the  certificate  itself  is  attached 
or  sold  on  execution.5     One  element  of  its  value  to  the  stockholder 


1  Hubbell  v.  Drexel,  11  Fed.  Rep. 
115  (1882).    See  also  §469,  infra. 

As  to  the  numbers  of  the  shares 
in  England,  the  court  said,  in  Inds 
case,  L.  R.  7  Ch.  App.  485  (1872),  "the 
numbers  of  the  shares  are  simply  di- 
rectory for  the  purposes  of  enabling 
the  title  of  particular  persons  to  be 
traced." 

2  Quoted  and  approved  in  Pietsch  v. 
Krause,  116  Wis.  344  (1903);  Payne 
v.  Elliot,  54  Cal.  339  (1880).  "But 
in  the  business  world  such  obliga- 
tions or  securities  are  treated  as  some- 
thing more  than  mere  muniments  of 
title.  They  are  daily  bought  and  sold 
like  ordinary  chattels;  they  may  be 
hypothecated  or  pledged ;  they  have  an 
inherent  market  value,  and,  while  dif- 
ferent in  some  respects  from  chat- 
tels, they  are  generally  classified  as 
personal  property,"  Merritt  v.  Ameri- 
can, etc.  Co.,  79  Fed.  Rep.  228,  235 
(1897). 

3  Johnson  v.  Albany,  etc.  R.  R., 
40  How.  Pr.  193  (1870),  rev'd  on 
another  point  in  54  N.  Y.  416.  Cf. 
Arnold  v.  Suffolk  Bank,  27  Barb.  424 
(1857),  a  case  in  which  the  distinc- 
tion between  a  refusal  on  the  part  of 
a  corporation  to  issue  a  certificate  in 
a  certain  form  and  a  refusal  to  recog- 


nize the  owner  of  shares  as  owner — 
a  denial  of  his  property  in  the  Btock 
— is  clearly  drawn.  The  supremo 
court  of  Indiana  has  noted  the  dis- 
tinction to  the  effect  that  a  certificate 
is  not  the  title,  but  only  evidence 
of  the  title,  to  shares.  The  court 
says:  "The  certificate  did  not  con- 
stitute the  title  to  the  stock.  .  .  . 
In  legal  contemplation  the  certificate 
was  merely  an  additional  and  conven- 
ient evidence  of  the  ownership  of  the 
stock."  Cincinnati,  etc.  R.  R.  v. 
Pearce,  28  Ind.  502  (1S67). 

4  People  v.  Reardon,  184  N.  Y.  431, 
450    (1906). 

5  See  §  485,  infra.  The  New  York 
court  of  appeals  has  recently  held 
that  where  certificates  of  stock  issued 
by  a  New  Jersey  corporation  are 
within  the  state  of  New  York,  an  at- 
tachment may  be  levied  upon  them 
and  the  interest  of  the  owner  or 
pledgor  therein  sold,  such  certificates 
being  a  property  right  within  the 
state.  Simpson  v.  Jersey  City,  etc. 
Co.,  165  N.  Y.  193  (1900),  the  court 
distinguishing  the  case  of  Plimpton 
v.  Bigelow,  93  N.  Y.  592  (1883),  on 
the  ground  that  the  certificates  of 
stock  in  that  case  were  not  within 
the  state.    The  court  said:     "Certifi- 

64 


(  II.  I.] 


XITIONS  AND   NATURE    OF   CORPORATIONS. 


[§  13. 


is  thai  it  is  '    ■  vidence  of  his  title.1    A  certificate  of  stock 
d    ii'  i    be  under  &  d   ao\   be  in  any  particular  form 
unless   required   bj  [f   by   its  words   the           Lture  of  a 
istrar  lition  must  be  observed.4     When  cer- 
tificates are  dy  of  the  officers  required  by  law 

But  a  certificate   issued  to  an 

:er  of  the  corp  [holder,  although  the  certifi- 

L  1  ,  is  valid.6 

A  ci  rtifii  ary  to  the  complete  ownership  of 

the  ubseription   ue<  essary  thereto.8 


catea  of  s  ■  .1  by  bu 

d  as  pi  a]  pur- 

and 

in 

Tli-  of 

in  a  N 

his 

adminl 
ter   sin  b 

. 
i. 
i  Bi 
X.   J.    Eq.    24    i  ' 

• 
Mich.   : 
I      $2  ) . 

-  l:  v.    D  "l     X.    Y. 

Su;  :..      T! 

common-law    rnlo    i  ;ifi- 

B    Of    s 

l  upon  thi  ni.     i  ton 

V.     i 

urn.     Rev<  qui  a  omitted  by 

lit    from    i  of    stock 

ny   time.     Jones 

Co.,    27    Wa  h.    136 

I 

If  1  l  by 

not  under  seal, 
■ 
'ooks  n 
b         k.    Byera  v.  Rollins, 
13  Col.,    22   (  i     :•). 

C5 


8  The    statutory    provision    that    a 

tficate  of  stock  shall  state  on  its 

to    what    extent   it   is    paid    up, 

r   in   money  or  property, 

not  invalidate  an  issue  of  stock 

without  such  statement  appearing  on 

ate.       French     v.     North- 

iindry,  107  N.  W.  Rep.  430 

(Io.  !). 

i  Where  a  certificate  of  stock  pro- 

oii    its    face   that   it   must   ho 

by   a  transfer   agent  the  cor- 

l   is  not  liable  on  a  certificate 

i    the  transfer   agent's  name 

Q   forged   by  an   employee  of 

( "i-poration.     Dollar,   etc.   Co.   v. 

burg,   etc.   Co.,   213    Pa.   St.    307 

I) .    See  also  §  293  infra. 

•r.  Holbrook  v.  Fauquier,  etc.   Co.,  3 

Crunch,    C.    C.    425    (1829);    s.    c.    12 

Cas.    322.      See    §§     293,    365, 

infra. 

8  Titus    v.    Great    Western    Turnp. 
Road,  CI  X.  Y.  237   (1874). 

7  Wheeler  v.   Millar,   90   N.   Y.   353 
: )  ;  Burr  v.  Wilcox,  22  N.  Y.  551, 
(I860);     Thorp    v.    Woodhull,    1 
Sandf.  Ch.  411  (1844). 

loted  and  approved  in  Reed  v. 
Gold,  102  Va.  37  (1903);  Wheeler  v. 
Millar,  90  N.  Y.  353  (1882).  A  suh- 
•  r  cannot  rescind  his  subscrip- 
tion on  the  ground  that  the  certifi- 
cates had  never  been  issued  to  him. 
Cotter  v.  Butte,  etc.  Co.,  31  Mont.  129 
(1904).  Even  though  no  certificates 
of  stock  are  issued  the  subscriber  is 
a  stockholder  and  entitled  to  divi- 
dends.    South  Dakota  v.  Xorth  Caro- 


§  13.] 


DEFINITIONS  AND   NATURE    OF   CORI'o; 


[<il.    1. 


But  tbo  corporal  ion  is  bound,  upon  demand,  to  issue  certi  -  of 

stock  to  its  stockholders,1  and,  if  it  refuses,  the  stockholder  may 
bring  suit  in  equity  to  compel  its  issuanci  ;2  or  he  may  sue  it  in  an 
action  at  law  for  damagi  The  corporation  in  transferring 

to  the  trustee  in  bankruptcy  of  a  stockholder  has  no  righl  to  write 
on  the  face  of  the  certificate  that  it  is  subjecl  to  a  lien  belonging 
to  tho  corporation,  even   though  such   !  ists,   all  other  certifi- 

cates of  stock  not  having  any  such   writing  on  them.4     Jt    is 
essential  to  the  i  ace  of  the  corporation  thai  certificates  of  stock 

be  issued/'     Without   a  certificate  the  stockholder  has  a  compl 
power  to  transfer  his  stock,''1   to  receive  dividends,7   and   to  v< 
and  he  is  individually   liable  as   a   stockholder.9     A   certificate 
stock  may  be  a  valid  subject  of  a  donatio  causa  mortis,  of  a  ! 
a  contracl  of  sale,  a  pledge,  or  a  gift10     Under  the  English  statu 
an  issue  of  stock  by  a  corporation  h  the  issue 

of  the  cer  es  and  means  an  original  putting  oul  of  the  sh 

In   New   York,  making  out  and   mailing  the  certii  en 

held  to  constitute  a  du<    issue  thereof.12    And  in  Maryland,  the  stub 
of  a  hoik  from  which  certificates  have  been  detached  is  evidi  i 
of  their  regular  issue.13     Stock  may  be  said  to  be  issued  when  it  is 


lina,  192  U.  S.  286  (1904),  the  court 
saying  (p.  309)  "there  was  no  formal 
issue  of  certificates  by  the  company 
to  the  State,  but  that  was  a  matter 
of  arrangement  between  the  pan 
to  the  subscription.  The  State's 
right  as  a  stockholder  was  not 
abridged  by  lack  of  the  certificates, 
and  in  fact  it  has  been  receiving 
dividends  on  the  stock  exactly  as 
though  certificates  had  been  issued." 
i  See  §  61,  infra. 

2  See  §  61, infra. 

3  Quoted  and  approved  in  West- 
minster Nat.  Bank  v.  New  England, 
etc.,  73  N.  H.  465  (1906).  See  also 
§  61,  infra. 

4  Re  Yf.  Key,  etc.,  [1902]  1  Ch. 
467. 

5  Quoted  and  approved  in  Pietsch 
v.  Krause,  116  Wis.  344  (1903); 
Chester  Glass  Co.  v.  Dewey,  16  Mass. 
94  (1819);  Burr  v.  Wilcox,  22  N. 
Y.   551    (I860). 

6  First  Nat.  Bank  v.  Gifford,  47 
Iowa,  575  (1877);  National  Bank  v. 
Watsontown    Bank,    105    U.    S.    217 


(1881).  Of.  Brighan  V.  Mead,  92 
(1S65).  A  subscription  of 
stock  may  be  assigned,  even  though 
only  a  part  of  the  subscription  has 
been  called  for  and  paid,  and  even 
though  no  certificate  of  stock  has 
ever  been  issued.  Such  assignment 
may  be  oral.  Manchester  St.  Ry. 
r.  Williams,  71  N.  H.  312   (1902). 

t  Ellis  v.  Essex  Merrimack  Bridge, 
19   Mass.    243    (1824). 

8  Beckett  v.  Houston,  32  Ind.  393 
(1869). 

9  Agricultural  Bank  v.  Wilson,  24 
Me.  273  (1844) ;  Mitchell  v.  Beckman, 
64  Cal.  117   (1883). 

io  See  ch.  XVIII. 

li  East  Gloucestershire  Ry.  v.  Bar- 
tholomew, L.  R.  3  Exch,  15  (1867), 
Bush's  Case,  L.  R.  9  Ch.  App.  554 
(1874). 

12  Jones  v.  Terre  Kaute,  etc.  R.  R., 
17  How.  Pr.  529  (1859).  Cf.  §  12, 
supra. 

13  Weber  v.  Fickey,  47  Md.  196 
(1877),  s.  c.   52  Md.  501. 


66 


en.  i.] 


DEFINITIONS    AND    NATURE    OF    CORPORATIONS. 


[§  13. 


paid  for.1     A  tax  on  transfers  of  stock  docs  not  apply  to  an  original 
■k.~ 
( lertifieates  of  stock  arc  not  negotiable  instruments,  but  they  come 
v,  rv  c  all  the  el<  3  of  n<  They  have 

id  to  have  a  quasi-negotiability,  but  this  phrase- 
ology throws  little  light  upon  the  real  character  of  the  transfera- 
bility of  .11  may  be  said  in  general  that  by  the  operation  of 
tl„.  iaNV  ,  >ppel  the  purchaser  of  a  certificate  of  stock,  in  good 
faith  and  for  value,  may  take  it  free  from  many  claims  of  previous 
holders  which  would  be  allowed  to  ■  in,  in  the  case  of  a  sale  of 
an  ordinary  chose  in  action.4  En  England  it  has  ban  held  that 
a  certificate  of  fully  paid  up  stock  running  to  "bearer"  is  negotiable, 
and  if  stolen  and  then  sold  to  a  bona  fide  holder  for  value  without 
notice,  the  latter  mighl  compel  the  company  to  pay  subsequent  divi- 
dends to  him  in  n                      hare  warrant6    A  forged  transferof  a 

no  title.8    An  ordinary  certificate  of  stock 
na  many  qualities  of  negotiability  in  England  as  in  the 

.   to   regards   taxation   it  is  issued  Pietsch     r.     Krause,     11G    Wis.    344 

when  sul                 t-..  I          '•      Stock   purchased  by   a  cor- 

Co    e    State  no               N.  J.   I-    389  poration  and  then  sold  is  issued  stock. 

,       st0,                           -to,];    that  Hartley   r.   Pioneer   Iron  Works,  1S1 

been    su'            I,   i>"t             sot  N.  v.  :::  (1905) 


•  iiy  include  ai:  that  has 

>,  etc 

r.  Mill.  :        i         B.  Rep. 

•  within  the  mean 
of  the  New  York  Btatute,  render 


2  People  v.  Duffy,  etc.  Co.,  122  N. 

pp.  Div.  336   (1907). 

3  See  §  112,  infra. 

4  See  ch.  XXIV.     The  words  on  a 

ficate  of   stock  that  it  is  trans- 


tag    stockholders     personally     liable,  ferable  only  on  the  books  of  the  com- 

a    though    the    certificates    there-  pany   are   "only  for  the  convenience 

have    not   been    actually    issued,  and    protection    of    the    corporation 

Flour   City    Natl.    Bank    v.    Shire,   SS  itself,"   and   if   the  certificate   is   en* 

\     V     ipp.DlT.40J    (1903).     A  tax  dorsed  in  blank  on  the  back,  it  can 

on    sto.k  I    and    outstanding"  be   sold   and  any   purchaser  can   fill 

appllea  to  iry   stock.     Kni.ker-  in  his  name  and  have  a  new  certifl- 

hocker.  etc.   Co.   r/  State  Board,  etc.,  cate  issued  to  him,  the  court  saying 

Ul    Rep.  913   (N.  J.  1907).     The  "As  a  rule,  stocks  are  so  sold  and 

rt  in  0  intimated  bought    in   this   busy   age    an  I    pa*, 

•  the  treasury  stock  was  illegally  from   seller   to  ^nyer jum  negoti 

u.uuired    by    the    corporation    as    a  able.     .     .     .     ine  wu 

Le  It  was  originally  Illegally  necessities  of  commercial  centers rwi  1 

issued,   there  being  no  proof  that  it  always  require  such  a  usage.         hat 

gned    for    fall    value,   but   the  tuck  v.  American  Cement  Co.,  205  Pa. 

reasoning  of  the  opinion  in  that  re-  St.  197  (1903).  ..._,„    etc 

Bpert     can     hardly     be     commended.        5  Webbet  c.  Co.^;  Atond»a    etc. 

a  though  a  statute  deel  hat  Co.  Ltd.,  93  L.  T.  Rep.  o*9  <190o). 

,  k  not  issued  at  H.  par  value  shall       «  See  §1  «*j™  «£*     fte  capitel 

67 


§    14.]  DEFINITIONS   AND    NATURE    OF   CORPORATIONS.  [OH.    I. 

By  reason  of  certificates  of  stock  having  many  elements  of  nego- 
tiability, a  pledge  of  the  certificates  may  be  enforced  by  Buit  in  a 
state  where  the  certificates  arc  deposited.1  A  provision  in  a  certifi- 
cate of  stock  to  the  effect  thai  the  corporation  shall  have  a  lien  on 
the  stock  for  debts  due  to  the  corporation  from  the  registered  stock- 
holders may  be  valid  and  enforceable,  even  though  neither  the  stat- 
utes of  the  stale  b  •  chari.r  nor  the  by-laws  nor  the  proceed- 
ings of  the  directors  or  stockholders  provide  for  such  a  lien.  It  is 
sufficient  that  the  certificate  of  stock  was  the  one  used  by  the  cor- 
poration.2 A  stockholder  has  the  right  to  break  up  into  smaller 
amounts  his  certificate  of  stocl 

Stock  may  be  transferred  without  a  transfer  of  the  certifical  . 
and  if  the  transfers  r  afterwards  transfers  the  certificate  to  another 
party  he  is  Liable  to  the  first  transfer)  e.4 

§14.  Definition  of  bond  mortgage,  deed  of  trust,  debenture,  ar- 
ticles of  association,  memoranda  of association,  scrip,  certificatebook, 
transfer  book,  stock  ledger,  underwriting,  founders'  shares.—  A 
bond  of  a  corporation  is  an  instrumenl  executed  under  the  sea] 
of  the  corporation,  acknowledging  the  loan  and  agreeing  to  pay 
the  same  upon  terms  se1  forth  therein.  A  coupon  bond  is  one  that 
has  coupons  attached,  usually  in  the  form  of  promissory  notes,  to 
pay  an  amount  of  money  equal  to  the  animal  or  semi  animal  interest 

the  production  of  the  certificate,  separate  from  the  certificates.  Long- 
where  the  certificate  recites  on  its  man  v.  Bath,  etc.  Ltd.,  [1905]  1  Ch. 
face  that  no  transfer  can  be  regis-  646.  See  also  §  412,  infra. 
tered  without  its  production,  and  l  Certificates  of  stock  represent 
hence  the  company  is  liable  to  a  the  stock  itself  sufficiently  to  sustain 
pledgee  of  the  certificate,  even  a  suit  commenced  by  substituted 
though  he  does  not  apply  for  a  service  for  the  purpose  of  establish- 
transfer  until  after  the  owner  has  ing  a  lien,  even  though  the  corpora- 
transferred  the  shares  to  a  third  per-  tion  is  located  in  another  state.  Mer- 
son,  without  producing  the  original  ritt  v.  American,  etc.  Co.,  79  Fed. 
certificate.  Rainford  v.  Keith,  etc.  Rep.  22S  (1897).  Cf.  §  485,  infra. 
Co.  Ltd.,  [1905]  2  Ch.  147;  rev'g  2  Stafford  v.  Produce,  etc.  Co.,  61 
[1905]  1  Ch.  296.  Ohio    St.    160    (1899).      See   also    ch. 

In  England,  even  if  the  secretary  XXXI,  infra. 
by  mistake  delivers  the  old  certifi-  3  It  is  unreasonable  for  a  stock- 
cates  back  to  the  transferer  and  he  holder  owning  twenty-five  shares  in 
pledges  them,  the  pledgee  is  not  pro-  one  certificate,  to  demand  that  the 
tected,  the  basis  of  this  decision  be-  corporation  issue  twenty-five  share 
ing  that  the  proximate  cause  of  the  certificates  of  one  share  each  in  ex- 
loss  was  the  transferrer  and  not  the  change  therefor.  Schell  v.  Alston 
secretary,  but  in  England  the  trans-  Mfg.  Co.,  149  Fed.  Rep.  439  (1906). 
fers      are      made      by      instruments  4  Mahaney  v.  Walsh,  16  N.  Y.  App. 

Div.  601  (1897).    See  §  358,  infra. 
68 


<  11.    I.]  DEFINITIONS   AND   NATURE   OP   CORPORATIONS.  [§   14. 

<-n  the  bond.1  A  registered  bond  is  one  whose  negotiability  is  tem- 
porarily withdrawn  by  a  writing  on  the  bond  that  it  belongs  to  a 
specified  person,  and  by  a  registry  to  that  effect  at  an  office  speci- 
fied by  the  company. 

A  mortgage  given  by  a  corporation  may  be  similar  to  the  ordi- 
nary mortga£  en  by  an  individual. 

Bui  usually  a  corporate  mo  made  in  the  form  of  a  mort- 

'  of  trust.  Such  a  deed  of  trust  is  a  mortgage  to  a  trustee 
for  bondholders,  the  bonds  :ured  by  the  mortgage  deed  of 

trust     The  trui  Lay  be  an  individual,  but  generally  is  a  trust 

company.      Where    the    moi  secure   a   large   number   of 

bonds,  it   is  almost   in  ry  that  a  deed  of  trust  be  used.     Other- 

e    the   up  •    would    run    to   the   bondholders,   who   are   con- 

stantly  changing,  and  many  of  whom  are  soon  unknown  to  the  cor- 
poration    mortgagor.      Moreover    in    foreclosing    such    a    mortgage 

ious  difficulties  would  arise.  Bence,  where  a  corporation  gives 
a  mortgage  to  secure  bonds,  this  mort  is  made  in  the  form  of  a 

(Ui<\   of  tni- 

The  word  "debenture1*  1.  definite  legal  d  xcept  that 

it  always  means  a  debt  h  may  lie  applied  t.»  any  promise  or  secu- 
rity of  the  company  to  pay  money.  It  may  be  a  mere  promise  to 
pay,  or  a  covenant  under  .-<  al  t>>  pay,  mi-  a  :  ge  or  charge  under 

the  Beal   of  the  e.dnpai 

The  word  "stock"  ha-  a  peculiar  meaning  in  England.  It  applies 
t.»  debentures  as  well  as  -hare  capital.  Shares,  bonds  ami  debentures 
of  fixed  amount-,  be  Led  in  any  amount  or  multi- 

plea  'tain  sums,  Bubjecl   !••  a   minimum,  usually  of  II. 

In  tin-  United  States  invi  ■  "bear*  r  •■  curities,"  while  in 

England  reg  !  securities  are  most  preferred.     One  advantage  of 

t  A  coupon  bond  is   \               to  the  which    interest    is    collected    by    the 

bearer.     It  may   1               ht  and   sold  holder. 

without    formality    as    freely    as    any  Planted  on  the  same  sheet  with  the 

kind  of  property  and  without  indorse-  bond  is  a  series  of  coupons  or  small 

•its    of    any    kind.      Owing    to    tl  rtificates  of  interest  due,  which  are 

a  of  tra             eoupon  bonds  are  so  de               hat  one  is  cut  off  at  each 

illy  p;  interest   period.     Each   coupon   bears 

pect  to  hold   them  but  a  short  time,  the  number  of  the  bond  and  shows 

Their    disadvantage    for    the    person  the    date    of   the   coupon's    maturity. 

who  wishes  to  make  a  permanent  in-  The  holder  of  a  coupon  bond,  at  each 

ment  lies  in  the  danger  that  they  interest  period,  detaches  the  coupon 

might    be    lost    or    stolen,    in    which  due  that  day  and  collects  it.    The  cou- 

case  the  loss  to  the  owner  would  be  pons   may   be   collected   through   any 

as    complete    as    would    be    the    loss  bank. 

of  a   bank  note.     The   coupon  bonds  2  See   also    §  776,   infra.     People  v. 

take  their  name  from  the  method  by  Miller,  ISO  N.  Y.  16  (1904). 

69 


§   14.]  DEFINITIONS   AND    NATUEB    OF    CORPORATIONS.  [CH.    I. 

"stock"  is  that  an  inv<  stor  may  buy  any  amount  from  £1  upward, 
and  thus  can  invest  just  as  many  pounds  sterling  as  be  baa  availa- 
ble. Anothi  p  advantage  is  that,  without  any  trouble  on  his  pari,  be 
receives  bis  interesl  or  dividend  by  cheque  through  the  poet,  while 
yet  another  advantage  is  that,  even  should  be  lose  his  certificate, 
his  dividend  or  in  ches  bim  ad  by  putting  on 

record  his  .  the  risk  of  the  Btock  being  transferred  by  forgery  is 
reduci  d  to  a  minimum,  while  in  the  evenl  of  bis  desiring  to  sell  his 
stock  before  be  has  found  his  losl  certificate,  il  is  customary  on  his 
giving  an  adequate  indemnity,  to  p]  i  further  obstacle  in  the 

way  of  his  doing  so.     A  bolder  "  usually  gets  a  certificate 

for  every  purchase  he  make-,  and  so  may  have  several  certifical  , 
The  voting  power  on  capital  stock  is  the  same  as  with  shares.  De- 
tock  does  not  vote  except  in  very  special  cases.  Debentures 
have  coupons  attached,  and  are  usually  uot  registered,  but  frequently 
they  are  ped  and  are  then  transferable  by  deed.       Debentures 

usually  are  to  I  come  due  at  a  certain  fixed  date,  while  debenture 
stock  may  be  perpetual  or  redeemable  by  drawings  or  otherwise  at 

eed  periods  and  prices.  Sometimes  shares  and  debentures  are 
first  issued  and  subsequently  converted  into  stock.  Usually  this  is 
done  for  the  convenience  of  making  calls  as  the  capital  is  required, 
because  there  is  no  liability  on  stock,  and  only  fully  paid  shares  can 
be  consolidated  into  stock.  As  to  debentures  it  is  so  much  easier  to 
borrow  on  them  than  on  debenture  stock  that  it  is  more  convenient 
to  commence  in  that  form  Colonial  Governments  generally  fellow 
l!i is  course. 

"Debenture  stock"  is  an  English  term.  H  do<  a  uot  menu  shari  - 
of  stock,  as  in  America,  but  means  an  English  bond,  an  absolute 
obligation  of  the  corporation  to  pay  principal  and  interest  at  fixed 
times.  It  is  the  English  form  of  bond,  and  may  or  may  not  be  se- 
cured by  a  mortgage.1  A  holder  of  debenture  stock  is  generally 
given  a  certificate  by  the  corporation,  similar  in  many  respects  to 
a  certificate  of  shares  of  stock,  except  that  the  former  represents 
a  portion  of  a  lump  debt,  while  the  latter  represents  a  portion  of 
the  capital  stock.2     In  this  country  practically  the  same  kind  of 

i  A    debenture    is    "a    writing    ac-  treated  as  a  single  stock,  and  bonds 

knowledging  a  debt."  People  v.  Miller,  are  issued  declaring  the  holder  to  be 

180  N.  Y.  16  (1904).  entitled  to  a  definite  sum,  part  of  this 

2Lindley,    Company    Law,    p.    195.  stock.     This  sum   is   not   necessarily 

See    also    §    777,    infra.     "Debenture  a   round   sum,   but   may   be  for  any 

stock   is   of   the   same   nature   as  or-  number  of  pounds,  and  may  include 

dinary    debentures,    except    that    in-  fractions   of   a   pound  unless   express 

stead  of  each  bond  securing  a  definite  limitation    is   made    in   that   respect, 

amount    the    whole    sum    secured    is  The  debenture   stock  may  be  repay- 

70 


CH.    I.J  DEFINITIONS    AND    NATURE    OF    CORPORATIONS.  [§    14. 

is  issued  by  giving  to  a  bondholder,  in  exchange  for  coupon 
bonds,  a  certificate  entitling  him,  and  him  alone,  to  a  specified  sum 
and  interest  in  the  Tl  ited  States  government  issues 

Mich  a  certificate  and  calls  it  a  i  n  d  bond.    An  American  mort- 

E  '  may  drawn  as  t<>  secure  both  American  bonds  and  English 

debenture  ,  with  suitable  provisions  for  the  exchange  of  bonds 

for  debenture  Btock.1 

In  England  articles  of  association  are  similar  to  by-laws,  and  are 
for  the  regulation  ami  management  of  the  corporation.2 

M  of  asi  me  as  the  American  articles 

incorporation  required  to  be  filed  under  general  statutes  for  in- 
corporatio 

in    I         ind  scrip  is  a  wril  knowledgment  by  a  corporation 

that,  tin-  holder  will  1m>  entitled  to  ,  M  shares  of  stock  and  a  cer- 

tificate therefor  when  the  unpaid  instalments  on  such  shares  are  all 
paid  in.     '  instrument.4 

The  certificah    booh  ■•(  :\  corporation  contains  the  printed,  litho- 

phed   or  of  Stock,  which   are   filled  out  and 

ind  by  the  proper  officers  and   then  delivered  to  the  stockhold- 

A     Mil)  in  the  I  :   certificate,  states  the  name, 

amount,   dat  E  the  certificate  which  is   issued.     When  the 

i-   returned,  upon  a  transfer  to  a  new  person,  it  is  can- 

d  and  a  '>.     On  the  back  of  the  certificate 

ir-  Bank,   etc.,    81   N.   Y.   App.   Div.   3C7 

•  inn!.:..  I);   aff'd  179  N.  Y.  577.     Cf.  §  4, 

ting  it,  and                             t   In  supra. 

any    manner    In    which                    ire  d   of  settlement"   is  a  term 

that  was   used   in  England,  prior  to 

L862,    to    indicate    the    same    as    the 

Invariably  in                          Btock,  and  modern    articles    of    association    and 

are   -usually                 lal."      Jordan    S  memoranda  of  association.     See  Bur- 

iwn     on      J                   :      Con:;  rows    v.    Smith,    10    N.    Y.    550,    556 

th    ed.)     p.     13          A     '                 of  (1853);  Rapalje  &  L.  Law  Diet.  361; 

stocks    does     not    carry     debentures,  London   Financial  Assoc,  v.  Kelk,  L. 

r   :i  R.    20   Ch.   D.   107    (1884);    Guinness 

re    to    be   convertible    into  v.    Land    Corporation,   L.   R.    22    Ch. 

stock.     Conn                     .  Co.  V.  Chase,  D.  349  (1882). 

:).  4  Goodwin  r.  Robarts,  L.  R.  1  App. 

7  7 ;.  Cas.    47G    (1S7G);    Rumball   v.   Metro- 

j  \    Hen   i                          icles  of  as-  politan  Bank,  L.  R.  2  Q.  B.  D.  194 

BOciation  of  a   bank,  being  the  same  (1S77). 

by-laws,    is    not    good    as    agninst  In     this    country    scrip     generally 
ee  of  the  certificate  means  a  kind  of  dividend:  e.  g.,  land 
of   stock    where    the    certificate   does  scrip  dividend  entitling  the  holder  to- 
re fer  to  such   articles  of  associa-  take  so  much  land;  and  a  scrip  divi- 
tion  nor  to  the  lien.    Lyman  r.  State  dend   entitling   the  holder  to  future 

71 


§  11.] 


luI'INITIONS   AND   NATUE  UPORAT1 


[CH.    i. 


a  Wank  form  for  a  transfer  of  the  stock  represented  \>\  rem. 

The  transfer  book  :  the  pu  |  sord  oJ 

fers  of  stock.     The  entries  in  it  corn  1  to  the  trai  on  the 

backs  of  the  canceled  certifii  '..    The  entrii  the  tra 

for  book  arc  generally  made  by  a  clerk  as  attorney  in  facl  for  the 
transferrer.  The  form  of  tn  c  on  the  back  of  the  certificate  con- 
tains such  a  power  of  att<  Transfer  b  re  kepi  by  all 
important  corporations  and  yi  t  their  i  and  utility  may  well 
be  doubted.1  Even  though  the  statute  requires  transfer  books  to 
be  kept,  yet  the  certificate  of                                     at.2 

The  stock  ledger  contains  a  statement  of  how  much  stock  the  past 
and  present  stockholders  have  owned  or  now  own.8 

Underwriting  means  an  agreement,  made  before   the  Bhares   are 


dividends  the  same  as  stock  receives, 
but  without  the  voting  privilege  of 
stock.    See  ch.  XXXII,  infra. 

i  See  §  382,  infra.  Probably  the 
transfer  book  and  the  power  of  at- 
torney on  the  back  of  certificates  of 
stock  and  the  provision  in  the  certifi- 
cate of  stock  that  it  can  be  trans- 
ferred on  the  books  of  the  company 
only  in  person  or  by  duly  authorized 
attorney  might  be  abolished  without 
harm.  In  these  days  a  sale  and 
assignment  of  the  certificate  of  stock 
should  be  sufficient  to  warrant  a  cor- 
poration making  a  transfer  on  its 
corporate  books  upon  the  presenta- 
tion of  the  old  certificate  tso  as- 
signed. The  fact  is  that  the  transfer 
on  the  transfer  book  is  a  mere  repe- 
tition of  the  transfer  on  the  back  of 
the  certificate  of  stock,  and  as  the 
stock  ledger  can  be  posted  directly 
from  the  canceled  certificates  of  stock, 
the  transfer  book  might  well  be  abol- 
ished. A  stock  journal  might  be  con- 
venient to  show  daily  transfers. 
Certificate  of  stock  book,  stock  jour- 
nal and  ledger  would  then  corre- 
spond to  day-book,  journal  and  ledger 
in  ordinary  book-keeping.  But  in 
these  days,  when  it  is  the  rule  to 
issue  certificates  of  stock,  and  a  trans- 
fer thereof  transfers  the  equitable 
title  to  the  stock  itself  in  all  the 
states,   and   the   legal   title   in   most 


of  the  states,  every  lo^al  and 
equitable  right  can  be  preserved 
as  well  without  a  transfer  book  and 
power  of  attorney  as  with  them.  The 
practical  result  would  be  the  saving 
of  transfer  books  and  much  book- 
ping.  Many  small  corporations 
even  now  have  only  a  certificate  of 
stock  book.  See  §  3S2,  infra.  Of 
course  where  the  statutes  of  a  state, 
as  in  New  Jersey,  require  the  keeping 
of  a  transfer  book,  the  above  sug- 
gestions could  not  be  adopted. 

2  In  re  Election,  etc.,  65  Atl.  Rep. 
849    (N.   J.    1907). 

S  "The  keeping  of  a  stock  book,  in 
which  the  original  issue  and  all  sub- 
sequent transfers  must  be  entered, 
enables  the  holder  or  purchaser  to 
trace  his  shares  back  to  the  original 
issue  by  the  numbers  of  the  different 
certificates,  and  thus  identify  the 
shares  upon  which  any  assessment 
has  been  made,  and  enables  him  to 
ascertain  with  certainty,  in  connec- 
tion with  the  other  records  of  the 
corporation  relating  to  assessments 
and  delinquent  sales,  whether  his 
shares  are  free  from  liens  or  liability 
in  favor  of  the  corporation,  and  in 
the  same  manner  enables  the  cor- 
poration to  enforce  its  delinquent  as- 
sessment upon  the  shares  liable  there- 
for, no  matter  how  many  transfers 
have   been   made   subsequent   to  the 


72 


CH.    I.J 


DEFINITIONS   AND   NATURE   OF   CORPORATIONS. 


[§14. 


brought  before  the  public,  that  in  the  event  of  the  public  not  taking 
all  the  shares  or  the  number  mentioned  in  the  agreement,  the  un- 
derwriter will  take  the  shares  which  the  public  do  not  take.1  An 
underwriter  may  be  held  liable,  even  though  the  entire  amount  is 
net,  underwritten,  there  being  nothing  in  the  agreement  requiring 
that.2 

A  bill  in  equity  <\<<i<  not  lie  to  compel  an  underwriting  syndicate 
to  assign  t<»  plaintiff  an  interest  therein,  which  they  had  contracted 
to  sell  t«»  him,  even  though  he  alleges  that  the  value  is  uncertain  and 
that  specific  pert'., nuance  ig  the  only  full  and  adequate  relief.3  Of 
course  the  rights  of  persons  interested  in  an  underwriting  agree- 
ment depend  lav  11  the  terms  of  the  agreement  itself.4 


assessment;  each  transferee  taking 
the  legal  titl",  but  subject  to  I 

I    as    the   y:  of  the 

il  title  to  Ian  I  it  subject  to 

all    valid    recorded    liens."     Craig   v. 
Co.,  113  t'.il.  7  i  l  -:iG). 
•    also  It    may    be 

that  the  .  p  also  en- 

able;   tic    corporation    to  tain 

quickly  who  is  entitled  to  vote  and 
on  how  much  stock;  also  who  is  en- 
titled to  divi  :  ad  on  how  much 
stock.      It    is    not    necessary    for    I 

ep  either  a  tran 
book   or  a  stock  ledger.     See    §  3 
infra. 
i  Underwriting    "means    an    agree- 
red   into  before  the  shares 
are  brought  before  the  public,  that  in 
the  event  of  the  public  not  taking  up 
whole   of    them    or    the    number 
mentioned  in  the  agreement,  the  un- 
derwriter  will   take  an   allotment   of 
such  part  of  the  shares  as  the  public 
has  not  applied  for."    The  underwrit- 
er   is    liable    on    the    stock.      Re    Li- 
sed,  etc.  Assoc,  L.  R.  42  Ch.  D.  1 
(  1889).    See  T     P   1.  Rep.  9 

During  the  past  five  years  under- 
writing asreemeir  ome  quite 
common  in  the  United  States. 

Whore  an  "underwriter"  agrees  to 
subscribe  for  whatever  the  public  do 
not  take,  and  authorizes  another  to 
make  the  subscription  for  him,  he  is 
bounrl  by  the  subscription.  Shaw  r. 
Bentley,  etc.  Co.,  C8  L.  T.  Rep.   812 


(1893);    also  Re  Bentley,  etc.  Co.,  69 
L.  T.  Rep.  204   (1893). 

An  underwriter's  contract  is  given 
in  full  in  Re  Hannan's,  etc.  Co.,  75  L. 
T.  Rep.  45  (1896),  s.  c.  [1896]  2  Cli. 
643.     See  also  §52,  infra. 

2  Knickerbocker  T.  Co.  v.  Davis, 
1  13   Fed.  Rep.  587   (1906). 

3  Gilbert  v.  Bunnell,  92  N.  Y.  App. 
Div.  2S4    (1904). 

•i  A  construction  company  that 
contributes  stock  to  go  with  bonds 
which  are  being  underwritten,  may 
itself  be  a  subscriber  to  the  under- 
writing agreement.  The  insolvency 
of  the  company  issuing  the  bonds  is 
no  defense  in  itself  to  the  under- 
writing agreement.  Eastern  Tube  Co. 
r.  Harrison,  140  Fed.  Rep.  519  (1905). 

Where  underwriters  have  agreed  to 
purchase  the  bonds  of  the  corporation 
at  a  certain  price  with  a  bonus  of 
in  stock,  the  corporation  may 
pledge  the  bonds  and  assign  the  un- 
derwriting agreement  to  the  pledgee, 
and  the  pledgee  in  order  to  enforce 
the  underwriting  agreement  may  com- 
pel the  corporation  to  furnish  the 
in  stock  for  that  purpose.  Kirk- 
patrick  v.  Eastern,  etc.  Co.,  135  Fed. 
Rep.  146  (1904),  aff'd,  137  Fed.  Rep. 
387. 

In  the  case  Hudson,  etc.  Ry.  v. 
O'Connor,  95  N.  Y.  App.  Div.  6  (1904), 
an  underwriting  syndicate  agreement 
was  construed  where  bonds  were  sold 
at  eighty  cents  on  the  dollar  with  a 


73 


§14.] 


DEFINITIONS   AND    NATURE    OP   CORPORAT! 


[<•!!.    I. 


Founders'  shares  are  shares  which  take  the  profits  after  certain 
dividends  arc  paid  on  the  other  shares.  They  are  a  sort  of  deferred 
stock.1  They  are  issued  to  the  founders  or  promoters  of  the  enl 
prise.  They  are  unknown  in  America.  In  England  they  often 
acquire  a  great  value,  and  so  enormous  have  been  the  profits  of 
some  of  the  trust  and  investment  companies  that  tluar  foundi 
shares,  which  divide  the  surplus  after  payment  of  a  moderate  maxi- 
mum dividend  on  the  ordinary  shares,  are  worth  almosl    fabulous 


stock  bonus,  and  it  was  held  that 
coupons  attached  to  the  bonds  be- 
longed to  the  underwriters,  ev 
though  the  bonds  were  not  delivered 
for  some  time  after  the  coupons  be- 
came due. 

The  agreement  of  individuals  with 
a  promoter  to  underwrite  shares  of 
stock  of  a  company  cannot  necessari- 
ly be  enforced  by  the  company,  and 
may  be  modified  without  the  consent 
of  the  company,  but  if  shares  are  al- 
lotted to  the  underwriters,  and  they 
do  not  object,  they  are  liable  as  share- 
holders by  English  law,  and  if  the 
corporation  was  an  English  corpora- 
tion such  liability  may  be  enforced 
in  the  United  States.  Electric,  etc. 
Co.  v.  Prince,  81  N.  E.  Rep.  306 
(Mass.  1907). 

A  pledgee  of  an  underwriter's 
agreement  may  have  difficulty  in  ten- 
dering performance  to  the  underwrit- 
ers. Litchfield,  etc.  Society  v.  Dibble, 
67  Atl.  Rep.  476   (Conn.  1907). 

An  underwriter  is  a  guarantor,  and 
if  the  agreement  which  he  under- 
writes is  modified  without  his  con- 
sent he  is  thereby  released.  Guard- 
ian T.  Co.  v.  Peabody,  122  N.  Y.  App. 
Div.    648    (1907). 

i  In  the  case  Re  New  Transvaal 
Co.,  [1896]  2  Ch.  750,  the  founders' 
shares  had  the  following  rights: 

"The  profits  of  the  company  in  each 
year  shall  ...  be  applicable  first 
in  or  towards  payment  of  a  dividend 
of  eight  per  cent,  on  the  amount  of 
the  ordinary  shares,  and  the  surplus, 
if  any,  shall  ...  be  divided  as 
follows,  viz.:  one-fifth  part  thereof 
among     the     holders     of     founders' 


shuns,  and  the  remaining  four-fifths 
mong  the  holders  of  ordinary 
shares  in  proportion  to  the  amounts 
for  the  time  being  paid  up  thereon." 
In  Re  London,  etc.,  Ltd.,  77  L.  T. 
Rep.  146  (1897),  then-  were  one  hun- 
dred and  twenty  founders'  shares  of 
£10  each  and  twelve  thousand  ordi- 
nary shares  of  £10  each.  The  found- 
ers' s  were  entitled  to  half  of 
any  divid<  Qd  Which  might  remain 
after  paying  ten  per  cent,  on  the  ordi- 
nary shares.  The  directors  allotted 
to  themselves  eighty  of  these  found- 
ers' shares  and  the  court  upheld  the 
allotment.  The  prospectus  stated 
that  each  person  taking  fifty  ordi- 
nary shares  would  be  entitled  to  take 
one  of  the  founders'  shares.  The  di- 
rectors caused  the  fifty  ordinary 
shares  for  each  of  the  eighty  founders' 
shares  to  be  taken  by  others.  A 
scheme  by  which  founders'  shares 
are  to  be  exchanged  for  ordinary 
stock  at  the  rate  of  one  hundred 
shares  of  the  latter  for  each  share  of 
the  former  is  ultra  vires  and  illegal, 
and  will  not  be  sanctioned  by  the 
court.  lie  Development  Co.  etc., 
[1902]  1  Ch.  547.  Under  the  English 
statute  a  reduction  of  the  capital 
stock,  when  approved  by  the  court, 
is  binding,  and  the  court  may  ap- 
prove a  reduction  which  pays  off  the 
founders'  shares  at  par,  even  though 
the  reserve  is  more  than  sufficient 
therefor,  it  appearing  that  the  found- 
ers' shares  have  no  commercial  value?. 
Poole  v.  National  Bank  of  China,  96 
L.  T.  Rep.  8S9  (1907),  disapproving 
Re  Anglo-French  Ex.  Co.,  [1902]  2 
Ch.    845. 


74 


CTI.   I.] 


DEFINITIONS   AND   NATURE    OP   CORPORATIONS. 


[§14. 


Bums  of  money.1      There  seems  to  bo  but  little  difference  betwesn 


i  For  instance,  the  founders'  shares 
in  The  Trustees,  Executors  and  Se- 
curities Insurance  Company  have 
been  quoted  on  the  market  at  some- 
thing like  seven  thousand  five  hun- 
dred per  cent,  of  their  par  value. 

The  following  article  in  the  Finan- 
cial News  of  London  of  June  2,  1890, 
is  interesting  if  not  particularly  edi- 
fying: 

"In  a  considerable  proportion  of  the  new 
which  ht    out, 

y   a 
.   or   it    Invit  ms 

of  ordinary 

t  of  a  proportionate  allotmi  nl  ol 

of     fou: 

'    it, 

.     .     .     and  wi 
to,    that 

.,    the    I 
tl"  fou 
them  worked  op   Is  to  a  : 

miui 

'•i   a 

CO\' 

a    \  tne 

1    of 

'  j 

t  will.     In  no  or' 

0f  liability 

pri: 

obtalm  d.      I  "ut~ 

■ 
all  fonrn  out 

1:1  Doi 

of 

ons 

infully   1  of.   from   any 

ordinal.  Q8  of  cor  ;  romotion   to 

■  r   the   allot- 

it     of     one     or     two     found 
.     .     .     Tlure  can  be  no  question  that  the 
iiv.  •  ot  lm~ 

por  t  of  fou 

a   number  of   l 

I  ly  of  flu  ■  and 

they  jump  to  the  conclusion  that  the  tak- 
ing up  of  the  fon  hares  by  these 
persons  lm]  npe  on  their 
pectability  and  hot  a  fides  of 
the    promotion.      The    founders    themselves, 

ibably,  have  never  looked   at  the  matter 

confess   that   the   privilege  of  holding  these 
lly-favored    Bhari  "t    conferred 

with     an    altogether    diBlnti  n  Jted     ol 
Promoters  want  to  get  good  names  on   the 


prospectus,  and  this  is  one  of  the  expedi- 
by  which  they  accomplish  their  end. 
It  is  quite  understood  in  many — 
perhaps  in  a  majority  of — cases  that  it  is 
their  personal  influence  which  is  being  pur- 
chased by  the  grant  of  an  exclusive  privi- 
lege. To  that  extent  they  do  undoubtedly 
further  and  encourage  the  interests  of  the 
promoters.  Sometimes  they  undertake  for 
each  founders'  share  to  place  a  certain 
number  of  ordinary  shares — in  other 
words,  to  'guarantee  a  subscription.'  " 

Founders'  shares  resemble  pre- 
ferred stock  in  that  the  amount  of 
dividends  payable  thereon  depends  in 
each  case  upon  the  terms  of  the 
agreement  under  which  the  shares 
are  issued.  The  dividends  going  to 
the  founders'  shares  may  be  great 
or  small,  and  may  be  more  or  less 
fixed  or  contingent,  just  as  the  orig- 
inal incorporators  may  determine. 
Tbe  nature  of  founders'  shares  and 
variable  character  of  the  rights 
conferred  thereby  are  illustrated  in 
the  case  Re  London,  etc.  Corp.,  73  L. 
T.  Rep.  2S0  (1895),  the  charter  con- 
taining the  following  provisions: 

i    There  shall  first  be  paid  out  of  the 

of  the  company  in  each  year  to 

the  of  the  preferred  shares  a  cumu- 

ireferential    dividend,    at   a   rate   not 

exceeding  £5  per   cent,  per   annum  on   the 

am  d  up  thereon  for  the  time  being. 

hall,   in  the  next    place,  be  paid 

out   of   the  net   profits   of   the    company   to 

the  holders   of   ordinary   shares   a   dividend 

at  the   rate  of  seven   per  cent,   per  annum 

on  the  amount  paid  up  thereon  for  the  time 

being,    (d)    After  these  payments,  and  pro- 

for  the  further  remuneration  of  the 

directors,    ono    moiety    shall    belong   to   the 

holders  of  founders'  shares,  and  the  residue 

shall    belong    to    the    holders    of    ordinary 

shares." 

"The  founders'  shares  shall  entitle  the 
holders  thereof  to  such  dividends  and  other 
interest  in  the  profits  of  the  company  as  is 
defined  by  the  memorandum  and  articles 
of  association;  but,  except  in  the  case  of 
liquidation,  they  shall  not  entitle  the  hold- 
thereof  to  any  share  in  the  capital  of 
the  company  beyond  the  actual  amount  paid 
up  or  duly  credited  as  paid  up  upon  them." 

"In   any  winding  up  of  the  company  the 
holders   of    founders'    shares   shall   be   en- 


75 


15.] 


DEFINITIONS    AND    NATURE    OF    CORPORATIONS. 


[l   II.    I. 


founders'  shares,  as  related   to  common  stock,   and  common   -tuck 

lis  related  to  preferred   stock.1 

Founders'  shares  are  often  given  as  a  gift  to  eminenl  persons 
who  consent  to  act  as  directors  and  to  be  held  out  to  the  public  as 

such. 

Tho  word  "securities"  means  bonds,  certificates  of  -tuck  and  other 

evidences  of  debt  or  of  propert 

§15.  The  name  of  a  corporation. — A  corporation  has  an  exist- 
ence distinct  from  thai  of  the  individuals  constituting  it.  Eence, 
for  the  purposes  of  identification  and  continuity,  it  is  essential  that 
the  corporation  have  a  name.  "The  name  is  an  indispensable  part 
of  the  constitution  of  every  corporation,  the  knot  of  its  combina- 
tion, as  it  has  been  called,  without  which  it  cannot  perform  its  cor- 
porate functions."3 

Tho  corporate  name  is  usually  the  choice  of  the  incorporators, 
and  is  specified  in  the  creating  instrument  By  this  name  it  takes 
and  grants  property,  sues  and  is  sued,  and  does  all  corporate  nets.1 


titled  (as  between  them  elvea  and  holders 
of  preferred  and  ordinary  shares)  to  one 
moiety  of  any  assets  of  the  company  re- 
maining after  the  payment  and  discharge 
of  the  debts  and  liabilities  of  the  company, 
and  the  repayment  to  the  holders  of  pre- 
ferred and  ordinary  shares  of  the  amount 
paid  up  or  credited  as  paid  up  on  such 
shares,  together  with  the  costs  of  winding 
up ;  provided  always  tbat  in  the  division 
of  any  reserve  fund  under  this  clause  the 
founders  shall  be  entitled  to  one  moiety  of 
any  portion  of  such  reserve  fund  arising 
from  the  issue  of  any  shan  in  the  com- 
pany at  a  premium,  but  as  to  any  otln  r 
reserve  fund  shall  only  be  entitled  to  one 
moiety  of  such  reserve  fund  up  to  twenty 
per  cent,  of  the  subscribed  capital,  and  no 
more." 

See  also  Re  Macdonald,  etc.  Co., 
[1894]  1  Ch.  89. 

i  Fisher  v.  Black,  etc.  Co.,  [1901] 
1  Ch.  174. 

2  Thayer  v.  Wathen,  17  Tex.  Civ. 
App.  382  (1897).  A  certificate  of  stock 
is  not  a  security  in  the  proper  sig- 
nification of  that  term.  Culp  v.  Mul- 
vane,  66  Kan.  143   (1903).     Cf.  §305. 

3  Fort,  etc.  Assoc,  v.  Model,  etc. 
Assoc,  159  Pa.  St.  308   (1893). 

4  Viner's  Abr.,  Corporation;  Ba- 
con's Abr.,  Corporation;  1  Bl.  Com. 
475,  476;  Class  v.  Tipton,  etc.  Co., 
32  Ind.  376  (1869).    Where  the  name 


signed  to  a  bond  begins  with  the 
word  "The"  and  ends  with  the  word 
"Company,"  the  law  presumes  that  it 
is  a  corporation.  Allen  v.  Hopkins, 
62  Kan.  175  (1900).  Statutes  rela- 
tive to  corporations  usually  prescribe, 
i  xpressly  or  by  implication,  that  the 
articles  of  incorporation  shall  specify 
the  name  assumed  by  the  corporation. 
In  Wells  v.  Oregon  Ry.  etc.  Co.,  15 
Fed.  Rep.  561,  567  (1883),  it  is  said 
that  the  statute  might  create  a  cor- 
poration without  any  special  designa- 
tion, although  some  description  would 
be  necessary,  and  then  it  might  sub- 
sequently acquire  a  name.  Corpora- 
tions are  required  both  at  common 
law  and  by  the  statutes  of  all  the 
states  to  have  names.  Glass  v.  Tip- 
ton, etc.  Co.,  32  Ind.  376  (1869).  The 
corporate  name  has  been  variously 
spoken  of  as  "the  very  being  of  the 
constitution,"  "the  knot  of  their  com- 
bination," "as  the  name  of  baptism," 
"the  substance  and  essence  of  it." 
The  form  of  the  name  is  sometimes 
prescribed  by  statute,  as  that  it  shall 
begin  with  "The"  and  end  with  "com- 
pany," "corporation,"  "association," 
or  "society."  Colo.  Gen.  Laws,  1877, 
pp.    143,   144.     See  also    Conn.    Gen. 


76 


CH.    I.] 


DEFINITIONS    AND    NATURE    OP    CORPORATIONS. 


[§  15. 


The  right  of  a  corporation  to  the  exclusive  use  of  its  chosen  name 
is  recognize;!  by  statute  in  many  states.  Moreover,  it  is  usually  pro- 
tected by  the  courts,  independently  of  any  statute.1 

Stat.  1888,  §  1905.  In  Hammond  i\  the  name  "University"  unless  author- 
Hastings,  134  U.  S.  401  (1S90),  the 
name  of  the  corporation  was  "George 
H.  Hammond  &  Company."  The  court 
held  that  even  if  this  name  on  the 
certificate  of  stock  did  not  give  notice 
that  it  was  a  corporation,  yet  that  a 
Hen  on  the  Btock  was  sufficient. 
Where  the  name  of  an  Individual  is 
the  same  as  that  of  a  corporation  of 
whieh  he  : 
may    .show    that    the    Big  to   an 

trument  was  the 
company   and  not  of  the  individi 

!1  p.  Ochs,  34  X.  V.  App.  Div.  103 
i  1898).     A  j  .t    in   favor  of  a 

corporation    nam  !\    Avery    & 

Sons"   should    be    it  'he 

letter  a,  and  nol  ';. 

ina  much  a<   individual   I  In- 

dexed  in   that   waj ,     B.    P.    Avery  & 
Sons  r.  Texas,  etc.    '  W. 

Rep.    793    11  l  I.      School    dls- 

trii  t.-,i   undi  r  aeral    I 

which  do  require  the  d 

tion  of  a  nam.',  may  acquire  Buch  for 
the   pnrpOB<  B   Of  and   other  cor- 

al c  acts  by  usage.     South  School 
Dist.     v.     Bl  Conn.    227 

(1839).  The  Wesl  Virginia  Cod 
p.  LI,  prescribes  that  "no  joint- 

stock  company  Bhall   adopt  the  same 
name  which  is  1  •  it  the  time 

by  another  corporation  of  this  state." 
N.   v.    i  15,  ch.  672,  prohibits 

the  sel  of  a   name   sufficiently 

sembling  another  as  to  deceive.   See 

An  author  rannot  repudiate  his  con- 
tract  with  a  corporation,  although  the 
corporation  has  the  same  name  as  a 
person  who  has  fled  from  a  criminal 
prosecution.  Jewett  Pub.  Co.  P.  But- 
ler. 1"  3.  517  (1893).  In  . 
bama  the  name  must,  indicate  the 
busini  '••  Colias.  43  S.  1. 
190  i  Ala  1907  i.  '"'i  ler  the  Pennsyl- 
vania  statute   a   concern   cannot   use 


ized  so  to  do  in  a  particular  way. 
Commonwealth  v.  Banks,  198  Pa.  St. 
397  (1901).  The  Kentucky  statute, 
requiring  the  corporate  name  to  be 
painted  on  signs  at  the  principal 
places  of  business  in  the  state,  does 
not  sustain  an  indictment  for  failure 
to  print  the  name  on  the  principal 
place  of  business  in  a  specified  city. 
Such  a  statute  does  not  apply  to  every 
place  of  business  of  the  corporation. 
Standard  Oil  Co.  v.  Commonwealth, 
110  Ky.  821  (1901). 

"inc."  does  not  satisfy  the  Ken- 
tucky statute  requiring  the  word  "In- 
corporated" to  follow  the  corporate 
name  at  the  principal  place  of  busi- 
ness. Commonwealth  v.  American 
iff  Co.,  101  S.  W.  Rep.  364  (Ky. 
1907). 

A  corporation  not  doing  business 
in  the  state  is  not  liable  for  its  sell- 
ing agent  advertising  its  goods  with- 
out adding  the  word  "Incorporated" 
after  its  name.  Commonwealth  v. 
Cook,  etc.  Co.,  104  S.  W.  Rep.  255 
(Ky.  1907). 

Letter-heads  and  bill-heads  of  a 
corporation  in  Kentucky  need  not  con- 
tain the  word  "incorporated."  Com- 
monwealth v.  National  Biscuit  Co., 
106  S.  W.  Rep.  799   (Ky.  1908). 

A  Kentucky  corporation  need  not 
add  the  word  "incorporated"  on  the 
label  of  goods  which  it  manufactures 
and  sells.  Jung,  etc.  Co.  v.  Common- 
wealth, 96  S.  W.  Rep.  476  (Ky.  1906). 
It  is  legal  for  an  unincorporated 
association  to  use  what  apparently  is 
a  corporate  name.  People  v.  Rose, 
219  111.  46   (1905). 

l  Thus,  it  is  said  that  a  corporate 
name  legally  acquired  should  be  pro- 
tected upon  the  same  principle  and  to 
the  same  extent  that  individuals  are 
protected  in  the  use  of  trade-marks. 
Holmes,  etc.  v.  Holmes,  etc.  Co.,  37 


77 


15.] 


DEFINITIONS   AND   NATURE   OF   CORPORATIONS. 


[CII.    I. 


The  matter  of  protecting  the  use  of  a  corporate  name  is  intrin- 
sically of  equitable  cognizance,  as  the  injured  party  seldom  if  ever 
has   an  adequate   and  complete  remedy   at   law.      To   prevent   the 

continuance  of  such  a   wrong  equity  will  interfere,  and  at  the  suit 
of  the  injured  party  will  grant  an  injunction.1 


Conn.  278,  293  (1870).    The  corporate     sells  such  stock,  cannot  prevent  the 


name  is  a  trade-mark  from  the  neces- 
sity of  the  thing,  and  upon  every  con- 
sideration of  private  justice  and  pub- 
lic   policy    deserves    the    same    con- 


continuation  of  the  use  of  that  name. 
Geo.  T.  Stagg  Co.  v.  E.  II.  Taylor, 
etc.,  113  Ky.  709   (1902). 

i  Ottoman   Cahvey   Co.   v.   Dane,  95 


sideration  and  protection  from  a  court     111.    2<>:;    (1880).      A    corporation    the 


of  equity.     The  case  of  an  encroach- 
ment is  analogous  to  if  not  stronger 


"Landlords'   Protective   Bureau"   may 
enjoin   another   corporation   from   us- 


than  that  of  a  piracy  upon  an  estab-  ing  the  name  "Landlord's  Protective 

lished  trade-mark.     Newby  v.  Oregon  Department,"  inasmuch  as  the  public 

Cent.    Ry.,    Deady,    C09,    616    (1S69);  will  be  misled  and  confused.     Koebel 

s.  a,  18  Fed.  Cas.  38.     Cf.  Goodyear's  v.  Chicago,   etc.   Bureau,  210   111.  176 

India   Rubber,    etc.    Co.    v.    Goodyear  (1904).  Where  a  corporation  selects  its 

Rubber    Co.,    12S   U.    S.    598    (1S8S).  name  with  a  view  to  misleading  the 

State     officials     cannot    be     enjoined  public  and  getting  the  trade  of  anotlir 

from  allowing  a  domestic  corporation  institution,  it  may  be  enjoined  from 

to  take  the  name  that  a  foreign  cor-  using  that  name.     International,  etc. 

poration  has,  even  though  a  fraud  is  Co.   r.   William   H.   Rogers   Corp.,   67 

worked  thereby.     Lehigh  Valley  Coal  N.  J.  Eq.  646  (1905).   See  also  Eureka, 

Co.    v.    Hamblen,    23    Fed.    Rep.    225  etc.  Co.  v.  Eureka,  etc.  Co.,  69  N.  J. 

(1885).      In    Massachusetts,    by    stat-  Eq.  159  (1905).  The  "Knights  of  Mac- 

ute,    a    foreign    corporation    doing    a  cabees  of  the  World"  may  enjoin  an- 

banking,    loan,    trust    or    investment  other  corporation  from  using  the  word 

business  in  the  state  cannot  use  the  "Maccabees"   in   its   name.     Knights, 

same  name  as  or  a  similar  name  to  etc.    v.    Searle,    106    N.   W.   Rep.    448 

a  domestic  corporation.  International  (Neb.    1905).     A   corporation   named 

T.   Co.   v.   International  L.  &  T.   Co.,  "Glucose    Sugar    Refining    Company" 

153  Mass.  271  (1891).     A  corporation  may  enjoin  another  corporation  doing 

may  take  a  name  which  an  old  cor-  business  under  the  name  "American 

poration  is  about  to  take  by  change  Glucose    Sugar    Refining    Company." 

of  name.     Illinois  Watch  Case  Co.  v.  Glucose,  etc.  Co.  v.  American,  etc.  Co., 

Pearson,  140  111.  423   (1892).     A  for-  56  Atl.  Rep.   861    (N.  J.  1904).     The 

eign    corporation    cannot    prevent    a  Electromobile  Company  cannot  enjoin 

domestic  corporation  from  using  the  another   company    carrying   on    busi- 

same  name,  where  the  latter  was  in-  ness  under  the  name  of  British  Elec- 

corporated  first,  even  though  the  pub-  tromobile    Company,    if   there    is    no 

lie   may    be  misled.     In  this   case  a  proof  that  the  public  would  be  misled, 

party  sold  out  to  individuals,  but  did  Electromobile  Co.  Ltd.  v.  British,  etc. 

not  sell  any  trade-marks.    He  then  in-  Co.   Ltd.,   97  L.   T.  Rep.   196    (1907). 

corporated     a     company     under    the  See  also  British  Vacuum,  etc.  Co.  v. 

name  of    the   trade-mark.      Hazelton  New,    etc.    Co.,    97    L.    T.    Rep.    201 

Boiler  Co.  v.  Hazelton,  etc.  Co.,  142  (1907).     A  Pennsylvania  corporation 

111.  494   (1892).     A  person  who  owns  having  the  name  Philadelphia  Trust, 

all  the  stock  of  a  corporation  which  Safe  Deposit  and   Security  Company 

has  the  same  name  that  he  has,  and  of  the  City  of  Philadelphia,  but  com- 

78 


CH.    I.] 


DEFINITIONS   AND    NATURE    OF    CORPORATIONS. 


L§  15. 


The  New  York  court  of  appeals  stated  the  law  on  this  subject  as 
follow- : 

"In  respect  to  corporate  names  the  same  rule  applies  as  to  the 
names  of  firms  or  individuals,  and  an  injunction  lies  to  restrain  the 
simulation  and  use  by  one  corporation  of  the  name  of  a  prior  cor- 
poration  which  tends  to  create  confusion  and  to  enable  the  latter 
corporation   to  obtain,   by   reason  of   the   similarity  of  names,   the 

monly  known  as  the  Philadelphia  Knit-Goods  Company."  See  also  Pen- 
Trust  Company,  may  enjoin  a  Dela-  berthy,  etc.  Co.  v.  Lee,  120  Mich.  174 
ware  corporation  from  using  the  (1S99).  In  the  case  of  Red,  etc.  Club 
name  Philadelphia  1  Company,  r.  Red,  etc.  Club,  108  Iowa,  105 
Philadelphia,  etc.  Co.  v.  Philadelphia.  (1S99),  the  court  enjoined  an  Iowa 

.;).  corporation    from   taking   as   its   cor- 

Tj1(.               ••Walsh    Boili  r    and    Iron  porate  name  a  name  already  used  by 

Works"    may                                         ra-  an    Illinois    corporation,    the    latter 

tion,    joint    stock    a  having    issued    a    book    under    that 

ship  or  Individual,  in  the  tr            Ion  name.      A    corporation    having    the 

of  business.  name    "The    Young   Women's   Chris- 

..      vr  onsylvanla  tian  Association"  may  enjoin  a  new 

corporation  fa                                         rl-  corporation  from  using  the  name  "In- 

I  -]  lV     Ma]                         i  inational  Committee  of  the  Young 

|oin  a                           trporation  Women's  Christian  Association."    In- 

h;i,  ternational,    etc.    v.   Young   Women's, 

In      P           ivanla,      even  etc.  Ass'n,  194  111.  194  (1901).    The 

the  latter  company   has  reg-  "Industrial  Mutual  Deposit  Company ' 

secre-  cannot   prevent   a   corporation   using 

,  statute,  the    name    "Central    Mutual    Deposit 

and  ,  v.  M  .  Company."      Industrial,    etc.    Co     v. 

a,  etc.  Central,  etc.  Co.,  112  Ky.  937   (1902). 

.     [njunc-  Even    an    unincorporated   association 

Uon  n,     at  the  ll               of  a  corpora-  may  enjoin  a  corporation  from  taking 

t,on   a                          r  corporation  us-  its    name    where    injury    is    shown 

inu                         umuch  as  the  name  Aiello    v.    Montecalfo,    21   R.    I.    49b 

I  as  at              ark.     St.  Pat-  (1899).    A  company  having  the  name 

■  .8>.etc    r                        N<  j.  Eq.  26  "The  Manchester  Brewery  Company 

having  a  trade-  may    enjoin    another   company    from 

mark  on   the  use  of  tfa                   Hy-  using  the  name  "The  Nortn  Cheshire 

another  com-  and   Manchester  Brewery  Company. 

,    nsii               ■    words,    but  North  Cheshire,  etc.  Co    v    Manches- 

not   enjoin    V              m   using  the  tar.  etc.  Co.,  [1899]  A.  C.  83     Equity 

mnection  with  the  will  always  interfere  where  the  same 

c.  co.  r.   Hy-  name  has  been  wrongfully  appropn- 

Ice    Co.,                                        0).  ated.     Where  only  a  simila enamels 

case  of  Lamh.  etc.  Co           mh,  used,   it   is   usually  held   that  some 

etc.   Co.,    120   Mich.    159    (1S99),    the  actual   damage    past,  present  or jm- 

court  enjoined  a  domestic  corporation  minent    must  be  shown.    A  corpora- 

••Lamb  Clove  ft  Mi.  *J^^"*£  To  by^t" 

CJompany,"    where    it    interfered  a   trade  mark      uiie             y 

h    the    businesa    of    another    cor-     State  v.  McG rath    92  Mo      55  (18^ 

poraUon    having    the    name    "Lamb    A    corporation   may    enjoin   another 

79 


§15.] 


DEFINITIONS    AND    NATURE    OF    CORPORATIONS. 


[CH.    I. 


business  of  the  prior  one.  The  courts  interfere  in  th<  not 

on  the  ground  thai   the  state  may  not  affix  Buch  corporate   nan 
as  it  may  elect  to  the  entities  it  creates,  but  to  prevent  fraud,  . 


corporation  from  taking  and  using 
its  name.  Farmers'  L.  &  T.  Co.  r. 
Farmers'  L.  &  T.  Co.,  1  X.  Y.  Supp. 
44  (1888).  The  use  of  any  particular 
name  by  a  corporation  will  not  be  en- 
joined unless  it  be  clearly  proven  that 
the  complainant  will  suffer  injury. 
Drummond  Tobacco  Co.  v.  Randle, 
114  111.  412  (1885);  London,  etc., 
Ass.  Soc.  v.  London,  etc.  Ins.  Co..  11 
Jur.  93S  (1847);  Newby  v.  On 
Cent.  Ry.,  Dcady,  609,  616  (1869); 
s.  c,  18  Fed.  Cas.  38;  Holmes,  etc. 
v.  Holmes,  etc.  Co.,  37  Conn.  278,  295 
(1870),  where  the  language  of  the 
court  is  as  follows:  "The  ground  on 
which  courts  of  equity  afford  relief 
in  this  class  of  cases  is  the  injury  to 
the  party  aggrieved,  and  the  imposi- 
tion upon  the  public  by  causing  them 
to  believe  that  the  goods  of  one  man 
or  firm  are  the  production  of  another. 
The  existence  of  these  consequences 
does  not  necessarily  depend  upon  the 
question  whether  fraud  or  an  evil 
intent  does  or  does  not  exist.  The 
quo  animo,  therefore,  would  seem  to 
be  an  immaterial  inquiry."  A  New 
York  corporation,  "Goodyear  Rubber 
Co.,"  cannot  enjoin  a  Connecticut  cor- 
poration from  using  substantially  the 
same  name.  Goodyear's  India  Rub- 
ber, etc.  Co.  v.  Goodyear  Rubber  Co., 
128  U.  S.  59S  (18S8),  reversing  21 
Fed.  Rep.  276  (1884).  Cf.  Boston 
Rubber  Shoe  Co.  v.  Boston  Rubber 
Co.,  149  Mass.  436  (18S9).  The  cor- 
porate name  is  not  a  franchise,  even 
though  it  is  a  trade-mark.  Hazelton 
Boiler  Co.  v.  Hazelton,  etc.  Co.,  137 
111.  231  (1891);  s.  c,  142  111.  494.  A 
benevolent  corporation  cannot  object 
to  a  subsequent  corporation's  assum- 
ing a  somewhat  similar  name.  Ameri- 
can, etc.  Clans  v.  Merrill,  151  Mass. 
558  (1S90) .  The  words  "employers'  lia- 
bility," used  in  the  name  of  an  in- 
surance company,  may  be  used  in  the 


name  of  another  insurance  company, 
both  companies  being  foreign  corpora- 
tions. Enipb'  etc.  Corp.  v.  Em- 
ployers', etc.  Co.,  10  N.  Y.  Supp. 
(1^90).  A  corporation  of  Nebraska, 
"The  Nebi  Loan  Ac  Trust  Com- 
pany," cannol  enjoin  another  Nebras- 
ka corporation,  the  "Nebraska  Loan 
&  Trust  Company,"'  from  using  that 
nan;.'.  The  name  is  too  gent  ral  for 
a  i  lie,  and  the  I  ion  of  tin' 
companies  in  different  cities  pi 
confusion  of  business.  Nebra 
Loan,  etc.  Co.  r.  Nine,  -!  N<  b. 
(1889).  Technically  this  derision 
but  when  such  a 
fraud  is  sustained  by  the  courts  it 
is  time  for  the  legislature  to  enact 
usual  law  against  one  corpora- 
tion assuming  the  name  of  a  prior 
corporation.  The  corporate  name 
"Richardson  &  Boynton  Company" 
does  not  prevent  another  company 
using  the  name  "Richardson  &  .Mor- 
gan Company."  Richardson,  etc.  Co. 
v.  Richardson,  etc.  Co.,  S  N.  Y.  Snpp. 
52  (1SS9).  If  a  corporation  wrong- 
fully refuses  to  accept  watch  move- 
ments with  its  name  thereon,  the 
manufacturer  may  sell  them  with 
that  name  on.  McCulloh  v.  Smith,  44 
Fed.  Rep.  12  (1890).  The  "Interna- 
tional Banking  Company"  cannot  pre- 
vent another  concern  using  the  name 
the  "International  Bank."  Koehler  v. 
Sanders,  122  N.  Y.  65  (1890).  Whera 
a  company  has  a  well  established  and 
known  business,  and  a  person  having 
the  same  name  attempts  to  incor- 
porate under  his  name  and  carry  on 
the  same  business,  although  he  wras 
never  in  the  business  before,  he  will 
be  restrained.  Tussaud  v.  Tussaud, 
L.  R.  44  Ch.  D.  678  (1890).  While 
there  may  be  "nothing  in  the  adop- 
tion of  a  name  which  is  borne  by 
another  which  infracts  any  known 
law"   {Re  Baptist  Church,  3  Haz.  Pa, 


80 


•  II.  I.] 


DEP]  XI)    NATURE    OP   CORPORATIONS. 


[§  15. 


ll;|l  ">'  tractive."       A  linary  family  surname,  such  as  Rem- 

mnot  be  an  exclusive  h  Lark,  and  any  other  person  hav- 
ing the  same  nan.  ial.lv  and  honestly  use  it  either  per- 
sonally or  in  a  fin  in  transacting  business,  but  there 
111 ''  in  the  use,  and  hence 

■  firm  using  such  a  name  in 
rporal  Mere  confusion  by  reason 

the  similarity  of  □  !i  fraud.     Unfair  competition 

i-  palming  off  •  '  another.2 


to  mislead  the   public.     Saunders  v. 
I  1894]  1  Ch.  537. 
i    will  Igin  Butter  Company  cannot 

ly   be  :  I    if  to  another  company  using  the 

Elgin   Creamery  Company. 


in. 
Church  of  ii 

111. 

1  I  1   X.    J 
Whi 


Butter  Co.   v.    FAgin  Creamery 
5   111.  127   (1895). 

me  Life  Insurance  Company, 

.  •    k  corporation,  cannot  pre- 

a  Michigan  corporation  from  or- 

and   r  the  name  The  Home 

u ranee  Company.     People  v. 


i  Home,  etc.  Co.,  til  Mich.  405  (1897). 


I 


A  committee  appointed  by  a  volun- 
lation  to  obtain  a  charter 


of     I  irate  in  the  name  of  the 


66   I'.  !    R 
The 

injury  will  r< 

tion,  or  an  In  it  will 


volu:  tion,   and   the   asso- 

iin  the  use  of  such 

:lino    v.    Portuguese    Ben. 

It.  I.  1G5   (1893). 

the  name  of  a  domestic 

iration  is  very  similar  to  that  of 


•  lomestic  corporation,  yet 

e  Co.,     where  there   is  no  evidence  that  the 

latter  company  knew  of  the  former, 

A   nan  •     and   no  sufficient  proof  that  any  one 

mark,   bul    !";-.  Lved,    the   court   may,    in    the 

plai  lae  of  a  sound  discretion,  refuse 

Ing  ,n   uni:,  to  enjoin  the  latter  corporation  from 

oh-     using  the  name — the  name  of  the  first 
tain    t;  impany  being  the  Hygeia  Water  Ice 

name.     United   '•'  i  my,  and  of  the  latter  the  New 

B6   I  I    Ice  Company,   Limited. 

etc.  Co.  u.  New  York,  etc.  Co., 


of  I  Sun 

fro 


N.   Y.   04    (1S93). 
-•  Howe   Scale   Co.   v.  Wyckoff,   etc. 
i    U.    S.    118     (1905);     rev'g 
etc.   v.    Howe,  etc.  Co.,  122 


1.     It  is  unfair  competi- 
must  not  me  so  as    tion  for  a  corporation  to  assume  the 

81 


§   15.]  DEFINITIONS   AND   NATURE   OF   CORPORATIONS.  [CH.    I. 

Certiorari  lies  to  review  the  action  of  the  ary  of  state  for 

rejecting  a  certificate  of  incorporation  because  the  name  reseml 
a  name  already  in  use,  but  after  he  has  accepted  the  certificate  and 
the  corporation  has  commenced  business,  the  remedy  is   a  bill   in 

equity.1 

A  foreign  corporation  cannot  prevent  a  state  granting  a  charter 
to  a  corporation  having  the  same  name,  and  for  the  same  purposes.2 

A  corporation  has  neither  the  right  nor  the  power  to  change  the 
corporate  name  originally  selected  unless  it  is  allowed  so  to  do  by 

name  of  an  individual  in  its  employ  moneys  received  by  him  are  not  sub- 
where  the  purpose  was  to  obtain  a  ject  to  the  debts  of  the  corporation, 
part  of  a  business  which  had  been  Boyle  v.  Northwestern,  etc.  Bank,  125 
built  up  by  another  corporation  hav-  Wis.  49S  (1905).  A  company  has  not 
ing  a  somewhat  similar  name.  J.  &  the  same  right  to  use  the  name  of 
P.  Coats  v.  John  Coates,  etc.  Co.,  135  its  promoter  that  he  himself  would 
Fed.  Rep.  177  (1905).  A  stockholder  have  to  use  it  in  business,  especially 
in  a  corporation  which  has  the  same  where  he  does  not  transfer  any  busi- 
name  as  his  name  may  do  business  ness  or  good  will  to  the  company, 
in  his  own  name,  so  long  as  he  does  Fine,  etc.  Assoc,  v.  Harwood,  etc.  Co., 
not  resort  to  artifice  to  deceive  the  97  L.  T.  Rep.  45  (1907).  The  secre- 
public,  but  he  cannot  organize  an-  tary  of  state  will  not  be  compelled 
other  corporation  to  use  his  name,  by  mandamus  to  receive  a  certificate 
Dodge  Stationery  Co.  v.  Dodge,  145  of  incorporation  of  the  "National  Lib- 
Cal.  380  (1904).  An  individual  can-  erty  League"  when  there  is  already  a 
not  enjoin  a  corporation  from  em-  corporation  with  a  name  "National 
bodying  his  name  in  its  corporate  Liberty  Legion."  People  v.  Rose,  80 
name  as  a  libel  or  defamation  of  his  N.  E.  Rep.  293  (111.  1907). 
business  reputation,  unless  he  shows  i  People  v.  O'Brien,  101  N.  Y.  App. 
that  it  will  have  that  effect.  Edison  Div.  296  (1905).  The  secretary  of 
v.  Thomas,  etc.  Co.,  128  Fed.  Rep.  state  will  not  be  ordered  by  man 
957  (1904).  Where  a  copartnership  damus  to  file  a  certificate  of  incor- 
having  a  trade  name  is  about  to  in-  poration  of  a  company  to  be  known 
corporate  under  that  name,  and  other  as  the  "United  States  Express  Corn- 
persons  do  so  first,  for  the  purpose  pany"  where  there  is  an  unincorpo- 
of  obtaining  part  of  the  copartner-  rated  association  which  has  used  that 
ship  business  and  appropriating  the  name  for  many  years.  People  v.  Rose, 
partnership  name,  they  may  be  en-  219  111.  46  (1905). 
joined  from  so  doing.  Pettes  v.  2  National  Council,  etc.  v.  State 
American,  etc.  Co.,  89  N.  Y.  App.  Div.  Council,  203  U.  S.  151  (1906).  Even 
345  (1903).  A  copartnership  may  though  a  foreign  corporation  is  doing 
enjoin  a  subsequent  corporation  from  business  in  the  state  without  corn- 
using  its  name.  Nesne  v.  Sundet,  93  plying  with  the  statutes  in  regard 
Minn.  299  (1904).  Where  a  grain  thereto,  a  domestic  corporation  there- 
dealing  corporation  becomes  insolv-  after  organized  under  the  same  name 
ent  and  a  trustee  is  appointed  and  cannot  enjoin  the  foreign  corpora- 
thereafter  the  president  continues  to  tion  from  doing  business  in  the  state. 
do  business  on  his  own  account,  but  Blackwell's,  etc.  Co.  v.  American,  etc. 
uses    the   name   of   the   corporation,  Co.,  59  S.  E.  Rep.  123  (N.  C.  1907). 

82 


CH.    I.]  DEFINITIONS  AND   NATURE    OF   CORPORATIONS.  [§   15. 

the  laws  under  which  it  has  been  created,  or  by  the  consent  of  the 
authority  from  which  its  charter  is  derived.1 

i  In  the  case  of  voluntary  religious  point,  86  N.  Y.  484.  As  to  a  change 
societies  constituted  under  general  of  name  under  the  New  York  statute, 
laws,  without  a  special  act  of  incor-  see  Re  U.  S.  etc.  Agency,  115  N.  Y. 
poration  and  without  an  established  176  (1SS9).  A  judgment  in  the  new 
name,  names  are  purely  arbitrary,  name  which  a  corporation  has  taken 
and  changes  therein  do  not  at  all  af-  by  proceedings  under  a  statute  is 
feet  their  Identity.  Trinity  Church  valid,  although  such  proceedings  to 
v.  Ball,  22  Conn.  125  (1852);  Cahill  change  the  name  were  not  regular. 
r.  nigger,  8  B.  Mon.  (Ky.)  I'll  (IMS).  King  v.  Ilwaco,  etc.  Co.,  1  Yv^ash.  St. 
So  the  identity  and  rights  of  a  mu-  127  (1S90).  An  irregular  and  inef- 
oicipal  corporation  are  not  affected  fectual  attempt  to  change  the  name 
by  a  change  of  its  name.  Girard  v.  of  a  corporation  does  not  affect  its 
Philadelphia,  7  Wall.  1  (1868).  A  charter.  O'Donnell  v.  C.  R.  Johns 
Change  In  the  name  by  statute  does  Co.,  76  Tex.  362  (1890).  In  some 
not  aff  liability   of  the  mem-    states  it  is  provided  in  the  general 

B  to  the  corporation.     South  Caro-     laws  that  the  corporate  name  may  be 
Una,  etc.  Co.   v.  Price,   67   S.  C.  207     changed  by  a  resolution  of  the  stock- 
•3).      Even    though    a    corporate    holders  or  of  the  directors,  properly 
name  is  changed  under  a  statute,  the    filed  and  recorded.    Me.  Rev.  St.  18S3, 
!   estate  need  not  be  I   from     ch.  46,  §6;   Tenn.  Code,  1896,  §2028; 

the  old  name   to   the  new  one.     Pal-     Shackelford,    etc.    Co.    v.   Dangerfield, 
frey  v.  Association,  etc.,  110  La.  452     L.  R.  3  C.  P.  407   (1868),  under  the 
13).     A  dei  !  to  a  corporation  be-    English  Companies  Act.    Similar  pro- 
fore  its  cl  -en  out  may    vision   is  sometimes  made  in  special 

is     acts.     Morris  v.  St.  Paul,  etc.  Ry.,  19 

granted,  and  la  valid  though  a     Minn.    52S    (1873);    Attorney-General 

Blightly    different    a  adopted    v.  Joy,  55  Mich.  94,  106   (1884).    Or 

from  that  wh  ears  in  the  deed,    the  change  may  be  directly  made  by 

Sumter,  etc.  Co.  r.  Phoenix   Ins.  Co.,    the  special  act.     Wallace  v.  Loomis, 

56   S.   E.    I  t    <S.   C.   1907).     A     97  U.  S.  146,  154    (1877);   Alexander 

corporation   cannot  change   its  name    v.  Berney,  28  N.  J.  Eq.  90,  92  (1877). 

unless   allowed   by   statute  so  to   do.    Cf.   Pacific   Bank  v.   De  Ro,  37   Cal. 

Sykes-r.  People,   132  111.  32    (1890);     538    (18G9).     Or  the  original  special 

Bellows    r.    Hallowell,    etc.    Bank,    2    act  of  incorporation  may  provide  for 

■     son,  31    (1819);    E  Fed.  Cas.    a  change  by  an  order  of  the  directors 

144.     The  power  is  sometimes  given    approved  by  the  stockholders.    Wells 

by   the   legislature   to   the  courts   to    v.   Oregon  Ry.   &  Nav.   Co.,   15  Fed. 

change  the  name  of  any  corporation    Rep.  561    (1883).     If  the  legislature 

within  their  jurisdiction  upon  proper    changes  the  name  of  a  corporation 

notice  being  given  to  the  auditor-gen-    without  altering  its  powers  or  iden- 

eral;    and    this    applies   to    religious    tity,  it  does  not  affect  a  controversy 

corporations.     Re  First  Presbyterian    between  the  company  and  third  par- 

Ch.    Ill   Pa.   St.   156    (1S85).     A   re-    ties.     Rosenthal  v.  Madison,  etc.  Co., 

organization,    with   change  of  name,    10  Ind.  358  (1S5S).  As  to  the  right  of 

under  a  statute,  does  not  affect  fixed     the  corporation  to  maintain  an  action 

or  running  obligations.     Hyatt  r.  Me-     on  a  note  executed   to  it  in  the  old 

Mahon,    25    Barb.    457     (1-57);    City     name,    see    Northwestern    College    v. 

tional    Bank    V.    Phelps,    16    Hun,    Schwagler,  37  Iowa,  577   (1873).     A 

158     (1S78);     reversed     on    another    grant   to   a   church   in   a   particular 

83 


§  15.] 


DEFINITIONS    AND    NATURE    OF    CORPOKATIu. 


[CH.   I. 


While  a  corporation  cannot  change  its  corporate  name,  it  may 
nevertheless  become  known  by  another  name,  through  usage;  and 
the  courts  have  frequently  treated  acts  done  and  contract.-?  entered 
into  by  corporations  under  another  name,  as  having  been  dune  or 
entered  into  by  it  under  its  true  nan    . 

Modern  law  has  departed  from  the  strict  rules  of  the  common 
law  as  to  the  use  of  the  corporate  name.  As  corporations  are  now 
able  to  contract  almost  as  freely  as  natural  persons,  it  is  held  that 
a  departure  from  the  strict  name  of  a  corporation  will  not  avoid  its 
contract  if  its   identity   substantially   appears;    and   an   ambiguity 


name  is  not  lost  by  a  subsequent 
change  of  name.  Cakill  v.  Bigger,  8 
B.  Mon.  (Ky.)  211  (1848).  Where  a 
railroad  company  was  authorized  by 
special  act  to  change  its  name  or 
the  names  of  its  branches,  and  did 
change  the  name  of  one  branch  and 
of  itself  in  the  management  of  such 
branch,  held,  that  for  the  purpose  of 
suits  its  original  name  remained  un- 
changed. Morris  v.  St.  Paul,  etc.  Ry., 
19  Minn.  528  (1873).  The  change  of 
a  corporation's  name  does  not  affect 
its  real  estate  contracts.  Welfley  v. 
Shenandoah,  etc.  Co.,  83  Va.  7G8 
(1887).  Nor  an  obligation  on  a  bond. 
West  v.  Carolina  L.  Ins.  Co.,  31  Ark. 
47G  (1876).  A  guarantee  to  pay  for 
goods  thereafter  delivered  by  Crane 
Bros.  Manufacturing  Company  can- 
not be  enforced  by  the  company, 
where  it  changed  its  name  to  Crane 
Company  before  the  goods  were  de- 
livered. Crane  Co.  v.  Specht,  39  Neb. 
123    (1894). 

i  Society  for  Propagating  Gospel  v. 
Young,  2  N.  H.  310  (1820).  An  as- 
signment by  a  corporation  in  a  name 
which  it  has  adopted  but  not  recorded 
as  required  by  statute  is  good.  Wood- 
rough,  etc.  Co.  v.  Witte,  89  Wis.  537 
(1895).  See  also,  in  general,  Smith 
v.  Tallassee,  etc.  Co.,  30  Ala.  650,  664 
(1857);  South  School  District  v. 
Blakeslee,  13  Conn.  227  (1839);  Mi- 
not  v.  Curtis,  7  Mass.  441  (1811), 
where  the  court,  in  using  the  lan- 
guage, "We  know  not  why  corpora- 


tions may  not  be  known  by  several 
names  as  well  as  individuals,"  evi- 
dently had  in  mind  certain  classes  of 
corporations  and  societies.  Identity 
may  be  a  question  of  fact  for  the 
jury.  Dutch  West  India  Co.  v.  Van 
Moses,  1  Stra.  612  (1725).  An  as- 
signment of  a  claim  against  a  corpora- 
tion need  not  accurately  describe  its 
name.  Adler  v.  Kansas  City,  etc.  R. 
R.,  92  Mo.  242  (18S7).  A  corporation 
is  bound  by  an  abbreviated  name. 
People  v.  Sierra,  etc.  Co.,  39  Cal.  511, 
514  (1870).  There  is  a  distinction 
in  some  of  the  old  cases  to  the  effect 
that  corporations  by  prescription 
may  have  several  names,  while  with 
charter  corporations  it  is  otherwise. 
Anonymous  (2),  3  Salk.  102  (170.;  i  ; 
Mercers,  etc.  of  Shrewsbury  v.  Hart, 
1  Car.  &  P.  113  (1S23);  Hammond  v. 
Shepard,  29  How.  Pr.  188,  191  (1865) ; 
Thomas  v.  Dakin,  22  Wend.  9,  72 
(1839);  Melledge  v.  Boston  Iron  Co., 
59  Mass.  158,  175  (1849);  Medway 
Cotton  Manuf'y  v.  Adams,  10  Mass. 
360  (1813).  Where  the  company 
signs  a  contract  under  an  assumed 
name  the  contract  may  be  enforced 
against  it.  Marmet  Co.  v.  Archibald, 
37  W.  Va.  778  (1893).  In  Cincinnati 
Cooperage  Co.  v.  Bate,  96  Ky.  356 
(1894),  the  remarkable  conclusion 
was  reached  that  where  a  corporation 
changed  its  name  and  used  the  new 
name  without  complying  with  the 
statute  the  stockholders  were  liable 
as  partners. 


84 


CH.   I.] 


DEFINITIONS   AND   NATURE   OF   CORPORATIONS. 


[§  15. 


may,  under  proper  averments,  be  explained  by  parol.1  A  deed  to 
a  corporation  is  valid  although  the  corporate  name  as  set  forth  in 
the  deed  is  not  correct.2     Where  a  corporation  has  been  enjoined 

1  A    bequest    to   "Georgetown    Uni-    Medway  Cotton  Manuf'y  v.  Adams,  10 
versity"  will  go  to  "Georgetown  Col-    Mass.  360  (1813) ;  Commercial  Bank 
lege,"  a  corporation,  if  there  is  no  cor-    v.  French,  38  Mass.  486  (1839) ;  Has- 
poration  of  the  former  name.     Speer    call  v.  Life  Assoc,  5  Hun,  151  (1875) ; 
v.  Colbert,  200  U.  S.  130  (1906).    An     aff'd,   G6    N.   Y.   616;    Conro  v.   Port 
error  in  the  name  of  a  charitable  cor-     Henry    Iron    Co.,    12    Barb.    27,    55 
poration  to  which  a  bequest  is  given     (1851);    Northwestern    Dist.    Co.    v. 
does  not  prevent  the  vesting  of  the     Brant,  69  111.  658    (1873).     Cf.  New 
bequest  in  such  corporation.     Matter    York  African  Soc.  v.  Varick,  13  Johns. 
of  Pearson,  52   N.  Y.  Misc.  Rep.  273     38  (1S1G);  Mott  v.  Hicks,  1  Cow.  513 
(1906).      An     abbreviated    corporate     (1823) ;  Brockway  v.  Allen,  17  Wend, 
signature  is  sufficient  and   a  seal  is    40   (1837).    Although  the  name  used 
not  necessary  if  it  would  not  be  re-     in  a  contract  is   different   from  the 
quired   in   a   similar    individual   con-    corporate  name,  yet  if  the  identity  is 
tract.     Seiberling   v.    Miller,   207   111.    clear  the  contract  is  enforceable.  Has- 
443  (1904).    Even  though  a  contract    selman  v.  Japanese,  etc.   Co.,  2  Ind. 
is   made    with    the    "Halls   Safe   and     App.  180  (1891).    There  is  a  line  of 
Lock  Works,"  which  is  a  local  namo    cases  where  corporations  draw  or  ac- 
for  a  shop  of  the  Herring-Hall-Marvin    cept  bills  or  make  deeds  in  another 
Company,  yet  the  latter  may  sue  upon    name   merely  as  a  convenient  mode 
and   enforce   the  contract.     11-  rring,    of  doing  the  special  act  of  business, 
etc.  Co.  v.  Smith,  43  Ore.  315  I  1903).     and  they  are  held  liable  although  the 
A  creditor  of  a  corporation,  before  a    corporate  name  is  not  mentioned.    In 
change  in  the  name  of  the  latter,  may    such  cases  they  are  to  be  sued  in  their 
after  such  change  sue  it  by  its  new    true  name.    Culpeper  Agric.  etc.  Soc. 
name.      Wright,    etc.    Co.    <\    Hoen    &    r.  Digges,  6  Rand.  (Va.)  165  (1828); 
Co.,    105   Va.   327    (1906).     Although    Milford,  etc.   Co.  v.   Brush,  10   Ohio, 
a  notice  of  a  corporate  meeting,  and     111  (1S40);  Ryan  v.  Martin,  91  N.  C. 
proxies  given  for  a  corporate  meet-    464     (18S4);     Asheville    Division    v. 
tag,  add  to  the  name  of  the  corpora-    Aston,  92  N.  C.  578  (1SS5);  Clement 
tion  the  place  where  it  is  located,  this    v.  Lathrop,  18  Fed.  Rep.  885  (1884); 
is  immaterial.     Langan  v.  Francklyn,    Bridgeford  v.  Hall,  18  La.  Ann.  211, 
20   N.   Y.   Supp.   404    (1892).     A  cor-     218    (1SGG);    Brock   Dist.    Council  V. 
poration  may  be  liable  on  a  contract    Bowen,  7  U.  C.  Q.  B.  471  (1850).    A 
which  it  enters  into  in  a  name  other    slight  variation  in  documentary  evi- 
than  its  corporate  name.    Nefl  v.  Cov-    dence  of  a  national  bank's  corporate 
ington,  etc.  Co.,  108  Ky.  457   (1900),     existence  which  does  not  go  to  raise 
the  court,  however,  sending  the  case    a  doubt  of  the  identity  is  to  be  dis- 
back  on  account  of  error  in  the  form    regarded.     Thatcher   v.    West   River 
of  judgment.    Haag  v.  County  Com'rs,     Nat.   Bank,  19  Mich.  196   (1869). 
34  Fed.  Rep.  778  (18SS);  Berks,  etc.        2  Precious,  etc.  Soc.  v.  Elsythe,  102 
Road  r.  Myers,  6  Serg.  &  R.  (Pa.)  12,     Tenn.   40    (1S99).     A   deed  to   a  re- 
17    (1S20);    Boisgerard   p.  New  York    ligious  corporation  is  good  although 
Banking  Co.,  2  Sandf.  Ch.  23  (1844);     the  name  is  not  correctly  stated  in 
Hammond   v.    Shepard,   29   How.   Pr.    the  deed.    Church  of  Christ  v.  Chris- 
188    (1865);    Gifford   P.   Rockett,   121    tian  Church,  193  111.  144  (1901).    Al- 
Mass.  431  (1877);  Melledge  v.  Boston    though  by  error  land  is  deeded  to  a 
Iron  Co.,  59  Mass.  158,  175    (1849);     corporation   not   by   its   right   name 

85 


§  15.] 


DEFINITIONS   AND   NATURE    OP   CORPORATIONS. 


[Cll.    I. 


from  using  its  name  this  is  cause  for  a  dissolution,  at  the  instai 
of  the  stockholders.1  Upon  dissolution  a  company  may  sell  its 
trade  name.-  There  have  been  a  greal  many  decisions  as  to  the  ef- 
fect of  an  error  in  setting  forth  the  name  of  a  corporation  in  suits  l>v 
or  against  it.  The  decided  tendency  of  the  conn-  is  to  ignore  Buch 
errors,  unless  attention  is  called  to  them  at  once  or  unless  a  criminal 
liability  is  involved.8 


but  by  a  name  wbich  another  cor- 
poration has,  yet  the  latter  company 
does  not  take  title.  Clarke  v.  Milli- 
gan,  58  Minn.  413  (1894).  The  omis- 
sion of  part  of  the  corporate  name 
in  the  assignment  of  a  mortgage  by 
a  corporation  is  immaterial.  Chilton 
v.  Brooks,  71  Md.  445  (18S9).  A 
mistake  in  writing  the  name  of  the 
corporation  in  a  mortgage  is  imma- 
terial. Woronieki  v.  Pairskiego,  74 
Conn.  224  (1901).  But  a  mortgage 
indexed  as  "Scandinavian  Congrega- 
tional Church,  Trustees  of,"  is  not 
notice  of  the  actual  mortgage  given 
by  the  "Scandinavian  Free  Church." 
Congregational,  etc.  Soc.  v.  Scandi- 
navian Free  Church,  24  Wash.  433 
(1901).  Even  though  the  name  of  a 
corporation  is  abbreviated  as  signed 
to  its  mortgage  and  bonds,  yet  they 
are  legal.  William  Firth  Co.  v.  South 
Carolina,  etc.  Co.,  122  Fed.  Rep.  5G9 
(1903).  Even  though  the  signature 
of  a  mortgagor  corporation  to  the 
mortgage  and  to  the  bonds  leaves  off 
a  part  of  the  name,  yet  this  does 
not  invalidate  the  mortgage  and 
bonds.  In  re  Goldville,  etc.  Co.,  118 
Fed.  Rep.  892  (1902);  aff'd,  122  Fed. 
Rep.  569.  A  variation  will  not  in 
general  invalidate  a  deed,  grant,  or 
lease  by  or  to  a  corporation  when  the 
true  name  can  be  collected  from  the 
instrument  or  is  shown  by  proper 
averments.  2  Kent,  Com.  292;  Bacon, 
Abr.,  Corporation;  Kentucky  Semi- 
nary v.  Wallace,  15  B.  Mon.  (Ky.) 
35,  45  (1854);  Clarke  v.  Potter  Coun- 
ty, 1  Pa.  St.  159  (1845) ;  Douglass  v. 
Mobile  Branch  Bank,  19  Ala.  659 
(1851) ;  Culpeper  Agric.  etc.  Soc.  v. 
Digges,   6   Rand.    (Va.)    165    (1828); 


1  Kyd,  Corp.  2S6,  2S8;  Com.  Dig., 
Pleader,  2  B.  2;  Case  of  Linne  Regis, 
10   Co.    122&,    L25B    (1613);    Ayray'a 

Case,  11  Co.  1S&  (1612). 

i  Re  Thomas,  etc.  &  Sons,  Ltd., 
[1S97]  1  Ch.  406. 

2Townsend  V.  .human,  [1900]  2 
Ch.  698.  A  publishing  corporation  in 
selling  its  business  may  sell  the  use 
of  its  name.  Lothrop,  etc.  Co.  v. 
Lothrop,  etc.  Co.,  191  Mass.  353 
(1906). 

8  Where  a  corporation  is  sued  by 
the  wrong  name  it  may  appear  spe- 
cially and  object,  but  must  disclose 
the  facts  as  to  its  name.  Montello, 
etc.  Co.  v.  Pullman's,  etc.  Co.,  4  Pen. 
(Del.)  90  (1902).  If  the  defendant 
is  incorrectly  named  in  the  process 
its  remedy  is  a  plea  in  abatement, 
showing  the  true  name.  A  changed 
name  under  a  statute  is  no  defense 
against  an  old  liability.  Wilhite  v. 
Convent,  etc.  117  Ky.  251  (1904).  The 
omission  of  the  word  "The"  from  the 
corporate  name  is  immaterial  in  liti- 
gation. Carlson  v.  White  Star,  etc. 
Co.,  39  Wash.  394  (1905).  A  pub- 
lished notice  giving  a  corporate  name 
without  the  word  "The"  is  sufficient, 
even  though  that  was  a  part  of  the 
name.  Clifford  v.  Thun,  104  N.  W. 
Rep.  1052  (Neb.  1905).  Adding  the 
word  "The"  to  the  corporate  name  in 
a  pleading  is  immaterial.  Western 
Bank,  etc.  Co.  v.  Ogden,  93  S.  W.  Rep. 
1102  (Tex.  1906).  Where  a  foreign 
and  a  domestic  corporation  have  near- 
ly the  same  name  and  are  connected 
in  business,  and  by  mistake  the  for- 
eign corporation  was  named  when  the 
domestic  one  was  intended  to  be,  and 
the  latter  appeared  and  defended  and 


86 


L]  DEFINITIONS   AND    NATURE    OP   CORPORATIONS.  [§    15. 

The  sale,  of  a  business  of  a  corporation  which  does  not  specific- 
did  not  make  known  the  mistake  un-  Kanawha   Dispatch   cannot  maintain 
til    the   trial     the    pleadings   may    be  a  suit.     Kanawha  Dispatch  v.  Fish, 
amended  so 'as  to  contain  the  name  219  111.  236  (1905).    "It  is  immaterial 
of  the  domestic  corporation.    McCord,  what  name  it  does  its  business  under. 
Co.  p.  Prichard,  84  S.  W.  Rep.  388  A  corporate   name  is  that  which  is 
(Tex   ]:„,<).                 . i  suit  is  brought  adopted  in  the  articles  of  incorpora- 
agai'Ilst   ^  «B                         rtmentof  tion.      If    the    name    is    changed    it 
the    |           a'8    Hank."    ami    the   corpo-  must  be  done  by  changing  the  articles 
,..„,.  Qame  i,                             k  of  Lou-  of     incorporation."       Where     a     cor- 
isiani-  the  defendant  may  deny  that  poration  sued  on  an  agreement,  and 
it   has   been   si  rved   and   thus  defeat  alleged    a    due    and    legal    change 
the   suit.                                                't-  of   name    between    the    time    of   the 
,.-,,,  (1904).  Where  execution  and  the  suit,  it  was  held 
a  , ,  such  change  must  be  proved  by  the 
,„,,    wj                                  to   a    mis-  articles  and  not  by  testimony  of  the 
Qon                        may  be  try.      Chicago,    etc.    R.    R.    v. 
amendment    E            v.  Southern  Ry.,  I,  43  Iowa,  39   (1876).    "A  cor- 

0    though  poration    may    sue   or   be   sued   only 

of   a   compai  by   its  corporate  name."     Iowa  Rev., 

51151;     Iowa    Code,    §1059.      Where 

...t  -H,                w  the   name   in  a  ft.   fa.   was   different 

6tC.  from   that  by   which  the  corporation 

Co.,   :,1    S.    B.  was  sued  and  judgment  had.     Brad- 

349   r>v    va.  L906).     En  a  plead-  ford    v.   Water   Lot   Co.,   58   Ga.   280 

the    adding    to                       ot    a  (1877).    Of.  Ga.  Code,  §  3636.    Where 

tion    its   BuppoB(  1    locaUon    is  two  insurance  corporations  in  issuing 

:il,r.    Kannow  v.  a  policy  use  a  name  to  designate  both 

.   107  N.  W.  Rep.  Of  them  they  may  be  sued  under  that 

(Neb.  1906).     v.            i  corpora-  name.      Perry   t?.    Cincinnati   Under- 

,   is  incor,  writers,  111  Mich.  261   (1896).     Alex- 

the   game  I    with   the   same    ander    v.    Berney,    28    N.    J.   Eq    jo 

office™  and  b  <1S77>-   holding  that  *  COrP°ra f  °*1 

glvhu  th.  tin  ripari-  through  its   retaining  the  use  of  its 

an    right*    on    a    ri  original    name   after   the    passage   of 

given'  by    one    of    the    corpo..  an   amendatory  act  changing  it,  re- 

^thout    stating     which     one,     when  gained,  so  to  speak,  its  original  nam, 

foreclosed,     must     be     foreclosed     as  and  could  be  sued  and  he  proceeded 

I   both  cor;  in  order  to  against  in  bankraptcy  by  it.    At  com^ 

vey  complete  titl-  bama,  etc.  mon   law  a  substantial  variance J,e- 

Co.  p.  Rlverdale,   etc  Mills,  127   Fed.  tween  the  name  of  the  party  injured 

,.   ,,7    ,  ;   affd.  198  U.  S.  188.  as    laid    in     he    mdictment    and    as 

Ef    the  Lant   is   named   with   a  given  in  evidence  was  fata  1.   and. 

■The-  as  a  part  of   Its  name,  when  was  so  held  In  New  York,  In  a  case 

in  fart  each  is  not  a  part  of  its  name,  involving   a   misnomer  «**«»*" 

a   Plea    in    abatement   may   be   inter-  rate  owner  of  the ,  prone rty     McGary 

posed.     Lapham   V.  Philadelphia,  etc.  v.  People    45  N.  Y.  ™W™£™ 

R  4    Pen      (Del)     421     (1903).  judges   dissenting;    Sykes   v.   People 

*  ^  .         ,        .       '  too  in    32    (1890).     But  this  rule  is 

Where  several   lines   of   railroad   use  132  111.  Sj    {.uvvj. 

for  convenience  the  name  "Kanawha     modified  ;nrsreft/U"f^rse"uon 
Dispatch"    in   handling  freight,  such    the  Penal  Code  of  California,  section 

S7 


§15.] 


DEFINITIONS    AM)    NA1  OF    CORPORATl 


[cn.  i. 


ally    transfer   the    trade   name    and   good   will    does   not   enable   a 


956.    See  People  v.  Potter,  35  Cal.  110 
(18G8).     Cf.  N.  Y.  Code  Crim.  Proc, 
§  281.     Cf.,  also,  People  v.  Runkel,  9 
Johns.  147,  156  (1812).    A  misnomer 
has  been  held  material  where  a  cor- 
poration is  required  by  statute  to  act 
for  its  own  benefit,   as   in  collecting 
assessments  for  benefit  to  land  from 
its  proposed   road.     Glass  v.   Tipton, 
etc.  Co.,  32  Ind.  376   (1869).     A  suit 
brought  against   the   Bell   Telephone 
Company   is    sustainable   though   the 
corporate  name  is  the  American  Bell 
Telephone    Company.      State    v.    Bell 
Telephone  Co.,  36  Ohio  St.  296  (1880). 
When  the  corporate  name  has  once 
correctly  appeared  it  is  generally  not 
necessary  that  it  should  be  complete- 
ly  stated   at   every    recurrence    in   a 
pleading.    Antipasda  Bapt.  Ch.  v.  Mul- 
ford,  8  N.  J.  L.  182   (1825);  London 
v.  Lynn,  1   H.  Bl.   206    (1789);    Staf- 
ford v.  Bolton,  1  Bos.  &  P.  40  (1797) ; 
Case    of    Lynne   Regis,    10    Rep.    120 
(1613).    In  an  action  or  special  pro- 
ceeding brought  by  or  against  a  cor- 
poration the  defendant  is  deemed  to 
have  waived  any  mistake  in  the  state- 
ment  of  the   corporate  name   unless 
the  misnomer   is  pleaded  in  the  an- 
swer   or   other    pleading    in   the    de- 
fendant's   behalf.      N.    Y.    Code    Civ. 
Pro.,    §  1777.      So    generally    a    mis- 
nomer is  not  ground  for  a  nonsuit 
and   must  be  pleaded  in  abatement. 
Whittlesey   v.   Frantz,   74    N.  Y.    456 
(1878);  Bank  of  Utica  v.  Smalley,  2 
Cow.     770      (1824);     Methodist     Ep. 
Church  v.  Tryon,  1  Denio,  451  (1845) ; 
Lake  Superior  Bldg.  Assoc,  v.  Thomp- 
son,  32  Mich.   293    (1875) ;   Northum- 
berland Co.  Bank  v.  Eyer,  60  Pa.  St. 
436     (1869) ;     Wilson    v.    Baker,    52 
Iowa,    423    (1879);    Medway    Cotton 
Manuf'y    v.    Adams,    10     Mass.    360 
(1813);  Gilbert  v.  Nantucket  Bank,  5 
Mass.  97    (1809);    State  v.  Bell  Tele- 
phone  Co.,   36   Ohio   St.   296    (1SS0); 
Sunapee   v.   Rastman,    32    N.   H.    470 
(1855);     Burnham    v.    Strafford    Co. 


Sav.    Bank,    5    N.    H.    446     (1831); 
School  District  v.  Griner,  8  Kan.  224 
(1S71).      Misnomer    is    pleadable    in 
abatement,  but  not  in  bar.  Baltimore, 
etc.  R.  R.  v.  Fifth  Bapt.  Church,  137 
U.    S.    568    (1891).      Proceedings   for 
perpetuating    testimony    are    not    ad- 
missible  when   only   the   letters   "C, 
B.  &  Q.  R.  R.  Co."  are  used  to  desig- 
nate  defendant.     Accola   v.   Chicago, 
etc.   Ry.,   70    Iowa,   185    (1886).     Cf. 
Martin  v.  Central  Iowa  Ry.,  59  Iowa, 
411    (1SS2);   Stone  v.  East  Berkshire 
Cong.  Soc,  14  Vt.  86   (1842);   Souhe- 
gan,   etc.   Factory  v.  McConihe,  7   N. 
H.   309    (1S31);    Bank  of  Metropolis 
v.    Orme,    3    Gill    (Md.)    443    (1845); 
Gray    v.    Monongahela    Nav.    Co.,    2 
Watts  &  S.    (Pa.)    156    (1841);    Staf- 
ford v.  Bolton,  1  Bos.  &  P.  40  (1797) ; 
Beene  v.  Cahawba,  etc.  R.  R.,  3  Ala. 
(N.   S.)    660    (1842);    Lafayette   Ins. 
Co.  v.   French,   18    How.   405    (1855). 
Cf.  Brittain  v.  Newland,  2  Dev.  &  B. 
(N.    C.)    L.    363    (1837);    Traver    v. 
Eighth  Ave.  R.  R.,   4   Abb.  Dec.  422 
(1867) ;  Mauney  v.  High  Shoals  Mfg. 
Co.,   4  Ired.  Eq.    (N.  C.)   195   (1845). 
A  mistake  in  setting  out  the  name  of 
a  corporation  party  in  a  pleading  may 
be  corrected  by  amendment.     Smith 
v.  Central  Plank-road  Co.,  30  Ala.  650, 
662     (1S57);     Bullard    v.    Nantucket 
Bank,  5  Mass.  99  (1809) ;  Sherman  v. 
Connecticut   River   Bridge,    11   Mass. 
338    (1814);    Brittain   v.    Newland,   2 
Dev.  &  B.  (N.  C.)  L.  363  (1837).    Or 
if    manifestly    immaterial    no    objec- 
tion will  be  allowed.     Baltimore  Ma- 
rine Bank  v.  Biays,  4  Har.  &  J.  (Md.) 
338    (1818).     And  judgment  will  not 
be     arrested.       Coulter     v.     Western 
Theol.    Seminary,   29  Md.   69    (1868). 
Where  a  corporate  name  is  established 
it  is  usually  held  that  suits  must  be 
brought  and  defended  in  such  name. 
Romeo    v.    Chapman,     2    Mich.     179 
(1S51).     In  the  case  of  a  misnomer 
in  a  devise  the  courts  are  very  lib- 
eral   in    permitting    the    identity    of 


88 


CH.   I.] 


DEFINITIONS   AND   NATURE    OP   CORPORATIONS. 


[§  15. 


purchaser  of  the  business  from  the  corporation  to  claim  such  trade 


name. 


the  corporation  to  be  otherwise 
shown.  Deaf  and  Dumb.  Inst.  v.  Nor- 
wood, Bush.  (N.  C.)  Eq.  C5  (1S52); 
First  Parish  in  Sutton  v.  Cole,  20 
Mass.  232  (1825);  Minot  v.  Boston 
Asylum,  48  Mass.  416  (1844);  St. 
Louis  Hospital  Assoc,  v.  Williams,  19 
Mo.  009  (1854);  Preachers'  Aid  Soc. 
v.  Rich,  45  Me.  552  (1858);  Vansant 
V.  Roberts,  3  Md.  119  (1852);  New 
York  Inst,  for  Blind  v.  How,  10  N. 
Y.  84  (1854);  Domestic,  etc.  Soc.'s 
Appeal,  30  Pa.  St.  425  (1858);  Cres- 
Appeal,  30  Pa.  St.  137  (1  358) ; 
Newell's  Appeal,  24  Pa.  St.  197 
(1855);  Chapin  v.  Winchester  School 
Dist.,  35  N.  11.  115  (1857);  Button  v. 
American  Tract  Soc,  23  Vt.  336 
(1851);  Hornbeck  r.  American  Bible 
Soc,  2  San. If.  Ch.  133  (1844);  Attor- 
ney-General p.  Rye,  7  Taunt.  546 
MS17);  General  Lying-in  Hospital  v. 
Knight,  21  L.  J.  Ch.  537  (1851);  Be 
Kilvert's  Trusts,  L.  R.  7  Ch.  App. 
17"  (1871);  Jarman,  Wills,  326. 
Where  a  corporation  voluntarily  ap- 
ra  under  a  wrong  name  it  becomes 
a  party  in  such  name  and  may  not 
object  to  a  decree  for  want  of  proc- 
ess against  it.  Virginia,  etc.  Nav.  Co. 
v.  United  States,  Taney,  418  (1840): 
B.  ...  28  Fed.  Cas.  1229;  State  v.  Bell 
Teleph.  Co.,  36  Ohio  St.  296  (1880); 
School*  District  v.  Griner,  S  Kan.  22  1 
(1871).  So,  in  general,  whenever,  for 
any  purpose,  a  corporation  is  de- 
scribed, a  slight  variance  will  not 
be  held  material.  Burdine  v.  Grand 
Lodge,  37  Ala.  478  (1S61);  Souhegan, 
etc.  Factory  r.  McConihe,  7  N.  H. 
309  (1S34).  In  the  case  of  a  mis- 
nomer in  a  notice  required  by  stat- 
ute to  be  given  as  a  condition  prece- 
dent to  an  action  where  there  was  no 
possibility  of  anybody  being  misled, 
Pollock,  C.  B.,  said:  "For  the  credit 
of  Westminster  Hall  we  ought  to  re- 
fuse this  rule."  Eastham  v.  Black- 
burn Ry.,  23  L.  J.  Exch.  199   (1854). 


See  also  Bruce  County  v.  Cromar,  22 
L.  J.  Exch.  321,  327  (1863);  Trent, 
etc.  Co.  v.  Marshall,  10  U.  C.  C.  P. 
329,  336  (1861);  Hawkins  v.  Munici- 
pal Council,  etc.,  2  U.  C.  C.  P.  72,  121 
(1852);  Whitby  v.  Harrison,  18  U. 
C.  Q.  B.  603  (1859);  Croydon  Hos- 
pital v.  Farley,  6  Taunt.  467  (1816); 
Doe  v.  Miller,  1  B.  &  Aid.  699  (1818) ; 
Hagerstown  Turnp.  Co.  v.  Creeger,  5 
Har.  &  J.  (Md.)  122  (1820)  ;  Ho- 
boken  Bldg.  Assoc,  v.  Martin,  13  N. 
J.  Eq.  427  (1861);  Upper  Alloways 
Creek  v.  String,  10  N.  J.  L.  323 
(1829);  Woolwick  v.  Forest,  2  N.  J. 
L.  115  (1806);  Middleton  v.  McCor- 
mlck,  3  X.  J.  L.  (3d  ed.)  92  (1809); 
Granville  Charitable  Assoc,  v.  Bald- 
win, 42  Mass.  359  (1840);  Lowell  «. 
Morse,  42  Mass.  473  (1840);  Shawmut 
Sugar  Co.  v.  Hampden  Mut.  Ins.  Co., 
78  Mass.  540  (1859);  Levant  Trustees 
v.  Parks,  10  Me.  441  (1833);  New- 
port Mechanics'  Mfg.  Co.  v.  Starbird, 
10  N.  H.  123  (1839);  Society  for 
Propagating  Gospel  v.  Young,  2  N.  H. 
310  (1820);  Delaware,  etc.  R.  R.  v. 
Irick,  23  N.  J.  L.  321  (1852).  A  mis- 
nomer of  a  corporation  defendant  can 
be  raised  by  a  plea  in  abatement  only. 
Gillespie  v.  Planters',  etc.  Co.,  76  Miss. 
406   (1899). 

i  Cutter  v.  Gudebrod,  etc.  Co.,  44 
N.  Y.  App.  Div.  605  (1899);  aff'd, 
168  N.  Y.  512.  Where  a  company  is 
in  difficulties  and  an  agreement  is 
made  by  which  creditors  are  given 
the  right  to  sell  all  the  assets  in  case 
•the  business  does  not  succeed  within 
a  certain  time,  and  they  do  so,  the 
purchaser  has  no  right  to  organize  a 
corporation  having  the  same  name  as 
the  old  corporation,  unless  that  was 
a  part  of  the  original  agreement,  and 
not  even  a  majority  of  the  stockhold- 
ers have  a  right  to  vote  to  allow  such 
use  of  the  name,  unless  there  is  a 
new  consideration  therefor.  Arming- 
ton  v.  Palmer,  21  R.  I.  109    (1898). 


89 


§   15a.]  DEFINITIONS    AND    NATURE    OP    CORPORATIONS. 


[CH.   I. 


A  corporation  may  take  the  name  of  a  partnership  which,  it  buys 
out.1  Where,  on  a  judicial  sale,  the  name  and  good  will  is  included 
in  the  sale,  the  reorganized  company  may  protect  such  name  by  in- 
junction.2 

§  15a.  Statutes  which  apply  to  "persons"  are  generally  con- 
strued to  apply  to  corporations. — The  word  "person"  includes  a 
corporation,  when  it  is  clear  that  such  was  the  legislative  intent.3 
Thus,  a  statute  authorizing  persons  to  obtain  a  discharge  from 
their  debts  upon  going  through  certain  insolvency  proceedings  ap- 
plies to  a  corporation,  and  it  may  obtain  such  a  discharge.4  A  stat- 
ute prohibiting  "persons"  from  engaging  in  banking  applies  not 
only  to  natural  persons  but  also  to  corporal  ions.5  A  corporation  is 
subject  to  a  statute  which  prescribes  that  a  "person"  shall  be  su1>- 
ject  to  a  penalty;0  or  that  the  United  States  shall  he  a  preferred 
creditor;7  or  that  all  "inhabitants"  or  "residents"  shall  pay  taxes;8 
or  that  testimony  shall  be  admitted  as  against  certain  "poisons;"9 
or  that  "persons"  may  do  certain  acts  in  regard  to  promissory 
notes;10  or  shall  be  guilty  of  a  misdemeanor;11  or  that  a  local  court 


Even  though  a  company  having  the 
name  of  "Sabiston  Lithographic  and 
Publishing  Company"  sells  out  its 
business  and  good  will  to  another 
company,  yet  the  latter  cannot  pre- 
vent a  brother  of  the  managing  di- 
rector of  the  former  doing  business 
under  the  name  "Sabiston  Litho- 
graphing and  Publishing  Company," 
it  not  appearing  that  he  held  himself 
out  as  the  successor  of  the  old  com- 
pany. Montreal,  etc.  Co.  v.  Sabiston, 
[1899]   A.   C.   610.     Cf.  208  U.  S.  2G7. 

i  Bristol,  etc.  Trust  Co.  v.  Jones- 
boro,  etc.  Trust  Co.,  101  Tenn.  545 
(1898). 

2  Peck  Brothers,  etc.  Co.  v.  Peck 
Bros.  Co.,  113   Fed.  Rep.  291    (1902). 

3  State  v.  Portage  City,  etc.  Co., 
107  Wis.  441    (1900). 

4Barth  v.  Backus,  140  N.  Y.  230 
(1893). 

5  People  v.  Utica  Ins.  Co.,  15  Johns. 
358  (1818).  A  corporation  may  be  a 
"person"  within  the  meaning  of  the 
words  of  a  statute.  Jeffries  Neck  Pas- 
ture v.  Ipswich,  153  Mass.  42  (1891). 
A  statute  authorizing  tax  commis- 
sioners to  reduce  an  assessment,  and 
to  extend  the  time  for  applying  there- 


for in  case  of  illness,  etc.,  applies  to 
corporations,  and,  if  the  officers  are 
absent  or  ill,  the  corporation  is  en- 
titled to  further  time.  People  v.  Bar- 
ker, 140  N.  Y.  437   (1893). 

c  U.  S.  v.  Amedy,  11  Wheat.  392 
(1826).  Contra,  Androscoggin,  etc. 
Co.  v.  Bethel,  etc.  Co.,  64  Me.  441 
(1374);  Cumberland,  etc.  Corp.  v. 
Portland,  56  Me.  77  (1S6S). 

7  Beaston  v.  Farmers'  Bank,  12 
Pet.  102  (1838).  Contra,  Common- 
wealth v.  Phoenix  Bank,  52  Mass.  129 
(1846). 

s  Bank  of  U.  S.  -y.  Deveaux,  5 
Cranch,  61  (1809);  Rex  v.  Gardner, 
Cowp.  79  (1774);  Otis  Co.  v.  Ware, 
74  Mass.  509  (1857);  International, 
etc.  Soc.  v.  Com'rs,  28  Barb.  318 
(1858);  Baldwin  v.  Ministerial  Fund, 
37  Me.  369  (1S54) ;  Cortis  v.  Kent 
Water  Works,  7  B.  &  C.  314  (1827). 
Contra,  Hartford  F.  Ins.  Co.  v.  Hart- 
ford, 3  Conn.  15    (1819). 

o  La  Farge  v.  Exchange  F.  Ins.  Co., 
22  N.  Y.  352    (1860). 

io  State  v.  Woram,  6  Hill,  33  (1S43). 

li  White  v.  State,  69  Ind.  273 
(1879).  A  statute  that  any  "person" 
employing    a    child    under    fourteen 


«/iy 


en.  i.] 


DEFINITIONS  AND   NATURE   OF   CORPORATIONS. 


[§  15a. 


shall  have  jurisdiction;1  or  that  property  may  be  attached;2  or 
that  "persons"  shall  be  liable  for  damages  for  injuries  which  result 
in  death;3  or  in  case  "1"  injury  by  a  dam;4  or  a  statute  which  allows 
"owners"  of  vessels  to  obtain  a  registry;5  or  gives  a  mechanic's 
li,  n  io  "persons;"6  or  that  renders  persons  liable  for  misrepresent- 
ing the  pi  ibility  of  another  party.7  A  trust  company  is  not  a 
bank  within  the  meaning  of  a  criminal  statute.8  Stockholders  are 
liable  for  taxes  Levied  on  a  distillery,  where  the  statute  levies  the 
tax  on  "persons  in1  d  in  the  use  of  the  distillery."9  A  corpora- 
tion may  take  ou1  an  original  copyright.10  In  New  York,  by  stat- 
ute, "the  term  person  includes  a  corporation  and  a  joint-stock  asso- 
ciation."13  A  foreign  corporation  i<  a  "person"  outside  of  the  state 
ards  the  Btatute  of  limitations.12  But  a  foreign  corporation  is 
not  a  "resident"  within  the  chattel  mortgage  ad  ;13  nor  is  a  domestic 
corporation   a   •             at  taxpayer/'   so  as   to  be  counted  in  voting 


years  of  age  shall  be  guilty  of  a  mis- 
demeanor applies  to  a  corporation. 
Overland,  etc.  Co.  v.  People,  32  Colo. 
263   (19ol  i. 

1  Brown  V.  .Mayor,  etc.,  66  X.  Y. 
385  (1S7G);  Bristol  v.  Chicago,  etc. 
R.  R.,  15  111.  436  (1854);  Bank  of 
North  Ann  ii<a  r.  Chicago,  etc.  R.  R., 
82  111.  4'.t::  <lx7»;>:  Eslava  v.  Ames 
Plow  Co.,  47  Ala.  384  (1872). 

2  Knox  r.  Protection  Ins.  Co.,  9 
Conn.  430  (1833);  Mineral  Point  R. 
R.  r.  Ke  p.  -2  111.  9  (  L859)  ;  Trenton 
Bkg.  Co.  V.  Haverstick,  11  X.  J.  L. 
171  (1S29)  ;  Bushel  r.  Commonwealth 
Ins.  Co.,  15  Serg.  &  R.  (Pa.)  17;; 
(1827.);  Planters',  etc.  Bank  v.  An- 
drews,  17   Ala.    (0.    S.)    404    (IS: 

Or  garnished.  Brauser  v.  New  Eng- 
land, etc.  Ins.  Co.,  21  Wis.  506  (1867). 

:?  Southwestern  R.  R.  v.  Paulk,  24 
Ga.  356   (1858). 

4  Lehigh  Bridge  v.  Lehigh  Coal  & 
Nav.  Co.,  4  Rawle   (Pa.),  8  (1S33). 

B  Regina  v.  Arnaud,  9  Q.  B.  806 
(1846). 

1  chapman  v.  Brewer,  43  Neb.  890 
(1895).  A  statutory  lien  given  to 
any  "person"  for  work  done  may  be 
availed  of  by  a  corporation  doing 
work  for  another  corporation.  Wetzel, 


etc.  Ry.  v.  Tennis  Bros.  Co.,  145  Fed. 
Rep.  458   (1906). 

7Hirst  v.  West,  etc.  Co.,   [1901]   2 
K.  B.  560. 

s  State  v.  Reid,  125  Mo.  43  (1894). 
;it'.  S.  v.  Wolters,  46  Fed.  Rep. 
509  (1591);  U.  S.  v.  Distillery,  43 
Fed.  Rep.  846  (1890).  Where  the 
law  permits  punishment  or  confisca- 
tion of  property,  but  not  both,  the 
conviction  of  a  stockholder  for  vio- 
lation of  the  internal  revenue  law 
prevents  a  confiscation  of  the  corpora- 
tion property.  U.  S.  v.  Distillery,  43 
Fed.  Rep.  846   (1890). 

in  Schumacher  v.  Schwencke,  25 
Fed.  Rep.  466  (1885) ;  Mutual  Adver- 
tising Co.  v.  Refo,  76  Fed.  Rep.  961 
(1896);  R.  S.  of  U.  S.,  §4952. 

1 1  New  York  Stat.  Construction 
Law,  §  5. 

i2  01cott  V.  Tioga  R.  R.,  20  N.  Y. 
210  (1859);  Blossburg,  etc.  R.  R.  v. 
Tioga  R.  R.,  5  Blatchf.  387  (1867); 
s.  c,  3  Fed.  Cas.  735;  s.  c,  20  Wall. 
137.  Contra,  Connecticut,  etc.  Ins. 
Co.  v.  Duerson,  28  Gratt.  (Va.)  630 
(1877),  where  it  had  an  agent  in  the 
state  to  accept  service. 

i:«Cook    v.     Hager,    3     Colo.     386 
(1877). 


91 


§    156  ]  DEFINITIONS   AND   NATURE    OP   CORPORATIONS. 


[CH.    I. 


municipal  aid  to  railroads;1  nor  is  a  state  a  person,  and  as  such 
entitled  to  take  by  devise.2  A  preference  to  laborers  does  not  in- 
clude a  corporation,  especially  where  the  latter's  claim  is  for  print- 
ing and  binding  books.3  A  corporation  is  not  a  "citizen"  within 
the  meaning  of  the  federal  constitution;4  but  is  a  "person"  within 
the  meaning  of  the  fourteenth  amendment.5  Although  a  state  can- 
not give  a  preference  to  its  own  citizens  as  against  citizens  of  another 
state  in  the  distribution  of  the  assets  of  an  insolvent  corporation, 
yet  as  against  corporations  of  other  states  such  preference  may  be 
given.6 

§  15b.  Torts  committed  by  corporations— Exemplary  damages- 
Indictment. — Alter  much  discussion  the  general  rule  is  now  firmly 
established  that  corporations  cannot  make  defense  to  actions  in 
tort  by  claiming  that,  the  acts  by  which  the  wrongs  have  been  com- 
mitted are  not  within  the  corporato  powers  conferred  upon 
them.7     A  corporation  is  liable  at  common  law  for  torts  committed 


i  People  v.  Schoonmaker,  63  Barb. 
44  (1871).  Cf.  Crafford  v.  Warwick 
County,  87  Va.  110. 

2  Re  Fox,  52  N.  Y.  530  (1873); 
U.  S.  v.  Fox,  94  U.  S.  315   (1876). 

3  In  re  Barr-Dinwiddie,  etc.  Co., 
42  Atl.  Rep.  575  (N.  J.  1899). 

4  See  §  697,  infra.  Cf.  McKinley 
v.  Wheeler,  130  U.  S.  630  (1S89); 
Thomas  v.  Chisholm,  13  Colo.  105 
(1889).  A  corporation  is  not  a  citi- 
zen within  the  meaning  of  the  four- 
teenth amendment  to  the  Constitu- 
tion of  the  United  States  prohibiting 
any  law  which  abridges  the  privi- 
leges or  immunities  of  citizens,  and 
hence  a  statute  in  regard  to  insur- 
ance corporations  is  not  affected  by 
that  amendment.  yEtna  Ins.  Co.  v. 
Brigham,  120  Ga.  925   (1904). 

5  San  Mateo  County  v.  Southern 
Pacific  R.  R.,  13  Fed.  Rep.  722  (1882). 

c  Blake  v.  McClung,  172  U.  S.  239 
(1898). 

7  National  Bank  v.  Graham,  100 
U.  S.  699,  702  (1879),  where  a  bank 
was  held  in  damages  for  the  loss,  oc- 
casioned by  the  gross  negligence  of 
its  agents,  of  a  special  deposit  which 
it  had  received  with  the  knowledge 
and  acquiescence  oi  its  officers  and  di- 
rectors; Baltimore,  etc.  R.  R.  v.  Fiftn 


Baptist  Church,  108  U.  ^  317  (1882), 
for  maintaining  a  nuisance;  Phila- 
delphia, etc.  R.  R.  v.  Quigley,  21  How. 
202,  210  (1858),  for  libel  published 
by  the  board  of  directors,  Campbell, 
J.,  saying:  "For  acts  done  by  the 
agents  of  a  corporation,  either  in 
contractu  or  in  delicto,  in  the  course 
of  its  business  and  of  their  employ- 
ment, the  corporation  is  responsible 
as  an  individual  is  responsible  under 
similar  circumstances."  This  rule 
was  directly  affirmed  and  applied  to 
a  municipal  corporation  in  Salt  Lake 
City  v.  Hollister,  118  U.  S.  256  (1886). 
See  New  York,  etc.  R.  R.  v.  Schuyler, 
34  N.  Y.  30  (1865);  State  v.  Morris, 
etc.  R.  R.  23  N.  J.  L.  360,  367  (1852), 
and  cases  cited;  Brokaw  v.  New  Jer- 
sey R.  R.  &  T.  Co.,  32  N.  J.  L.  328 
(1867),  an  action  for  assault  and  bat- 
tery (ejecting  a  passenger);  Rams- 
den  v.  Boston,  etc.  R.  R.,  104  Mass. 
117  (1870),  assault  and  battery 
(seizing  property  for  fare) ;  Peebles 
v.  Patapsco  Guano  Co.,  77  N.  C.  233 
(1877);  a  case  of  deceit  and  fraudu- 
lent representations  made  by  agents; 
Chicago,  etc.  R.  R.  v.  Davis,  86  111.  20 
(1877),  trespass,  see  infra;  Vinas  v. 
Merchants'  Mut.  Ins.  Co.,  27  La.  Ann. 
367    (1S75),    slander   and   libel   sanc- 


92 


CH.    I.]  DEFINITIONS   AND   NATURE   OF   CORPORATIONS.  [§    156. 

by  its  servants  or  agents  precisely  as  a  natural  person  would  be,1  ex- 
cepting in  some  instances  a  charitable  corporation.2     Thus  where 

tioned   by  a  corporation;    Goodspeed  if  such,  statements  were  false.    Hind- 
is East  Haddam  Bank,  22  Conn.  530  man  v.  First  Nat.  Bank,  etc.,  98  Fed. 
(1853),  vexatious  suit;   South,  etc.  R.  Rep.   562    (1899).     Where  a  national 
R.   v.    Chappell,   Gl   Ala.    527    (1S78),  bank   and   two   of  the  directors  of  a 
injury   to   person;    Hays  v.   Houston,  corporation  are  secretly  interested  in 
etc.     R.     R.,     46     Tex.     272     (1S7C),  the   profit  made  by  selling  property 
expulsion    from   train;    Fishkill    Sav.  to   a   corporation   for  stock,  the  cor- 
Inst.  r.  Fishkill  Nat.  Bank,  SO  N.  Y.  poration   may    hold   them   liable    for 
162    (18S0),   conversion    of  bonds   by  such    profit.      The    defense    of    ultra 
cashier;  Ranger  v.  Great  Western  Ry.  vires  on  the  part  of  the  bank  is  not 
Co.,  5  H.  L.  Cas.  72,  86  (1854) ;  Lewis  good.      Zinc,    etc.    Co.    v.    First,    etc. 
v.   Meier,    14    Fed.    Rep.    311    (1882);  Bank,    103   Wis.   125    (1899).     A  cor- 
Philadelphia,  etc.  R.  R.  v.  Derby,   14  poration  may  be  held  liable  for  false 
How.    !               _),  injury  to  person  in  representations  in  a  prospectus  issued 
a  collision  caused   by  the  negligence  by  it  to  sell  stock  of  another  corpora- 
of  employees;   Hussey  v.  Norfolk,  etc.  tion.     Such  a  cause  of  action  is  as- 
R.  R.,  98  N.  C.  34    (1887),  malicious  signable.      Benedict    v.    Guardian    T. 
prosecution   and    false   imprisonment,  Co.,  58  N.  Y.  App.  Div.  302    (1901). 
the   court   saying:      '-These   artificial  A   bank   is   not   chargeable   with   the 
persons  have  become  so  numerous  and  acts  of  its  cashier  who  is  the  agent 
entered  so  largely  into  the  every -day  of  another  party  and  as  such  agent 
trans."  tions   of   life,   that  it   has  be-  transfers  the  funds  of  that  party  into 
come  the  policy  of  the  law  to  subject  his  own  name.     School  District,  etc. 
them,    as   far   as    practicable,   to  the  v.  De  Weese,  100  Fed.  Rep.  705  (1900). 
same  civil  liability  for  wrongful  acts  An  incorporated  society   which  gives 
attach   to   natural   persons;"   Den-  a  ball  is  not  liable  for  the  act  of  its 
,     Ry,   ,.   Harris,   L22  U.  S.  597  floor    manager   in   ejecting   a   person 
(18S7),    assault    and     battery;     New  from  the  room.     Maisenbacker  v.  So- 
Jersey  Steamboat  C«              ockett,  121  ciety,  etc.,  71  Conn.  3G9   (1899). 
U.  S.   637   (1887),  undue  violence  by  i  Southern,   etc.   Co.  v.   Platten,   93 
employee;  New  Orleans,  etc.  R.  R.  v.  Fed.  Rep.  936   (1899).    A  street  rail- 
Bailey,  40  Miss.  395   (1866).     A  rail-  way  may  be  liable  for  the  death  of 
road*  which  has  engaged  in  transport-  a  person  who  was  killed  by  a  shot 
ing  passengers   by   a  steamboat   can-  fired  by  one  of   its  conductors,  even 
not   defeat   an   action   for   negligence  though   he   was  shooting  at  another 
by  asserting  that  the  use  of  the  steam-  person.     Savannah,  etc.  Co.  v.  Wheel- 
boat  by   it  was   ultra  vires.     Gruber  er,  58  S.  E.  Rep.  38   (Ga.  1907). 
v   Washington,  etc.  R.  R.,  92  N.  C.  1  -  A    charitable    corporation    is    not 
(1885) ;  South  Wales  Ry.  v.  Redmond,  liable  for  the  negligence  of  its  serv- 
10  C   B    (N    S.)  675  (1SG1).     Contra,  ants  unless  it  was  negligent  in  select- 
Gunn    r.    Central    R.   R.,    74    Ga.    509  ing  them.     Gittzhoffen  v.  Sisters,  etc. 
(1885)     where   a    railroad    was   held  Assoc,  88  Pac.  Rep.  691  (Utah  1907). 
not  responsible  for  a  tort  (an  injury  Even  though  a  corporation  created  by 
to  the  person)  committed  by  a  firm  in  Congress  for  a  home  for  disabled  sol- 
which   it   had   become,   although   ille-  diers  may  be  sued  on  a  contract,  yet 
gallv    a  J)                 A  bank  which   as  this  does  not  authorize  a  suit  against 
pledgee    causes    by    its    statements    a  it  for  a  tort.     Overholser  v   National 
party  to  purchase  the  stock  held  in  Home,   etc.,  68   Ohio   St.   236    (1903>. 
pledge  may  be  held  liable  in  damages  A  hospital  run  by  a  stock  corporation 

93 


156] 


DEFINITIONS   AND   NATURE    OF   CORPORATIONS. 


[CH.    I. 


the  president  of  a  bank  is  acting  as  the  agent  of  a  person  and  sells 
to  the  latter  securities  of  the  bank  by  means  of  false  representations, 
the  bank  is  liable,  even  though  the  purchaser  did  not  know  that  the 
sale  was  in  behalf  of  the  bank.1 

Even  where  it  is  necessary  to  prove  a  fraudulent  or  malicious 
intent,  it  is  held,  by  the  great  weight  of  modern  authority,  that  the 
fraud  or  malice  of  the  authorized  agents  of  a  corporation  may  be 
imputed  to  the  corporation  itself.2 

Although  a  corporation  may  not  strictly  be  guilty  of  deceit,  yet 
it  is  held  liable  for  damages  resulting  from  the  false  and  fraudu- 
lent representations  of  its  agents.3 


is  liable  for  negligence  in  the  treat- 
ment of  its  patients.  Hogan  v.  Clarks- 
burg, etc.,  59  S.  E.  Rep.  943  (W.  Va. 
1907). 

i  Carr  v.  National  Bank  &  L.  Co., 
167  N.  Y.  375   (1901). 

2  National  Exch.  Co.  v.  Drew,  2 
Macq.  H.  L.  Cas.  103  (1855);  New 
Brunswick,  etc.  Ry.  v.  Conybeare,  9 
H.  L.  Cas.  711,  740  (1862);  Barwick 
v.  English  Joint  Stock  Bank,  L.  R.  2 
Exch.  259  (1S67);  Philadelphia,  etc. 
R.  R.  v.  Quigley,  21  How.  202  (1S58) ; 
Whitfield  v.  Southeastern  Ry.  El.  B. 
&  E.  115  (1858);  Vance  v.  Erie  Ry., 
32  N.  J.  L.  334  (1867);  Copley  v. 
Grover,  etc.  Co.,  2  Woods,  494  (1875); 
s.  c,  6  Fed.  Cas.  517;  Goodspeed  v. 
East  Haddam  Bank,  22  Conn.  530 
(1853);  Carter  v.  Howe  Machine  Co., 
51  Md.  290  (1878);  Wheless  v.  Sec- 
ond Nat.  Bank,  1  Baxt.  (Tenn.)  469 
(1872);  Williams  v.  Planters'  Ins. 
Co.,  57  Miss.  759  (1880);  Iron  Moun- 
tain Bank  v.  Mercantile  Bank,  4  Mo. 
App.  505  (1877);  Edwards  v.  Mid- 
land Ry.,  L.  R.  6  Q.  B.  D.  287  (1880) ; 
Jeffersonville  R.  R.  v.  Rogers,  28  Ind. 
1,  7  (1807);  s.  c,  38  Ind.  116.  Cf. 
Walker  v.  Southeastern  Ry.,  L.  R.  5 
C.  P.  640  (1870);  Smith  v.  South- 
eastern Ry.,  L.  R.  5  C.  P.  640   (1870). 

3  Mackay  v.  Commercial  Bank,  L. 
R.  5  P.  C.  394  (1874),  in  which  a 
bank  was  held  liable  in  damages  for 
the  act  of  its  cashier  in  sending  a 
telegram  purporting  to  be  from  an  ' 
individual  by  means  of  which  other 


parties  were  induced  to  accept  bills 
of  exchange  in  which  the  bank  was 
interested;  Ranger  v.  Great  Western 
Ry.,  5  H.  L.  Cas.  72,  86  (1854),  Lord 
Chancellor  Cranworth  saying:  "If 
the  agents  employed  conduct  them- 
selves fraudulently,  so  that  if  they 
had  been  acting  for  private  employers 
the  persons  for  whom  they  were  act- 
ing would  have  been  affected  by  their 
fraud,  the  same  principles  must  pre- 
vail where  the  principal  under  whom 
the  agent  acts  is  a  corporation;"  Bar- 
wick v.  English  Joint  Stock  Bank, 
L.  R.  2  Exch.  259  (1867),  where  a 
bank  was  held  liable  for  false  'rep- 
resentations of  its  manager  as  to  the 
credit  of  an  individual;  Erie  City 
Iron  Works  v.  Barber,  106  Pa.  St. 
125  (1884),  where  a  manufacturing 
company  was  held  in  damages  for  the 
deceit  of  its  agent  in  knowingly  sell- 
ing a  defective  boiler  and  represent- 
ing it  as  sound  and  safe;  Peebles  v. 
Patapsco  Guano  Co.,  77  N.  C.  233 
(1S77),  involving  representations  of 
an  agent  that  a  spurious  article  was 
genuine;  Cragie  v.  Hadley,  99  N.  Y. 
131  (1885),  where,  an  officer  of  a 
bank  receiving  a  deposit  after  he 
knew  the  bank  was  insolvent  and  its 
paper  protested,  it  was  held  to  be  a 
deceit  which  justified  a  rescission  of 
the  contract  and  a  recovery  of  the 
deposit;  New.  York,  etc.  R.  R.  v. 
Schuyler,  34  N.  Y.  30  (1865),  involv- 
ing an  issue  of  false  certificates  of 
stock;    Butler   v.   Watkins,   13   Wall. 


94 


CH.    I.]                 DEFINITIONS   AND   NATURE    OF   CORPORATIONS.  [§    156, 

A  corporation  may  be  held   liable  in  damages  for  a  libel;1   or 

456  (1S71),  where  an  agent  of  a  cor-  R.,  13  Lea  (Tenn.),  507  (1884);  Even- 
poration,  by  pretending  to  negotiate  ing  Journal  Assoc,  v.  McDermott,  44 
for  the  purchase  of  a  patent,  sue-  N.  J.  L.  430  (1882);  Detroit  Daily 
ceeded  in  keeping  the  patented  arti-  Post  Co.  v.  McArthur,  16  Mich.  447 
cle  out  of  the  market.  The  corpora-  (1S68);  Aldrich  v.  Press  Printing 
tion  was  held  liable  in  damages;  Co.,  9  Minn.  133  (1864);  Hewett  v. 
Candy  v.  Globe  Rubber  Co.,  37  N.  J.  Pioneer-Press  Co.,  23  Minn.  178 
Eq.  175  (18S3),  where  a  sale  to  a  (1S76);  Vinas  v.  Merchants'  Mut.  Ins. 
corporation  made  upon  false  repre-  Co.,  27  La.  Ann.  367  (1875);  Whit- 
sentations  of  its  officers  as  to  its  sol-  field  v.  Southeastern  Ry.,  EL,  B.  & 
vency  and  prosperity  was  rescinded;  E.  115  (1858);  Tench  v.  Great 
Fogg  v.  Griffin,  84  Mass.  1  (1861),  Western  Ry.,  32  U.  C.  Q.  B.  452 
where,  in  an  action  upon  premium  (1S72).  A  corporation  may  be  held 
notes,  a  defense  that  they  had  been  liable  in  a  suit  for  libel.  Sun, 
procured  through  false  and  fraudu-  etc.  Co.  v.  Bailey,  101  Va.  443 
lent  representations  by  an  agent  of  (1903).  An  insurance  company 
the  company  as  to  the  amount  of  may  be  liable  for  a  libel  pub- 
capital  stock  paid  in  was  held  good,  lished  by  one  of  its  officers,  acting 
See  also  Ettiug  v.  Bank  of  U.  S.,  11  within  the  scope  and  in  the  course 
Wheat.  59  {1S2K);  Lamm  v.  Port  De-  of  his  employment.  Citizens',  etc.  Co. 
posit  Homestead  Assoc,  49  Md.  233  Ltd.  v.  Brown,  [1904]  A.  C.  423.  The 
(1878);  Carter  v.  Howe  Machine  Co.,  president  of  a  newspaper  corporation 
51  Md.  290  (187S);  Western  Bank  v.  is  not  personally  liable  in  damages 
Addie,  L.  R.  1  Sc.  (H.  L.)  145  (1S67),  for  a  libel  published  in  the  newspa- 
and  §§  139,  140,  157,  infra.  per,  even  though  he  was  editor  in 
i  Philadelphia,  etc.  R.  It.  v.  Quig-  chief  and  the  principal  stockholder, 
ley,  21  How.  202  (185S),  where  the  it  appearing  that  he  had  no  personal 
court  In  Id  that  the  publication  of  a  knowledge  of  the  publication  before 
libelous  letter  received  in  evidence  by  it  was  made.  Folwell  v.  Miller,  145 
a  committee  of  investigation  in  a  Fed.  Rep.  495  (1906).  A  corporation 
bound  volume  of  its  transactions,  by  is  not  liable  for  the  malice  of  its 
authority  of  the  board  of  directors  agent  for  publishing  a  libel  unless 
of  a  railroad  company,  constituted  a  the  corporation  authorized  the  libel 
sufficient  ground  for  an  action  for  or  ratified  it  or  did  something  from 
libel  against  the  corporation;  Van  which  such  authority  or  ratification 
Aernam  v.  Bleistein,  1C2  X.  Y.  335  may  be  implied.  Warner  v.  Missouri, 
(1SS6);  Howe  Machine  Co.  v.  Souder,  etc.  Ry.,  112  Fed.  Rep.  114  (1901). 
58  Ga.  64  (1S77),  where  the  publica-  An  allegel  libel  is  not  proved  by 
tion  of  libelous  matter  was  caused  showing  that  the  manager  of  a  cor- 
by  an  agent  within  the  scope  of  his  poration  dictated  to  a  stenographer 
authority;  Maynard  v.  Fireman's,  etc.  the  alleged  libelous  matter,  even 
Co.,  34  Cal.  49  (1867) ;  s.  c,  47  Cal.  though  the  stenographer  wrote  it  out 
207  (1873);  Johnson  v.  St.  Louis  Dis-  and  mailed  it.  This  is  not  sufficient 
patch  Co.,  2  Mo.  App.  565  (1S76);  to  prove  publication.  Owen  v.  Ogil- 
Fogg  v.  Boston,  etc.  R.  R.,  148  Mass.  vie,  etc.  Co.,  32  N.  Y.  App.  Div.  465 
513  (18S9) ;  Van  Aernam  v.  Bleistein,  (1898).  A  newspaper  corporation  may 
102  N.  Y.  355  (1SSG),  holding  that  a  be  liable  for  exemplary  damages  in 
joint-stock  association  under  the  New  an  action  of  libel  by  its  agents  act- 
York  statute  is  liable  to  an  action  ing  within  the  scope  of  their  duty 
for  libel;    Payne  v.  Western,  etc.  R.  and    authority.      Times,    etc.    Co.   v. 

95 


§  156.] 


DEFINITIONS   AND    NATURE   OP    CORPORATIONS. 


[CH.    I. 


for  slander1  (and  may  maintain  a  suit  fur  damages  for  libel  or 
slander)  ;2  for  assault  and  battery  committed  by  its  officers,  agentb 
or  servants  in  executing  the  rules  and  regulations  or  orders  of 
the    corporation  j3    for    damag  -     for    arrest    and    false    imprison- 


Carlisle,  94  Fed.  Rep.  762  (1899).  A 
railroad  may  be  held  liable  for  a  libel 
by  its  division  agent  in  reporting 
causes  of  discharge  of  employees  to 
other  agents.  Bacon  v.  Michigan 
Cent.  R.  R.,  66  Mich.  ICG  (1887).  A 
corporation  was  held  liable  for  a  libel 
in  Missouri  Pac.  Ry.  v.  Richmond,  73 
Tex.  5G8   (1889). 

i  Sawyer  v.  Norfolk,  etc.  R.  R., 
142  N.  C.  1  (1906).  A  corporation 
may  be  sued  for  slander.  Empire, 
etc.  Co.  v.  De  Laval,  etc.  Co.,  67  Atl. 
Rep.  711  (N.  J.  1907).  A  railroad 
company  is  liable  for  a  slander  by 
one  of  its  employees  in  regard  to 
another  employee  made  in  the  per- 
formance of  duties,  even  though  the 
corporation  knew  nothing  about  it. 
Rivers  v.  Yazoo,  etc.  R.  R.,  43  S.  Rep. 
471  (Miss.  1907).  A  corporation  is 
not  liable  for  slander  on  the  part  of 
its  agent  in  settling  with  a  sub-agent. 
Redditt  v.  Singer,  etc.  Co.,  124  N.  C. 
100  (1899).  A  corporation  formed  to 
furnish  private  watchmen  cannot 
maintain  an  action  for  slander 
against  a  person  who  states  that  one 
of  its  employees  has  been  guilty  of 
a  crime,  inasmuch  as  this  is  not  in 
direct  relation  to  the  business  of  the 
corporation.  Brayton  v.  Cleveland, 
etc.  Co.,  63  Ohio  St.  83  (1900).  A 
corporation  is  not  liable  for  a  slan- 
der by  its  president  as  to  the  right 
of  a  person  to  sell  goods.  Perkins  r. 
Maysville,  etc.  Assoc,  10  S.  W.  Rep. 
659    (Ky.  1889). 

2  A  corporation  may  sue  for  libel. 
Pennsylvania,  etc.  Co.  v.  Voght,  etc. 
Co.,  96  S.  W.  Rep.  551  (Ky.  1906). 
A  corporation  may  sue  for  libel  in- 
juring its  business  or  property.  Re- 
porters' Assoc,  v.  Sun,  etc.  Assoc,  186 
N.  Y.  437  (1906).  A  corporation  may 
maintain  a  suit  for  slander  or  libel. 
Gross  Coal  Co.  v.  Rose,  126  Wis.  24 


(1905).  A  corporation  cannot  main- 
tain a  libel  suit  based  on  charges  that 
its  promotors  had  issued  watered 
stock  and  intended  to  unload  on  to 
the  public,  there  being  no  allegation 
of  special  damages  and  the  language 
referred  only  to  the  promotors.  Mem- 
phis, etc.  Co.  v.  Cumberland,  etc.  Co., 
145  Fed.  Rep.  904  (1906).  A  corpo- 
ration may  bring  suit  for  libel.  South 
Hetton  Coal  Co.  v.  Northeastern  News 
Assoc,   [1894]   1  Q.  B.  133. 

3  Brokaw  v.  New  Jersey  R.  R.  & 
T.  Co.,  32  N.  J.  L.  328  (1867),  for 
ejecting  a  passenger  from  a  train, 
and  in  such  action  an  individual  may 
be  joined  as  a  defendant  with  the 
corporation;  Hewett  v.  Swift,  85 
Mass.  420  (18G2),  for  using  undue 
force  in  removing  a  minor  from  a 
freight  depot  under  an  order  of  the 
president  directing  employees  to  keep 
boys  out  of  the  depot;  Denver,  etc. 
Ry.  v.  Harris,  122  U.  S.  597  (1887), 
where  forcible  possession  was  taken 
of  a  railroad;  Ramsden  v.  Boston, 
etc.  R.  R.,  104  Mass.  117  (1870),  in- 
volving an  assault  by  a  conductor  in 
seizing  property  to  secure  payment  of 
fare.  And  see  Frost  v.  Domestic  S. 
M.  Co.,  133  Mass.  563  (1882);  Jack- 
son v.  Second  Ave.  R.  R.,  47  N.  Y.  274 
(1872),  holding  that  if  an  illegal  fare 
be  demanded  by  a  conductor  any 
force  used  in  ejecting  a  passenger  ren- 
ders the  railway  company  liable  for 
an  assault  and  battery;  Pennsylvania 
R.  R.  v.  Vandiver,  42  Pa.  St.  365 
(1862),  for  ejecting  a  passenger  and 
thereby  causing  his  death;  Moore  v. 
Fitchburg  R.  R.,  70  Mass.  465  (1855), 
where,  in  an  action  for  assault  in 
ejecting  from  a  train,  there  being  a 
verdict  against  the  corporation  but 
in  favor  of  the  conductor,  the  joinder 
of  the  defendants  was  held  not  to  be 
a   ground    of   exception   by  the   cor- 


96 


CI  J.    I.] 


DEFINITIONS    AND    NATURE    OF    CORPORATIONS.  [§    156. 


incut;1   knowingly  keeping  a  dangerous  animal;2  a  vexatious  civil 
suit;3  fur  trespass  quarc  clausula  fregit;4  for  malicious  prosecution;5 


poration;  Chicago,  etc.  R.  R.  v.  Wil- 
liams, 55  111.  185  (1S70),  for  prevent- 
ing a  colored  woman  from  entering  a 
car  set  apart  for  ladies;  Jeffersonville 
R.  R.  r.  Rogers,  28  Ind.  1  (1867); 
s.  (.,  38  End.  116;  St.  Louis,  etc.  R. 
R.  V.  Dalby,  19  111.  353  (1857),  hold- 
ing thai  in  Illinois  the  proper  rem- 
edy is  -s. 

i  Owsley    v.    .Montgomery,    etc.    R. 
R.,  37  Ala.  560   (1861);    Wheeler,  etc. 
Co.    r.    Boyce,    36    Kan.    350    I 
American   Exp.  Co.    v.   Patterson,   73 
Ind.  430  (1881);   Lynch  v.  on- 

tan  El.  10  X.  Y.  77   (1882);   I 

ter  v.  Hour  Machine  Co  Id.  290 

(1878).     Where  a  si  on- 

ductor  assaults  and  arrests  a   \ 

.  the  company  may  be  liable  for 
false  Imprisonment  Conklin  v.  Con- 
solidat<  d  Ry.,  82  N.  E  (Mass. 

1907).     A   corpor:  »  on  a 

department  More  may  be  liable  for 
punitive  damages  for  the  acts  of  its 
chii  utive  officers  in  illegally  ar- 

resting  an  employee.  Bingham  v. 
Lipman,  etc.  Co.,  40  Oreg.  3G3  (1901). 
Where  the  president  and  manager 
and  attorney  of  the  company  illegally 
cause  the  arrest  of  an  employee  for 
embezzling  corporate  funds,  the  cor- 
poration may  be  held  liable  for  ma- 
licious 'prosecution.  Schwarting  v. 
Van  Wie,  etc.  Co.,  G9  X.  Y.  App.  Div. 
282  (1902).  See  also  Hussey  v.  Xor- 
folk  Southern  R.  R.,  9S  X.  C.  34 
(1887),  in  which  the  question  of 
agency  was  left  to  the  jury.  A  cor- 
poration is  not  liable  for  an  arrest 
by  a  special  policeman  appointed  by 
the  governor  at  its  request  and  for 
its  protection,  even  though  the  ar- 
rest was  made  at  the  request  of  an 
officer  of  the  company,  the  policeman 
acting  merely  in  the  exercise  of  his 
common-law  powers  as  an  officer,  and 
not  as  a  duly  authorized  agent  of  the 
company.  Tolchester,  etc.  Co.  v. 
Steinmeier,    72    Md.    313    (1890).     A 


corporation  is  not  necessarily  liable 
for   a   false   imprisonment   instigated 
by  its  state  agent,  where  the  plaintiff 
fails    to    show   the    agency,    and    the 
agent  testifies  that  he  acted  individ- 
ually.    Travis  v.   Standard,   etc.   Ins. 
Co.,   86  Mich.  2S8    (1891).     See  also 
Gillett   v.    Missouri   Valley   R.   R.,    55 
Mo.  315  (1874),  overruled  in  Boogher 
v.    Life    Assoc,    75    Mo.    319    (1882). 
Although  the  gate-keeper  of  a  turn- 
pike company  causes  a  person  to  be 
arrested  for  defrauding  the  company 
of  tolls,  yet  the  company  cannot  be 
Id    liable    for    false    imprisonment, 
lumore,  etc.  T.  Road  v.  Green,  86 
Md.    161     (1897).      A    bank    may    be 
1  liable  in  damages  for  malicious 
intent  in  arresting  an  alderman  who 
had    introduced    a   privileged    resolu- 
tion   which    the    bank    claimed    was 
libelous.      Wachsmuth    v.    Merchants' 
Xat.  Bank,  90  Mich.  426   (1893). 

2  Stilis  r.  Cardiff  Steam  Xav.  Co., 
33  L.  J.  Q.  B.  310  (1864) ;  but  in  this 
case  the  action  failed  for  want  of 
proof  that  the  dangerous  character  of 
the  animal  was  known  to  any  one 
whose  knowledge  could,  in  point  of 
law,  be  that  of  the  corporation. 

3  Goodspeed  v.  East  Haddam  Bank, 
22  Conn.  530  (1853);  Wheless  v.  Sec- 
ond Xat.  Bank,  1  Baxt.  (Tenn.)  469 
(1872).  See  8  Ry.  &  Corp.  L.  J.  478. 
■i  Maund  v.  Monmouthshire  Canal 
Co.,  4  Man.  &  G.  452  (1842),  where 
the  trespass  consisted  in  breaking 
and  entering  canal  locks  and  carry- 
ing away  barges  by  an  agent  acting 
within  the  scope  of  his  authority. 
Chicago,  etc.  R.  R.  v.  Davis,  86  111. 
20  (1870);  Dater  v.  Troy,  etc.  R.  R., 
2  Hill,   629    (1842). 

5  Willard  v.  Holmes,  etc.,  142  N. 
Y.  492  (1894);  Vance  v.  Erie  Ry.,  32 
N.  J.  L.  334  (1867);  Reed  v.  Home 
Sav.  Bank,  130  Mass.  443  (1881); 
Ricord  v.  Central  Pacific  R.  R.,  15 
Nev.  167   (1880),  holding  that  prose- 


(7) 


97 


§  156.] 


DEFINITIONS    AND    NATURE    OF    CORPORATIONS. 


[cn.  I. 


for  a  nuisance;1  for  conversion;2  and  for  a  conspiracy.3    A  corpora- 


cution   of    criminal    offenders    is   one 
of  the  privileges  of  railroad  corpora- 
tions,   and   therefore   they   are  liable 
for    malicious    prosecutions;    Morton 
v.  Metropolitan  L.   Ins.  Co.,   34   Hun, 
366    (1884);    Jordan  v.  Alabama,  etc. 
R.  R.,  74  Ala.   85    (1883),  overruling 
Owsley  v.  Montgomery,  etc.  R.  R.,  37 
Ala.    5G0     (1861);     Boogher    v.    Life 
Assoc,  of  America,  75  Mo.  319  (1882), 
overruling   Gillett  v.   Missouri   V.   R. 
R.,    55    Mo.    315     (1S71) ;     Copley    v. 
Grover,  etc.  Co.,  2  Woods,  494  (1875) ; 
s.  c,  6  Fed.  Cas.  517;  Carter  v.  Howe 
Machine    Co.,    51    Md.    290     (1S78); 
Williams    v.    Planters'    Ins.    Co.,    57 
Miss.     759      (1880);     Iron     Mountain 
Bank  v.  Mercantile  Bank,  4  Mo.  App. 
505     (1S77).      See    also    Brennan    v. 
Tracy,  2  Mo.  App.  540    (1S7G);   Whe- 
less    v.    Second    Nat.    Bank,    1    Baxt. 
(Tenn.)     469     (1872);     Philadelphia, 
etc.   R.    R.    v.   Quigley,   21   How.    202 
(1858).     A  corporation  may  be  sued 
for   malicious   prosecution   in   that  it 
caused  a  person  to  be  indicted.  Feigh- 
ner    v.    Delaney,     21     Ind.    App.     36 
(1898).     A  foreign   corporation   may 
be  held  liable  for  malicious  prosecu- 
tion   for   larceny.     Cascarella  v.   Na- 
tional   Grocer    Co.,    114    N.    W.    Rep. 
857  (Mich.  190S).    A  corporation  may 
be  liable  for  a  malicious  prosecution 
instituted  by  its  superintendent,  and 
the    fact   that   the    attorney    for    the 
corporation    conducted    the    proceed- 
ings, and  that  the  superintendent  had 
no  personal  interest  therein,  and  that 
the  costs   were   not  paid   by  him,   is 
evidence   that   the    corporation    insti- 
tuted the  proceedings.    Reed  v.  Loose- 
more,    197    Pa.    St.    261    (1900).     An 
action  lies  against  a  corporation  for 
malicious    prosecution.      Cornford    v. 
Carlton    Bank,     [1900]     1    Q.    B.    22, 
aff'g  [1899]  1  Q.  B.  392.     In  the  Eng- 
lish case  of  Stevens  v.  Midland  Coun- 
ties Ry.,  10  Exch.  352   (1854),  where 
the   power  to   sue   a  corporation   for 
malicious  prosecution  was  questioned, 
Lord   Alderson   was   of    opinion   that 


there  was  no  such  power.  See  Walker 
v.  Southeastern  Ry.,  L.  R.  5  C.  P.  640 
(1870),  where  it  was  held  that  the 
action  would  not  lie  because  the  act 
out  of  which  the  case  originated  was 
not  within  the  scope  of  the  authority 
of  the  servant  who  committed  it. 
And  in  Henderson  v.  Midland  Ry.,  20 
\Y.  R.  23  (1871),  and  Abrath  v.  North- 
eastern Ry.,  L.  R.  11  App.  Cas.  247 
(1886),  Lord  Bramwell,  in  dissenting 
opinions,  insisted  that  corporations 
aggregate  cannot  be  liable  for  ma- 
licious prosecution,  because  they  are 
incapable  of  malice  or  motive.  In 
Hussey  v.  Norfolk,  etc.  R.  R.,  98  N. 
C.  34  (1S87),  it  was  held  that  a  cor- 
poration is  liable  for  a  malicious 
prosecution  jointly  with  the  officer 
who  instituted  the  prosecution.  No 
allegation  of  his  authority  to  act  is 
necessary.  A  corporation  is  not  lia- 
ble for  malicious  prosecution  in  in- 
stituting criminal  proceedings  where 
it  acted  on  the  advice  of  counsel. 
Atchison,  etc.  R.  R.  v.  Brown,  57  Kan. 
785   (1897). 

l  Baltimore,  etc.  R.  R.  v.  Fifth 
Baptist  Ch.,  108  U.  S.  317  (1883); 
Pennsylvania  R.  R.  v.  Angel,  41  N. 
J.  Eq.  316  (1886).  "The  directors  and 
officers  are  the  persons  primarily  re- 
sponsible, and  therefore  the  proper 
ones  to  be  prosecuted"  for  a  nuisance 
carried  on  by  the  corporation.  The 
corporation  itself  can  also  be  prose- 
cuted and  fined.  People  v.  Detroit, 
etc.  Works,  82  Mich.  471    (1890). 

2  Beach  v.  Fulton  Bank,  7  Cow. 
485  (1827);  Mayor,  etc.  v.  Bailey,  2 
Denio,  433  (1845),  holding  that  an 
action  of  trespass  or  trover  or  an 
action  on  the  case  for  malfeasance 
lies  against  a  corporation;  Chestnut 
Hill,  etc.  Co.  v.  Rutter,  4  Serg.  &  R. 
(Pa.)  6  (1818),  holding  that  trespass 
on  the  case  lies  against  a  corporation 
for  stopping  a  water-course.  See  also 
ch.  XXXV. 

3  Buffalo    Lubricating    Oil     Co.    v. 
Standard    Oil    Co.,    106    N.    Y.    669 

98 


en.  i.] 


DEFINITIONS   AND   NATURE    OF   CORPORATIONS. 


[§  156. 


tion  may  be  guilty  of  a  criminal  libel  and  may  be  punished  therefor 
by  a  fine.1  A  corporation  may  be  guilty  of  the  crime  of  violating 
the  eight-hour  law,  and  may  be  fined  therefor.2  Since  corporations 
are  not  in  themselves  capable  of  an  evil  intent,  they  can  be  indicted 
only  for  such  offenses  as  arise  from  misfeasance — such  as  a  nui- 
sance;3 or  obstructing  a  road.4  Or  for  non-feasance— such  as  an 
omission  to  perform  a  legal  duty  or  obligation.5    A  statute  may  ren- 


(1887),  aff'g  42  Hun,  153.  If  a  cor- 
poration takes  part  in  a  conspiracy 
to  compel  a  builder  to  hire  only  union 
workmen,  it  may  be  enjoined  and  held 
liable  in  damages  the  same  as  an 
individual.  Aberthaw,  etc.  Co.  v. 
Cameron,  80  N.  E.  Rep.  478  (Mass. 
1907).  A  corporation  may  be  guilty 
of  a  conspiracy.  United  States  v. 
MacAndrews,  etc.  Co.,  149  Fed.  Rep. 
823  (1906).  For  a  common  law  in- 
dictment against  coal  corporations  for 
a  conspiracy  to  fix  the  price  of  coal, 
see  Chicago,  etc.  Co.  r.  People,  214 
111.  421  (1905).  Where  a  bank  agrees 
with  a  partnership  that  the  partner- 
ship shall  buy  goods  and  give  a  chat- 
tel in. tit-age  to  the  bank,  and  then 
that  the  bank  foreclose  and  resell  the 
goods  and  give  two-thirds  of  the  prof- 
its to  the  copartnership,  a  creditor 
of  the  partnership  who  is  thus  de- 
frauded may  hold  the  bank  liable. 
Johnston,  etc.  Co.  v.  National  Bank,  4 
Okl.  17  (1S9G).  A  corporation  may 
be  held  liable  for  conspiracy.  West 
Virginia,  etc.  Co.  v.  Standard  Oil  Co., 
50  W.  Va.   611    (1902). 

i  Telegram,  etc.  Co.  v.  Common- 
wealth, 172  Mass.  294  (1S99),  a  case 
where  a  newspaper  corporation  was 
fined  for  publishing  such  a  report 
of  a  case  as  to  prevent  a  fair  trial. 
In  Brennan  v.  Tracy,  2  Mo.  App.  540 
(1876),  it  was  said  that  a  corpora- 
tion may  be  guilty  of  a  criminal  libel. 

2  United  States  r.  J.  Kelso  Co.,  86 
Fed.  Rep.  304  (1S98). 

3  Commonwealth  v.  New  Bedford 
Bridge,  6S  Mass.  339  (1S54),  erecting 
a  bridge  over  a  navigable  stream: 
Commonwealth  v.  Vermont,  etc.  R.  R., 
70    Mass.    22     (1855),    obstructing    a 


highway  by  embankment;  State  v. 
Morris,  etc.  R.  R.,  23  N.  J.  L.  360 
(1S52),  obstructing  a  highway  by  a 
building  and  trains;  Louisville,  etc. 
R.  R.  v.  State,  3  Head  (Tenn.),  523 
(1S59),  obstruction  by  a  cut  across  a 
street;  Susquehanna,  etc.  Co.  v.  Peo- 
ple, 15  Wend.  267  (1836),  suffering  a 
turnpike  to  be  and  remain  out  of  re- 
pair; People  v.  Albany,  11  Wend.  539 
(1834),  neglecting  to  excavate  and 
cleanse  a  basin,  whereby  the  water 
became  corrupted  and  a  nuisance; 
Regina  v.  Great  North,  etc.  Ry.,  9  Q. 
B.  315  (1S46),  obstruction  by  a  cut 
across  a  highway;  Queen  v.  Bradford 
Nav.  Co.,  6  Best  &  S.  631  (1865),  per- 
mitting water  in  the  canal  to  be- 
come foul.  Contra,  State  v.  Great 
Works  Milling  Co.,  20  Me.  41  (1841). 
A  corporation  may  be  indicted  for 
keeping  a  disorderly  house.  State  v. 
Passaic,  etc.  Soc,  54  N.  J.  L.  260 
(1S92).  A  corporation  may  be  in- 
dicted for  an  offense  which  is  punish- 
able by  fine.  Commonwealth  v.  Pu- 
laski County,  etc.  Assoc,  92  Ky.  197 
(1891).  A  corporation  may  be  in- 
dicted. State  v.  Security  Bank,  2  S. 
D.  538  (1892).  A  corporation  may  be 
indicted  for  maintaining  a  nuisance, 
and  judgment  may  be  given  on  de- 
fault. Commonwealth  v.  Lehigh  Val- 
ley R.  R.,  165  Pa.  St.  162  (1895).  As 
to  the  indictment  of  a  corporation  in 
Indiana  for  maintaining  a  nuisance, 
see  Paragon  Paper  Co.  v.  State,  19 
Ind.  App.  314   (1898). 

4  State  v.  White,  96  Mo.  App.  34 
(1902). 

5  A  national  bank  may  be  indicted 
for  violating  the  state  usury  laws. 
State  v.  First  Nat.  Bank,  2  S.  D.  568 


99 


g    j.35.]  DEFINITIONS   AND   NATURE   OF    CORPORATIONS. 


[CH.    I. 


der  a  railroad  corporation  subject  to  indictment  and  fine  fur  failing 
to  supply  pure  drinking  water  to  its  patrons.1  A  corporation  may 
be  subject  to  criminal  prosecution  for  furnishing  liquor  to  a  minor 
in  violation  of  the  statute.2  "The  corporation  as  such,  the  technical 
legal  entity,  cannot  suffer  imprisonment  for  a  crime,  but  those  who  ( 
represenl  it  and  act  for  it  as  its  officers  and  agents  can."3  The  per- 
sonal liability  of  the  officers  and  stockholders  in  such  cases  is  dis- 
cussed elsewhere.4     An  officer  in  executing  a  bail  process  against 

(1892).      An    indictment    of    the    di-     R.  v.  State,  32  N.  H.  215   (1855).     A 
rectors  of  the  New  York  &  New  Ha-     corporation  may  be  indicted  for  fail- 


ven  R.  R.  Co.  for  an  accident  due  to 
not  using  steam  heat  in  cars  as  re- 
quired by  statute  failed  in  People  v. 
Clark,  N.  Y.  L.  J.,  May  28,  1891; 
Commonwealth  v.  Central  Bridge 
Corp.,    G6   Mass.    242    (1S53),    for   not 


ing  to  use  revenue  stamps.  U.  S.  v. 
Baltimore,  etc.  R.  R.,  7  Am.  L.  Reg. 
(N.  S.)  757  (1868);  s.  c,  24  Fed. 
Cas.  972.  A  corporation  cannot  be 
indicted  for  a  crime,  but  its  particu- 
lar   members    may   be.     Anonymous, 


keeping  a  bridge  properly  lighted  at  12  Mod.   559    (1701).     A  corporation 

night,   its  charter  requiring  it  to  be  may  be  indicted.     See  4  Am.  &  Eng. 

kept  in  "good,  safe  and  passable  re-  Encyc.  of  Law,  pp.  267,  etc.     A  cor- 

pair;"   Louisville,   etc.  R.  R.  v.  Com-  poration  may  be  enjoined  from  doing 

monwealth,     13     Bush      (Ky.),     388  criminal     acts,    such     as     promoting 

(1877),    involving   a    failure   to    give  prize-fighting,  and  a  receiver  may  be 

warning    signals    at    highway    cross-  put  in.    Columbian  Ath.  Club  v.  State, 

ings;   Regina  v.  Manchester,  7  El.  &  143  Ind.  98   (1895). 

B.    453     (1857),    where   there    was    a  1  Southern  Ry.  v.  State,  125  Ga.  287 


failure  of  a  city  to  repair  streets; 
State  v.  Murfreesboro,  11  Humph. 
(Tenn.)  217  (1850),  to  same  effect; 
People  v.  New  York,  etc.  R.  R.,  74  N. 
Y.  302  (1878),  sustaining  an  indict- 
ment  for    failure    to    repair    a   high- 


(1906). 

2  Southern  Express  Co.  v.  State,  58 
S.  E.  Rep.  67   (Ga.  1907). 

3  People  v.  Sherman,  133  N.  Y.  349, 
354  (1892).  Where  the  law  permits 
punishment   or    confiscation   of   prop- 


way;  Susquehanna,  etc.  Co.  v.  People,  erty,   but  not  both,  the  conviction  of 

15   Wend.   267    (1836),  for  failure  to  a  stockholder  for  violation  of  the  in- 

repair  a  plank-road.     An   indictment  ternal  revenue  law  prevents  a  confis- 

lies  against  a  turnpike  company  for  cation  of  the  corporate  property.     U. 

failure   to   repair   its   road.     State  v.  S.    v.    Distillery,    43    Fed.    Rep.    848 

Godwinsville,    etc.    Co.,    49    N.    J.    L.  (1890).    See  158  Fed.  Rep.  456. 

266    (1887) ;    Mower   v.    Leicester,    9  4  See  §  682,  infra.    The  president  of 

Mass.  247  (1812),  holding  that  an  in-  a  newspaper  corporation   is  not  per- 

dictment  may   lie  when  there   is  no  sonally  liable  in  damages  for  a  libel 

action   at  common   law   for   damages  published     in    the    newspaper,     even 

sustained  through  defects  in  a  high-  though  he  was  editor  in  chief  and  the 

way.      In    Brennan    v.   Tracy,    2   Mo.  principal    stockholder,    it    appearing 

App.  540    (1876),  it  was  said  that  a  that   he  had   no   personal  knowledge 

corporation  may  be  the  subject  of  a  of  the  publication  before  it  was  made, 

criminal  libel.     It  has  been  held  that  Folwell  v.  Miller,  145  Fed.  Rep.   495 

a  statute  subjecting  railroads  to  in-  (1906).     In  a  suit  against  a  corpora- 


dictment  and  fine  for  loss  of  life  on 
account  of  the  negligence  or  careless- 
ness of  the  proprietors  or  their  serv- 
ants is  constitutional.    Boston,  etc.  R. 


tion  and  its  agent  for  malicious  prose- 
cution, the  agent  may  be  held  liable 
and  the  corporation  not  liable.  Farm- 
ers', etc.  Assoc,  v.  Stewart,  167  Ind. 


100 


CH.    I.] 


DEFINITIONS   AND   NATURE    OF   CORPORATIONS. 


[§  156. 


a  corporation  cannot  arrest  the  corporation  and  is  not  authorized  to 
arrest  the  officers.1 

Upon  the  question  whether  or  not  corporations  are  liable  in  ex- 
emplary or  punitive  damages  for  wrongs  maliciously  committed  by 
their  agents  when  acting  in  the  line  of  their  duty,  the  authorities 
are  far  from  uniform.  In  one  line  of  cases  the  courts  adhere  to  the 
ordinary  rule  that  a  principal  cannot  be  held  for  more  than  the 
actual  damage  resulting  from  the  acts  of  his  agent  or  for  those  im- 
mediately and  necessarily  growing  out  of  them,  and  therefore  refuse 
to  allow  exemplary  damages.2  In  other  cases  it  is  held  that  if  it 
appears  that  injury  has  r<  suited  through  the  wilful  misconduct  of 
employees,  or  through  such  a  reckless  indifference  to  the  rights  of 
others  as  amounts  to  an  intentional  violation  of  them,  punitive  or 
exemplary   dam  may   be   awarded.3     In   still   another   class  of 

544    (190G).      Where    money    Is    con-  solvent,   even   though   he   directs  the 

V<  rted   by  a  corporation,  not  only  is  corporate  business.     Glucose,  etc.  Co. 

the    corporation    liable,    but    the    offi-  v.   St.  Louis,   etc.  Co.,  135   Fed.  Rep. 

cers  and  agents   participating  in  the  540    (1905). 

act  are   personally    liable.      Sweet    p.  »  Hall,  etc.   Co.  v.  Barnes,  115  Ga. 

Montpelier,    etc.    Co.,     C9    Kan.     G41  945    (1902). 

(1904).  The  president  is  not  guilty  2  Detroit  Daily  Post  Co.  v.  Mc- 
of  larceny  merely  because  a  clerk  em-  Arthur,  16  Mich.  447  (1868);  Great 
bezzled  funds  paid  in  by  a  customer.  Western  Ry.  v.  Miller,  19  Mich.  305 
State  v.  Carmean,  12G  Iowa,  291  (1S69)  ;  Wardrobe  v.  California  Stage 
(1905).  Stockholders  and  officers  are  Co.,  7  Cal.  118  (1857);  Mendelsohn 
not  liable  for  a  libel  published  by  v.  Anaheim  Lighter  Co.,  40  Cal.  657 
the  corporation  unless  they  aided  or  (1871);  Turn,;-  v.  North  Beach,  etc. 
advised  Its  publication  or  their  du-  R.  R.,  34  Cal.  594  (1868);  Hill  v. 
ties  were  such  that  the  law  would  New  Orleans,  etc.  R.  R.,  11  La.  Ann. 
charge  them  as  agents  in  the  publi-  292  (1856);  Hays  v.  Houston,  etc.  R. 
cation  or  circulation.  Belo  v.  Fuller,  R-,  46  Tex.  272  (1876)  ;  Ackcrson  v. 
84  Tex.  450  (1892).  Persons  who  Erie  Ry.,  32  N.  J.  L.  254  (1867); 
are  large  stockholders  and  executive  Doss  v.  Missouri,  etc.  R.  R.,  59  Mo. 
officers  and  in  full  management  of  27  (1875),  holding  that  no  exemplary 
an  infringing  corporation  and  who  damages  may  be  awarded  unless  the 
have  incited  the  company  to  wilfully  act  complained  of  be  wanton  or  ma- 
infringe,  are  liable  personally  for  the  licious.  In  a  suit  against  a  corpora- 
damage.  Saxlehner  v.  Eisner,  140  tion  for  libel  its  wealth  cannot  be 
Fed  Rep.  938  (1905).  In  a  suit  for  shown,  and  the  malice  of  a  stock- 
,1  a  mages  for  infringing  a  patent  a  holder  is  not  admissible.  Randall  v. 
corporation  and  its  chief  stockholder  Evening  News  Assoc,  97  Mich.  136 
may  be  joined  as  defendants,  where  (1893).  A  newspaper  corporation 
it  is  charged  that  he  directs  its  af-  may  be  liable  for  exemplary  damages 
fairs  and  that  they  conspired  to-  in  an  action  of  libel  by  its  agents 
gether  Whiting,  etc.  Co.  r.  Western  acting  within  the  scope  of  their  duty 
etc.  Co.,  148  Fed.  Rep.  396  (1905).  and  authority.  Times,  etc.  Co.  v.  Car- 
The  president  should  not  be  joined  as  lisle,  94  Fed.  Rep.  762  (1899). 
a  party  defendant  in  a  suit  for  in-  3  Denver,  etc.  Ry.  v.  Harris,  122 
fringing  on  a  patent  where  it  is  not  U.  S.  597,  610  (1887);  Milwaukee, 
alleged    that   the    corporation    is    in-  etc.  Ry.  v.  Arms,  91  U.  S.  489,  49d 

101 


§  156.] 


DEFINITIONS    AND    NATURE    OF    CORPORATIONS. 


[CII.    I. 


cases  the  liability  for  exemplary  damages  is  made  to  depend  upon 
the  authority  of  the  servant  or  agent  who  commits  the  wrong;  the 
corporation  being  liable  if  the  agenl  acted  under  the  express  direc- 
tion of  the  corporation  or  of  tin'  officer  representing  it,  or  if  the 
wrongful  act  was  afterwards  ratified  either  expressly  <>r  impliedly.1 

(1875);    Philadelphia,    etc.    R.    R.    v.  ployee    beyond    his     stopping    place. 

Larkin,    47    Md.    155    (1877);    Balti-  Arkansas    Const.    Co.    v.    Eugene,    20 

more,    etc.    Turnp.   Rd.   v.   Boone,   45  Tex.  Civ.  App.  601   (1899). 

Md.  344   (1876);  Philadelphia,  etc.  R.  i  Hagan  v.   Providence,   etc.   R.   R., 


R.  v.  Quigley,  21  How.  202,  214 
(1858);  New  Orleans,  etc.  R.  R.  o. 
Hurst,  36  Miss.  660  (1859);  Beale  v. 
Railway,    1   Dill.    568    (1871);    s.    c, 


3  R.  I.  SS  (1854) ;  Nashville,  etc.  R.  R. 
t\  Starnes,  9  Heisk.  (Tenn.)  52  (1871), 
where  exemplary  damages  were  re- 
fused because  it  did  not  appear  that 


2  Fed.  Cas.  1110;  Samuels  v.  Evening  the  company,  after  knowing  the  reek- 
Mail  Assoc,  75  N.  Y.  604  (1878),  re-  less  character  of  its  agent,  retained 
versing  s.  c,  9  Hun,  288  (1876),  him  in  its  employment;  Bass  v.  Chi- 
where  a  libel  had  been  published;  cago,  etc.  Ry.,  42  Wis.  654  (1877); 
New  Orleans,  etc.  R.  It.  r.  Burke,  Cleghorn  v.  New  York,  etc.  R.  R.,  56 
53  Miss.  200  (1876),  where  the  con-  N.  Y.  44  (1S74);  Mendelsohn  v.  Ana- 
duct  of  the  conductor  of  a  train  in  heim  Lighter  Co.,  40  Cal.  657  (1871); 
not  properly  protecting  a  passenger  Turner  v.  North  Beach,  etc.  R.  R., 
from  the  assault  of  employees  of  the  34  Cal.  594  (186S);  Perkins  v.  Mis- 
road  and  the  failure  of  the  road  to  souri,  etc.  R.  R.,  55  Mo.  201  (1874); 
discharge  or  punish  the  assailants  Malecek  v.  Tower  Grove,  etc.  Ry.,  57 
was  held  to  justify  a  verdict  for  ex-  Mo.  17  (1874),  where  the  language 
emplary  damages;  Jeffersonville  R.  of  the  superintendent  of  a  street  rail- 
R.  v.  Rogers,  38  Ind.  116  (1871),  it  way  admitting  and  justifying  an  as- 
being  held  that  exemplary  damages  sault  by  a  driver  was  held  to  bind 
may  be  awarded  for  a  wrongful  ex-  the  company;  Travers  v.  Kansas  Pac. 
pulsion  from  a  train  without  harsh  Ry.,  63  Mo.  421  (1876),  holding  that 
or  unnecessary  force,  on  account  of  authority  of  the  agent  sufficient  to 
the  time,  place  and  circumstances  of  warrant  exemplary  damages  may  be 
the  act.  Goddard  v.  Grand  Trunk  inferred  from  the  general  scope  of 
Ry.,  57  Me.  202  (1869),  where  ex-  his  duty;  Galveston,  etc.  Ry.  v.  Dona- 
emplary  damages  were  awarded  be-  hue,  56  Tex.  162  (1882);  Western 
cause  a  railroad  company  had  re-  Cottage,  etc.  Co.  v.  Anderson,  97  Tex. 
tained  in  service  a  brakeman  after  432  (1904);  Goddard  v.  Grand  Trunk 
knowledge  of  his  gross  assault  upon  Ry.,  57  Me.  202  (1869).  See  also 
a  passenger;  Taylor  v.  Grand  Trunk  Ackerson  v.  Erie  Ry.,  32  N.  J.  L. 
Ry.,  48  N.  H.  304  (1869);  Belknap  254  (1867).  In  some  states  the  dis- 
v.  Boston,  etc.  R.  R.,  49  N.  H.  358  tinction  between  corporations  and 
(1870),  holding  that  in  estimating  ex-  natural  persons  as  to  liability  for 
emplary  damages  the  condition  and  exemplary  damages  is  entirely  ob- 
circumstances  of  the  defendant  may  literated,  and  corporations  are  held 
be  material  and  are  to  be  considered;  to  be  equally  liable  with  individuals 
Caldwell  v.  New  Jersey  Steamboat  and  to  the  same  extent.  New  Orleans, 
Co.,  47  N.  Y.  282  (1872);  Cleghorn  etc.  R.  R.  v.  Bailey,  40  Miss.  395 
v.  New  York,  etc.  R.  R.}  56  N.  Y.  44  (1866);  Atlantic,  etc.  Ry.  v.  Dunn, 
(1874).  Exemplary  damages  cannot  19  Ohio  St.  162  (1869);  Cf.  Western 
be  recovered  from  a  railroad  con-  Union  Tel.  Co.  v.  Eyser,  91  U.  S. 
struction  company  on  account  of  the  495  (1875),  rev'g  2  Colo.  141  (1873). 
construction   train    carrying   an    em- 

102 


CHAPTER   II. 

STOCK  MAY  BE  ISSUED  LEGALLY   FOE   MONEY  OR  PROPERTY,  OR 

BY  A  STOCK  DIVIDEND. 


§  16. 

17. 

18. 

19. 

20. 
21. 


Different  methods  of  issuing 
stock. 

First  method:  Issue  by  money 
subscription. 

Second  method :  Issue  for  proper- 
ty, labor  or  construction  work. 

When  such  subscriptions  are  not 
legal. 

What  property  may  be  recei 

Payment  in  property  as  a  favor, 
not  as  a  contract  right. 

Sale  of  stock  for  property. 


23. 


24. 


23. 

2G. 
27. 


English  statutes  governing  issue 

of  stock  for  property. 
Performance  of  contract  to  pay 

in  property — Obligation  of  the 

corporation  to  issue  the  stock. 
Third   method:    Issue   by    stock 

dividend. 
Pledge  of  stock  by  corporation. 
Issue   of   stock   for   partnership 

property,    or   the   property   of 

another  corporation. 


§  L6.  Methods  of  issuing  stock.— There  are  in  general  three 
methods  of  issuing  stock.  It  may  be  issued,  first,  by  means  of  sub- 
Bcriptions,  payable  in  cash,  the  subscription  being  made  in  writing, 
or  by  acts  equivalent  thereto.1  Second,  the  issue  may  be  by  means  of 
subscriptions,  payable  in  Labor,  property,  or  both.  Third,  the  issue 
may  be  by  a  Btock  dividend. 

§  it.  First  //  thod:  Issue  by  money  subscription. —An  issue  of 
stock  by  means  inscription,  payable  in  cam,  is  the  most  simple 

and  gafe  method  of  issuing  Btock.  In  the  absence  of  any  agreement 
to  the  contrary,  an  ordinary  subscription  for  stock  is  deemed  a  cash 
subscription,  and  payment  in  money  may  1..'  enforced.  The  sub- 
scription   contract  -rally  made  by  a  writing  duly  signed  by 

the  subscriber.  The  writing  itself  is  contained  in  #  books  opened 
by  ilu-  corporation  or  by  commissioners  appointed  in  conformity 
with  a  statute,  or  it  is  made  without  formality  on  subscription  lists 
or  separate  sheets  of  paper. 

A  subscription,  payable  in  cam.  may  arise  also  from  the  mere  acts 
or  declarations  of  a  party.     A  person  having  assumed  the  position 

a  subscriber  or  stockholder  is  frequently  held  to  be  bound  as  such. 
Any  act  or  declaration,  sufficient  to  indicate  an  intent  on  the  part 
of  die  person  to  be  a  subscriber,  and  an  acceptance  by  the  corpo- 
ration of  the  person  as  such,  is  equivalent  to  a  written  subscription, 
and  the  person  is  bound  as  a  subscriber.2 

§  18.  Second  method:  Issue  for  property,  labor  or  construction 
work.— The  issue  of  stock  for  labor,  property,  contract  work,  or 
any  valuable  a  nsideration  other  than  money,  has  given  rise  to  much 


l  See  §  52,  infra. 


2  See  §  52,  infra. 


103 


§18.] 


METHODS  OF  ISSUING  STOCK. 


[OH.    II. 


controversy  and  litigation.  In  England  a  long  line  of  decisions, 
under  the  Companies  Act,  has  established  the  principle  that 
stock  need  not  necessarily  be  paid  for  in  cash,  but  that  it  may  be 
paid  for  in  money's  worth.1  Such,  also,  was  the  rule  at  common 
law.2    The  well-established  rule  now  is  that  a  subscription  fur  stock, 


i  See    many    cases    in    §46,    infra;  Rep.  C7G   (1904),  overruling  122  Fed. 

Steacy  v.   Little  Rock,   etc.   R.  R.,   5  Rep.    40.      Stock    may   be    issued   for 

Dill.   348,   376    (1876);    s.  c,  22  Fed.  property.     Palliser  v.  Home  Tel.  Co., 

Cas.  1142,  1153.  44   S.  Rep.   575    (Ala.   1907).     A  cor- 

2  Stock  may  be  issued  in  payment  poration  may  issue  its  stock  in  pay- 
for  property  or  labor,  or  both.     Far-  ment  for  property  and  agree  to  buy 
well  v.  Great  West.  Tel.  Co.,  161  111.  the  stock  back  within  lour  months  at 
522  (1896);  Woolfolk  v.  January,  131  its  par  value.    United  States,  etc.  Co. 
Mo.   620    (1895);    Foster  v.  Belcher's  v.  Camden,  etc.,  56  S.  E.  Rep.  561  (Va. 
etc.  Co.,  118  Mo.  238    (1893);   Wood-  1907).      "It    is    not    now    questioned 
fall's  Case,  3  De  G.  &  Sm.  03   (1S49).  that  a  corporation  may  issue  its  stock 
Stock    may    be    issued    for    property,  by   way  of  payment  in  the  purchase 
Bristol,   etc.   Trust   Co.   v.  Jonesboro,  of  property.    This  is  on  the  principle 
etc.  Trust  Co.,  101  Tenn.  515   (1S9S);  that  there  is  no  need  for  the  round- 
Burkinshaw  v.  Nicholls,  L.  R.  3  App.  about  process  of  first  issuing  the  stock 
Cas.   1004,   1012    (1878),   where,   pay-  for     money,     and     then     paying    the 
ment  having  been  made  in  property,  money   for   the   property.     But   it   is 
the  court  said:      "If  there  had  been  necessary  that  the  property  so  taken 
no  statutory  enactment  forbidding  a  be   considered    reasonably   worth   the 
transaction  of  that  kind,  it  is  a  trans-  par  value  of  the  stock  paid   for  it." 
action     which     might     be     perfectly  Chouteau    v.    Dean,    7    Mo.    App.    210 
valid."     Cf.  dictum  in  Sanger  v.  Up-  (1879);  Wyman  v.  American  Powder 
ton,  91  U.   S.   56,  60   (1875).     In  the  Co.,  62  Mass.  168   (1851);   Reichwald 
absence  of  a  statutory  prohibition  the  v.  Commercial  Hotel  Co.,  106  111.  439 
directors  may  receive  property  in  pay-  (1883);     Hayden    v.    Atlanta    Cotton 
ment  for  stock.     Macbeth  v.  Banfield,  Factory,  61  Ga.  233    (1878).     "What- 
45  Ore.  553  (1904).    A  statutory  pro-  ever   may   have   been   formerly   held, 
vision  that  stock  may  be  issued  for  it   is   now   established   that  subscrip- 
property  only  where  the  stockholders  tions    to    corporate    stock    need    not, 
have  authorized  the  issue  at  a  meet-  in  the  absence  of  statutory  provisions 
ing  called  for  that  purpose,  is  satis-  requiring  it,  be  paid  for  in  cash.    The 
fied    by    the    incorporators    accepting  principle   is  now  generally   accepted, 
the  subscription  payable  in  property,  both   in   England   and   America,   that 
Southern,    etc.    Co.    v.    Yeatman,    134  any   property   which  the  corporation 
Fed.  Rep.  810  (1905).     A  corporation  is  authorized   to   purchase,  or  which 
having  charter  power  to  purchase  the  is  necessary  for  the  purposes  of  its 
stock  of  other  corporations  may  give  legitimate  business,  may  be  received 
its    certificates    of     indebtedness     in  in  payment  for  its  stock.     Any  pay- 
payment  therefor,  and  may  also  issue  ment,    whether    it    be    in    money    or 
with    such    certificates    its    preferred  money's  worth,  so  that  it  be  made  in 
stock,    the    dividends   to   be  used   to  good   faith,   will   give  the   shares   so 
pay    the    principal    and    interest    of  paid  for  the  status  of  paid-up  stock, 
such  certificates,  the  preferred  stock  In  the  language  of  Lord  Justice  Gif- 
then  to  belong  to  the  vendors.     In-  fard,    in   Drummond's   Case,  L.  R.    4 
graham  v.  National  Salt  Co.,  130  Fed.  Ch.    App.    772    (1869):      'If    a    man 

104 


CH.  II.] 


METHODS  OF  ISSUING  STOCK. 


[§  18. 


payable  by  its  terms  in  property  or  labor,  or  both,  is  a  good  and 
legal  subscription.  If  the  property  is  taken  at  a  valuation  made 
without  fraud,  the  payment  is  as  effectual  and  valid  as  though 
made  in  cash  to  the  same  amount.  An  issue  of  stock  for  property 
is  one  which  finds  support,  not  only  in  the  decisions,  but  in  the 
daily  practice  of  corporations,1  and  the  law  does  not  compel  the  cor- 
poration and  the  subscriber  to  go  through  the  useless  form  of  a 
payment  by  the  corporation  to  the  subscriber  of  the  value  of  the 
property,  and  an  immediate  repayment  of  the  same  money  by  the 
subscriber  to  the  corporation  on  his  subscription.2     It  is  to  be  borne 


contracts  to  take  shares  he  must 
pay  for  them,  to  use  a  homely  phrase, 
in  meal  or  in  malt;  he  must  either 
pay  In  money  or  in  money's  worth. 
If  he  pays  in  one  or  the  other  that 
will  be  a  satisfaction.'  .  .  .  The 
contract   to   receive    in   payment   the 

ters-patent,  plows,  material,  and 
other  assets  of  its  predecessor,  Un- 
thank  &  Coffin,  was  therefore  not 
ultra  viret"  Coffin  v.  Ransdell,  110 
Ind.  417  (1SS7),  holding,  also,  that 
payment  for  stock  by  transferring  to 
the  corporation  the  property  and  as- 
sets of  a  partnership  was  legal,  pro- 
vided that  a  fair  valuation  was  placed 
upon  the  property  so  conveyed.  If 
Buch  property  is  overvalued,  the 
dangers  incurred  thereby  are  various. 
Garrett  P.  Kansas  City  Coal.  Min.  Co., 
113  Mo.  330  (1S92),  approving  the 
above  statement  of  law.  See  also 
ch.   III. 

'  foreman  p.  Bigelow,  4  Cliff.  508, 
544  (1S78) ;  s.  c,  9  Fed.  Cas.  427,  441. 

2  American  Tube,  etc.  Co.  v.  Hays, 
105  Pa.  St.  4S9  (1S95);  Searight  v. 
Payne,  6  Lea  (Tenn.),  283  (1880); 
affd,  2  Tenn.  Ch.  175;  Brant  v.  Ehlen, 
59  Md.  1  (18S2);  Spargo's  Case,  L.  R. 
8  Ch.  App.  407,  412  (1S73);  Ashue- 
lot  Boot,  etc.,  Co.  r.  Hoit,  56  N.  H.  548 
(1S7G).  In  the  case  of  South  Dakota 
V.  North  Carolina,  192  U.  S.  2S6 
(1004),  where  state  bonds  were  by 
statute  to  be  sold  at  not  less  than 
par,  and  the  profits  invested  in  stock 
at  par,  the  court  held  that  the  bonds 
might   be   issued    for   the   stock   and 


said  (p.  309):  "It  Is  true  that  no 
money  was  paid  into  the  treasury  and 
thence  out  of  the  treasury  to  the  rail- 
road company,  yet  looking  at  the  sub- 
stance of  the  transaction  (and  equity 
has  regard  to  substance  rather  than 
form),  the  transaction  was  the  same 
as  though  the  company  had  been  the 
only  bidder,  had  placed  a  thousand 
dollars  in  the  treasury  in  payment 
of  each  bond  and  received  that  thou- 
sand dollars  back  from  the  treasury 
in  payment  of  the  subscription 
for  ten  shares  of  stock."  Payment 
in  property  by  subscribers  was  held 
not  allowable  in  Neuse  River  Nav. 
Co.  v.  Com'rs  of  Newbern,  7  Jones, 
L.  (N.  C.)  275  (1859);  also  Henry 
p.  Vermillion,  etc.  R.  R.,  17  Ohio 
187  (1S43),  although  the  latter  case 
seems  to  involve  an  oral  agreement 
to  allow  such  payment,  and  to  have 
been  decided  on  that  ground.  There 
is  a  long  line  of  cases  sustaining 
the  validity  of  an  issue  of  stock 
for  money's  worth  instead  of  money 
Itself.  They  are  given  in  this  and 
the  following  chapter.  So  well  estab- 
lished has  this  principle  of  law  be- 
come, that  the  few  cases  holding  to 
the  contrary  can  no  longer  be  con- 
sidered good  law.  "That  in  the 
absence  of  fraud  an  agreement  may 
ordinarily  be  made  by  which  stock- 
holders can  be  allowed  to  pay  for 
their  shares  in  patents,  mines  or 
other  property,  to  which  it  is  not 
easy  to  assign  a  determinate  value, 
appears    to   be   well    settled."     New 


105 


§  18.] 


METHODS  OF  ISSUING  STOCK. 


[CH.    II. 


in  mind,  however,  that  a  corporation  has  no  power  to  issue  stock 
unless  expressly  authorized  so  to  do.1 

There  is  some  doubt  as  to  whether  an  oral  agreement  of  the  cor- 
porate agents  that  a  subscription  may  be  paid  in  property  is  bind- 
ing upon  the  corporation.  Under  the  well-established  rule  that 
parol  evidence  will  not  be  allowed  to  add  to  or  vary  a  written  agree- 
ment, it  has  been  held  that  such  an  oral  agreement  with  the  agent 
cannot  be  admitted  in  evidence.2  When,  however,  the  parol  agree- 
ment is  made  subsequently  to  the  act  of  subscribing,  and  is  sup- 
ported by  a  sufficient  consideration,  it  is  valid  and  enforceable.3 

Under  a  statute  requiring  stock  to  be  paid  for  in  cash  or  in  prop- 
erty it  has  been  held  that  stock  cannot  be  issued  for  services  ren- 
dered prior  to  the  incorporation.4  A  statute  that  the  commissioner 
of  corporations  must  pass  upon  the  value  of  property,  which  is 
turned  in  for  stock,  cannot  be  evaded  by  the  parties  paying  cash  to 
the  corporation  for  the  stock  and  then  using  that  cash  to  buy  the 
property  from  themselves.  Yet  if  they  do  so  under  advice  of  coun- 
sel, they  are  not  liable  for  the  penalty  for  doing  so.5 

A  statutory  provision  that  a  certain  percentage  of  the  capital  stock 


Haven,    etc.    Co.    v.    Linden     Spring 
Co.,  142  Mass.  349  (1S86). 

i  Cooke  v.  Marshall,  191  Pa.  St.  315 
(1889),  involving  a  cemetery  corpora- 
tion, s.  c,  196  Pa.  St.  200. 

2  See  §  137,  infra. 

3  See  §  137,  infra. 

4  Herbert  v.  Duryea,  34  N.  Y.  App. 
Div.  478  (1S98),  aff'd  1G4  N.  Y. 
595  and  59G.  While  a  corporation 
may  issue  stock  for  labor  and  ser- 
vices, yet  it  must  be  at  a  fair  and 
bona  fide  valuation,  and  the  proof 
that  the  issue  was  made  for  labor 
must  be  clear.  Clevenger  v.  Moore, 
71  N.  J.  Law.  148  (1904). 

A  financier  who  brings  about  a 
settlement  between  a  corporation  and 
its  creditors,  may  be  paid  for  his  ser- 
vices in  stock,  even  though  he  was  a 
director  part  of  the  time  and  even 
though  there  was  no  previous  agree- 
ment to  pay  him.  Rosehill  Ceme- 
tery Co.  v.  Dempster,  79  N.  E.  Rep. 
276  (111.  1906). 

Stock  may  be  issued  for  legal  ser- 
vices, already  performed  or  to  be  per- 
formed  in   the   future,  and   a  stock- 


holder cannot  cause  to  be  set  aside 
an  issue  of  $50,000  par  value  of  stock 
in  a  Michigan  corporation  for  legal 
services,  unless  actual  fraud  is 
proven.  Vogeler  v.  Punch,  103  S.  W. 
Rep.  1001  (Mo.  1907). 

5  Harvey-Watts  Co.  v .  Worcester, 
etc.  Co.,  193  Mass.  138   (1906). 

Even  though  the  form  is  gone 
through  with,  of  all  subscribers  for 
stock  paying  therefor  in  cash  and 
then  using  the  cash  to  purchase  their 
property,  this  is  not  paying  for  the 
stock  in  cash.  International  Paper 
Co.  v.  Gazette  Co.,  182  Mass.  578 
(1903). 

Payment  for  a  subscription,  by  can- 
cellation of  a  debt  due  from  the  cor- 
poration to  the  subscriber,  is  a  pay- 
ment in  cash.  Breck  v.  Barney,  183 
Mass.  133   (1903). 

Where  a  statute  requires  that  a 
minimum  subscription  must  be  paid 
in  cash  before  an  allotment  of  shares 
is  made,  this  means  cash  and  does 
not  mean  checks  which  have"  not  yet 
been  cashed.  Mears  v.  Western,  etc. 
Co.  Ltd.,  [1905]  2  Ch.  353. 


106 


CH.  II.]  METHODS  OF  ISSUING  STOCK.  [§§  19    20. 

must  be  paid  in  before  business  is  commenced  is  satisfied  by  turn- 
ing in  property.3 

§  19.  When  such  subscriptions  are  not  legal. — A  subscription 
payable  by  its  terms  in  labor  or  property  is  in  the  nature  of  a  con- 
ditional subscription.  Accordingly,  in  certain  states,  where  a  per- 
centage  or  fixed  amount,  of  the  capital  stock  must  be  subscribed  for 
before  a  charter  can  lie  obtained,  and  where,  by  the  decisions  of 
the  courts,  such  preliminary  subscriptions  must  be  absolute  and  un- 
conditional,  a  subscription  payable  by  its  terms  in  labor  or  property, 
being  conditional  to  that  extent,  cannot  form  a  part  of  the  sub- 
scriptions preliminary  to  incorporation.2  In  such  states,  however, 
subscriptions  to  tin-  remainder  of  the  capital  stock,  the  part  sub- 
s' -rilicd  after  the  charter  has  been  obtained,  may  be  conditional,  and 
may,  by  their  terms,  be  payable  in  property  or  labor.3  On  the 
ground  that  subscriptions  payable  in  property  or  labor  are  condi- 
tional, it  has  been  held  also  thai  a  subscription  payable  in  labor  or 
property  is  oo1  to  he  counted  in  ascertaining  whether  the  full  capital 
stock  has  be<  ii  subscribed,4  in  order  to  enforce  other  suhscriptions 
for  stock.  An  ultra  vires  purchase  of  property  may  be  insufficient 
a-  a  consideration  l'"i-  the  issue  of  stock.5 

^  20.     What  rty  may  be  received. — A  corporation  may  re- 

ceive in  payment   of  its  shares  of  any   property  which  it  may 

lawfully  purchase,6  and,  in  general,  may  receive  any  consideration 
which  i^  suitable  and  applicable  to  the  purposes  for  which  the  cor- 
poration was  organized.7      A  railroad  corporation  may  receive  pay- 

i  Pargason    v.    Oxford,    etc.    Co.,   78  poration,  it  was  held  that  the  parties 

Miss.  65   (1900).  so    receiving    the    stock    were    liable 

A    statute    requiring     twenty     per  thereon  under  the  New  York  statute 
cent,  of  the  capita]  stock  to  be  paid  as  not  being  paid-up  stock,  such  con- 
in  is  satisfied  by  payment  in  property  tract   being  ultra  vires. 
or  labor.     La  Crosse,  etc.  Co.  v.  God-  c  Brant  v.  Ehlen,  59  Md.  1  (1882); 
d;ird,  114  Wis.  610   (1002).  American  Silk  Works  v.  Salomon,  4 

Where  ten  per  cent,  of  the  capital  Hun,  135   (1875). 

stock  must  be  paid  in  before  business  In   Louisiana   the   general    act   for 

is   commenced,    payment    may    be    in  incorporation     prescribes     that     the 

property.     McCandless  v.  Inland,  etc.  articles    of   incorporation   shall    state 

Co    115  Ga    90S  (1902).  the   time    when   and   the   manner   in 

2  See  §§  79,  180,  infra.  which    the    stock    shall   be   paid   for. 

3  See  §  82,  infra.  See  New  Orleans,  etc.  R.  R.  v.  Frank, 

4  See   §  ISO,  infra.  39  La.  Ann.  707  (1887). 

5  In  Powell  r.  Murray,  3  N.  Y.  App.  i  "Payment  of  stock  subscriptions 
DIv.  273  (1896),  aff'd,  157  N.  Y.  717,  need  not  be  in  cash,  but  may  be  in 
where  a  company,  formed  to  manufac-  whatever,  considering  the  situation  of 
ture  electric  appliances  and  plant,  the  corporation,  represents  to  that 
issued  stock  in  payment  for  a  license  corporation  a  fair,  just,  lawful,  and 
to  sell  the  product  of  a  foreign  cor-  needed  equivalent  for  the  money  sub- 

107 


§  20.] 


METHODS  OF  ISSUING  STOCK. 


[cn.  II. 


ment  in  contract  work,  in  right  of  way,  or  in  any  kind  of  material 
or  labor  applicable  to  its  construction.1      A  manufacturing  corpo- 


scribed."  Liebke  v.  Knapp,  79  Mo. 
22  (1S83).  Under  a  charter  power 
to  receive,  in  payment  for  stock, 
property  "for  the  advancement  of 
the  purposes  for  which"  the  corpora- 
tion was  organized,  a  trust  company 
may  receive  stock  in  a  savings  asso- 
ciation, and  even  though  by  statute 
the  payment  of  stock  by  property 
must  first  be  authorized  by  the 
stockholders,  yet  if  the  corporation 
receives  the  stock  and  pledges  it  and 
receives  a  dividend  thereon  and  re- 
tains it  two  years  until  it  depreciates 
in  value,  it  cannot  then  repudiate  the 
transaction.  Southern  Trust,  etc. 
Co.  v.  Yeatman,  130  Fed.  Rep.  798 
(1904).  Payment  in  newspaper  ad- 
vertising of  the  enterprise  upheld 
in  this  case.  The  subscription  may, 
by  its  terms,  be  payable  in  plank 
for  a  plank-road  company,  and  the 
subscriber  is  a  stockholder  before 
payment  is  completed.  Haywood, 
etc.  Co.  v.  Bryan,  6  Jones,  L. 
(N.  C.)  82  (1858).  Payment  in  Con- 
federate bonds  redeemable  in  cotton 
upheld.  Schroder's  Case,  L.  R.  11 
Eq.  Cas.  131  (1870).  So,  also,  pay- 
ment in  stock  in  a  coal  corporation 
carrying  on  a  supplementary  busi- 
ness. East  New  York,  etc.  R.  R.  v. 
Lighthall,  6  Rob.  (N.  Y.)  407  (1868). 
Payment  by  a  patent-right  is  legal. 
Edwards  v.  Bringier  Sugar  Extract- 
ing Co.,  27  La.  Am.  118  (1875).  It 
is  no  objection  to  the  validity  of  the 
issue  of  stock  for  patents  that  the 
corporation  selling  the  patents  was 
not  legally  incorporated.  Way  v. 
American,  etc.  Co.,  CO  N.  J.  Eq.  263 
(1900).  Payment  may  be  by  cancel- 
ing a  debt  of  the  company  past  due. 
Carr  v.  Le  Fevre,  27  Pa.  St.  413 
(1856).  Or  not  yet  due.  Appleyard's 
Case,  49  L.  J.  (Ch.)  290  (1880).  A 
company  may  issue  stock  in  exchange 
for  bonds  of  another  corporation 
where  the   former   corporation  owns 


the  equity  of  the  property,  subject  to 
the  mortgage  securing  the  bonds. 
Beebe  r.  Richmond,  etc.  Co.,  3  N.  Y. 
App.  Div.  334  (1896).  A  company  or- 
ganized to  manufacture,  bleach  and 
dye  cottons  has  power  to  issue  its 
stock  in  exchange  for  and  payment 
of  stock  in  a  dyeing  corporation 
which  had  been  organized  by  the 
consulting  chemist  of  the  former  com- 
pany for  the  purpose  of  exchanging 
the  stock  as  above  set  forth.  Jo- 
seph Bancroft,  etc.  Co.  v.  Bloede,  106 
Fed.  Rep.  396  (1901).  Payment,  how- 
ever, to  a  bank  in  its  own  currency 
was  not  upheld,  it  being  statutory 
that  only  specie  could  be  received. 
King  v.  Elliott,  13  Miss.  428  (1845). 
Payment  by  check  cannot  be  ob- 
jected to  by  another  subscriber. 
Thorp  v.  Woodhull,  1  Sandf.  Ch.  411 
(1S44).  Stock  may  be  issued  to  the 
president  in  payment  of  past  salary 
and  debts.  Reed  v.  Hayt,  51  N.  Y. 
Super.  Ct.  121  (1884);  aff'd,  109  N. 
Y.  659.  Where  stock  is  issued  to  a 
city  by  a  street  railway  company  in 
payment  for  its  street  rights,  a  pro- 
vision in  the  grant  of  the  street 
rights  that  in  case  the  company  be- 
came indebted  the  city  should  have 
a  lien  on  the  company's  franchise  and 
property  does  not  give  the  city  a  lien 
in  preference  to  creditors  of  the  com- 
pany, but  only  in  preference  to  other 
stockholders.  Guaranty,  etc.  Co.  v. 
Galveston,  etc.  R.  R.,  107  Fed.  Rep. 
311  (1901). 

i  "We  can  see  no  objection  what- 
ever to  a  railroad  company  issuing 
stock  and  taking  in  payment  ma- 
terials or  labor  or  land  necessary  for 
its  road."  Clark  v.  Farrington,  11 
Wis.  306  (1860).  As  to  payment  in 
stock  for  construction  work,  see  also 
Wood,  Railways,  §  282.  "The  cor- 
poration had  a  right  to  accept  pay- 
ment of  stock  in  labor  or  materials, 
in  damages  which  the  company  were 


108 


CH.  II.]  METHODS  OF  ISSUING  STOCK.  [§   20. 

ration  may  receive  payment  in  the  good-will  of  a  business  or  the 
stock  in  trade.1  Land  may  be  taken  in  payment  when  the  corpo- 
ration would  bo  allowed  to  purchase  the  same.2  Promissory  notes 
may  also  be  taken,  under  the  corporate  power  to  give  *credit  and 
extend  the  time  of  payment  of  debts.3     But  a  bank  may  have  no 

liable  to  pay,  or  in  any  other  liability        2  Goodin  v.  Evans,  18  Ohio  St.  150 
of  the  company,  provided  these  trans-  (18CS);     Cincinnati,    etc.    R.    R.    v. 
actions    were    entered    into   and   car-  Clarkson,    7    Ind.    595    (1856);    Peck 
ried  out  in  good  faith."    Philadelphia,  v.  Coalfield  Co.,  11  Bradw.   (111.)   88 
etc.  R.  R.  v.  Hickman,  2S  Pa.  St.  318  (1SS2);     Brant   v.   Ehlen,    59   Md.    1 
(1857);   Bedford  County  v.  Nashvill2,  (1SS2) ;    Jones's    Case,    L.    R.    6    Ch. 
etc.  Ry.,  14  Lea  (Tenn.),  525  (1SS4),  App.  48    (1S70) ;   Maynara's  Case,  L. 
holding,  also,  that  thirty  years'  delay  R.    9    Ch.   App.   60    (1873);     Dayton, 
in  demanding  the  stock  is  no  bar  to  etc.  R.  R.  v.  Hatch,  1  Disney  (Ohio), 
the   right.     To  the  same  effect,  pay-  84   (1S55) ;   Carr  v.  Le  Fevre,  27  Pa. 
ment  being  in  services,   Kobogum   v.  St.  413    (1S56);   Lohman  v.  N.  Y.  & 
Jackson  Iron  Co.,  76  Midi.  198  (1SS9).  Erie   R.  R.,   2    Sandf.    Super.   Ct.   39 
Payment  may  be  in  cross-ties.    Ohio,  (1848).     In  Foreman  v.   Bigelow,   4 
etc.    R.    R.    v.    Cramer,    23    Ind.    490  Cliff.   508,   544    (1878),   s.   c,   9   Fed. 
(1S64).     Or   in   real   estate  and  ser-  Cas.  427,  441,  the  court  said:     "Argu- 
vices.    Cincinnati,  etc.  R.  R.  v.  Clark-  ment   to   show   that   the   transaction 
son,  7  Ind.  595  (1S56).    Or  in  services  of  issuing  the  stock  in  payment  for 
and  materials.     Phillips  0.  Covington  the   mineral   land   would   have   been 
Bridge  Co.,  2  Mete.  (Ky.)  219  (1S59).  valid     ...     is  scarcely  necessary." 
Or  by  construction  of  the  road.     See  In  Indiana  formal  acceptance  by  the 
§  18.      One     railroad     having     power  directors     is     necessary.       State     v. 
to  consolidate  with   another  may,   in  Bailey,  16   Ind.  46    (1861);   Junction 
payment  therefor,  issue  stock  to  the  R.  R.  v.  Reeve,  15   Ind.  236   (1860). 
contractors  who  are  constructing  the  A    corporation    receiving   a    deed    of 
latter.     Branch   v.   Jesup,   116   U.   S.  land  in  payment  of  a  stock  subscrip- 
468   (18S2).  A  corporation  may  agree  tion  is  protected  in   its  title  to  the 
to  give  $5,000  of  stock  to  one  who  land  the  same  as  any  other  bona  fide 
will  borrow  $15,000  for  it.    Arapahoe,  purchaser  of  it  would  be  against  a 
etc.    C6.    v.     Stevens,     13    Colo.    534  former  vendor's  lien  for  the  purchase- 
(18S9).      A    contract    that    subscrip-  money.     Frenkel  v.  Hudson,  82  Ala. 
tions  shall  be  payable  in  land  is  il-  15S    (1887).     A  subscriber  for  stock 
legal  by  statute  in  Alabama,  but  after  may  show  that  payment  therefor  was 
subscription  payment  in  land  may  be  by  the  conveyance  of  land  or  an  in- 
allowed.     Knox  v.  Childersburg  Land  terest  in  land.     Libby  v.  Mt.  Monad- 
Co.,  86  Ala.  180  (18SS).  nock,  etc.  Co.,  68  N.  H.  444   (1896). 
1  Pell's  Case,  L.  R.   5  Ch.  App.  11  A   corporation   owing  a  party   for  a 
(1S69).    Stock  may  be  issued  for  the  tract    of    land    may    issue    stock    in 
good-will  of  a  business,  and  a  person  cancellation  of  the  debt.    Richardson 
who  has  taken  part  in  the  transaction  v.    Graham,    45    W.    Va.    134    (1898). 
cannot  afterwards  complain.     Wash-  Stock   may   be   paid   for,   under   the 
burn   v.   National,   etc.    Co.,    81   Fed.  New  Jersey   statute,   partly  in   cash 
Rep.  17  (1897).    Stock  may  be  issued  and  partly  by  furnishing  a  site  for 
for    good-will.      White    Corbin    &   Co.  buildings.  In  re  Remington,  etc.  Co., 
v.    Jones,    79    N.    Y.    App.    Div.    373  153  Fed.  Rep.  345  (1907). 
(1903)  3  Stoddard    v.    Shetucket    Foundry 

109 


§  20.] 


METHODS  OP  ISSUING  STOCK. 


[CH.    II. 


power  to  accept  the  subscriber's  notes  in  payment  of  a  subscription 
to  its  stock,  and  the  directors  are  personally  liable  for  so  doing,  un- 
less the  notes  were  good  or  the  directors  had  reasonable  cause  to  be- 
lieve they  were  good.1     A  note  given  in  payment  for  the  subscrip- 

Co.,  34  Conn.  542  (1868);  Ogdens-  cept  in  payment  of  stock  a  note  se- 
burgh,  etc.  R.  R.  v.  Wooley,  3  Abb.  cured  by  a  mortgage  on  real  estate. 
Ct.  of' App.  Dec.  398  (1864);  Magee  Clark  v.  Farrington,  11  Wis.  306 
v.  Badger,  30  Barb.  246  (1859),  aff'd  (1860);  Blunt  v.  Walker,  11  Wis.  334 
34  N.  Y.  247;  Goodrich  v.  Reynolds,  (1860);  Cornell  v.  Hichens,  11  Wis. 
31  111.  490  (1863);  Vermont  Central  353  (1860);  Lyon  v.  Ewings,  17  Wis. 
R.  R.  v.  Clayes,  21  Vt.  30  (1848);  61  (1863);  Andrews  v.  Hart,  17  Wis. 
Hardy  v.  Merriweather,  14  Ind.  203  297  (1S63);  Western  Bank  of  Scot- 
(1860);  Pacific  Trust  Co.  v.  Dorsey,  land  v.  Tallman,  17  Wis.  530  (1863). 
72  Cal.  55  (1SS7).  Wyinan  v.  Bow-  In  Tennessee  payment  in  notes  is  not 
man,  127  Fed.  Rep.  257  (1904).  Stock  upheld,  but  the  subscriber  is  to  be 
may  be  paid  for  by  a  note  fully  se-  credited  with  the  amount  collected 
cured  by  collateral.  Clarke  v.  Lexing-  on  such  notes.  Moses  v.  Ocoee  Bank, 
ton  Stove  Works,  72  S.  W.  Rep.  286  1  Lea  (Tenn.),  398  (1878).  In  New 
(Ky.  1903).  A  stock  dividend  need  York  the  payment  of  a  subscription 
not  be  delivered  forthwith  to  a  stock-  by  one's  own  note  is  prohibited  by 
holder  who  paid  for  his  original  stock  statute.  Payment  by  bond  and  mort- 
by  a  note  to  the  corporation  se-  gage  was  upheld  in  Valk  v.  Crandall, 
cured  by  the  original  certificate  of  1  Sandf.  Ch.  179  (1843),  and  in 
stock.  Alford  v.  Laurel  Imp.  Co.,  Leavitt  v.  Pell,  27  Barb.  322  (1S58), 
86  Miss.  375  (1905).  Under  the  New  aff'd,  25  N.  Y.  474.  As  to  payment 
York  statute  which  requires  that  by  note,  see  §§  172-175,  infra.  But  a 
stock  or  bonds  shall  be  issued  only  worthless  note  is  not  payment  so  far 
for  money  paid  or  property,  the  as  corporate  creditors  are  concerned, 
purchaser  of  bonds  from  the  corpora-  Bouton  v.  Dement,  123  111.  142  (1887). 
tion  cannot  make  payment  in  the  note  A  company  authorized  by  statute  to 
of  a  third  person,  where  the  note  is  sell  stock  for  cash  may  sell  it  for 
never  collected.  In  re  Waterloo,  etc.  the  bonds  of  the  vendee,  and  may 
Co.,  134  Fed.  Rep.  341  (1904),  rev'g,  enforce  the  bonds.  Southern  Life  Ins. 
128  Fed.  Rep.  517  (1904).  A  New  Co.  v.  Lanier,  5  Fla.  110  (1853).  Sub- 
York  corporation  cannot  under  the  scriptions  may  be  paid  by  notes,  es- 
New  York  statute  receive  a  note  in  pecially  where  the  corporation  sells 
payment  for  its  bonds,  especially  the  notes.  Rouse,  etc.  Co.  v.  Detroit, 
where  it  was  a  note  of  the  president,  etc.    Co.,    Ill   Mich.   251    (1896).     A 


unless  such  note  is  actually  collected. 
In  re  Waterloo,  etc.  Co.,  134  Fed.  Rep. 


note    given    in    payment    for   a   sub- 
scription does  not  bear  interest  unless 


341  (1904).  A  statute  relative  to  the  the  note  itself  so  provides,  especially 
incurring  of  debts  before  the  capital  where  no  call  on  the  subscription  has 
stock  is  fully  paid  in  is  not  satisfied  been  made.  Seattle  T.  Co.  v.  Pitner, 
by  a  subscriber  giving  his  note.  Wil-  18  Wash.  401  (1898).  In  Massachu- 
liams  v.  Brewster,  117  Wis.  370  (1903).  setts  by  statute  a  note  cannot  be  re- 
A  receiver's  suit  on  notes  given  in  ceived  in  payment  for  stock.  Harvey- 
payment  for  stock  cannot  be  defeated  Watts  Co.  v.  Worcester,  etc.  Co.,  193 
on  the  ground  that  all  the  creditors  Mass.  138  (1906). 
have  been  paid.  Pope  v.  Merchants'  T.  l  Coddington  v.  Canaday,  157  Ind. 
Co.,  103  S.  W.  Rep.  792  (Tenn.  1907).  243  (1901).  A  note  given  in  pay- 
In  Wisconsin  a  corporation  may  ac-  ment    of    the    subscription    price    of 

110 


CH.  II.]  METHODS  OF  ISSUING  STOCK.  [§   20. 

tion  price  of  stock  is  illegal  under  the  New  York  statute  which  re- 
quires ten  per  cent  to  be  paid  in  cash,  where  the  subscription  is  a 

h  subscription,  and  hence  in  such  a  case  the  entire  subscription 
is  void,  even  though  ii  provided  for  the  employment  of  the  subscriber 
and  for  giving  him  a  bonus  of  stock.1  Fully  paid-up  stock  may  be 
issued  by  an  irrigation  company  in  payment  for  pipe  lines,  wells 
and  ditches.2  It  is  1  gal  for  a  corporation  to  issue  stock  as  fully 
paid  to  a  person  in  consideration  of  his  leaving  an  employment  in 
which  he  is  engaged  and  of  assuming  the  presidency  of  the  cor- 
poration.3    Services  rendered  by  a  director  after  he  had  subscribed 

for  stock  are  a  g 1  consideration  in  payment  therefor  in  accordance 

with  an  agreemenl  to  that  effect.4     A  person  to  whom  a  corporation 

les  full-paid  stock  in  settlement  of  a  claim  is  not  bound  by  any 
prior  contracts  of  the  corporation  in  regard  to  that  stock  where  he 

stock  in  a  national  bank  may  be  en-  that  they  provided  for  cancellation 
forced  by  the  re  and  it  is  no  at  fifty  per  cent,  on  the  amount  paid, 
defense  that  the  president  had  agreed  and  that  they  were  redeemable  in 
that  the  stock  might  be  returned  and  numerical  order  in  six  years,  and 
the  note  canceled.  Atwater  v.  Strom-  that  it  would  be  impossible  for  the 
berg,  75  Minn.  277  (1899).  Where  company  to  pay  them.  The  same  con- 
upon  an  increase  of  elusion  was  reached  in  State  v.  Lou- 
ie a  p  the  isiana,  etc.  Co.,  51  La.  Ann.  1795 
For  worthless  notes,  the  directors  (1S99). 
upon  the  bank  becoming  Insolvent  iHapgoods  v.  Lusch,  123  N.  Y. 
are  liable  to  the  receiver  for  the  par  App.  Div.  23  (1907). 
value  of  such  stock,  unless  they  can  oud  v.  Pomona,  etc.  Co.,  153  U. 
show  the  stock  could  not  have  been  S.  564,  582  (1894). 
otherwise  issued  or  sold.  Cockrell  3  Shannon  v.  Stevenson,  173  Pa. 
r.  Abeles,  8G  Fed.  Rep.  505  (1S9S).  St.  419  (1896).  A  corporation  in 
In  the  case  of  State  r.  New  Orleans,  order  to  retain  the  services  of  em- 
etc.  Co.,  51  Uh.  Ann.  1S27  (1899),  ployees  to  be  rendered  thereafter  may 
the  subscribers  to  the  stock  of  a  issue  stock  at  eighty-five  cents  in 
debenture  company  paid  ninety-five  cash,  the  remaining  fifteen  cents  to 
per  cent,  of  their  subscription  by  be  paid  for  by  such  services.  Potter 
borrowing  that  amount  from  the  com-  v.  Necedah,  etc.  Co.,  105  Wis.  25 
pany   on    their   notes,  and   thereupon  (1S99). 

full-paid   stock   was   issued   to   them,  a  Doak  v.  Stahlman,  58  S.  W.  Rep. 

although  the  statute  prohibited  the  is-  741  (Tenn.  1899).    A  corporation  may 

sue  of  stock  until  paid  for.    The  state  agree   to  issue  stock  to  a  person  in 

brought  suit  to  set  aside  the  charter  payment  for  services  in  procuring  a 

and     liquidate     the    company.       Tha  loan  for  the  corporation  and  guaran- 

court  held  that  under  the  constitution  teeing  payment  of  the  same.     If  the 

of    Louisiana   the    incorporation    was  corporation    refuses   to   perform,    the 

illegal.     The  court  held  also  that  the  person    may   obtain   damages   to   the 

charter   was   illegal,    in    that  the   de-  amount    of   the   actual   value   of   the 

bentures  issued  were  forfeited  if  de-  stock.    Saunders  v.  United  States,  etc. 

ferred  payments  were  not  made,  and  Co.,  25  Wash.  475  (1901). 

Ill 


g  21.] 


METHODS  OF  ISSUING  STOCK. 


[cu.  u. 


took  the  stock  without  notice  of  the  contracts.1  A  corporation  may 
maintain  a  suit  to  cancel  stock  which  the  directors  and  president 
voted  to  themselves  as  commissions  for  selling  the  stock  of  the  com- 
pany.2 Where  stock  is  issued  for  property  and  the  transaction  is 
set  aside,  a  suit  lies  hy  the  receiver  of  the  company  to  have  the  stock 
cancelled.3 

§  21.  Payment  in  'property  as  a  favor,  not  as  a  contract  right. — 
There  is  an  important  distinction  to  be  made  between  payments  in 
property,  where  the  subscription  it-elf,  by  its  terms,  allows  such 
payment,  and  a  payment  in  property,  which  is  allowed,  as  a  matter 
of  favor,  by  the  corporation,  the  subscription  itself  being  silent  as 
to  the  mode  of  payment.4  The  later  class  of  transactions  has  been 
uniformly  upheld,  except  when  positively  prohibited  by  statute,  and 
payment  has  even  been  held  to  be  valid,  although  the  statute 
required  it  to  be  in  money  or  in  cash.5  A  subscription  is  payable 
in  cash  unless  there  is  a  contract  by  which  it  is  to  be  paid  in  labor 


i  Angle  v.  Chicago,  etc.  Ry.,  94 
Fed.  Rep.  717  (1899).  See  also  §  766c, 
infra. 

2  Central,  etc.  Co.  v.  Madden,  68 
Atl.  Rep.  777  (N.  J.  190S). 

3  McMaster  v.  Drew,  68  Atl.  Rep. 
771    (N.  J.  1908). 

4  Many  of  the  cases  which  appar- 
ently are  cases  of  subscriptions, 
wherein  the  subscriber  has  expressly 
stipulated  that  he  may  pay  in 
property  or  labor,  will  be  found,  on 
close  examination,  to  be  absolute  sub- 
scriptions payable  in  cash.  After- 
wards the  corporation,  although  not 
obliged  so  to  do,  accepts  property  or 
labor  instead  of  the  cash.  This  kind  of 
transaction  is  almost  universally  up- 
held by  the  courts  when  entered  into 
and  carried  out  in  good  faith.  Such 
payment  is  upheld  even  in  opposition 
to  the  express  terms  of  a  statute 
requiring  payment  in  cash.  See 
§  23.  Many  of  the  American  cases, 
also,  are  plainly  cases  in  which  pay- 
ment in  property  was  allowed  by  the 
corporation,  not  as  a  right  but  as  a 
matter  of  favor.  The  courts  uphold 
such  agreements  because  they  are 
similar  to  offsets  of  accounts,  and 
the  delays,  uncertainties,  special  privi- 
leges,   and    other    objections    to    sub- 


scriptions payable  in  terms  in 
property  and  labor  are  obviated.  See 
Ashuelot  Boot,  etc.  Co.  v.  Hoit,  56 
N.  H.  548  (1S76);  Stoddard  v.  She- 
tucket  Foundry  Co.,  34  Conn.  542 
(1S6S),  where  the  court  said,  "that 
the  defendants  could  have  insisted 
upon  the  plaintiff's  payment  for  his 
stock  in  cash  is  unquestionable."  See 
also  Vermont  Central  R.  R.  v.  Clayes, 
21  Vt.  30  (1848);  Boston,  etc.  R.  R. 
v.  Wellington,  113  Mass.  79  (1873). 
A  subscription  may  be  made  and  then 
by  another  contract  be  paid  by  a 
lease  of  a  railroad.  Coe  v.  East,  etc. 
R.  R.,  52  Fed.  Rep.  531  (1892).  Even 
where,  by  statute,  railroad  corpora- 
tions must  require  payment  in  cash 
of  a  certain  percentage  of  the  sub- 
scription at  the  time  of  subscribing, 
the  courts  hold  that  the  percentage 
may  be  paid  by  property  actually  re- 
ceived. Beach  v.  Smith,  30  N.  Y. 
116  (1864),  where  payment  was  by 
services  rendered.  The  court  said: 
"Was  it  necessary,  for  any  purpose, 
that  the  ceremony  of  paying  money 
by  the  company  to  the  defendant,  and 
by  the  defendant  of  the  same  money 
back  again,  should  be  gone  through 
with?  It  seems  to  me  not." 
5  See  p.  114,  note  4. 
12 


CH.  II.]  METHODS  OF  ISSUING  STOCK.  [§   22. 

or  property.1  Where  a  person  subscribes  for  stock  and  afterwards 
payment  is  made  in  property  at  a  gross  overvaluation,  the  court 
may  hold  him  liable  for  the  difference  between  the  actual  value  of 
the  property  and  the  par  value  of  the  stock,  even  though  the  com- 
pany went  through  the  form  of  canceling  the  subscription  and  is- 
suing the  .-!  jinal  issue  for  property.2  Where  stock 
is  sul  !  for,  although  thereafter  it  is  agreed  that  the  subscrip- 
tion shall  be  paid  by  the  transfer  of  property,  yet  if  no  actual  trans- 
fer is  made,  a  buI  r  may  be  liable,  even  though  he  understood 
that  the  properly  had  iially  transferred.3 

§  22.  Sale  of  stock  for  property. — The  issue  of  stock  for  prop- 
erty, labor  or  contracl  work  need  not  necessarily  be  accompanied 
with    the    formality    of    a  iption.4      Frequently   the   issue   is 

spoken  i  f  as  a  3ale  of  the  stock  for  the  property  received  in  pay- 
ment, metimee  the  issue  is  by  means  of  a  contract,  whereby, 
upon  the  completion  of  certain  work,  the  party  is  to  be  entitled  to 
the  stock.  The  .Ww  York  court  of  appeals  stated  the  law  clearly 
when  it  said,  in  r<  .  that  "the  right  of  the  offi- 
cers  of  a  railr  ration  to  enter  into  an  agreement  to  build 
its  road  and  pay  for  the  construcl  I  the  same  in  stock  or  bonds 
riously  questioned,  and  contracts  of  this  description  are 
[uently   made    for   Buch    a   pur  A    railroad   construction 

i  Farwell    V.                                 I.   Co.,  tion   against  any  other  mode  of  be- 

161    [11    522    (1     ••                                   Cor  coming  a  stockholder.     "If  a  railroad 

is  liabl  company  could  sell  its  stock  for  the 

although   afterwards        i             tor  to  right   of    way,    for   lands    for   depot 

whom    stuck    is    Issued    for    property  purposes,    for    iron,    or   anything   es- 

transfers  to  the                          ill-paid  sential  to  the  accomplishment  of  its 

share  of  stock  to  fulfill  the  Bubscrip-  purpose,    it   might   do   so."     It  is   a 

tion.     Dalton,   etc.   Co.    v.  Dalton,   06  legal  issue  of  stock  without  subscrip- 

L.  T.  Rep.   704    I  tion.     Western   Bank   of   Scotland  v. 

a Hebberd  v.  Southwestern,  etc.  Co.,  Tallman,   17   Wis.    530    (1863).     See 

X.  .J.   ]•:■!.   18   I                 Even  after  also  Clark  v.  Farrington,  11  Wis.  306 

subscriptions     to     stock     have     been  (1860) ;  Reed  v.  Hay t,  51  N.  Y.  Super, 

ia  cash,  the  company  Ct.  121    (1884);    aff'd,  109  N.  Y.  659. 

may  receive  land   from  a  third  party  In    Jackson    v.    Traer,    64    Iowa,    469 

in    payment    of    the    halance    due    on  (1884),  stock  having  been  issued  in 

such  subscriptions,  ami  such  payment  payment  of  contract  work,  the  court 

will    he    si                             though    the  said:     "We  have  seen  no  case  which 

land    turns    out    to    have    been   over-  recognizes  a  difference  between  those 

value,].     Carr  r.  Le  Fevre,  27  Pa.  St.  stockholders  who  become  such  in  pur- 

413    (1856).      i  ■               :t,   etc.,   infra,  suance   of  a   written   agreement  and 

a  (                 v.   Walton,   2:;   K.    I.   331  those  who  become  such  by  the  mere 

(1901).  acceptance  of  stock  issued  to  them." 

i  A     charter    provision    authorizing  ."Van   Cott  v.  Van  Brunt,  82  N.  Y. 
the    opening    of    stock    subscription  535    (1880).    See   also   Eppes   v.   Mis- 
books  does  not  amount  to  a  prohibi-  sissippi,  etc.  R.  R.,  35  Ala.  33  (1859); 
8                                                 H3 


§   23.]  METHODS  OP  ISSUING  STOCK.  [CH.    II. 

contract  by  which  the  work  is  paid  for  by  stock  and  bonds  is  not  a 
stock  subscription  nor  a  sale  of  the  stock,  but  is  merely  a  contract, 
and  the  receiver  of  the  railroad  cannot  hold  a  contractor  liable  for 
the  alleged  value  of  the  stock  and  bonds,  he  being  estopped  the  saun- 
as a  corporation  itself,  and  there  being  no  promise  to  pay  the  par 
value  of  the  stock.1 

It  is  doubtful,  however,  whether  any  clearness  of  ideas  is  ol>- 
tained,  under  any  circumstances,  by  calling  an  original  issue  of 
stock  a  sale  of  stock.  Such  a  transaction  is  not  a  sale  of  stock.  A 
sale  of  stock  means  a  transfer  of  stock  after  the  stock  has  been  is- 
sued, or  an  agreement  to  transfer  the  same.  Original  issues  of  stock 
which  are  occasionally  spoken  of  as  being  sales  of  stock  might  bet- 
ter  be  considered  as  informal  subscriptions  arising  by  the  acts  or 
declarations  of  the  parties,  and  payable  in  property.2 

§  23.  English  statutes  on  issues  of  stock  for  property. — In  Eng- 
land the  payment  for  stock  in  property,  Labor  or  contract  work  is 
regulated  largely  by  net  of  parliament.  The  statute  requires  that 
payment  shall  bo  in  cash,  unless  the  contract  allowing  payment 
in  property  is  registered  at  a  specified  public  registry.3  Neverthe- 
less, even  where  no  registry  is  made,  the  courts  have  held  that  a 
payment  in  property  at  its  real  value  is  equivalent  to  payment  in 
cash,  where  the  property  has  been  actually  delivered.4     Such  a  pay- 

Boody  v.  Rutland,  etc.  R.  R.,  3  Blatchf.  (1899).  A  so-called  sale  of  stock,  be- 
25  (1853);  s.  c,  3  Fed.  Cas.  857;  s.  c,  ing  the  original  issue  thereof,  is 
24  Vt.  G60;  Troy,  etc.  R.  R.  v.  New-  equivalent  to  an  original  subscription 
ton,  74  Mass.  59G  (1857);  McMahon  r.  therefor.  New  Haven  T.  Co.  v.  Gaff- 
New  York,  etc.  R.  R.,  20  N.  Y.  463  ney,  73  Conn.  480  (1901).  In  the 
(1859),  construing  such  a  contract,  case  of  Kohlmetz  v.  Calkins,  16  N. 
An  agreement  to  buy  stock  was  held  Y.  App.  Div.  518  (1897),  the  court 
to  be  a  subscription  to  stock  in  Lin-  held  that  a  sale  of  stock  was  an 
coin,  etc.  Co.  v.  Sheldon,  44  Neb.  executory  contract  to  take  the  stock, 
279   (1895).  and  that  a  tender  of  the   certificate 

i  Bostwick    t?.    Young,    118    N.    Y.  might  be  necessary   before   suit.     In 

App.  Div.  490   (1907).  .he  case  McDowell  v.  Lindsay,  213  Pa. 

2  See  Weiss  v.  Mauch   Chunk   Iron  St.   591    (1906),   the   court  said  that 

Co.,  58  Pa.  St.  295    (1868);   St.  Paul,  here  is  a  difference  between  an  orig- 

etc.  R.  R.  v.  Robbins,   23  Minn.   439  inal  subscription  of  stock  and  a  con- 

(1877);  Clarke.  Continental  Improve-  tract  by  the  corporation  for  the  sale 

ment    Co.,    57    Ind.    135    (1877).      In  of    stock    and    that    the    latter    may 

the  case  of  Seymour  v.  Jefferson,  74  apply  to  an  issue  of  increased  capital 

N.   W.    Rep.    149    (Minn.    1898),    the  stock. 

court   held   that   a   contract   to    take  3  Companies  Act,  Amendment  1867, 

stock    from    the    corporation    was    a  30  and   31  Vict,   ch.   131,   §   25. 

subscription  and  not  a  sale  of  stock.  4  Under    this    statute    three    classes 

There  is  no  difference  between  a  sub-  of    cases    of    unregistered    contracts 

scription  of  stock  and  a  sale  of  stock,  arise:      First,   where   payment   is   ac- 

Richardson  v.  Merritt,  74  Minn.  354  tually    made    in    property,    if    fairly 

114 


CH.  II.]  METHODS  OF  ISSUING  STOCK.  [§   24. 

ment  in  property,  however,  is  as  a  matter  of  favor,  and  not  as  a 
matter  of  right1  It  is  to  be  distinguished  from  the  payment  in 
property  which  the  subscriber  may  not  yet  have  made,  but  has  a 
right  to  make  in  the  future. 

§  24.  Performance  of  contract  of  payment  in  property— Obliga- 
tion of  the  corporation  to  issue  the  stock.  — Subscriptions  payable 
in  properly  are  not  subject  to  calls,  and  a  demand  for  the  property 
must  be  made  by  the  corporation.2  Upon  failure  of  the  subscriber 
to  furnish  the  property,  or  upon  Insolvency  of  the  corporation,  such 
subscriptions  become  payable  in  cash.3     A  corporation  may  compel 

made,  it  is  upheld,  under  the  princi-  tion     becomes     insolvent.       Peilatt's 

plea    laid    down    in    section    16.      See  Case,  L.  R.   2   Ch.  App.   527    (1867); 

Jones's    Case,    L.    R.    6    Ch.    App.    48  Stace's    Case,    L.   R.   4   Ch.   App.    682 

(1870);   Maynard's  Case,  L.  R.  9  Ch.  (1869);    Simpson's  Case,  L.  R.  4  Ch. 

App.  60  (1873);   |           at  by  colliery,  App.  184   (1869).    The  third  class  is 

Re  Bagglan    Hall   Colliery  Co.,  L.  R.  where  the  contract  to  pay  in  property 

5  Ch.  App.  346    I  L870);    Drummond'e  is  construed  to  be  a  condition  subse- 

Case,   L.   R.   4   Ch.   App.   772    (1869);  quent.    The  condition  being  subsequent 

Schroder's    Case,    L.    R.    11    Eq.    Cas.  the  party  must  pay;  and  if  the  corpora- 

131    (  1870);   Pell's  Case,  L.  R.  5  Ch.  tion  becomes  insolvent,  he  must  pay 

11     (1869);    by    services,    Ea    parte  in   cash.     Elkington's  Case,  L.  R.  2 

I      rk,  L.  R.   7   Eq.   650    (1869).     The  Ch.  App.  511   (1S67);  Bridger's  Case, 

amounts  on   each   side  must  be   pay-  L.  R.  5  Ch.  App.  305   (1870);   Thom- 

able  presently  and   in   cash.     Fother-  son's  Case,  34  L.  J.  (Ch.)  525  (1865); 

gill'a    Case,    L.    R.    8    Ch.    App.    270  Re    Southport,   etc.     Banking   Co.,   L. 

<i^7::t;  so  that  the  transaction  is  in  K.   :;i    Ch.  D.   121    (1885).     See  also 

the  nature  of  a  set-off.    Forbes's  Case,  §§  78,  80,  infra. 

L.    K     5    Ch.    App.    270    dsTo);    Re  i  See  §  21,  supra. 

Johannesburg  Bote]  Co..  [1891]  l  Ch.  2  See    §89,    infra.     A    subscription 

119.    Conveyance  of  a  lease  held  to  be  which  by  its  terms  is  payable  partly 

a  good  payment.     Spargo's  Case,  L.  R.  in  cash  and  partly  in  stock  of  another 

8   Ch.   App.   4n7    (1873).     Where  the  corporation,     does     not     sustain     an 

parties  fail  to  register  their  contract  action  for  cash  altogether.    Southern, 

as  required  by  law,  they  are  liable  ou  etc.    Co.   v.    Yeatman,   134   Fed.   Rep. 

the  stock  to  the  full  par  value  thereof  810    (1905). 

in  cash,  but  may  set  off  a  debt  due  3  See  §  89,  infra.  Although  prop- 
to  them  from  the  company.  Re  Jo-  erty  which  is  deeded  to  a  corporation 
hannesberg  Hotel  Co.,  [1S91]  1  Ch.  in  payment  for  stock  is  really  subject 
119,  following  Spargo's  Case.  A  to  a  mortgage  which  is  not  mentioned 
second  class  of  unregistered  agree-  in  the  deed,  the  grantor  is  not  liable 
ments  to  take  pay  in  property  turn  on  covenant  of  title  where  another 
upon  the  question  whether  the  agree-  piece  of  property  was  also  deeded  as 
ment  that  payment  shall  be  in  compensation  for  the  amount  of  the 
property  is  a  condition  precedent  or  mortgage.  Johnston  v.  Markle  Paper 
subsequent  to  the  subscription.  If  Co.,  153  Pa.  St.  189  (1893).  Where  a 
the  condition  is  precedent,  and  must  person  subscribes  for  stock  payable 
be  performed  before  the  subscription  by  its  terms  in  wages,  and  the  di- 
can  be  enforced,  none  of  the  parties  rectors  pay  such  subscription  in  full 
are  bound,  even  though  the  corpora-  and  take  the  wages,  but  before  the 

115 


§  25.] 


METHODS  OF  ISSUING   STOCK. 


[CH.    II. 


specific  performance  of  a  contract  for  a  deed  of  land  in  consideration 
of  the  issue  of  stock,  such  contract  having  been  made  by  the  pro- 
moters and  accepted  by  the  corporation.3  When-  a  corporation  has 
issued  stork  for  services  which  haw  aever  been  performed  it  may 
maintain  a  bill  in  equity  to  cancel  such  stock.2  A  payment  of  part 
of  the  subscription  in  cash  docs  not  waive  the  right  of  the  sub- 
scriber to  pay  the  balance  in  property.8 

The  stock  may  be  issued  to  a  contractor  before  his  work  in  pay- 
ment therefor  has  been  completed.4  If  the  corporation  prevents 
the  completion  of  tho  contract  or  refuses  to  fulfill,  the  contractor 
may  hold  it  liable  for  damages  or  may  have  specific  performance.5 
A  contract  by  which  a  party  turns  in  land  in  exchange  fc>T  stock 
may  be  such  as  to  give  him  a  vendor's  lien  on  such  land  in  case  the 
scheme  is  not  carried  out.0 

§  25.  Third  method  of  issue:  By  stock  dividend. — The  third 
method  of  issuing  stock  is   by   a   stock  dividend.      It  is   allowable 


stock  is  fully  paid  for  by  him  the 
corporation  becomes  insolvent,  he  can- 
not recover  back  the  part  already 
paid  out  of  his  wages.  Lincott  r. 
Northwood,  etc.  Co.,  G8  N.  H.  2G0 
(1895).  Where  a  subscriber  for  stock 
has  the  option  of  paying  cash  or 
property,  and  he  sells  the  property  to 
another,  he  is  liable  for  the  par  value 
of  the  stock.  Enslen  v.  Nathan,  136 
Ala.  412    (1903). 

i  Scadden,  etc.  Co.  v.  Scadden,  121 
Cal.  33   (1898). 

An  agreement  of  several  parties  to 
sell  their  property  to  a  corporation  in 
exchange  for  stock  of  the  latter,  the 
amount  of  stock  going  to  each  to  be 
determined  by  arbitrators,  will  not  be 
specifically  enforced  where  the  arbi- 
trators have  fixed  the  value  in  an 
illegal  way.  Any  party  may  with- 
draw from  such  a  contract  prior  to 
the  time  when  it  has  been  signed  by 
all.  Consolidated,  etc.  Co.  v.  Nash, 
109  Wis.  490    (1901). 

2  Hillside,  etc.  Ass'n  v.  Holmes, 
97  Minn.   261    (1906). 

3  See'  §  89,  infra. 

4  See  §  766c,  infra. 

5  See  §  766c,  infra.  Where  various 
properties  are  transferred  to  a  coal 
company   for   stock,   on   the    further 


understanding  that  all  moneys  al- 
ready expended  on  such  properties 
should  be  repaid  in  bonds  of  a  rail- 
way to  be  guaranteed  by  the  coal 
company,  but  such  distribution  of 
bonds  is  never  made  on  account  of 
the  impossibility  of  such  a  guarantee 
being  legally  made,  one  of  the  parties 
who  turned  in  his  property  may  hold 
the  coal  company  liable  in  damages 
for  the  amount  of  money  expended 
by  him  on  the  property  before  turn- 
ing it  in  for  stock.  Crown,  etc.  Co. 
v.  Thomas,  177  111.  534  (1898).  Even 
though  a  promoter  by  agreement 
made  with  a  foreign  corporation,  be- 
fore the  incorporation  of  a  mining 
company,  was  to  have  one  share  of 
stock  for  his  services  for  every  ten 
shares  which  he  obtained  subscrip- 
tions for,  and  the  company  accepted 
the  subscriptions,  yet  he  cannot  hold 
it  liable  for  the  value  of  the  stock 
to  be  received  by  him  as  commissions 
where  he  merely  demanded  it  by 
letter  and  the  company  offered  to  de- 
liver it  after  suit  was  brought. 
Teeple  v.  Hawkeye,  etc.  Co.,  114  N. 
W.  Rep.  906   (Iowa  1908). 

6  Slide,  etc.  Mines  v.  Seymour,  153 
U.  S.  509,  520  (1894).  A  vendor'3 
lien  may  apply  to  a  sale  of  property 


116 


CII.  II.  1  METHODS  OP  ISSUING  STOCK.  [§§  26,  27. 

when  an  amount  of  cash  or  property  equal  to  the  amount  of  the 
par  value  of  the  stock  so  divided  is  added  to  the  capital  stock  of 
the  corporation.  A  stock  dividend  can  he  made  only  when  the 
whole  of  the  capital  stock  has  not  been  issued,  or  when  it  has  been 
increased.  An  issue  of  stock  by  a  stock  dividend  is  prohibited  by 
constitutional  or  legislative  enactment  in  some  states.  In  England 
it  has  been  a  question  of  doubt  whether  stockholders  can  be  com- 
pelled to  accept  a  dividend  of  stock.  These  questions,  however,  are 
discussed  elsewhere.1  :i 

§  26.  Pledge  of  stock  by  a  corporation. — It  is  now  settled  that  a 
corporation  may  pledge  its  unissued  stock  to  secure  the  debts  of 
the  corporation.2  It  is  also  clear  that,  for  non-payment  of  the  debts 
s.i  secured,  the  pledgee  may  sell  the  Btock;3  and  such  sale  is  legal 
even  though  the  Btock  do<  -  D.ol  sell  for  its  full  par  value.4 

7.  Issue  of  stock  for  partnership  property  or  the  property  of 
another  corporation. — A  copartnership  may,  of  course,  sell  its  stock 
to  a  corporation  and  take,  shares  of  stock  in  payment.  But  if  the 
partnership  La  in  a  failing  condition  at  the  time  of  the  transfer,  the 
creditors  of  the  firm  may  in  some  eases  disregard  the  sale  and  levy 
an  execution  on  the  property  itself.8  The  same  rules  apply  to  a  sale 
by  one  company  to  another.8 

for  stock.    Barter  r.  Capital  City,  etc.  4  See  §  465,  note. 

64   X.  J.  Bq.   165   (1902).  r-  This    subject    and    the    numerous 

is            .  and  ch.  XXXII,  infra.  complicated  questions  connected  with 

2  Sec  I  465,  infra.  it  are  considered  in  ch.  XL,  infra. 

3  See  §  47G,  infra.  c  See  ch.  XL. 


117 


CHAPTER  III. 

"WATEKED"  STOCK— STOCK  ISSUED  ILLEGALLY  FOR  MONEY.PROP- 
ERTY.OB  BY  A  stock  DIVIDEND.  [T  IS  THEN  CALLED  "WATERED" 

OR  FICTITIOUSLY    PAID-UP  STOCK. 


A.    NATURE   OF  WATERED   STOCK. 

§  28.  Definition  and  nature  of  "wa- 
tered" or  fictitiously  paid-up 
stock. 

29.  Methods    of    issuing    "watered" 

stock. 

30.  Dicta  in  regard  to  such  issues. 

31.  Fictitious  stock  may  be  voidable. 

B.    WATERED  STOCK  ISSUED  FOR  CASH. 

32.  First  method  of  issue:    By  dis- 

count in  cash. 

33.  34.  Dangers        attending        this 

method. 

C.  WATERED  STOCK    ISSUED  EOR  PROPERTY 

OB    CONSTRUCTION    WO  UK    WHICH    IS 
OVERVALUED. 

35.  Second  method:     Issue  of  stock 

for  property  taken  at  an  over- 
valuation. 

D.  WHO     MAY     COMPLAIN     AND     AOAINST 

WHOM    COMPLAINT    MAY   RE   MADE. 

36.  Liability    on     "watered"     stock, 

and  who  may  enforce  it. 

37.  Who  may  complain  of  an  issue 

of  stock  as  "paid  up"  when  it 
has  not  been  fully  paid? — The 
state. 

38.  Right  of  the  corporation  itself  to 

complain. 

39.  Stockholders     participating     in 

the  act  cannot  complain. 

40.  Transferees       of       participating 

stockholders  may  complain, 
when? 

41.  Stockholders   dissenting    at    the 

time  of  the  issue  may  com- 
plain. 


§  42.  Corporate  creditors  as  complain- 
ants where  the  issue  is  for 
money — Bonus  of  stock  with 
bonds — Issue  of  stock  by  em- 
barrassed corporation — What 
creditors  may  complain. 

43.  Corporate  creditors  as  complain- 
ants where  the  issue  is  tor 
property  or  construction  work. 

11.  Who  is  liable,  and  the  character 
of  the  liability — Liability  of 
the  corporation. 

45.  Liability  of  persons  to  whom 
stock  is  issued  for  cash  at  less 
than  par. 

4G,  47.  Liability  of  persons  to  whom 
stock  is  issued  for  property 
taken  by  the  corporation  at  an 
overvaluation  —  Liability  of 
such  persons  under  various 
constitutional  provisions  in 
Pennsylvania,  Illinois,  Califor- 
nia, Nebraska,  Alabama,  Ar- 
kansas, Missouri,  Texas,  Louis- 
iana, Colorado,  South  Dakota, 
and  other  states,  and  under 
statutory  provisions  in  New 
York,  Maine,  Ohio,  Wisconsin, 
Minnesota,  Tennessee,  In- 
diana, New  Jersey,  Washing- 
ton, Iowa,  Massachusetts,  Ore- 
gon and  Utah — Treasury  stock. 

4S.  Liability  of  the  officers  of  the 
corporation. 

49.  Liability    of    the    persons    pur- 

chasing the  stock  with  notice. 

50.  Liability  of  bona  fide  transferees 

without  notice. 

E.  ISSUE  OF  WATERED  STOCK  BY  A  STOCK 

DIVIDEND. 

51.  Third   method:    Issue   by   stock 

dividends. 

F.  ISSUE   OF   WATERED   STOCK   ON   A   CON- 

SOLIDATION. 

51a.  Fourth  method:  Issue  by  a  con- 
solidation of  companies. 


A.    NATURE    OF    WATERED    STOCK. 


§  28.    Definition  and  nature  of  *  'watered"  or  fictitiously  paid-up 

stock. — Watered  stock  or  fictitiously  paid-up  stock  is  stock  which 

118 


CH.  III.]  "watered"  STOCK.  [§  29. 

is  issued  as  fully  paid-up  stock,  when  in  fact  the  whole  amount  of 
the  par  value  thereof  has  not  been  paid  in.  All  stock  which  has 
been  issued  as  paid-up  stock,  but  the  full  par  value  of  which  has 
not  been  paid  into  the  corporation  in  money  or  money's  worth,  is 
watered  to  the  extent  that  the  par  value  exceeds  the  value  actually 
paid  iu.  Watered  Btock  is,  accordingly,  stock  which  purports  to 
represent,  but  doea  aol  represent,  in  good  faith,  money  paid  into 
the  treasury  of  the  company,  or  money's  worth  actually  contributed 
to  the  capital  of  the  concern. 

The  issue  of  Bharee  of  stock  as  "paid  up,"  when  in  fact  they  are 
nol  paid  up,  gives  rise  to  Borne  of  the  most  complicated  questions 
connected  with  the  law  of  corporations.  A  share  of  stock  is  sup- 
posed,  in  theory,  to  represent  its  par  value  in  money  or  money's 
worth  paid  in  or  to  be  paid  in  to  the  corporation.  Accordingly  when 
it  is  i  —  1 1 <  •  I  as  paid  up,  it  is  boughl  and  sold  in  the  open  market  on 
tin-  supposition  that  it  is  full-paid  stock.1  Upon  this  basis,  trans- 
actions  in  paid  up  Btock,  involving  millions  of  dollars,  are  of  daily 
occurrence  in  the  commercial  centers  of  the  country.  The  fact  is, 
however,  that  where  stock  ia  issued  in  payment  for  property,  the 
actual  value  of  the  property  is  rarely  equal  to  the  par  value  of  the 
Btock  issued  for  it.  Especially  is  this  the  case  with  the  great  in- 
dustrial corporations.  Hence  it  becomes  important  to  know  what 
liability  ifi  attached  to  such  stock;  who  is  liable;  to  whom  the  lia-l 
bility  arises,  and  when  the  liability  may  be  enforced.  i 

ij  l'!>.  Methods  of  issuing  "watered"  stock. — There  are  four  dif- 
ferent ways  in  which  watered  stock  is  issued:  First,  by  the  issue  of 
certificate  a  of  stock  for  an  amount  of  money  less  than  the  par  value 
of  the  stock,  although  the  certificates  assert  on  their  face  that  the 
full  value  has  been  paid  in;  Becond,  for  property  or  construction 
work  taken  at  an  overvaluation;  third,  by  a  stock  dividend,  the 
equivalent  par  value  of  which  has  not  been  added  to  the  capital 
stock;  and  fourth,  by  consolidation  under  a  statute.     Each  of  these 

i  The  reasons  why  the  par  value  of  such   value   it   is   either  a  deception 

stock   is   required   by  the   law  to  be  and  fraud  upon  the  public,  or  an  evi- 

tiirned  in  to  the  corporation  are  stated  dence  that  the  original  value  of  the 

by  the  supreme  court  of  the  United  corporate  property  has  become  depre- 

States  in  Handley  v.  Stutz,  139  U.  S.  ciated.    .    .    .    If  it  be  once  admitted 

417,  428   (1S91),  as  follows:  that   a   corporation   may   issue  stock 

"The  stock  of  a  corporation  is  sup-  without  receiving  a  consideration 
posed  to  stand  in  the  place  of  actual  therefor,  and  where  it  does  not  repre- 
property  of  substantial  value,  and  as  sent  actual  or  substituted  value  in 
being  a  convenient  method  of  repre-  corporate  assets,  there  is  apparently 
senting  the  interest  of  each  stock-  no  limit  to  the  extent  to  which  the 
holder  in  such  property,  and  to  the  original  stock  may  be  'watered,'  ex- 
extent  to  which  it  fails  to  represent  cept  the  caprice  of  the  stockholders." 

119 


§30.] 


"watered" 


STOCK. 


[OH.    HI. 


four  methods  may  bo  the  means  of  issuin  k  which  has  1- 

paid  up  in  good  faith.  Each,  also,  is  available  for  the  issue  of 
"watered"  stock.  The  second  method  particularly— thai  of  taking 
property  at  an  overvaluation — is  well  calculated  to  concea]  the  fic- 
titious character  of  the  issue,  and  to  accomplish  the  purpos<  a  of  the 

participants. 

Where  a  corporation  has  acquired  shares  of  its  own  paid-up  capi- 
tal stock,  cither  by  purchase  or  by  forfeiture  for  uon-paymenl  of 
calls,  it  may  legally  re-issue  and  sell  the  same  at  Less  than  the  par 
value  thereof.1 

§30.  Dicta  in  regard  to  such  issues. — There  have  been  various 
opinions,  generally  dicta,  as  to  the  character  of  stock  issued  as  paid 
up,  when  in  fact  it  ha<  not  been  paid  for.  The  customary  expres- 
sion is  that  such  an  issue  is  a  fraud  upon  the  law  and  upon  the 
public  and  upon  the  stockholders;  i  r  that  i1  is  againsl  public  policy; 
or  is  a  fraud  on  subsequent  purcha  he  stock  so  issued.2     The 

law  now  is,  however,  that  an  issue  of  stock  as  full  paid-up  stock, 
under  an  agreement  that  the  full  par  value  shall  not  be  paid,  is  not 
necessarily  a  fraudulent  transaction,  but  that  as  between  the  par- 
ties thereto  it  is  a  legal  and  valid  agreement,  and  violates  no  prin- 
ciple of  public  policy.3 


i  Sea  §  46,  infra. 

2  In  Barnes  v.  Brown,  80  N.  Y.  527, 
534    (1880),  the  court  said   in  a  dic- 
tum:   "It  is  not  claimed,  and  could 
not  be  claimed,  that  the  corporation 
or  its  directors  could  create  any  valid 
stock   by   issuing   the   same    without 
any  consideration.    The  directors  as- 
suming  to  issue  stock   in  that  way 
would  perpetrate  a  wrong  upon  the 
corporation  and  its  stockholders,  and 
a  fraud  upon  every  person  who  took 
such  stock  as  full-paid  stock,  relying 
upon   the  appearances,   and   deceived 
thereby."     In  the  case  of  Sturges  v. 
Stetson,  1  Biss.  246,  253  (1858) ;    s.  c, 
23  Fed.  Cas.  311,  314,  the  court  said: 
"The  subscription  of  stock  by  plain- 
tiff,  for   less   than  the   price   of  the 
shares  fixed  by  the  charter,  was  void, 
as  against  law  and  the  power  of  the 
directors."     See  also  Ex  parte  Dan- 
iell,  1  De  G.  &  J.  372    (185.7);    Oli- 
phant  v.  Woodburn,  etc.  Co.,  63  Iowa, 
332    (1884);     Tobey   v.   Robinson,   99 
111.  222,  228  (1881);    Osgood  v.  King, 


42  Iowa,  478  (1876).  In  Coleman  p. 
Howe,  154  111.  458  (1S95),  the  court 
said:  "The  issue  of  paid-up  shares 
at  less  than  their  par  value  is  a  fraud 
upon  the  creditors." 

8  In  Scovill  r.  Thayer,  105  U.  S.  143, 
153  (1881),  the  court  said:  "It  is  con- 
ceded to  have  been  the  contract  be- 
tween him  and  the  company  that  he 
should  never  be  called  upon  to  pay 
any  further  assessments  upon  it  [the 
tock].  The  same  contract  was  made 
with  all  the  other  shareholders,  and 
the  fact  was  known  to  all.  As  be- 
tween them  and  the  company  this 
was  a  perfectly  valid  agreement.  It 
was  not  forbidden  by  the  charter  or 
by  any  law  or  public  policy."  In  Re 
Ambrose,  etc.  Co.,  L.  R.  14  Ch.  D.  390, 
394,  395  (18S0),  where  paid-up  stock 
was  issued  for  property  taken  at  a 
gross  overvaluation,  the  court  said: 
"It  seems  to  me  impossible  to  say 
that,  however  wrong  the  transaction 
was  in  respect  to  other  persons,  there 
was  anything  wrong  as  between  the 


120 


CH.   III.] 


1 '  WATERED  ' ' 


STOCK. 


[§   30. 


The  explanation  of  this  is,  as  will  be  shown  hereafter,  that  such 
issues  are  open  to  attack  in  some  cases  and  in  other  cases  not.  It 
depends  altogether  on  who  complains  of  the  issue  and  against  whom 
complaint  is  made.  The  issue  may  be  fraudulent  as  to  one  party 
while  it  is  free  from  fraud  as  to  another  party. 

The  genera]  Btatement  of  law  that  watered  stock  is  illegal  throws 


company  and  the  vendors."  In  Flinn 
p.  Bagley,  7  Fed.  Rep.  785  (1881),  the 
court  held  that  it  was  only  as  a  fraud 
upon  future  creditors  that  exception 
could  be  taken  to  an  Issue  of  stock 
at  a  discount  In  Lorlllard  v.  Clyde, 
86  N.  V.  384  (  1881  i.  the  court  b 
it  legal  for  the  parties,  as  between 
themselves,  to  paid-up  stock  for 

iperty  taken  at  a  valuation  agreed 
upon  between  themselves.  The  court 
Bald:     "If    it    had    a;  I    that    the 

organization  of  the  corporation  in 
this  way  was  a  device  to  defraud  the 
public,  by  putting  valueless  stock  on 
the  market,  having  an  apparent  basis 
only,  a  different  question  would  be 
presented."  See  also  Otter  v.  Bre- 
voort,  etc.  Co.,  50  Barb.  247,  256 
i  1867),  dictum;  Spring  Co.  v.  Knowi- 
ton,  103  U.  S  3   (1880),  dictum. 

In  an  article  in  the  "Statist"'  of  April 
6th.    1907,    the    following   statements 
are  made:  "The  assent  of  both  Houses 
of  Parliament  in  England  has  more 
than    once   been    given   to  operations 
by  which  the  Ordinary  stock  of  Eng- 
lish    railroads    has    been    converted 
from  £100  of  Ordinary  stock  into  £100 
of     Preferred     Converted     Ordinary, 
bearing  a  low  rate  of  dividend,  and 
£100    Deferred    Converted    Ordinary, 
thereby  doubling  the  amount  of  the 
original   stock.     ...     It  seems  to 
me  that  in  condemning  watered  capi- 
tal  the  American  public  are  led  by 
theorists.     If   a   law   prohibiting  the 
issue  of  stock  unless  for  par  in  cash 
had   existed   in   that  country  in   the 
past,  many  of  what  are  now  big  sys- 
tems  would   never  have  been  built; 
and    if   in   the  future   the   capital   of 
railroads    is    to    represent    no    more 
than  the  money  spent,  it  follows  that 


no  new  railroads  will  be  built,  unless 
by  existing  dividend-paying  systems. 
.  .  .  To-day  the  law  of  Massachu- 
setts prevents  a  sale  of  stock  under 
par.  It  is  a  good  law  for  a  developed 
and  rich  State  like  Massachusetts, 
and  would  be  a  good  law  for  the 
United  States,  but  its  provisions  must 
not  be  so  inelastic  as  to  throttle  the 
country's  development." 

There  have  been  various  dicta  in 
the  cases  and  text-books  that  the  is- 
sue of  "watered"  stock  by  mining 
companies  is  a  customary,  and  hence 
legal,  issue.  There  is  no  reason,  how- 
ever, why  stock  issued  for  a  mine 
should  be  issued  more  recklessly  than 
stock  issued  for  a  patent  right. 

The  case  generally  cited  as  holding 
that  mining  companies  may  legally 
issue  watered  stock  is  Be  South 
.Mountain  Consol.  Min.  Co.,  7  Sawy. 
30  (1SS1);  B.c,  5  Fed.  Rep.  403.  In 
this  case,  however,  it  is  stated  that 
corporate  creditors  were  protected 
"by  the  personal  liability  of  each 
stockholder  for  his  pro  rata  share  of 
the  indebtedness  of  the  corporation." 
Aff'd,  14  Fed.  Rep.  347  (1882). 

Under  the  Minnesota  statute  au- 
thorizing mining  corporations  to  sell 
their  unissued  stock  as  the  corpora- 
tion might  see  fit,  and  providing  that 
if  issued  thus,  as  paid  up,  no  further 
liability  should  exist,  the  sale  of 
shares  of  a  par  value  of  $2  for  six 
cents  exempts  the  purchaser  from 
further  liability  to  any  one,  includ- 
ing corporate  creditors.  Ross  v.  Kel- 
ly, 36  Minn.  38  (1887).  See,  in  gen- 
eral, Kimberly  v.  Arms,  129  U.  S.  512, 
530  (1889).  A  distribution  of  in- 
creased capital  stock  for  no  considera- 
tion whatsoever  seems  to  have  been 


121 


k  31  ]  "watered"  stock.  [oh.  hi. 

little  light  upon  the  important  questions  of  the  rights,  risks  and  lia- 
bilities growing  ont  of  such  issues  of  stock.  The  stockholder  and 
the  practitioner  wish  to  know  whether  such  stock  is  void  or  i-  void- 
able, or  is  valid.  They  wish  to  know,  also,  whal  are  the  rights  and 
remedies  of  the  various  parties  involved.  If  the  stock  is  valid,  then 
the  question  arises  whether  any  one  is  liable  for  that  part  of  the 
par  value  which  has  not  been  paid,  and  also  who  may  bring  suit  to 
enforce  that  Liability. 

It  is  well  settled  that  watered  stock  is  not  illegal  and  void,  per  se, 
unless  it  is  declared  to  be  void  by  constitutional  or  statutory  pro- 
visions. Nearly  all  the  cases  assume  this  to  be  the  rule,  and  do  not 
discuss  it.  Even  when  a  constitution  or  statute  declares  such  stock 
to  be  void,  it  is  rarely  possible  to  apply  the  statutory  law.  A  few 
cases  speak  of  such  stock  as  being  void,  but,  inasmuch  as  the  reme- 
dies given  in  those  cases  were  remedies  for  the  rescission  of  con- 
tracts for  fraud,  they  do  not  establish  the  proposition  that  the  issue 
was  void  absolutely.1  Thus,  a  bona  -fide  purchaser  of  stock  issued 
without  consideration  in  violation  of  the  constitution  and  statutes 
of  Louisiana  may  nevertheless  have  a  status  to  enjoin  illegal  acts  of 

the  directors.2 

§  31.  Fictitious  stock  may  be  voidable. — Is  stock  voidable  when 
fraudulently  issued  as  paid  up?  There  are  few  cases  on  this  ques- 
tion, but  the  courts  hold  that  such  issues  of  stock  may  be  avoided 
by  a  withdrawal  of  the  issue  and  a  cancellation  of  the  certificates. 
Thus,  a  court  of  equity,  on  the  application  of  a  dissenting  stock- 
holder, has  decreed  that  stock  falsely  issued  as  paid-up  stock  should 
be  delivered  up  to  the  corporation  for  cancellation.3  Where,  how- 
sustained  in  Knapp  v.  Publishers,  127  has  been  declared  void  by  a  court  in 
Mo.  53  (1895),  there  being  no  creditors  New  Hampshire  as  being  contrary  to 
and  all  the  stockholders  assenting.  the  statute,  yet  the  subscriber  cannot 

l  Sturges  v.  Stetson,  1  Biss.  246  recover  back  the  money  paid  if  he  has 
(1858);  s.  a,  23  Fed.  Cas.  311;  Fos-  delayed  eight  years  after  the  issue 
dick  v.  Sturges,  1  Biss.  255  (1858);  of  stock  before  bringing  suit.  Hal- 
S.C.,  9  Fed.  Cas.  501;  Gilman,  etc.  lett  v.  New  England,  etc.  Co.,  105  Fed. 
R.   R.    v.    Kelly,    77    111.    426    (1875);     Rep.  217   (1900). 

Campbell  v.  Morgan,  4  Bradw.  (111.)  2  United  Elect.  Sec.  Co.  v.  Louisiana 
100  (1879).  The  stock  is  voidable  Elect.  L.  Co.,  6S  Fed.  Rep.  673  (1895). 
rather  than  void  even  in  Alabama  2  Gilman,  etc.  R.  R.  v.  Kelly,  77  111. 
under  a  constitutional  prohibition.  426  (1875).  In  this  case  it  was  ad- 
Nicrosi  v.  Irvine,  102  Ala.  648  (1893).  mitted  that  the  stock  was  issued 
See  also  §  47.  Even  though  a  citizen  gratuitously  and  for  the  purpose  of 
of  Massachusetts  subscribes  and  re-  enabling  the  construction  company  to 
ceives  stock  in  a  New  Hampshire  cor-  own  a  majority  of  the  stock,  thereby 
poration  at  sixty  per  cent,  of  its  par  controlling  the  corporation, 
value,   and   even   though  such   stock 

122 


en.  in.]  "watered"  stock.  [§  32. 

ever,  the  stock  has  passed  into  the  hands  of  bona  fide  purchasers  for 
value,  such  purchasers  are  entitled  to  retain  the  stock.  Some  cases 
intimate  that  the  Btock  fictitiously  issued  may  be  canceled,  except 
a  part,  whose  par  value  would  equal  the  amount  actually  paid  in  by 
the  persons  receiving  it.1  Many  cases  hold  also  that  the  transaction 
ie  in  the  nature  of  a  fraudulent  contract,  and  that  it  may  be  rescinded 
for  fraud;  in  which  case  the  stuck  would  have  to  be  returned  to  the 
corporation. 

So  far  as  the  right  of  the  corporation  to  issue  stock  below  par  is 
concerned,  the  courts  have  frequently  held  that  the  issue  is  an 
ultra  vires  act2  But  an  ultra  vires  act  is  not  always  void  abso- 
lutely, ami  it  ia  voidable  only  a1  the  instance  of  persons  standing 
in  a  certain  relation  towards  the  act  Who  can  avoid  the  act  will 
be  explained  hereafter. 

B.     w.\TI.::i  l>   STO<   K    ISSUED  FOR   CASH. 

§32.  First  method  of  issue:  By  discount  in  cash.— As  already 
stated,  paid-up  Btock  may  be  improperly  issued  in  four  different 
methods:  by  pari  cash  payment;  by  taking  property  at  an  over- 
valuation; by  an  invalid  Btock  dividend;  and  by  consolidation. 

.\-  [ague  of  paid-up  stock  for  cash,  upon  payment  of  only  part  of 
the  par  vain-  of  the  Btock,  is  not  often  uncle,  inasmuch  as  the  real 
nature  of  the  transaction  lb  readily  discovered  and  easily  remedied. 
Sometimes  the  corporation  makes  the  issue  under  a  contract  with 
tl„  eiving   i\    that   no  more   than   a  certain  percentage  of  the 

par  value  will  be  called   for.     Again,  a  release  is  sometimes  made 

i  Sturges  D   Stetson,  1  Diss.  246,  254  management  on   the  part  of  the   di- 

(1858)-     s  c     23   Fed.  Cas.   311,   315.  rectors.     It  is  a  question  of  power." 

The  court  said,  in  a  dictum,  that  stock  In  West  Cornwall  Ry.  v.  Mowatt,  12 

taken  at  less  than  par,  with  knowl-  Jur.,  pt.  1,  407   (1848),  the  court  sus- 

edge    is  subject  to  the  right  of  other  tained  a  demurrer  to  a  bill  for  spe- 

stockholders,  being  such  at  the  time  cine    performance    of    a    contract    to 

of   its   issue    "to   have   it  reduced   to  take  shares  from  the  corporation  at 

the  charter  'value  of  the  shares.    This  a  discount,  the  court  holding  that  the 

would  take  from  him  nearly  one-third  contract  was  ultra  vires     ^f*V*** 

of  his  shares."    In  Fosdick  v.  Sturges,  Danlell,  lDeG.fi  J.  372  (1857  ,  the 

1  Biss.  255    (1858);   S.  ...  9  Fed.  Cas.  court  says:    "It  was  very  properly  ad- 

501,  the  court  says  there  can  be  no  mitted     .     .     .     that  the  directors  of 

question   that   this    remedy    is   avail-  the   company  had   no  power  to  pass 

the  resolution"  issuing  the  stock  for 

1  2Fisk    v.    Chicago,    etc.    R.    R.,    53  less   than   its  par  valne      In  Dunn's 

Barb     513    (1868).    where   the    court  Case,  2  De  G.f  F.  &  J.  2<o,  29o  (1860), 

Sys:'    "I     Is  not  a  question  of  good  it  is  held  to  be  "beyond  the  functions 

faith,   or   of   honest    intention,- or   of  and  in  excess  of  the  powers     of  the 

wise    policy,    or    skilful    or    discreet  directors. 

123 


33-35.] 


"w 


[CH.   III. 


by  a  resolution  of  the  directors  or  stockholder.-,  after  subscriptions 
have  been  made  and  partly  paid,  discharging  the  subscribers  from 
any  further  liability  on  such  subscriptions.  The  proceedings  are 
generally  spread  upon  the  corporate  records;  certificates  are  is- 
sued, asserting  on  their  Pace  that  they  are  paid  up;  and  all  inquiries 
at  the  corporate  oilier  are  answered  by  a  substantiation  of  thai 
sertion. 

§§33,  34.  Dangers  attending  this  method. — There  arc  various 
dangers  and  liabilities  growing  out  of  such  a  transaction.  The 
stock  is  liable  to  be  canceled.11  The  person  to  whom  it  was  issued,2 
or  his  transferee  with  notice,8  or  the  corporate  officers  participat- 
ing in  the  act,4  may,  under  certain  circumstances,  each  be  held 
liable  personally  for  the  unpaid  par  value  of  the  stock.  They  may 
be  liable  to  the  corporation  itself,8  or  to  the  corporate  creditors,6  or 
to  bona  fule  transferees  of  the  stock.7 

A  bona  fide  transferee  of  such  stock,  however,  is  not  liable.8 

C.    WATERED   STOCK    ISSUED    FOB    PBOPEBTT    OB    CONSTUUCTION    WORK 

W1LICII    IS    OVEEVAIiUED. 

§  3  5.  Second  method:  Issue  of  stock  for  property  taken  at  an  over- 
valuation.— A  second  method  of  issuing  stock  as  paid  up,  when  it 
is  not  actually  paid  up,  is  by  its  issue  for  property  taken  at  an 
overvaluation.  This  method  is  the  most  frequently  employed,  the 
most  difficult  to  prove,  and  the  leasl  easy  to  remedy.  A  large  amount 
of  litigation  and  confusion  has  been  experienced  in  determining  the 
principles  of  law  which  should  govern  such  transactions.  The  ques- 
tions which  have  perplexed  the  courts  were,  first,  what  constitutes 
an  overvaluation  sufficient  to  invalidate  the  contract;  second,  what 
remedy  should  be  applied  when  the  contract  was  invalid. 

It  is  now  well  settled  that  in  order  to  invalidate  an  issue  of  stock 
which  is  issued  for  property  taken  at  an  overvaluation,  it  must  be 
shown  not  only  that  there  was  an  overvaluation,  but  also  that  such 
overvaluation  was  intentional  and  fraudulent.9  Moreover,  it  does 
not  follow  that  because  the  issue  was  invalid  the  holders  of  the  stock 
are  liable  thereon.10    The  better  rule  is  that  in  such  a  case  rescission 


i  See  §  31,  supra. 

2  See  §§  46,  47,  167,  infra. 

3  See  §  49,  infra. 

4  See  §  48,  infra. 

5  See  §  38,  infra. 

6  See  §  42,  infra. 
i  See  §  40,  infra. 
8  See  §  50,  infra. 


o  Quoted  and  approved  in  Calivada, 
etc.  Co.  v.  Hays,  119  Fed.  Rep.  202 
(1902);  Speer  v.  Bordeleau,  20  Colo. 
App.  413  (1905),  and  Kelley  v.  Fletch- 
er, 94  Tenn.  1  (1894).  See  also  §§  46, 
47,  infra,  and  119  Fed.  Rep.  202. 

io  See  §  46,  infra. 


124 


ch.  m.]  "watered"  stock.  [§§36  37. 

is  the  only  remedy,  the  property  being  returned  to  the  stockholder 
and  the  stock  returned  to  the  corporation.1 

The  property  is  uot  to  be  considered  as  overvalued  merely  be- 
cause, subsequently,  it.  turns  out  to  be  so.  The  various  circum- 
stances under  which  the  valuation  was  made  should  be  considered 
in  determining  the  bona  fides  of  the  transaction.2 

D.     WJIi)   MAY   COMPLAI1S   AND  AGAINST   WHOM  COMPLAINT  MAT  BE 

.MADE. 

§  3G.  Liability  on  "watered"  stock,  and  who  may  enforce  it.— 
When    it    h;  tablished    that   the  overvaluation  of  the  prop- 

erty taken  in  paymenl  for  Btock  was  intentional  and  fraudulent, 
the  questions  then  arise,  what  liability  has  been  incurred,  who  is 
liable,  and  what  is  the  remedy.  The  clearest  method  of  investi- 
gating and  presenting  the  law  in  answer  to  these  questions  is  by 
considering,  first,  who  may  complain  of  the  transaction — who  may 
be  the  party  plaintiff  or  complainant;  second,  who  is  liable  in  such 
a  transaction — who  i-  to  be  made  the  defendant.  Incidentally  also 
there  arise  qu<  Jtions  a-  t<>  the  extentfof  that  liability,  and  the  rem- 
edy  t'-  he  applied. 

:  7 .  Who  may  compla  in  of  an  issue  of  stock  as  *  'paid  up, ' '  when 
it  has  not  been  fully  paid? — The  state. — As  already  stated,  the 
issue  of  stock  as  paid  up,  when  no1  actually  paid  up,  is  an  act  ultra 
vires  of  the  corporation.  The  commission  of  ultra  vires  acts  by  a 
corporation,  to  the  detriment  of  the  public,  renders  its  charter  lia- 
ble to  forf<  iture,  at  the  instance  of  the  .-tale. 

The  Lssui  of  fictitiously  paid-up  stock,  with  a  view  to  defrauding 
the  public,  may  constitute  a  misuse  of  the  corporate  rights  and  priv- 
ileges. In  Buch  a  case  it  has  been  held  that  the  state  might  forfeit 
the  charter  of  the  corporation,  and  that  a  palpable  case  of  fraud 
would  justify  Buch  forfeiture.8 

i  See  §  46,  infra.  cept  for  cash  at  par  applies  to  street 

2  Quoted  and  approve.  1  in  McCarter  railroads,  and  the  attorney-general  by 

l)     I 'it  man.  Am.    Rep.  the  statute  is  obliged  to  enforce  the 

211   (N.  .1.  L908).     See     5  46,  47,  infra,  statute  whenever  any  stockholder  or 

i 'inter  the  statutes  of  Alabama  in  two    reputable    citizens    make   out   a 

rence  to  watered  stock,  quo  war-  prima   facie  case.     Cheetham  v.  Mc- 

ranto   lies   where  one  million  dollars  Cormick,  178  Pa.  St.  186   (1896). 

of  Btock   is  :   for  the  possibility        In  Holman  v.  State,  etc.,  105  Ind. 

of   patents   to  be   thereafter   granted.  569  (1886),  the  state  caused  a  charter 

In    su<  h    quo    warranto    proceedings  to  be  forfeited  because  the  subscrib- 

Btockhi  need   not  be  made  par-  ers   for  stock  were  insolvent  at  the 

b,  97  Ala.  Ill  (1893).  time     of     subscribing,     thereby     per- 

The    Pennsylvania    statute    against  petrating  a  fraud  on  the  public.     See 

railway  companies  issuing  stock  ex-  also  State  v.  Atchison,  etc.  R.  R.,  24 

125 


§37.] 


"watered"  stock. 


[ch.  in. 


Moreover,  when  a  corporation  is  guilty  of  an  ultra  vires  aot,  and 
Buch  act  is  detrimental  to  the  interests  of  the  public,  it  is  possible 
that  the  attorney-general  may  file  an  information  for  the  purpose  of 


Neb.  143  (1888);  s.  c,  38  Neb.  437; 
State  v.  Webb,  97  Ala.  Ill  (1S92); 
8.  a,  110  Ala.  214  (1896).  The  case 
of  Jersey  City  Gas  Co.  v.  Dwight,  29 
N.  J.  Eq.  242  (1878),  was  overruled 
by  National  Docks  Ry.  v.  Central  R. 
R.,  32  N.  J.  Eq.  755  (1880),  according 
to  Elizabethtown  G.  L.  Co.  v.  Green, 
46  N.  J.  Eq.  118  (1S90) ;  affd,  49  N. 
J.  Eq.  329   (1892). 

The  state  may  bring  an  action  to 
forfeit  a  charter  where  the  corpora- 
tion commences  business  before  the 
full  capital  stock  is  subscribed.  Peo- 
ple v.  National  Sav.  Bank,  11  N.  E. 
Rep.  170  (111.  18S7);  affirmed  on  re- 
hearing, 129  111.  618   (1889). 

In  State  v.  Janesville  Water  Co.,  92 
Wis.  496  (1896),  the  court  refused 
leave  to  the  attorney-general  to  bring 
suit  to  forfeit  the  charter  of  a  water- 
works company  although  it  was  al- 
leged that  watered  stock  and  bonds 
had  been  issued,  it  being  shown  in 
opposition  that  there  had  been  eight 
years'  delay.  Even  though  a  person 
who  has  a  contract  with  a  street  rail- 
way company  that  the  latter  will 
lease  its  street  railway  on  certain 
terms,  turns  over  such  contract  to  a 
new  corporation  for  $900,000  of  stock 
of  the  latter,  and  the  latter  then  as- 
sumes the  lease,  and  even  though  such 
stock  is  illegal  under  the  constitution 
and  statutes  of  Pennsylvania,  yet 
where  the  state  delays  three  years  in 
filing  a  bill  to  declare  it  void,  and 
meanwhile  the  stock  has  passed  into 
bona  fide  hands,  and  not  until  five 
years  thereafter  are  the  real  owners 
of  the  stock  made  parties  defendant, 
the  bill  will  be  dismissed.  Common- 
wealth v.  Reading,  etc.  Co.,  204  Pa.  St. 
151  (1902). 

Quo  warranto  does  not  lie  against 
a  corporation  merely  because  it  issues 
its  stock  below  par.  State  v.  Minne- 
sota, etc.  Co.,  40  Minn.  213   (1889). 


The  state  cannot  enjoin  private  par- 
lrom  dealing  in  ,4watered"  stock. 
State  r.  American  Cotton  Oil  Trust, 
40  La,  Ann.  8  (1S88);  People  v.  Na- 
tional Sav.  Bank,  11  N.  E.  Rep.  170 
(111.  1SS7);  affirmed  on  rehearing, 
L29  111.  618  (1889).  See  also  Colum- 
bus, etc.  R.  R.  c.  Burke,  20  Week.  L. 
Bull.  2S7  (Ohio,  1888),  and  §  766,  in- 
//■</.  where  the  prolonged  litigation  in 
New  York  and  Ohio  over  that  trans- 
action la  explained. 

Quo  warranto  failed  in  Common- 
ai  h  v.  Centra]  P.  Ry.,  52  Pa.  St. 
506  (1866),  where  a  large  amount  of 
"watered  stock"  had  been  issued. 
Where  the  state  by  a  suit  in  the  state 
court  has  forfeited  the  charter  of  a 
waterworks  company,  no  receiver  be- 
ing appointed,  and  thereafter  on  a 
bill  filed  in  the  United  States  court 
a  receiver  is  appointed  by  the  latter 
court,  and  thereafter  under  a  statute 
the  Governor  of  the  state  appoints  a 
liquidator  of  the  affairs  of  such  cor- 
poration, and  thereafter  the  liquida- 
tor is  brought  in  as  a  party  defendant 
to  the  suit  in  the  United  States  court 
and  interposes  a  plea,  and  thereafter 
the  stockholders  organize  a  new  cor- 
poration and  receive  its  stock  in  ex- 
change for  their  stock  in  the  old  cor- 
poration, the  state  cannot  maintain  a 
suit  to  forfeit  the  charter  of  the  lat- 
ter corporation  and  enjoin  a  transfer 
of  the  assets  of  the  old  corporation 
to  the  new  corporation,  on  the  ground 
that  the  stock  of  the  new  corporation 
is  issued  at  a  fictitious  value,  the 
proof  being  insufficient  to  sustain 
any  such  claim,  and  the  plant  itself 
not  yet  having  been  sold  and  its  value 
ascertained.  State  v.  New  Orleans, 
etc.  Co.,  Ill  La.  1049  (1904).  In  the 
case  of  State  v.  New  Orleans,  etc.  Co., 
51  La.  Ann.  1827  (1899),  the  sub- 
scribers to  the  stock  of  a  debenture 
company  paid  ninety-five  per  cent,  of 


126 


CII.   III.] 


"watered"  stock. 


[§  38. 


stopping  such  acts.1  Such  a  proceeding,  however,  is  difficult  to  main- 
tain. An  injunction  does  qo1  lie  at  the  instance  of  the  state  against 
a  corporation  doing  business,  on  the  ground  that  its  stock  was  not 
properly  issued  and  that  there  was  no  intent  to  do  any  business 
within  the  state  or  to  have  an  office  therein.2 

§  38.  Right  of  the  corporation  itself  to  complain.— The  corpora- 
tion itself,  after  issuing  its  stock  as  paid-up  stock,  and  declaring  it 
so  to  be,  cannot  subsequently  repudiate  that  declaration  and  agree- 
ment and  proceed  to  collect,  either  from  the  person  receiving  the 
stock  or  his  transferee,  the  unpaid  part  of  the  par  value.  It  is 
|i|k  d  from  so  doin{ 

Win  re,  however,  actual  fraud  enters  into  a  transaction,  whereby 


tlnir  subscription  by  borrowing  that 
amount  from  the  company  on  their 
notes,  and  thereupon  Cull-paid  Bl 
was  issued  to  them,  although  the 
statute  prohibited  the  issue  of  stock 
until  paid  for.  The  state  brought 
suit  to  set  aside  the  charter  and  liqui- 
date the  company.  The  court  held 
that  under  the  constitution  of  Louis- 
iana the  incorporation  was  ill.  : 
The  court  held  also  that  the  charter 
was  ill  gal,  in  that  the  debentures 
ted  wi  re  forfeited  if  deferred  pay- 
ne  nts  were  not  made,  and  that  they 
provided  for  cancellation  at  lift  \  per 
cent,  on  the  amount  paid  and  that 
they  w<  re  redeemable  In  numerical 
order  in  six  years  and  that  it  would 
he  impossible  for  the  company  to  pay 
them.  The  same  conclusion  was 
reached  in  State  v.  Louisiana,  etc.  Co., 
51  La.  Ann.  1795   (1899). 

i  See  §  635,  infra. 

The  state  will  not  be  allowed  to  in- 
tervene in  a  foreclosure  suit  for  the 
purpose  of  preventing  it  on  the 
ground  that  the  bonds  are  illegal  and 
void,  and  that  on  a  re-organization  a 
ue  will  be  made.  State  v. 
rmers'  L.  &  T.  Co.,  81  Tex.  530 
i  IS91  ». 

Concerning  the  power  of  the  state 
to  object  to  an  ultra  vires  act  of  a 
private  corporation  by  any  proceed- 
ing other  than  quo  warranto,  see  Peo- 
ple v.  Ballard,  134  N.  Y.  269    (1892). 

2  Stockton  v.  American,  etc.  Co.,  55 


N.  J.  Eq.  352  (1897).  A  state  cannot 
file  and  sustain  a  bill  to  declare  void 
watered  stock  and  bonds,  and  enjoin 
a  foreclosure  sale,  and  to  have  the 
property  sold,  and  the  proceeds  ap- 
ple d  to  the  moneys  actually  expended 
by  the  corporation.  "The  state  has 
no  authority  to  protect  such  private 
rights  by  suit."  State  v.  Guaranty, 
etc.  Co.,  73  Fed.  Rep.  914  (1896).  A 
statute  authorizing  a  corporation  to 
reduce  its  capital  stock  waives  in- 
formalities in  its  incorporation,  and 
such  waiver  may  extend  to  an  illegal 
issue  of  watered  stock.  State  v.  Webb, 
110  Ala.  214  (1896),  69  Atl.  Rep.  211. 

•  ;  Whatever  may  be  the  rights  of 
creditors,  it  is  settled  law  that  the 
corporation  itself  cannot  repudiate 
its  issue  of  stock  as  full  paid  and 
"proceed  to  collect  either  from  the 
party  receiving  the  stock,  or  his  trans- 
feree, the  unpaid  part  of  the  par 
value."  Dickerman  v.  Northern  T. 
Co.,  176  U.  S.  181,  202  (1900);  First 
Nat.  Bank  v.  Gustin,  etc.  Co.,  42  Minn. 
327  (1890).  Neither  the  corporation 
itself  nor  a  receiver  of  the  corpora- 
tion can  hold  a  stockholder  liable  for 
stock  issued  to  the  stockholder  at 
less  than  par  by  agreement.  Great 
Western,  etc.  Co.  v.  Harris,  128  Fed. 
Rep.  321  (1903)  (aff'd,  198  U.  S.  561), 
the  court  saying  (p.  329):  "A  con- 
tract between  a  corporation  and  its 
stockholders  that  they  should  not  be 
called  on  to  pay  therefor  in  full  is 


127 


§  38.] 


"watered"  stock. 


I'll.  III. 


stock  is  issued  for  property  a1  as  overvaluation,  then  the  corpora- 
tion is  not  estopped  from  having  the  agreement  set  aside.  The 
person  receiving  the  -lock  may  then  be  compelled  to  return  the  stock 

or  its  market  vahn^  and  take  back  that  which  he  gave  to  the  COrpora- 


good  between  the  corporation  and  its 
stockholders."  In  Unit  case  it  was 
held  also  that  a  contract  between  a 
corporation  and  all  its  stockholders 
cannot  be  attacked  by  the  corporation 
or  its  receiver,  and  can  be  attac] 
only  by  creditors  who  have  been 
actually  defrauded  thereby. 


Where  a  corporation  issued  certain 
stock  as  paid  up  to  forty  |  r  cent, 
and  Induced  the  holder  to  pay  the 
other  sixty  per  cent,  by  transferring 
to  him  second  mortgage  bonds  of  the 
company,  no  right  of  action  exists 
inst  him  either  in  favor  of  the 
corporation  or  its  judgment  creditor 


The  corporation  itself  cannot  claim    for  the  forty  per  cent,  unpaid  on  the 


that  stock  was  Issued  tor  property  at 
a  fraudulent  overvaluation.  Panne- 
lee  v.  Price,  208  111.  544  (1904).  See 
also  S  729,   infra. 

In  ascertaining  the  value  of  capital 
stock    for    taxation    stock    issued    for 


shares,  or  for  the  value  of  the  bonds. 
Chrlstensen  v.  Quintard,  8  N.  V.  Supp. 
400 ( 1890),  overruling  s.c,  ::<J  Hun,  334. 
Where  a  bridge  corporation  issues 
all  its  stock  and  bonds  to  a  construc- 
tion company,  the  stock  having  been 


patents  may  be  considered  as  worth     first  subscribed  for  by  the  promoters, 


par.  People  v.  Kelsey,  101  N.  Y.  App. 
Div.  325  (1905);  affd,  1X1  X.  Y.  512. 
A  subscriber  cannot  defeat  his  sub- 
scription on  the  ground  that  the 
agent  of  the  company  who  obtained 
it   told   him   that   he   would   never  be 


a  contract  between  the  construction 
company  and  the  promoters,  by  which 
the  latter  take  the  profits  and  such  of 
the  stock  as  is  not  used,  is  legal,  so 
far  as  the  bridge  company  is  con- 
cerned.    The  court   will   enforce   the 


called  upon  to  pay  anything.   Maries,     contract  for  the  division  of  the  stock. 


etc.  Co.  v.  Stulb,  215  Pa.  St.  91  (1906). 
Where  a  corporation  issues  stock 
for  cash  at  twenty-five  cents  on  the 
dollar  and  agrees  not  to  call  for  more, 
a  trustee  in  bankruptcy  cannot  col- 
lect, except  the  amount  necessary  to 
pay   debts,   and  his  suit  must  be  in 


Even  a  settlement  made  without 
knowledge  and  a  year's  delay  are  not 
fatal.  Krohn  v.  Williamson,  62  Fed. 
Rep.  869  (1894);  affirmed  sub  nom. 
Williamson  v.  Krohn,  6G  Fed.  Rep. 
655  (1895). 
Where  stock  is  issued  for  property, 


equity  in  order  that  the  contract  shall     neither  the  corporation  nor  a  discon- 


first  be  set  aside  for  fraud.  Felker 
v.  Sullivan,  34   Colo.  212    (1905). 

A  contract  between  a  corporation 
and  a  person  that  stock  issued  to  the 
latter  is  full  paid,  is  binding  on 
the  company  and  its  stockholders  in 
the  absence  of  fraud  affecting  any 
stockholder.  Goodnow  v.  American, 
etc.  Co.,  66  Atl.  Rep.  607  (N.  J.  1907). 

An  assignee  of  a  corporation  can- 
not hold  liable  a  person  to  whom 
stock  is  issued  at  fifty  cents  on  the 
dollar  with  the  consent  of  the  stock- 
holders, the  creditors  not  being  in- 
jured. Ross  v.  Sayler,  104  111.  App. 
Rep.  19   (1902). 


tented  stockholder  can  hold  the  party 
receiving  the  stock  liable  for  any  fur- 
ther payments,  even  though  the  prop- 
erty was  overvalued.  A  corporate 
creditor  might  possibly  stand  in  a 
different  position.  The  court  said: 
"Whatever  may  have  been  in  fact  the 
value  of  the  property  turned  over  to 
the  company  for  its  stock,  the  com- 
pany agreed  to  take  it  for  the  stock. 
The  persons  interested  were  the 
stockholders,  and  there  was  no  dis- 
sent on  the  part  of  any  person  con- 
cerned from  what  was  then  done. 
Neither  any  person  then  holding 
stock,  nor  any  person  who  afterwards 


128 


CI1.    III.] 


\VA  i 


[§  38. 


fcion  for  it.     On  tbJ  tlio  supreme  court  of  Massachusetts 

held  that  wh<  perty  for  the  purpose  of  forming  a 

corporation  to  take  il  over,  and  this  plan  is  carried  out  by  the  use 

of  duinn.  -  who  issue  stock  therefor,  the  par  value  of 


became  a  stockholder  by  assignment 
I  rum  one  who  then  held  stock,  can 
now  :  complaint,  on  behalf  of  the 

corporation,    a  the   fairness 

of  that  tra:  a.    This  I  take  to  be 

the    settled     law    on     that    BUbjei 
Northern  Trust  e  Columbia,  etc. 

75  Fed.  B  -  aff'd, 

80  I  and  176  U.  S.  181. 

Ti  mnot   complain 

that    the   stock   v.  led   tor  prop- 

erty talon  at  an  overvaluation,  w '• 
r.   Oi     d    :  142 

I 

Land  which  cost  $100,000  and  upon 
which    only   ?  I    been    pail, 

remalndt  r  I  by  a  pur- 

cha  •  a. 

i  orporal  Ion    >  ur- 

for  |  *J    in  other 

words,  the  ! 

of  the  land  was  turned  In 
for    $."■'  i  k.      The    hold- 

ers of  tl 
thei  to 

off  the  in1  The 

company  borrowed  money  to  make  a 

ial  payment  on  the  mortgage  and 
then  brought  suit  against  a  stock- 
holder on  the  theory  that  the  stock 
was  not  paid  up.  The  court  held  ti 
the  suit  would  not  lift  John,  etc. 
Land  I  .y.  96  I 

Even  though  a  corporation  issued 
stock  for  cash  at  about  fifty  cents  on 
the  dollar,  nevertheless,  if  it  agreed 
with  the  subscriber  thai  d  pay 

no  more,  neither  the'  corporation  nor 

receiver  can  collect  the  balance. 
Thompson   r.    Knight,    74   N.  Y.   App. 

Div.  316   (  191 

a  though  a  corporation  accepts 
a  note  instead  of  cash  in  payment  for 
a  subscription,  in  violation  of  the 
statute  which  provides  that  only 
money,  labor  done  or  property  ac- 
tually  received   Fhall    be   accepted   in 

12 


payment  for  stocks  and  bonds,  yet  a 
bank  which  discounted  such  note  for 
a  corporation  may  hold  the  corpora- 
tion liable  thereon.  First  Nat.  Bank 
•-.  Cornell,  S  N.  Y.  App.  Div.  427 
(1896). 

In  the  case  of  Scoville  v.  Thayer, 
105  U.  S.  143  (1881),  the  court  said, 
in  a  dictum:  "No  call  could  have 
made  by  the  company  under  its 
agreement  with  the  stockholders,  un- 
to pay  its  creditors.  .  .  .  The 
shares  were  issued  as  full  paid,  on  a 
fair  understanding,  and  that  bound 
the  company."  The  issue  had  been 
at  a  discount.  See  also  Union,  etc. 
Co.  v.  Frear,  etc.  Co.,  97  111.  537 
;  ),  dictum.  In  the  case  of  Gran- 
ite Roofing  Co.  v.  Michael,  54  Md.  65 
.  stock  was  issued  as  paid  up 
for  cash,  although  not  actually  paid. 
The  corporation  passed  under  the 
control  of  purchasers  of  the  stock, 
who  caused  the  corporation  to  sue  the 
inal  subscribers  for  the  unpaid 
par  value  of  the  stock.  The  court 
said:  "While  the  law  may  reject,  as 
illegal  and  fraudulent,  that  which  the 
parties  have  agreed  upon,  ...  it 
will  not  arbitrarily  incorporate,  in 
lieu  thereof,  terms  in  the  contract  to 
which  the  parties  have  never  as- 
sented." In  the  case  of  Re  Ambrose 
Lake,  etc.  Co.,  L.  R.  14  Ch.  D.  390 
(1880),  where  all  the  stockholders 
acquiesced  and  there  were  no  cred- 
itors' rights  involved,  the  court  held 
that  the  corporation  could  not  hold 
the  directors  liable  for  the  profits 
made  by  them.  In  Zirkel  v.  Joliet 
Opera  House  Co.,  79  111.  334  (1875), 
the  corporation  had  released  the  sub- 
scriber after  the  subscription  had  been 
made.  The  release  being  without 
consideration,  and  not  a  contract,  was 
held  void,  and  the  corporation  was 
allowed  to  recover.  See  also  San  An- 
9 


§38.] 


"watered"  STOCK. 


[CH.    III. 


which  is  many  times  greater  than  the  actual  value  of  the  property, 
the  corporation  itself  may  thereafter  rescind  the  transaction  and  r<  - 
,„,.„  the  property  and  demand  back  the  stock,  even  though  all  the 
stockholders,  directors  and  officers  approved  the  transaction  when  it 

tonio  St  Ry.  v.  Adams,  87  Tex.  125  for  an  old  road-bed  which  cost  them 
(1894)  rev'g  25  S.  W.  Rep.  639.  An  $15,000  was  legal,  since  all  the  stock- 
agreement  by  promoters  that  certain  ho Lies  and  directors,  except  a  tew 
stock  need  not  be  paid  for  is  not.  bind-  nominal  holders  of  stock,  were  fully 


ing  on  the  corporation,  and  it  may 
collect.  York  Park  Bldg.  Assoc,  v. 
Barnes,  39  Neb.  834  (1894).  The  case 
of  Society  of  Prac.  Knowl.  v.  Abbott, 
2  Beav.  559  (1840),  was  distinguished 
in  Re  British,  etc.  Box  Co.,  L.  R.  17 
Ch.  D.  467  (1881),  the  latter  case 
holding  that  no  one  is  liable  on  Qcti 


informed  of  the  facts,  and  no  other 
holders  came  In  until  several 
months  subsequently.  The  corpora- 
tion was  held  to  be  estopped  from 
complaining.  See  also  Minn  v.  Bag 
ley,  7  Fed.  Rep.  785  (1881);  Re 
Glen  Iron  Works,  17  Fed.  Rep.  32 1 
(1883).     Cf.   People  v.  Sterling   Mfg. 


tiously    paid-up   stock   where    all    ac-  Co.,  82  111.  457  (1876).     As  to  receiv 
quiesced  and  there  was  no  intent  to  ers,   see   Mathis   v.   Pridham,   1   Tex. 
bring  in  new  stockholders.    This  was  Civ.  App.  58   (1892). 
held"  to    be    the    rule    even    though  A   corporation  cannot  hold   the   di- 
new   stockholders   were   subsequently  rectors  liable  on  stock  which  the  cor- 
brought  in.  poration  issued  to  them  for  services, 
In   the   case   of  Harrison  v.  Union  at  five  cents  on  the  dollar,  in  lieu  of 
P?c    Ry     13    Fed.   Rep.    522    (1882),  salary,  where  all  the  stockholders  as- 
where    plaintiff    sued    to    recover    on  sented  thereto,  such  stock  so   issued 
bonds   guarantied    by   the   defendant,  to  them  being  treasury   stock;     that 
the  court  said:    "The  intention  of  the  is,  stock  which   was  issued  for  prop- 
Arkansas    Valley    Railway    Company  erty   as   full    paid   and   then   donated 
was  to  sell  the  stock  to  Harrison  for  to  the  corporate   treasury.     The  evi- 
less  than  its  par  value;    i.e.,  to  give  dence   showed    that   the   stock   repre- 
him  $15  000  in  stock,  twenty  bonds  of  sented  a  patent-right  and  was  purely 
the  company,  guarantied  by  the  Kan-  speculative,  and  had  no  market  value, 
sas    Pacific    Company,    and   the    Clay  Divine  v.  Universal,  etc.  Co.,  38  S.  W. 
county  bonds,  all  for  $15,000  in  cash.  Rep.  93  (Tenn.  1896). 
There   is  nothing   in  the   statutes   of  Where  all  the  stockholders  unite  m 
Colorado,  where  the  corporation  was  the  issue  of  watered  stock  to  the  pres- 
created    to   forbid   the   sale   of  stock  ident  for  his  own  use,  and  assent  to 


at  less  than  par;  nor  was  Harrison 
forbidden  to  purchase  the  stock  by 
reason  of  the  fact  that  he  was  already 
a  stockholder  and  director  in  the 
Kansas     Pacific     Railway     Company. 


a  contract  between  him  and  the  com- 
pany, the  corporation  itself  cannot 
subsequently  complain.  Arkansas, 
etc.  Co.  v.  Farmers'  L.  &  T.  Co.,  13 
Colo.  587   (1889).     Cf.  People  v.  Ster- 


The  transaction   was  therefore  valid     ling,  etc.  Co.,  82  111.  457  (1876),  hold 


as  between  the  corporation  and  Har 
rison,  whatever  the  right  of  the  cred- 
itors  of   the   corporation   as   against 
Harrison  may  be." 

In  St.  Louis,  etc.  R.  R.  v.  Tiernan, 
37  Kan.  606   (1887),  it  was  held  that 


ing  that  the  corporation  may  refuse 
to  allow  a  transfer  of  watered  stock. 
Although  the  incorporators  of  a 
New  Jersey  company  have  contracted 
to  issue  sixty  per  cent,  of  its  stock 
to  a  person  for  two  patents,  yet  the 


an   issue  of   $3,600,000   of  stock   and     board  of  directors,  after  the  company 
the  payment  of  $200,000  to  directors    is    organized,    may    refuse    to    carry 

130 


en.  in.] 


' '  WATERED  ' '  STOCK. 


L§  3y. 


was  carried  out,  it  appearing  that  the  property  received  was  worth- 
less and  that  it  was  ;i  part  of  the  original  plan  to  sell  a  largo  part 
of  ill''  stock  to  the  public,  which  plan  was  carried  out,  and  it  appear- 
ing also  that  the  original  stockholders  and  officers  were  merely  reprc- 
:->  ntatives  of  the  vendor,  and  that  there  was  no  independent  judgment 
on  tin'  part  of  the  board  of  directors.  The  court  pointed  out  that 
this  was  a  different  from  one  where  it  was  not  contemplated  that 

the  public  Bhould  become  interested,  except  by  purchase  from  the 
original  stockholders.1  The  supreme  court  of  the  United  States, 
however,  subsequently  passed  on  the  same  transaction  and  held  very 

out  tli'              mi.  nt.  one  patent  being  Co.  t\  Culver,  GO  N.  Y.  App.  Div.  129 

and   the  other  not   having  (1901). 

red.  The  court  Bald:  "To  Where  the  sole  owner  of  the  stock 
Justify  oration  in  issuing  stock  of  a  corporation  executes  the  note  of 
under  our  act  for  property  purcha  d,  the  corporation  for  his  individual  in- 
there  should  be  an  approximation,  at  debtedness,  no  one  but  the  creditors 
least,  in  true  value  of  the  thing  pur-  of  the  corporation  can  complain.  Mill- 
chased  to  th<  int  of  the  stock  saps  r.  .Merchants',  etc.  Bank,  71  Miss, 
which   it   is   supposed    it  represents."  3C1   (1893).     See  also  §3,  supra.     In 

gerton  p.  Electric,  etc.  Co..  50  X.  J.  Canada  it  has  been  held  that  even 
I.;,,.  :;:,|,  ;',!,i  (1892).  An  agreement  though  stock  was  issued  at  twenty- 
id'  the  corporation  with  a  stockholder  cents  on  the  dollar,  and  purports  to 
t0  pay  to  him  in  dividends  the  be  paid-up  stock,  yet  the  corporation 
amount  he  pays  for  the  stock  cannot  may  levy  assessments  upon  it  and 
l„.  enforced  as  an  obligation  of  the  forfeit  the  stock  for  non-payment. 
,,  ration.     Smith   v.  Alabama,  etc.  North  West  Electric  Co.  v.  Walsh,  29 

.•M,  i2G  Ala.  53                    Where  a  Canada   S.    C.   Rep.    33    (1898).     In 

e  declares  that  stock  Issued  for  Nova  Scotia,  where  a  subscriber  sues 

moii'  v  or  labor  or  property  estimated  a  promoter  for  damages  for  fraud  in 

at  less  than  its  true  money  value,  ac-  obtaining  for  himself  stock  and  bonds 

tually  received,  equal  to  the  par  value  illegally,    the   suit   must   be   by  the 

of  the  stock,   shall  be  void,  and  the  corporation,  or  by  the  stockholder  for 

secretary    issues   to   himself   and   the  its  benefit  if  the  corporation  refuses 

president  some   stock    for  no   consid-  to    sue.      Weatherbe    v.   Whitney,    30 

ition,    and    tin  n    s  Us    such    stock,  Nova   Scotia  Rep.   49    (1897).     Such 

the  bondsmen  for  such  secretary  are  claim   cannot   be  joined   with   a  per- 

not  liable   on   account  of   such   issue  sonal  claim  for  services  rendered,  etc. 

of  stock,  there  being  no  sufficient  al-  Weatherbe  v.  Whitney,  30  Nova  Sco- 

legation    that    the    purchasers    relied  tia  Rep.  104   (1897). 

on  the  certificates,  and  were  innocent  »  Where    a    person    buys    all    the 

of  their  general  character,  and  that  stock  of  a  corporation  for  about  $G13,- 

they   i               1   ordinary  care.     First  000,  and  some  real  estate  for  about 

We    etc    Co.    r.   Parker,   111   Wis.   1  $175,000,   and   sells   the   former  to  a 

(1901)      A  corporation  cannot  main-  corporation   formed   by   him  for   the 

tain  a  suit  for  the  cancellation  of  il-  purpose,   for  $2,500,000  par  value  of 

dly  issued  certificates  of  stock  un-  stock,  having  also  an  actual  value  of 

s   it  alleges  that  it  had  the  right  $2,500,000,   and   sells   the   real   estate 

to  issue  certificates  of  stock  and  that  for  $750,000  par  value  of  stock   hay- 

the  certificates  complained  of  will  in-  ing  also  the  same  actual  value,  but  it 

jure  the  corporation  of  its  bona  fide  turns    out   that   the   real   estate   was 

stockholders  in  some  way.    Reno,  etc.  worthless,  the  corporation  so  issuing 

131 


§  33.] 


' '  WATERED ' '  STOCK. 


[CH. 


III. 


properly  that  the  corporation  could  not  complain  at  all.1     Certainly 
the    eorp  a    cannot    hold    him    liable    for    the    par    value    of 

the   stock.-      In   Pennsylvania   it   is   held    that   a   corporation    will 


the  stock  may  maintain  a  separate 
suit  for  rescinding  the  sale  and  issue 
of  stock  for  the  real  estate,  or  for 
nages,  if  the  stock  cannot  be  re- 
turned, it  appearing  that  the  pro- 
moter was  a  director  at  the  time  of 
the  Bales,  and  that  the  tair  market 
\alue  of  the  st(  of  issue 

was  par,  and  so  continued  to  be  for  a 
long  time  thereafter;  it  further  ap- 
pearing that  he  made  ao  disclosure 
of   the    facts   to    flu-  n    and 

did  not  see  to  it  that  the  corporation 
had  adequate  independent  advice. 
The  court  said  "that  is  an  obligation 
resting  upon  every  fiduciary  who 
makes  a  sale  of  his  own  property  to 
his  beneficiary,  no  matter  whether  it 
is  a  case  of  trustee  and  cestui  que 
trust,  guardian  and  ward,  solicitor 
and  client,  or  promoter  of  a  corpora- 
tion and  the  corporation  itself.  There 
is  no  pretense  that  in  the  transaction 
in  question  the  plaintiff  corporation 
was  represented  by  an  independent 
board."  It  is  no  defense  that  every 
stockholder  and  director  knew  of  and 
acquiesced  in  the  transaction  at  the 
time,  it  appearing  that  the  stock  was 
afterwards  sold  to  the  public  without 
any  disclosure  of  the  facts.  Old  Do- 
minion, etc.  Co.  v.  Bigelow,  74  N.  E. 
Rep.  653  (Mass.  1905),  the  court  re- 
fusing to  follow  Old  Dominion,  etc. 
Co.  v.  Lewisohn,  136  Fed.  Rep.  915; 
aff'd,  14S  Fed.  Rep.  1020,  involving 
the  same  issue  of  stock,  holding  that 
even  though  the  owners  of  mining 
claims  organize  a  corporation  in  New 
Jersey,  and  they  themselves  as  di- 
rectors,  together  with   dummy  direc- 


tors, cause  the  corporation  to  pur- 
chase the  claims  for  $750,000  par 
value  of  stock,  although  the  mining 
claims  were  worth  but  $5,000,  and 
even  though  thereafter  additional  cap 
ital  stock  is  sold  by  the  corporation 
to  the  public  for  cash  at  par,  yet  the 
corporation  cannot  rescind  the  trans- 
action, inasmuch  as  there  were  no 
other  stockholders  at  the  time  of  the 
transaction,  and  hence  no  one  was  de- 
ceived. The  court  pointed  out  that 
in  cases  to  the  contrary  it  was 
not  contemplated  that  other  parties 
should  become  interested  in  the  stock, 
except  by  purchase  from  the  original 
stockholders.  If  there  are  two  such 
promoters  it  seems  that  in  a  suit 
against  one,  he  is  liable  for  the  whole 
stock  so  issued. 

Where  by  fraud  a  corporation  has 
been  induced  to  sell  stock  and  it  sues 
to  recover  back  the  same,  it  may  have 
an  injunction  against  the  defendant 
assigning  or  transferring  the  stock, 
but  cannot  enjoin  him  from  voting 
it.  Maine,  etc.  Co.  v.  Alexander,  No. 
2,  115  N.  Y.  App.  Div.  112  (1906). 

"Where  promoters  obtain  an  option 
on  property  for  $40,000,  but  cause  the 
written  option  to  state  the  price  as 
$60,000,  on  which  $20,000  has  been 
paid,  and  then  by  misrepresentations 
causes  their  associates  to  organize  a 
company  and  take  over  the  property 
and  pay  the  $40,000  and  issue  to  them 
$20,000  in  stock,  they  may  be  com- 
pelled to  give  up  the  stock  for  can- 
cellation. Cuba,  etc.  Co.  r.  Kirhy,  112 
N.  W.  Rep.  1133   (Mich.  1907). 

Where  promoters  represent  to  cap- 


i  Old    Dominion,    etc.    Co.    v.    Lew-  the  transaction,  especially  where  any 

isohn,  210  TJ.  S.  206  (190S),  the  court  such    repudiation    would    be    for   the 

holding  that  a  corporation  will  not  be  guilty  and  innocent  alike, 

allowed  to  repudiate  its  consent  to  an  2  Quoted  and  approved  in  Orton  v. 

issue    cf    stock   for   property   and   to  Edson  Reduction,  etc.  Co.,  Ohio  Cir- 

charge  a  single  stockholder  therefor,  cuits    (1905),   p.   107;    aff'd,   75   Ohio 

when  thirteen-fifteenths   of   its   stock  St.  5S0.     See  §§  46,  47,  infra. 
were  parties  receiving  the  benefit  of 

132 


CH.   III.] 


"watered"  stock. 


[§  38. 


not  h< mpelled  to  transfer  stock  to  a  person  who  took  with  knowl- 
edge that  nothing  bad  been  paid  for  it.1  In  the  foreclosure  of  a  mort- 
,•  the  corporation  cannol  set  up  that  the  value  of  the  property 
received  by  it  for  bonds  and  stock  was  grossly  overvalued.2  The  cor- 
poration itself,  all  of  whose  stock  has  been  issued  in  payment  for  a 
mine  cannot  hold  a  vendor  liable  for  misrepresentations  as  to  the 
value  of  the  property.8  A  corporation  cannot  maintain  a  libel  suit 
based  on  charges  that  its  promoters  had  issued  watered  stock  and 
intended   to  unload  on   to  the  public,   there  being  no  allegation  of 

italists  that  it  will  cost  $1,900,000  to     purchasers   of   the   stock.     It   is   im- 
purchase  a   company   to  be   reorgau-    material  that  the  directors  approved 

of  the  transaction  with  full  knowl- 
edge. Non-disclosure  in  such  a  ca83 
is  a  misfeasance  in  the  nature  of  a 
breach  of  trust.  Re  Leeds,  etc.  Co., 
[1902]    2   Ch.   809. 

i  Crafner     v.     Pittsburg,     etc.    Ry., 
207  Pa.   St.  217   (1903). 

-  Big  Creek,  etc.  Co.  v.  American, 
etc.  Co.,  127  Fed.  Rep.  625    (1904). 

A  corporation  may  file  a  bill  in 
equity  to  enjoin  the  foreclosure  of  a 
mortgage  securing  bonds  which  have 
been  issued  to  the  stockholders  as  a 
dividend  illegally,  and  to  compel  the 
surrender  of  the  bonds  for  cancella- 
tion, it  appearing  that  no  other  rights 
have  intervened.  Gunnison,  etc.  Co. 
0.  Whitaker,  91  Fed.  Rep.  191  (1898). 
ton's,  etc.  v.  Dines,  12G  Fed. 
K   p.  968  (1904). 

Where  a  person  sells  property  to 
a  corporation  for  all  of  its  stock,  ex- 
cepting seven  qualification  shares, 
and  such  property  is  the  only  prop- 
erty the  corporation  owns,  it  cannot 
hold  him  liable  in  damages  for  deceit 


!.  when  in  fact  it  costs  them  but 
$1,400,OHO,  and  the  capitalists  ad- 
vance the  former  Bum,  and  the  pro- 
moters organize  a  company  and  carry 
out  the  reorganization  and  give  to 
capitalists  a  part  of  the  stock  with 
bonds,  the  latter  as  stockholders  may 
compel  the  promott  rs  to  pay  the  ex- 
tra $r,iin,ooo  to  the  company,  even 
though  the  promoters  controlled  all 
the  stock  at  the  time  the  prop* 
was  taken  over,  the  essence  of  the 
transaction  being  that  the  capitalists 
were  the  stockholders  in  the  new 
company  from  the  beginning,  and  it 
is  no  defense  that  for  each  dollar 
advanced  by  the  capitalists  they  were 
to  receive  a  dollar  in  bonds  and  a 
dollar  in  stock.  Arnold  v.  Searing, 
67  At!    i:  ip.     II    iN.  J.  1907). 

YVlc  re  a  person  purchases  property 
for  the  soh>  purpose  of  creating  a  cor- 
poration to  take  it  over  from  him 
and  to  pay  him  therefor  an  excessive 
price  in  cash  and  stock,  netting  a 
1   rge  profit  to  him,   the  stock  being 


offered  to  the  public,  and  he  causes     as  to  the  value  of  the  property,  even 


the  incorporation  to  be  made  and  di- 
rectors to  be  named,  who  are  his 
dummies,  he  is  a  promoter  and  can  be 
held  liable  by  such  corporation  for 
the  profit  he  has  made,  unless  he  fully 
disclosed  in  a  prospectus  that  he  had 


though  he  afterwards  sells  the  stock 
to  outside  parties  at  a  high  price. 
The  court  said  that  there  was  no 
damage  because  there  was  no  differ- 
ence between  the  value  of  the  stock 
and   the   value   of   the  property,   the 


ted   the  corporation  and  that  he    corporation    having    given    back      in 
had  made  such  profit.     Especially  is    substance     that     wh 
this    the    rule    where    the    prospectus     and  no  more." 
gave    a    false    impression.      He    occu-     ence    v.    Dines, 
pies  a  fiduciary  relation  towards  the     (1905). 

133 


Stratton's  Independ- 
135    Fed.    Rep.    449 


§  38.] 


"watered"  stock. 


[cii.  III. 


special  damages  and  the  language  referred  onlj  to  the  promoters.1 
The  promoters  of  a  company  may  so  act  as  to  put  themselves  into 
a  fiduciary  relationship  towards  the  corporation  and,  in  such  cas 
ln;lv  be  held  liable  to  the  corporation  for  all  profits  made  by  them.2 
The  corporation  has  also  a  remedy  herein  against  its  directors 
who  issued  the  stock  either  fraudulently  or  in  ultra  vires  manner.8 
This  liability  is  similar  to  their  general  liability  to  the  corporation 
for   fraudulent,   aegligenl   or  ultra   vires  acts  on  their  part.4     The 

i  Memphis,  etc.  Co.  v.  Cumberland,  for  fraud  as  promoters  in  making  a  se- 
etc.  Co.    145  Fed.  Rep.  904  (190G).  cret  profit  in  services  and  not  making 

2  See  §§4G  and  651,  infra.  a  full  disclosure  to  the  stockholders. 

Where  promoters  obtain  an  option  The  promoters  owe  a  duty  to  future 
on  property  for  $75,000  and  organize  stockholders.  The  land  need  not  be 
a  company  for  $100,000  capital  stock,  tendered  back.  The  promoters  are  to 
and  as  directors  of  the  company,  with  be  credited  with  their  actual  dis- 
other  friendls  directors,  purchase  the  bursements  and  to  be  charged  with 
option  for  $100,000  and  sell  $75,000  the  fair  market  value  of  the  stock, 
of  the  stock  at  par  and  thereby  have  with  interest,  and  also  with  dividends. 
the  remaining  $25,000  of  stock  as  The  suit  should  be  brought  by  the 
profit,  and  the  purchasers  of  the  $75,-  corporation  itself  and  not  by  its  re- 
000  of  stock  supposed  that  the  actual  ceiver,  according  to  the  Massachu- 
price  paid  was  $100,000,  the  corpora-  setts  decisions.  Hayward  v.  Leeson, 
tion  may  compel  such  promoters  to  176  Mass.  310  (1900).  Where  the 
return  and  cancel  the  $25,000  of  stock,  promoters  paid  to  a  person  who  is  to 
and  it  is  immaterial  that  the  prop-  act  as  chairman  of  the  directors,  and 
city  was  worth  $100,000,  the  actual  his  firm  who  underwrote  10,000 
facts  not  having  been  disclosed  to  the  shares,  a  commission  of  12,000  shares, 
corporation  or  its  stockholders.  The  the  court  held  that  10,000  of  the  12,- 
court  said:  "The  promoter  of  a  com-  000  was  for  the  use  of  his  name  and 
pany  stands  in  the  relation  of  a  trus-  only  2,000  shares  for  the  commission, 
tee  to  it  and  those  who  become  sub-  and  hence  he  was  liable,  at  the  in- 
scribes to  its  stock  so  long  as  he  stance  of  an  investor  in  the  stock, 
maintains  the  power  of  control  over  to  pay  to  the  corporation  the  differ- 
it."  Yeiser  v.  United  States,  etc.  Co.,  ence  between  the  amount  paid  for  the 
107  Fed.  Rep.   340   (1901).  stock   and    its   actual   value   the    day 

Where  promoters  pay  out  less  than  after  an  allotment,  the  transaction 
$30,000  to  secure  options  on  land  and  not  being  fully  disclosed  in  the  pros- 
then  sell  the  options  to  a  corporation  pectus.  A  clause  in  the  prospectus 
for  $700,000  of  stock  of  the  latter,  the  that  there  "may"  be  various  trade 
corporation  assuming  the  purchase  contracts  and  business  arrange- 
price  of  the  land,  and  then  issue  a  ments  and  underwriters'  agreements, 
prospectus   which   is   misleading  and     followed   by  the   usual   waiver  as   to 

them,  does  not  apply  to  such  a  con- 
tract, inasmuch  as  the  word  "may" 
was  misleading.  Cackett  v.  Keswick, 
85  L.  T.  Rep.  14  (1901);  aff'd,  87  L. 
T.  Rep.  11   (1902). 

3  See    §  48. 

4  See  Part  IV. 


does  not  state  the  facts  about  the  is- 
sue of  stock,  and  the  corporation  be- 
comes insolvent,  they  are  liable  to 
the  corporation  for  the  fair  market 
value  of  the  stock  at  the  time  the 
stock  was  issued,  or  as  soon  there- 
after as  it  had  a  market  value.  The 
liability  is  not  for  unpaid  stock,  but 


134 


OH.   III.] 


"watered"  stock. 


[§  39. 


measure  of  their  liability  herein  is  not  the  par  value  of  the  stock, 
3  the  value  actually  received  therefor  by  the  corporation,  hut  it 
is  the  actual  or  market  value  of  the  stock,  less  the  property  or  cash 
actually  received  by  the  corporation  on  the  stock  so  issued.  It  has 
been  held  that  the  corporation  cannot,  in  a  court  of  equity,  compel 
a  person,  who  agreed  to  take  stock  at  a  discount,  to  carry  out  the  con- 
tract,  inasmuch  as  it  is  ultra  vires.1 

Where  the  corporation  contracts  to  issue  stock  to  a  contractor  for 
w«»rk  to  he  done  in  the  future,  and  such  work  is  not  completed, 
various  complications  arise.  This  subject,  however,  is  considered 
elsewhere.2 

19.  Stockholdi  rs  participating  in  the  act  cannot  complain. — 
ickholders  in  a  corporation,  who  participate  or  aid  in  the  issue 
of  paid-up  stock,  upon  payment  of  Less  than  its  par  value,  or  who 
have  knowledge  of  the  acl  and  acquiesce  therein,  cannot  afterwards 
complain  of  the  transaction,  either  in  their  own  behalf  as  stock- 
holdi  rs  or  creditors  or  in  behalf  of  the  corporation.  They  are  bound 
ppel  or  acquiescem 

i  W<  Ry.  r.  Mowatt,  12  Jur.,  are  liable  proportionately  to  dona  fide 
pt.  1,  407  (1848).  corporate  creditors  for  the  difference 
infra.  Whore  a  cor-  between  the  actual  value  of  the  prop- 
poration  has  issued  stock  for  services  erty  and  the  par  value  of  the  stock. 
which  have  never  been  performed  it  One  of  the  promoters,  however,  can- 
may  maintain  a  bill  in  equity  to  can-  not  enforce  such  liability  to  repay 
eel  such  Btock.  Hillside,  •  tc.  As-  money  which  he  has  loaned  to  the 
soclation  v.  Holmes,  97  Minn.  261  company.  Meyer  v.  Ruby,  etc.  Co., 
(1906).  192  Mo.  162    (1905).     A  contract  be- 

8  An    Incorporator    who    I            part  tween  a  corporation  and  a  person  that 

in    tlie    issue   of    full    paid    Btock    for  stock  issued  to  the  latter  is  full  paid, 

property  cann                              a  cred-  is  binding  on  the  company  and  its 

Itor    claim    that    the    stock    was    not  stockholders  in  the  absence  of  fraud 

fully  paid  up.    Cunningham  v.  Holley,  affecting  any  stockholder.     Goodnow 

.    Co.,    121    Fed.    le  p.    720    (1903).  v.  American,  etc.  Co.,  G6  Atl.  Rep.  607 

Where  two  million  dollars  par  value  (N.  J.   1907).     Where,  by  agreement 

of   stock    is    issued    for   nothing   and  of   all    the  stockholders,   stock   is  is- 

the  parties  receiving  the  stock  subse-  sued  to  them  at  less  than  par,  one  of 

quently    obtain    a    Judgment    against  them  cannot  as  a  creditor  of  the  com- 

the  corporation  for  money  advanced,  pany   compel   the   others   to   pay   for 

they     cannot               I     the     judgment  the  stock  in  full.     Richardson  v.  Chi- 

from    other    persons    to    whom    they  cago,  etc.  Co.,  63  Pac.  Rep.  74    (Cal. 

have  assigned  a  portion  of  the  stock.  1900).    Although  $1,500,000  of  stock, 

.1,  etc.  Co.  v.  Cook,  152  Fed.  issued  as  fully  paid,  and  $1,500,000  in 

Re;..    652    (1906).     Where   an   option  bonds  are  issued  for  the  construction 

which  has  been  purchased  at  $125,000,  of    a  work    which    costs    less    than 

of    which    amount    ?               has    been  $1,500,000,  yet  an  attorney  who  took 

paid,    is   sold   to  an   Illinois   corpora-  part  in  the  transaction  cannot,  as  a 

tion  for  $8,000,000  par  value  of  stock,  creditor  of  the  corporation,  claim  that 

persons  taking  the  stock  with  notice  the  stock  was  not  fully  paid,     len 

135 


39.] 


"watered"     rocK. 


[CH.    ill. 


So  also  as  to  the  parties  who  actually  receive  the  Btocls  al   less 
than  its  par  value.     They  are  not  allowed  to  repudiate  the  trans- 


Eyck  v.  Pontine,  etc.  R.  R.,  Ill  Mich. 
494    (1897). 

A  promoter  who  takes  part  in  sell- 
ing property  to  the  corporation  for 
stock,  the  par  value  of  which  is  five 
times  the  amount  paid  hy  the  pro- 
moters for  the  property,  and  who 
afterwards  becomes  a  director  and 
then  sells  his  stock  and  becomes  a 
creditor  of  the  corporation,  cannot 
hold  the  stockholders  liable  for  the 
difference  between  its  par  value  a 
the  value  of  the  property.  Nicrosi  v. 
Calera  L.  Co.,  115  Ala.  429  (1896). 

Wh.  re  $59,000  of  stock  and  ?20,000 
of  bonds  are  issued  for  a  gas  plant 
worth  $34,000  besides  the  franchise,  a 
judgment  creditor  cannot  hold  tlie 
stockholders  liable  on  the  stock  where 
he  himself  is  a  stockholder  and  no 
charge  of  fraud  is  made.  Woolfolk 
v.  January,  131  Mo.  C20   (1S95). 

Stock  may  be  issued  for  the  good- 
will of  a  business,  and  a  person  who 
has  taken  part  in  the  transaction 
cannot  afterwards  complain.  Wash- 
burn v.  National,  etc.  Co.,  SI  Fed.  Rep. 
17   (1897). 

In  Re  Gold  Co.,  L.  R.  11  Ch.  D.  701, 
712  (1S79),  the  court  says:  "It  could 
not  be  a  fraud  upon,  or  a  wrong  to, 
the  existing  shareholders,  because 
every  one  of  them  was  a  party  to 
the  transaction."  See  also  Scovill  v. 
Thayer,  105  U.  S.  143  (1881) ;  Loril- 
lard  v.  Clyde,  86  N.  Y.  384  (1881); 
Hall  v.  Brooklyn  El.  R.  R.,  N.  Y.  L.  J., 
April  30,  1892;  Kolsky  v.  Enslen,  103 
Ala.  97  (1S94).  But  in  the  case  of 
Knowlton  v.  Congress,  etc.  Co.,  14 
Blatchf.  364,  368  (1877) ;  s.  c,  14  Fed. 
Cas.  797,  the  court  said  in  a  dictum: 
"Can  there  be  any  doubt  that,  up  to 
the  time  of  the  abandonment  of  the 
scheme  by  the  defendant,  the  plain- 
tiff could  have  resorted  to  a  court  of 
equity  and  restrained  further  proceed- 
ings and  vacated  the  proceedings  al- 
ready taken?   The  cases  are  numerous 

1 


where  courts  of  equity  have  in! 
fend  to  prevent  the  consummation  of 
a  wrong,  upon  the  motion  of  a  party 
who  was  instrumental  in  its  incep- 
tion." Affirmed,  Spring  Co.  v.  Knowl- 
ton, 103  U.  S.  49  (1S80).  The  issue 
of  stock  in  that  case  was  held  to  be 
olutely  void  by  statute. 

A  participating  stockholder  cannot 
complain,  even  though  he  or  his  as- 
signee is  a  corporate  creditor.  Calla- 
nan  v.  Windsor,  78  Iowa,  193  (1889); 
Lewis  v.  X.  Y.  etc.  Iron  Co.,  N.  Y. 
L.  .1..  Apr!  •  390. 

A  purchaser  of  stock  that  has  voted 
for  an  issue  of  "watered"  bonds  and 
stock  is  estopped  from  complaining, 
even  thou  issue  was  prohibited 

by  the  constitution  of  the  state 
(Pennsylvania).  Wood  V.  Corry,  etc. 
Co.,  41  Fed.  Rep.  146  (1890). 

A  purchaser  of  stock  who  voted  in 
favor  of  a  re-organization  scheme  can- 
not object  to  the  scheme  as  being 
ultra  vires,  there  being  nothing  il- 
legal per  se  in  it.  Hollins  v.  St.  Paul, 
etc.  R.  R.,  9  N.  Y.  Supp.  909    (1889). 

In  the  case  of  Skinner  v.  Smith, 
134  N.  Y.  240  (1S92),  $40,000  of  stork 
was  issued  for  letters  patent.  After- 
wards, with  the  consent  of  all  the 
stockholders,  the  transaction  was  re- 
scinded, the  stock  being  returned  and 
the  patents  retransferred.  A  license 
to  manufacture  under  the  patents 
was  then  transferred  to  the  company 
for  $350,000  in  stock.  The  court  found 
that  the  transaction  was  in  good 
faith  and  with  no  intent  to  defraud 
future  stockholders,  and  that  the  li- 
cense was  an  adequate  consideration 
for  the  stock.  The  court  held  that 
there  was  nothing  illegal  in  the  trans- 
action. 

A  stockholder  cannot  have  a  receiv- 
er appointed  and  mortgages  set  aside, 
where  all  the  stock  is  "water,"  even 
though  the  controlling  party  has 
made  the  mortgages  to  himself  and  is 
36 


"watered"  stock. 


CH.    III.]  "WATERED"    STOCK.  [§   39 

action  and  recover  from  the  corporation  the  money  they  may  have 


about  to  sell  the  assets  of  the  com- 
pany to  another  company  controlled 
by  himself,  and  has  levied  an  assess- 
ment on  the  stock  of  the  old  company 
in  order  to  sell  out  the  stock.  Rob- 
inson v.  Dolores,  etc.  Co.,  2  Colo.  App. 
17    (1892). 

A  person  to  whom  watered  stock 
has  been  issued  as  full-paid  stock  is 
not  such  a  buna  fide  stockholder  as 
may  compel  a  creditor  to  return  bonds 
Which  were  Illegally  issued.  The 
stock  is  void  under  the  Wisconsin 
statutes.  Hinckley  v.  Poster,  S3  Wis. 
64    1 1892). 

A  conditional  sab-  of  Btock,  the  con- 
dition being  that  the  sale  shall  be 
complete  for  fifty  cents  on  the  dollar, 
when  the  stock  is  worth  par,  Is  valid. 
I "nt i  1  the  stock  is  worth  par  no  fur- 
ther sum  is  recoverable  by  a  creditor 
who  as  a  Stockholder  participated. 
Callanan  P.  Windsor,  78  Iowa,  193 
(18i 

A  person  who  buys  stock  in  a  com- 
pany, knowing  that  the  stock  was  is- 
sued without  consideration,  cannot 
compel  another  stockholder  to  return 
his  stock  to  the  company  for  cancel- 
lation or  to  account  for  dividends. 
Clark  r.  American  Coal  Co.,  SG  Iowa, 
436   1  1892). 

A  stockholder  who,  as  secretary, 
signed  certificates  of  stock  cannot 
claim  they  were  watered  stock  and 
hence  that  they  cannot  be  voted  at  a 
meeting  called  to  ratify  a  sale  of 
property  to  a  director.  Wisner  v. 
Delhi,  etc.  Co.,  46  La.  Ann.  1223 
(1894). 

Where  three  persons  own  all  the 
stock  of  a  company,  two  of  them  may 
buy  the  stock  of  the  third  and  give 
the  company's  notes  in  partial  pay- 
ment for  the  same.  The  transaction 
is  legal  inasmuch  as  no  one  is  injured 
and  all  consent.  Neither  subsequent 
purchasers  of  the  stock,  nor  those  who 
become  stockholders  after  the  notes 
are  paid,  nor    stockholders   who    con- 


sent to  the  arrangement,  can  com- 
plain of  it.  Schilling,  etc.  Co.  v. 
Schneider,  110  Mo.  83  (1892).  See  also 
§  766,  infra. 

WThere  about  one-half  of  the  capital 
stock  is  issued  as  full-paid  stock  for 
property,  the  real  value  of  which  is 
one-quarter  of  the  par  value  of  the 
stock,  and  then  subsequently  the  re- 
maining stock  is  sold  for  cash  at  one- 
quarter  of  its  par  value,  the  remain- 
ing seventy-five  cents  on  the  dollar 
cannot  be  collected  from  the  parties 
to  whom  the  stock  was  issued  for 
cash,  as  between  the  stockholders  and 
orporation,  it  having  been  agreed 
at  the  time  of  the  issue  that  the  stock 
should  be  full-paid  and  non-assessa- 
ble. Green  r.  Abietine,  etc.  Co.,  96 
Cal.  322    (1892). 

Even  though  the  statutes  of  Vir- 
ginia provide  that  stock  shall  not  be 
issued  at  less  than  par,  yet  as  be- 
tween the  corporation  and  its  stock- 
holders stock  may  be  issued  at  less 
than  par,  the  stockholder  remaining 
liable  to  corporate  creditors  for  the 
difference.  A  stockholder  is  not  de- 
barred from  suing  another  stockholder 
in  regard  to  the  stock  merely  be- 
cause the  stock  was  issued  in  this 
manner.  The  court  said:  "In  the 
absence  of  a  statute  inflicting  a  pen- 
alty of  some  sort  for  issuing  or  re- 
ceiving, as  fully  paid  and  non-assess- 
able, shares  for  which  less  than  their 
face  value  had  been  paid,  or  pro- 
hibiting its  being  done,  we  are  not 
aware  of  any  general  principle  which 
holds  such  a  transaction  to  be  fraudu- 
lent, or  of  moral  turpitude,  so  as  to 
prevent  a  party  to  such  an  act  from 
having  any  standing  in  a  court  of 
equity.  The  penalty  is  that  the  stock- 
holders to  whom  such  shares  are  is- 
sued may  be  called  upon,  not,  indeed, 
to  pay  their  entire  par  value,  but  so 
much  thereof  as  may  be  required  to 
pay  those  creditors  who  had  a  right 
to  look  to  the  capital  stock  as  a  fund 


137 


§  39.] 


WATERED       STOCK. 


[♦■II.   III. 


already  paid   thereon.1     A  stockholder  who  has  received  stuck   at 
lea's  than  par  cannot  compel  other  stockholders,  who  have  received 


for  the  payment  of  their  debts.  Agree- 
ments not  to  require  payment  for 
stocks  issued  have  been  regarded  by 
the  courts  not  as  questions  affected 
by  public  policy,  but  as  questions  be- 
tween debtor  and  creditor,  as  to  which 
each  is  controlled  by  the  ordinary 
rules  of  law."  Barcus  v.  Gates,  89 
Fed.  Rep.  7S3   (1898). 

The  fact  that  a  bank  is  a  stock- 
holder in  a  corporation  which  issued 
stock  for  property  at  an  overvalua- 
tion does  not  compel  Buch  bunk  as  a 
creditor  of  the  corporation  to  resort 
to  its  collateral  before  sharing  In 
the  general  assets.  World,  etc.  Co. 
v.  Hamilton-Kenwood,  etc.  Co.,  123 
Mich.   G20    (1900). 

Even  though  directors  sell  property 
to    the    corporation    in    exchange    for 
treasury  stock  which  is  issued  to  them 
at  twelve  and  a  half  cents  on  a  dol- 
lar, yet  if  they  offer  to  allow  all  the 
stockholders    to    purchase    their   pro- 
portion   of   the    stock    at   that   price, 
and  they  all  take  the  stock  excepting 
one    director,    the    latter    cannot   ob- 
ject to  the  transaction  where  he  had 
himself  moved  that  the  stock  be  so 
issued.     Mackey   v.    Burns,    1G    Colo. 
App.  6    (1901).     Under  the  New  Jer- 
sey   statute    where    stockholders   are 
held  liable  to  corporate  creditors  on 
stock  issued  for  property  taken  at  a 
fraudulent    overvaluation,    a    creditor 
is  entitled  to  participate,  even  though 
he    is    also   one    of    the   stockholders 
and   took    part    in    the    illegal    issue. 
Easton   Nat.   Bank  v.  American,   etc. 
Co.,    64    Atl.   Rep.    917    (N.   J.    190G), 
rev'g  in  part  69  N.  J.  Eq.  326.    Where 
a  promoter  induces  an  owner  of  tim- 
ber land   to   convey   it  to  a  corpora- 
tion  for   stock,   one-quarter  to  go   to 
the  owner  and  three-quarters  to  the 
promoter,    for    which    the    promoter 
pays   nothing,   the   owner  may  cause 
the  whole  transaction  to  be  set  aside. 
Cranor  Co.  v.  Miller,  41   S.  Rep.  67$ 

1 


(Ala.  1906).  Where  a  corporation 
has  abandoned  business  for  many 
years  and  its  property  has  deteri- 
orated, and  tbe  officers  are  not  serv- 
ing, a  stockholder  may  file  a  bill  to 
liquidate  its  affairs  and  to  obtain  an 
adjudication  as  to  the  validity  of  cer- 
tain stock  in  order  that  the  distribu- 
tion may  be  made  to  those  stockhold- 
ers who  are  entitled  to  the  assets. 
Central  Land  Co.  v.  Sullivan,  44  S. 
Rep.  Clt    l  Ala.  1907). 

i  Even  though  a  citizen  of  Massa- 
chusetts subscribes  and  receives  stock 
in  a  New   Hampshire  corporation  at 
sixty  per  cent,  of  its  part  value,  and 
even   though  such  stock  has  been  de- 
clared void  by  a  court  in  New  Hamp- 
shire as  being  contrary  to  the  statute, 
vrt    the    subscriber    cannot    recover 
back   the   money  paid   if  he  has   de- 
layed  eight  years  after  the  issue   of 
stock   before    bringing   suit.     Hallett 
v.   New   England,    etc.   Co.,   105   Fed. 
Rep.    217    (1900).      A    subscriber    to 
stock  of  the  company   cannot  defeat 
the  subscription   on   the  ground  that 
the  person  to  whom  other  stock  had 
been    issued    for    patents    gave    him 
three  shares  of  such  stock  for   each 
share   that  he  subscribed  for  to   the 
company.     Maries,   etc.   Co.  v.   Stulb, 
215    Pa.    St.    91     (1906).      The    case 
Clarke  v.  Lincoln  Lumber  Co.,  59  Wis. 
655  (1884),  holds  that  a  participating 
subscriber  cannot  withdraw   and   re- 
cover back  sums  already   paid.     See 
also    Goff    v.    Hawkeye,    etc.    Co.,    62 
Iowa,  691   (1883).     Knowlton  v.  Con- 
gress,  etc.   Spring  Co.,  57  N.  Y.  518, 
537  (1874),  holds  the  same,  the  court 
saying:      "Such    parties    are    left    iu 
the  position  they  have  placed  them- 
selves."    The  latter  case  was  decided 
otherwise    in    the    federal    courts  — 
(Knowlton   v.    Congress,    etc.    Spring 
Co.,    14    Blatchf.    364     (1877);    s.    c. 
14  Fed  Cas.  797;   aff'd,  Spring  Co.  v. 
Knowlton,  103  U.  S.  49  (1880),— it  be- 
38 


C1I.    III.] 


"watered" 


STOCK. 


[§  40. 


stock  in  a  similar  way,  to  pay  anything  further  on  their  stock.1 
Where  the  stockholders  participating  in  the  issue  use  the  stock  to 
rob  a  railroad  and  bribe  a  judge,  and  then  disagree  among  themselves, 
the  courts  will  qoI  aid  one  as  againsl  the  others.2 

1 40.    Transferees  of  participating  stockholders  may  complain, 

when? — Not   only    the   participating  and    acquiescing   stockholders, 

but  also  their  transferees,  arc  bound  by  the  participation  or  acqui- 

The  transferee  cannot  claim  to  have  greater  rights  than 


ing  there  held  that  a  recovery  might 
be  hail  where  others  are  repaid.  A 
person  to  whom  stock  is  issued  for 
ii  at  a  discount  may  sue  to  have 
his  subscription  canceled.  Re  Zoe- 
done  Co.,  60  L.  T.  Rep.  383  I 
An  employee  who  by  contract  with 
the  company  la  entitled  to  a  propor- 
tion of  its  profits,  and  1  eed  not 
to  enter  Into  bu  In  competition 
with  it.  <unn<>t  I  against.  I 
.  on           -ii  the  ground  thai  ock 

i  all  "pure  wat<  i\"  61  I  n  though  the 
promoters    pur<  based   a   pr<  for 

a   ceii  and    th<  n    turned   it 

over  to  the  corporation  for  a  >iMiilar 
price  In  cash  and  also  a  large  amount 
of  stock.  Knapp  v.  S.  Jarvis  Adams 
Co..   135   Fed.   R<  p.  1008    I  L9 

Mandam  us  will  not  I 
the  Issue  of  Btocs  at   a  dii  count,  In 
p<  rformanc  •   of   a   resolution   by   the 

ckholders  thai  su<  b  1st  ue  shall  be 
mad  .     Equity  will  not  aid  the  fraud. 

.t,.     r.     Tiinl.cn,     4S    N.    J.    L.    ST 

iSivln  r.  Mutual  Match  Co.,  G6 
Atl.  Rep.  921  (N.  J.  1907).  "The  rule 
seems  to  be  esta  I  that  between 

stockholders    one    cannot    be    legally 

lied  upon  to  make  good  any  short- 
age in  value  ts  and  the 
nominal  par  value  of  the  stock,  when 
his  stock  is  issued  under  a  contract 
with  the  company  as  full  paid, 
whether  as  a  bonus,  or  for  property 


607  (N.  J.  1907).  Where  two  pro- 
moters form  a  partnership  and  ac- 
quire stocks  and  bonds,  one  cannot 
deny  the  rights  of  the  other  on  the 
ground  that  the  stock  and  bonds 
were  issued  by  a  railroad  company  in 
-s  of  the  cost  of  construction. 
Leeds  v.  Townsend,  81  N.  E.  Rep.  1069 
(111.  1907). 

2  Tobey  v.  Robinson,  99  111.  222 
«  1  s s  l  ) .  Although  a  stockholder  has 
transferred  certain  stock  to  the  presi- 
dent to  be  used  to  bribe  governmental 
officials  in  obtaining  a  renewal  of  gov- 
ernmental contracts  with  the  corpora- 
tion, yet  the  stockholder  may  recover 
back  the  stock,  it  not  having  been 
used  for  that  purpose.  Mulvane  v. 
O'Brien,  58  Kan.  463  (1897).  The 
courts  will  not  aid  a  stockholder  as 
against  directors'  breaches  of  trust, 
where  the  business  is  illegal  and  the 
stock  fictitious  and  "watered."  Le 
Warne  v.  Meyer,  38  Fed.  Rep.  191 
(18S9).  Where  an  option  to  buy  min- 
ing lands  is  sold  to  a  Missouri  cor- 
poration for  $1,000,000  of  stock,  the 
promoters  paying  practically  nothing, 
the  act  is  illegal  under  the  Kansas 
constitution,  and  a  suit  by  one  of 
them  against  the  corporation  to  ob- 
tain his  share  of  the  stock  will  fail. 
Garrett  v.  Kansas,  etc.  Min.  Co.,  113 
Mo.  330  (1892).  Where  "watered" 
stock  is  issued  to  directors  and  then 
by  common  consent  an  assessment  is 


at  an  overvaluation,  when  the  issue  is     levied  on  such  stock,  an  agreement  of 


sented  to  by  all  the  stockholders. 
It  is  a  bargain  between  the  contract- 
ing parties,  which.  In  the  absence  of 
fraud,  they  cannot  abrogate."  Good- 
now  r.  American,  etc.  Co.,  66  Atl.  Rep. 


one  of  them  to  cancel  his  stock  is 
binding  on  him  and  his  transferees 
who  took  with  knowledge.  Hill  v. 
Atoka,  etc.  Min.  Co.,  124  Mo.  153 
(1894). 


139 


§40.] 


'■  watered"  stock. 


[CH.    III. 


his  transferrer,  as  regards  a  general  remedy  invalidating  the  whole 
transaction.  Ee  cannol  bring  suit  in  behalf  of  the  corporation  and 
other  stockholders  against  the  party  or  parties  participating  in  the 
issue,  inasmuch  as  his  own  title  is  tainted   with  the  same  fraud.1 


l  A  stockholder  in  a  holding  cor- 
poration cannot  maintain  a  suit  in 
behalf  of  the  corporation  on  the 
ground  that  its  promoters  made  large, 
unlawful  and  secret  profits  by  being 
interested  in  the  constituent  company 
whose  stock  was  turned  in  to  the 
holding  company  in  exchange  for  the 
stock  of  the  latter,  it  appearing  that 
when  the  stock  was  so  turned  in  the 
promoters  were  the  only  parties  in- 
terested. If  any  of  the  original  par- 
tics  were  defrauded  their  remedy  Is 
a  suit  at  law  for  damages  against 
the  guilty  parties.  The  court  said 
(p.  241):  "We  have  here  nothing 
more  than  the  ordinary  transaction 
of  parties  coming  together  and  agree- 
ing in  writing  to  form  a  corporation 
that  shall  take  over  from  them  cer- 
tain definitely  understood  proper! 
and  cash,  for  which  is  to  be  issued  its 
entire  capital  stock.  It  is  doubtless 
true  that  in  many  instances  there  is 
great  overcapitalization,  and  that 
the  general  public  is  frequently  mis- 
led by  the  large  amounts  of  preferred 
and  common  stock  issued  by  corpora- 
tions. The  rights  of  the  public  are 
not  involved  in  this  litigation."  .  .  . 
"The  stockholders  of  the  constituent 
companies  and  the  individual  defend- 
ants were  the  organizers  of  the  cor- 
poration and  became  its  first  stock- 
holders; they  dealt  wholly  between 
themselves  as  sellers  and  buyers,  or- 
ganizers and  corporation;  no  other 
persons  had  any  interest  in  this  in- 
itial transaction;  if  fraud  had  been 
practiced  by  any  one  of  the  organizers 
upon  those  associated  with  him,  the 
cause  of  action  would  have  vested  in 
the  party  injured."  Blum  v.  Whit- 
ney,   185    N.   Y.   232    (1906). 

Even    though    stock    is    issued    for 
property  which  is  worth  but  one-tenth 


of  the  par  value  of  the  stock,  yet  if 
all  the  stockholders  assent  thereto  a 
subsequent  purchaser  of  the  stock 
cannot  maintain  a  suit  in  behalf  of 
the  corporation  to  cancel  the  stork 
on  the  ground  of  fraud.  His  remedy, 
if   any,   is   a   personal    suit   for   false 

iresentationa.    Garretson  v.  Pacific,     # 
etc.  Co..   1  16  Cal.  1S4   (1905). 

Even  though  a  large  quantity  of 
stock  has  hern  issued  for  patents 
and  a  portion  thereof  donated  back  to 
the  corporation  for  treasury  stock, 
\.  i  a  purchaser  of  such  treasury  stock 
cannot  maintain  a  suit  in  New  York 
to  have  the  entire  issue  declared 
illegal  and  void,  where  the  corpora- 
tion was  organized  under  the  laws 
of  West  Virginia  and  there  is  no  alle- 
gation that  the  transaction  was  void 
under  the  laws  of  that  state.  Insur- 
ance Press  v.  Montauk,  etc.  Co.,  83 
N.  Y.  App.  Div.  259  (1903);  aff'd,  178 
N.  Y.  623. 

Even  though  two  of  the  directors 
sell  to  the  corporation  certain  patents 
for  $3,000,000  full  paid  stock,  being 
the  entire  capital  stock,  and  give  to 
the  corporation  $750,000  of  the  same 
as  treasury  stock,  and  even  though 
the  patents  are  worth  but  $10,000, 
neither  the  corporation  nor  a  pur- 
chaser of  treasury  stock  at  fifty  cents 
on  the  dollar  can  compel  them  to 
return  the  stock  nor  hold  them  liable 
thereon,  but  the  remedy,  if  any,  is 
to  rescind  the  transaction  and  return 
the  patents  and  demand  a  return  of 
the  stock  or  the  value  of  such  part 
of  the  stock  as  they  have  sold.  Such 
is  the  rule,  even  though  the  statutes 
of  the  state  prohibit  the  issue  of 
stock  at  less  than  par.  The  court 
said  (p.  477) :  "Whether  they  knew 
that  the  value  of  the  patents  did  or 
did   not  exceed    $10,000   was   entirely 


140 


CH.   III.] 


"watered"  stock. 


[§40. 


Nor  ran  lie  bring  an  action  against  the  corporation.1  But  the  trans- 
ferred stock  and  $7,740,000  common 
stock,  yet  neither  the  corporation  nor 
its  stockholders  can  hold  them  liable 
for  such  profit  in  stock,  there  being 
no  proof  that  the  plants  were  not 
worth  the  amount  of  the  stock  issued 
for  them,  nor  that  the  sale  had  been 
rescinded,  and  there  being  no  com- 
plaint made  by  the  original  subscrib- 
ers to  the  stock  and  the  original  sub- 
scription having  recited  that  such 
stock  would  be  so  issued  for  the  prop- 
erties. Hutchinson  v.  Simpson,  92  N. 
Y.    App.   Div.    3S2    (1904). 

Where  for  six  years  an  issue  of 
stock  for  services  has  appeared  fully 
on  the  books  of  the  company  and  has 
not  been  objected  to,  a  stockholder 
inot  have  it  set  aside,  even  under 
the  constitution  of  Colorado,  espe- 
cially where  all  the  stockholders  at 
the  time  of  the  issue  assented  thereto 
and  the  party  receiving  the  stock 
used  a  large  portion  of  it  to  interest 
other  persons  in  the  company,  and 
even  though  the  stock  so  issued  to 
him  was  $125,000,  being  one-half  of 
the  entire  stock,  and  was  in  consid- 
eration of  services  rendered  in  ob- 
taining contracts  and  options,  which 
were  turned  over  to  the  company. 
Calivada,  etc.  Co.  v.  Hays,  119  Fed. 
Rep.  202   (1902). 

Where  a  mining  company  has  sold 
all  its  property  with  the  consent  of 
the  stockholders,  a  subsequent  pur- 
chaser of  the  stock  cannot  complain. 
Boldenweck  v.  Bullis,  90  Pac.  Rep. 
634    (Col.  1907). 

See   also    §§  730,    735,   infra.     Hig- 

gins  v.  Lansingh,  154  111.  30   (1895); 

Parsons  v.  Hayes,  14  Abb.  N.  Cas.  419 

(N.    Y.    Super.    Ct.    1883)  ;     Nott    v. 

Clews,   14  Abb.  N.  Cas.    (N.  Y.)    437 


immaterial.  They  had  a  right  to  hold 
the  letters  patent  until  they  were 
offered  the  price  at  which  they  were 
willing  to  sell.  They  sold  them  to 
this  company  for  its  whole  capital 
stock,  agreeing  with  the  company 
that  that  was  the  value  of  the  patents. 
I  know  of  no  principle  which  would 
justify  a  court  of  equity  in  compelling 
the  owners  of  these  patents  to  ac- 
cept any  co  m  tor  I  heir  tra 
fer  to  the  corporalion  r  that 
agreed  on,  and.  upon  the  ground  that 
the  pat  are  not  worth  the  sum 
agreed  on  as  deration  for  the 
transfer,  decree  that  th>  lors 
mi;  back  to  i  ay  the 
consideration  they  had  l.  less 
the  real  value."  A  purchaser  of  the 
treasury  Btoch  has  Of  course  a  | 

at  law  if  there  were  false  represen 
tions.     Insurance   Press   v.  Montauk, 

.    Co.,    103    N.    Y.    App.    Div.     172 
i  L905  >.    Compare 

A    stockholder    who    has    rect  | 
stock  for  nothing  from  a  party  who 
has  consented   to  the   Issue  i  I 
and  bonds  for  an  insufl  consid- 

.     ition,  may  not  be  able  to  complain 
thereof.      Ward    P.    Smith,    95    N.    Y. 

■i.    Div.    432    i  1904). 

in  though  promoters  obtain  op- 
tions on  a  large  number  of  malting 
plants,  and  take  subscriptions  to  stock 
in  a  corporation  to  be  organized  for 
the  purpose  of  taking  over  the  plants, 
and  use  the  proceeds  of  the  subscrip- 
tions to  pay  for  the  plants  and 
furnish  a  working  capital  for  the 
company,  and  receive  from  the 
corporation,  in  payment  for  the 
plants,  stock  sufficient  to  fill  the  sub- 

:  iptions  and  also  to  leave  with  the 
promoters    $500,000    as    a    profit    pre- 


i  Quoted  and  approved    in    Gumaer    In  Re  Ambrose  Lake,  etc.  Min Co.  L 


r.  Cripple  Creek,  etc.  Co.,  90  Pac. 
1.  1907).  In  Re  Gold  Co., 
[,  R  n  Ch  D  701  (1879),  the  court 
Bald:  "It.  was  not  a  wrong  done  by 
the    company    or    to    the    company." 

141 


R.  14  Ch.  D.  390,  397  (1880),  the 
court  said:  "There  would  be  no  lia- 
bility on  the  part  of  the  company  as 
such." 


§40.] 


"watered"  stock. 


[CH.    III. 


fcrcc  is  by  no  means  without  a  remedy.     It  may  bo  a  fraud  on  the 


(1883);  Ffooks  v.  Southwestern  Ry.. 
1  Sm.  &  G.  142  (1853);  He  British, 
etc.  Box  Co.,  L.  R.  17  Ch.  D.  4G7 
(1881),  holding  that  new  stock  also 
is  hound;  Flagler,  etc.  Co.  v.  Flagler, 
19  Fed.  Rep.  46S  (18S4);  Re  Syra- 
cuse, etc.  R.  R.,  91  X.  Y.  1  (  Lss::  > ; 
Kent  v.  Quicksilver  Min.  Co.,  78  N.  Y. 
159,  188  (1879);  Callanan  v.  Wind- 
sor, 7S  Iowa,  193  (1889);  Venner  r. 
Atchison,  etc.  R.  R.,  28  Fed.  Rep.  581, 
591  (1SSG).  Even  though  bonds  and 
stock  are  issued  for  the  construct  inn 
of  a  road,  the  face  value  of  which  is 
twice  the  cost  of  the  road,  yet  if  all 
the  stockholders  consented  and  none 
of  the  creditors  then  existing  are  in- 
jured, transferees  of  such  stock  can- 
not complain  on  the  foreclosure  of 
the  mortgage  securing  the  bonds. 
Wells  v.  Xorthern  T.  Co.,  195  111.  2SS 
(1902).  A  purchaser  at  public  auc- 
tion of  stock  that  has  been  issued  be- 
low par  cannot  complain  of  the  issue. 
Fraser,  etc.  Min.  Co.  v.  Gallagher,  5 
British  Columbia  Rep.  82  (1895).  A 
purchaser  of  stock  issued  to  a  con- 
tractor for  work  cannot  attack  the 
issue  on  the  ground  that  it  was 
watered  stock,  even  though  the  con- 
tractors immediately  sell  a  part  of 
the  stock  and  bonds  at  the  rate  of 
ninety  cents  on  the  dollar  for  the 
bonds,  with  nearly  an  equal  amount 
of  stock  thrown  in.  Drake  v.  New 
York,  etc.  Co.,  26  N.  Y.  App.  499 
(1898).  A  bona  fide  purchaser  of 
tainted  stock  stands  in  no  better  po- 
sition than  his  transferrer.  Miller  v. 
University,  etc.  Co.,  N.  Y.  L.  J.,  Nov. 
13,  1894.  Even  though  a  party  ac- 
quires all  the  stock  of  a  corporation 
amounting  to  $1,500,000,  and  then 
through  dummy  directors  issues 
$3,500,000  additional  stock  and  $4,000,- 
000  of  mortgage  bonds  to  himself,  and 
then  proceeds  to  sell  the  stock  and 
bonds  to  the  public,  yet  a  person  who 
purchases  some  of  the  stock  cannot 
file  a  bill  in  equity  against  the  cor- 


poration to  set  aside  the  transaction 


and  to  ascertain  what  part  of  his 
stock  is  legal.  His  remedy  is  at  law 
for  damages,  or  he  may  repudiate  and 
recover  back  his  money.  "It  is  ele- 
mentary that  the  court  is  possessed 
of  no  power  to  make  a  new  contract 
between  parties  entirely  distinct  and 
different  from  the  contract  that  they 
have  entered  into."  Church  o.  Citi- 
zens' Street  R.  R.,  78  Fed.  Rep.  526 
(1897).  The  purchaser  of  stock 
which  was  issued  to  directors  cannot 
complain  that  the  directors  were 
guilty  of  fraud  in  the  issue.  Barr  v. 
New  York,  etc.  R.  R.,  125  N.  Y.  2G3 
(lsiti).  See  also  Langdon  v.  Fogg, 
18  Fed.  Rep.  5  (1883).  Contra,  Par- 
sons r.  Joseph,  92  Ala.  403  (1891). 
In  Foster  v.  Seymour,  23  Fed.  Rep. 
65  (1885),  an  issue  of  stock  for  prop- 
erty at  an  overvaluation  is  distinctly 
held  to  be  no  fraud  upon  the  cor- 
poration, nor  upon  the  stockholders, 
all  of  whom  participated.  "A  pur- 
chaser of  the  stock  would  not  be  in- 
jured by  the  transaction  unless  he 
paid  more  for  it  than  it  was  worth; 
and  every  purchaser  would  stand 
upon  the  particular  circumstances  of 
his  purchase."  A  suit  against  the 
guilty  parties  who  were  the  directors, 
to  compel  them  to  account  for  a  fraud- 
ulent disposition  of  corporate  prop- 
erty, will  not  lie.  The  fraud  is  not 
corporate;  it  is  personal.  See  also 
§  §  705-707.  "As  a  general  proposition, 
the  purchaser  of  stock  in  a  corpora- 
tion is  not  allowed  to  attack  the  acts 
and  management  of  the  company 
prior  to  the  acquisition  of  his  stock." 
United  Elect.  Sec.  Co.  v.  Louisiana 
Elect.  Light  Co.,  68  Fed.  Rep.  673 
(1895).  But  in  London  Trust  Co.  v. 
Mackenzie,  68  L.  T.  Rep.  380  (1893), 
the  court  said:  "I  think  there  is  no 
authority  for  the  general  proposition 
that  an  ordinary  transferee  of  shares 
in  a  limited  company  is  affected  by 
the  fact  that  his  transferrer  had 
knowledge  which  would  have  dis- 
abled him  from  suing." 


142 


CH.    III.] 


"watered"  stock. 


[§  40. 


vendee  of  stock  to  sell  him  as  paid-up  stock  that  which  is  not  paid 
up,  although  issued  as  paid  up,  the  vendor  having  participated  in 
the  issue.1  Ee  may  bring  an  action  for  damages  against  the  vendor, 
or  against  those  who,  knowing  the  facts,  induced  him  to  purchase,  or 
those  who  made  it  possible  for  the  fraud  to  be  practiced,  or  who 
actually  assisted  in  perpetrating  the  fraud  upon  him.2 


i  Sturges  v.  Stetson,  1  Biss.  246 
(1858);  s.  c,  23  Fed.  Cas.  311,  hold- 
ing that  the  vendee  is  not  liable  on 
a  note  given  in  payment  thereof; 
Fosdick  v.  Sturges,  1 
s.  c.  9  Fed.  Cas.  501,  holding  that 
the  vendee  may  recover  back  money 
paid;  Reeve  v.  Dennett,  L45  .Mass.  23 
(18s7 1  ;  b.  0.,  1 11  Mass.  207,  where 
the  capital  of  $1,000,000   v  ted 

for  a  worthless  patent;  holding  also 
that  the  misrepresentations  may  In- 
validate also  a  second  and  Bubsequi  nf 
purchase  of  stock,  even  though  in 
the  meantime  the  vendee  has  become 
a  dire,  tor  in  the  i  orporal  Ion. 

It  Is  a  question  for  tie-  Jury  whether 
fraud 

■  I  to  be  paid  up.  when  part  of 
the  p;  b  id  been  by  dividends 

from  the  corporation.    Kryger  v.  An- 
Mich.  ,i. 

a  pin  chasi  r  of  stock  i  Bued  to  a 
contractor  for  work  cannot  attack  the 
issue  on  the  ground  that  it  was 
wal  red  Btock,  even  though  the  con- 
tractors  Immediately  ^-:i  a  part  of 
the  stock  and  bonds  at  t lie  rate  of 
nil.  -its    on    the    dollar    for    the 

bonds,   with  nearly  an  equal  amount 
of   stock   thrown    In.     Drake   v.   New 
k.  etc.  Co.,  26  N.  Y.  App.  Div.  499 

In  the  <ase  of  Reeve  v.  Dennett. 
1  15  Mass.  23  (1887),  where  the  capital 

of  $1,000, )  was  Issued  for  a  worth- 

1   3a   patent,   the  court  held  that  mis- 

atations    inducing  a   purchase 

of  stock  may  invalidate  also  a  second 

and    subsequent    purchase    of    stock, 

D    though    in    the    meantime    the 

has  become  a  director  in  the 

corporation. 

Even    though   the   agent   of  a   cor- 


poration represents  to  it  that  a  party 
owns  certain  property  and  will  sell 
it  to  the  corporation  for  $7,500  in 
bonds  and  $30,000  in  stock,  and  the 
purchase  is  made  on  those  terms,  and 
the  vendor  keeps  the  bonds  and  gives 
the  stock  to  such  agent,  and  the  agent 
sells  a  portion  of  the  stock  to  a  bona 
fide  purchaser,  yet  the  latter  cannot 
rescind  the  sale  on  the  ground  of 
fraud.  Foushee  v.  Snyder,  54  S.  W. 
Rep.  730  (Ky.  1900).  A  person  who 
deeds  land  in  exchange  for  stock 
which  is  represented  to  be  full-paid 
may  have  the  sale  rescinded  where 
only  $3  a  share  had  been  paid  in 
on  the  stock.  Coolidge  v.  Rhodes,  199 
111.  24  (1902).  A  person  who  has 
been  induced  to  transfer  property  to 
a  corporation  in  exchange  for  stock 
may  maintain  a  mandamus  to  compel 
the  company  to  allow  him  to  examine 
the  books,  papers  and  records  of  the 
company  to  ascertain  whether  certain 
representations  made  to  him  are  true, 
to  the  effect  that  all  the  stock  had 
been  issued  for  full  value.  State  v. 
Pan-American  Co.,  5  Penn.  (Del.)  391 
(1904). 

-  The  leading  case  on  this  princi- 
ple of  law  is  Cross  v.  Sackett,  2  Bosw. 
617  (1858),  argued  by  eminent  coun- 
sel and  decided  by  learned  judges.  A 
bona  fide  purchaser  in  open  market, 
from  an  innocent  holder  of  stock  is- 
sued as  paid  up  for  property  taken 
at  an  overvaluation,  sued  a  director, 
being  also  an  original  stockholder, 
for  damages.  The  court  in  its  de- 
cision said:  "When  a  party  projects 
and  publicly  promulgates  the  scheme 
of  a  joint-stock  company;  when  he 
causes  the  usual  books  to  be  opened, 
and  allows  or  causes  the  inscription 


143 


§40.] 


'  watered"  stock. 


[CH.   EEL 


The  transferee  has  other  remedies.  If  the  sale  to  him  was  by 
one  of  the  participants,  he  may  rescind  the  sale  and  recover  back 
the  price  paid  by  him;1  or,  If  the  contract  of  purchase  is  not  yet 
completed,  he  may  refuse  to  take  the  Btock.2  An  indictmenl  of  a 
person   for  the  unlawful  obtaining  of  money  by  selling  worth 


of  a  person  as  an  owner  of  an  interest 
to  a  definite  amount  and  vain-  there- 
in, which  is  false  within  his  own 
knowledge;  when  he  embodies  Buch 
false  statements  In  a  certificate  of 
this  righl  dire<  tly  Issued  and  of  the 
same  effecl  as  If  signed  by  himself; 
when  he  ac<  ompanles  that  certificate 
by  a  written  power  authorizing  a 
transfer  ai  large  by  the  party  to 
whom  he  has  given  the  certificate; 
when  that  representation  Induces  an 
innocenl  person  to  advance  his  money 
— the  defendant's  own  individual  act 
has  created  the  privity  of  contract. 
.  .  .  and  he  must  be  held  responsi- 
ble to  any  one  who  has  been  de- 
ceived."    See  also   §350,  infra. 

The    plaintiff    must    prove    that    a 
representation     was    made    that    the 


tlflcate  of  full-paid  stock  in  payment, 
although  the  stock  has  never  been 
paid  up,  the  former  is  not  a  debtor 
to  the  latter,  although  the  business 
is  never  turned  over  to  the  company. 
Re  Frye,  75  Hun,  402  (1894).  A 
suit  by  the  purchaser  of  stock  for 
damages  for  fraud,  in  that  the  stock 
had  been  fraudulently  paid  up  by 
property  conveyed  to  the  corporation 
at  an  overvaluation,  is  barred  by  the 
statute  of  limitations  applicable  to 
frauds.  Smith  r.  Martin,  135  Cal. 
247  (1901).  Where  promoters  trans- 
fer worthless  copyrights  for  $100,000 
common  stock  and  then  by  misrepre- 
E  ntations  as  to  the  value  of  the  pre- 
ferred stock  sell  it,  in  order  to  raise 
money  for  the  company,  the  pur- 
chaser may  hold  them  personally  lia- 


stock  was  paid  up,  and  that  he  relied     ble,  even  though   with  each  share  of 
thereon,   and   that  the  representation 
was    false   and    fraudulent.     McAleer 
v.  McMurray,  58  Pa.  St.  126   (1SG8); 
Priest  r.  White,  S9  Mo.  609   (18S6). 

The  court,  in  In  re  Ambrose  Lake, 
etc.    Co.,    L.    R.    14    Ch.    D.    390,    397 


preferred  stock  so  sold  they  contrib- 
uted one-half  of  a  share  of  common 
stock.  Grover  v.  Cavanaugh,  82  N.  E. 
Rep.  104   (Ind.  1907). 

l  Fosdick    v.    Sturges,    1    Biss.    255 
(1858);    s.   c,   9    Fed.   Cas.    501.     In 


(18S0),  said  that  the  transferee  has  this  case  the  certificate  was  brought 
a  remedy  against  the  person  who,  in  into  court  to  be  disposed  of  as  the 
any  way,  made  the  misrepresentations     court  should  direct.     See  also   §  350, 


to  him.  Re  Gold  Co.,  L.  R.  11  Ch.  D. 
701,  713,  714  (1879),  is  to  the  same 
effect.  In  Barnes  r.  Brown,  SO  N.  Y. 
527  (1880),  the  plaintiff,  being  under 
contract  to  receive  paid-up  stock 
from  defendants,  received  such,  and 
afterwards  discovered  that  its  par 
value  had  not  been  paid  in  to  the 
corporation.  The  court  held  that  he 
could  recover  damages  from  the  de- 
fendant for  the  fraud. 

"Where  after  incorporation  and  be- 
fore a  business  is  turned  over  the 
owner  of  the  business  gets  money  of 
an   incorporator  and    delivers   a  cer- 


infra.  The  purchaser  of  stock  may 
maintain  a  suit  to  recover  back  the 
price  on  the  ground  that  the  vendor 
sold  to  the  company,  for  three  mil- 
lion dollars  par  value  of  its  stock, 
property  worth  not  more  than  two 
hundred  and  fifty  thousand  dollars 
and  made  misrepresentations  in  re- 
gard to  it  and  also  misrepresented 
the  capacity  of  the  property.  Stern 
r.  Stern,  122  N.  Y.  App.  Div.  821 
(1907). 

2  Sturges  v.  Stetson,  1  Biss.  246, 
253  (1858);  s.  c,  23  Fed.  Cas.  311, 
314,  the  court  holding  that  an  action 


144 


C'H.    III.] 


"watered"  stock. 


[§41. 


Lr"l<l  milling  Btock  is  not  good  when  the  stock  was  paid  for  not  in 
money,  bnt  by  ch<  ck.1 

§  41.  Stockholders  dissenting  at  the  time  of  the  issue  may  com- 
plain.— Stockholders,  being  Buch  when  an  issue  of  paid-up  stock  is 
improperly  made,  and  not  assenting  to  or  acquiescing  in  it,  may 
bring  suit  in  a  courl  of  equity  to  enjoin  the  issue  if  not  yet  actually 
made,2  or,  it'  the  issue  has  already  been  made  he  may  file  a  bill  to 

for  the  price  of  such  stock  is  in  the  another  corporation  to  be  purchased 

nature  of  a  bill  in  equity  for  the  spe-  at  a  high  valuation,  this  does  not  pre- 

ciflc  performance  of  a  coir              D  1  vent   the  majority   of   the  stockhold- 

il  it  by  avoid-  ers  forming  a  holding  corporation  in 

Ing  the  contracl                        although  another  state  and   issuing  the  stock 

the  certificates  fc              a  transferred  of  the  latter  in  exchange  for  the  stock 

to   him.      To  of  the  two  former  corporations  at  a 

/.  Qoddard,  77  Mi                    i).     Even  price  equivalent  to   the  above   men- 

though  the  Btal  r                          equire  tioned  valuation.     The  court  has  no 

sto'                                 '    par,  yet  where  power   to   enjoin   such   a   transaction 

property  b                          !  i"  for  stock  at  the  instance  of  a  dissenting  stock- 

at    a    gross    «                                         art  holder.     The    fact    that   the   holding 

will    i                                                       to  company  may  name  the  directors  of 

be  paid  by  t!                                   to  the  both   companies   is  not   objectionable 

lor  of  in   itself.      Pierce    v.  Old    Dominion, 

,      V.1M    x,;-  etc.  Co.,  67  N.  J.  Eq.  399   (1904). 

(1900).  The  issue  of  new  stock  by  the  cor- 

i  Lory  0.  People,  S2  N.  B.  Rep.  2C1  poration    cannot    be    enjoined    where 

,111.   1907).  neither  the  corporation  nor  any  of  its 

2T1                                              bare    of  directors   are   parties   to   the   action. 

stock    in    a    l                                         my  "White  r.  Wood,  129  N.  Y.  527  (1892). 

may  die  a  bill  to  enj                    Mpany  A  stockholder  may  enjoin  the  issue 

from    |                                 l    bonds   to   a  of  stock  for  property  at  an  overvalua- 

Btructii             pany,  where  the  par  tion.     Dean  v.  Baldwin,  99  111.  App. 

value     of     tin-     stock     and     bonds     is  5S2    (1902). 

than    the    value    of   the   con-  The   federal   court   in   New   Jersey 

action  wmk.  and  the  construction  has  no  jurisdiction  of  a  suit  brought 

company    air              untrols    the    rail-  by   a   Pennsylvania  stockholder  in   a 

board    of   di-  New  Jersey  corporation  to  enjoin  the 
Montgon*  ry  Traction  Co.  r.  latter  and  its  directors  who  are  resi- 
Hannon,  140                           O.  dents  of  still  another  state  from  is- 
Althongb    Btoch    has               sold    at  suing  stock  on  an  alleged  illegal  con- 
about  sevent\              on  the  dollar  for  tract.     Lengel  v.  American,  etc.  Co., 
;,.  yet   if  the  I              tion  ha-s  been  110  Fed.  Rep.  19    (1901).    Where  the 
a    stockholder    cannot   enjoin  statute  authorizing  consolidation  spe- 
it.    although   i                 he  may  enjoin  cifies    that    the    consolidated    capital 
the  transfer  of  the  stork  during  the  stock    shall    not    be    more   than    the 
suit.    Huct  p.  Pidmont  Springs  Lum-  "fair   aggregate  value"   of  the   prop- 
erty, a  stockholder  may  enjoin  a  con- 
Even    thou                    art   at  the  in-  solidation  whose  capital  stock  is  far 
Btance  of                                   h(  ldi  r  has  in  excess  of  a  fair  value  of  the  prop- 
en               i   corporation    from   issuing  erty.     Langan  r.  Francklyn,  20  N.  Y. 
stock  in  payment  for  the  property  of  Supp.  404   (1S92). 
(10)                                                      145 


§41.] 


"watered"  stock. 


[cii.  III. 


:lI111ul  and  sel  aside  the  whole  transaction.1     Tin-  courl  has  power  to 
cancel  the  issue.2     Where  directors  issue  new  stock  to  their  friends 


Stockholders  may  restrain  the  issu? 
of  deferred  "honds,"  i.  c.  irredeemable 
bonds  entitling  the  holder  to  interest 
after   a    certain    dividend    is    paid    to 
the   stockholders,   it   being   merely   a 
scheme  to  issue  stock  below  par.  Tay- 
lor v.  Philadelphia,  etc.  R.  R.,  7  Fed. 
Rep.     386      (1881).     Compare     §762, 
infra.     A    minority   stockholder   can- 
not enjoin  the  company  from  issuing 
its   stock   in   payment   for   the   stock 
of    other   similar   companies    on   the 
ground   that  the   price  to  be  paid   is 
excessive   and   that   three   of   the   di- 
rectors are  interested  as  stockholders 
in    the    other    companies,    where    he 
does  not  prove  that  the  price  is  ex- 
cessive, and  it  appears  that  the  stock- 
holders   will    have    to    approve    the 
transaction   before   the   directors   can 
issue  the   stock,  and   it  appears  also 
that   the    plaintiff   owns   but   a   very 
small  amount  of  the  stock.     Geer  v. 
Amalgamated,  etc.  Co.,  61  N.  J.  Eq. 
3G4    (1901). 

l  In    Fisk    v.    Chicago,    etc.    R.    R., 
53    Barb.    513    (1868),    the    court   en- 
joined any  transfer  of  the  stock,  and 
appointed  a  receiver  to  receive  what 
the  corporation  had  realized  from  the 
stock,   and    to   use   the   funds   in    re- 
tiring the  stock  and  paying  damages 
caused   thereby.     In   Sturges  v.   Stet- 
son,  1   Biss.   246,    254    (1858);    s.   c, 
23  Fed.  Cas.  311,  314,  and  Fosdick  v. 
Sturges,  1  Biss.  255,  259  (1858);  s.  c, 
9  Fed.  Cas.  501,  503,  the  court  in  dicta 
said   that   the    issue    could    be    with- 
drawn,  leaving  with  the  guilty   par- 
ties so  much  stock  as  the  money  paid 
by  them  would  equal  the  par  value  of. 
2  Campbell    v.    Morgan,     4    Bradw. 
(111.)   100   (1879).     A  court  of  equity 
has  power  to  decree  the  return  and 
cancellation    of    certificates    of    stock 
fraudulently  issued.    Gibson  v.  Thorn- 
ton, 112  Ga.  32S    (1900). 

A  dissenting  stockholder  may  cause 
an  issue  of  stock  to  be  canceled  where 


it  was  issued  for  land  at  five  times 
its  real  value,  and  then  the  capital 
stock  was  doubled  and  the  increase 
issued  for  nothing.  Parsons  v.  Joseph, 
92  Ala.  403   (1891). 

A  dissenting  stockholder  may  cause 
to  be  canceled  certain  stock  which 
was  issued  without  consideration  to 
a  construction  company  in  which  the 
directors  are  interested.  Gilman,  etc. 
R.  R.   v.   Kelly,  77  111.  426    (1875). 

Where  the  president,  in  order  to  get 
control  of  the  corporation,  causes  a 
meeting  of  the  board  of  directors  to 
vote  stock  in  payment  for  services 
and  property  whose  value  is  much 
less  than  the  par  value  of  the  stock, 
the  stock  being  voted  to  outside  par- 
ties, but  thereafter  secretly  trans- 
ferred to  the  president,  a  stockholder 
may  compel  him  to  return  the  stock 
to  the  corporation  for  cancellation. 
Such  an  issue  is  also  illegal  by  the 
statutory  law  of  the  state  in  Ala- 
lia ma.  Perry  v.  Tuskaloosa,  etc.  Co., 
93  Ala.  364   (1891). 

A  distribution  gratis  of  stock 
among  the  stockholders  has  been  held 
to  be  an  unauthorized  reduction  of 
the  capital  stock,  and  it  will  be  or- 
dered to  be  returned.  Holmes  v.  New- 
castle, etc.  Co.,  L.  R.  1  Ch.  D.  6S2 
(1875). 

Where  the  chief  promoter  of  a  pro- 
posed manufacturing  corporation  ob- 
tains donations  from  property  owners 
to  the  proposed  corporation  on  his 
agreement  that  $75,000  of  stock 
should  be  subscribed  for  within  a  cer- 
tain time  and  then  proceeds  to  or- 
ganize the  company,  he  himself  sub- 
scribing for  $25,000  of  the  stock,  and 
the  corporation  then  purchases  cer- 
tain worthless  patents  and  agency 
contracts  and  issues  therefor  $63,250 
of  full-paid  stock,  including  the  $25,- 
000  subscribed  for  by  him,  and  after- 
wards the  corporation  collects  $4,000 
of  such  donations  and  borrows  money 


146 


CH.   III.] 


"watered"  stock. 


[§41. 


at  less  than  par  and  without  offering  it  to  the  existing  stockholders, 
the  ohject  being  to  control  a  coming  election,  the  election  will  be  en- 
joined and  the  issue  sel  aside.1  A  person  induced  to  subscribe  for 
stock  on  the  representation  of  the  president  that  the  other  stock- 
holders  had  paid  for  their  stock  in  full  may  defend  against  the  sub- 
scription   on   the  ground   that  the  other  stockholders  had  not  and 


from  such  promoter  and  gives  him  a 
mortgage  therefor,  his  mortgage  is 
not  good  as  against  the  parties  who 

donated  the  $1..' Moore  p.  Tniver- 

sal,  etc.  Co.,  122   Mich.   48    (1899). 

Where    the     four     directors     issue 

220  shares  of  treasury  stock  to 
two  of  their  Dumber  tor  $348.40,  the 
court  will  set  aside  ue  at  the 

In  tarn  e  ol  a  stockholder,  though 

that  was  all  the  ■-'<"  '.  onably 

worth.  Mosher  v.  Sinnott,  20  Colo. 
App.   1"  l   I  L905).  Sei  61  S.B.R" 

\     to  kholdi  r  maintain  a  bill 

in   equity    to   cancel  issued   in 

ment  for  property  overvalued  and 
also   inisi  ted   as   to  the   price 

which  bad  been  paid  for  it.  and  espe- 
clally  may  Buch  a  bill  be  maintained 
when  the  Bto<  k  really  goes  to  the 
president  of  the  company  in  order 
that  be  may  maintain  control,  and 
the    stock    la    also    i  .  ted    stock. 

iw  /•.  Florence,  etc.  Co.,  143  Ala. 
.Ml    (1905). 

In  det<  running  whether  a  stock- 
holder's suit  to  cancel  stock  and 
bonds  which  he  alleges  are  illegal 
may  he  removed  to  the  federal  court, 
the  corporation  being  an  indispensa- 
ble party  will  be  considered  a  party 
complainant  only  when  it  is  shown 
that  its  officers  or  persons  controlling 
it   are   actually   opposed   to   the   suit. 

oel  v.  United,  etc.  Co.,  132  Fed. 
Rep.   252    (1904). 

A  stockholder  who  brings  a  suit 
again.-t  parties  who  have  received 
from  the  corporation  $3,000,000  of 
stock  for  $10,000  worth  of  patents 
may  examine  the  defendants  before 
trial  in  order  to  prove  what  the  pat- 
ents were  worth.     Insurance  Press  v. 


Montauk,  etc.  Co.,  70  N.  Y.  App.  Div. 
50    (1902). 

A  stockholder  may  sue  on  behalf 
of  the  corporation  to  cancel  stock 
fraudulently  issued  for  good-will  or 
for  no  consideration  whatever.  Brahm 
r.  M  C.  Gehl  Co.,  112  N.  W.  Rep.  1097 
(Wis.  1907). 

A  person  who  is  liable  on  stock 
cannot  avoid  the  liability  by  trans- 
ferring a  worthless  formula  to  the 
corporation  as  against  the  dissent  of 
r  stockholders.  Dean  v.  Bald- 
win, 99  111.  App.  Rep.  582   (1902). 

Stock  may  be  issued  for  legal  serv- 
ices, already  performed  or  to  be  per- 
formed in  the  future,  and  a  stock- 
holder cannot  cause  to  be  set  aside 
an  issue  of  $50,000  par  value  of  stock 
in  a  Michigan  corporation  for  legal 
ices,  unless  actual  fraud  is 
proven.  Vogeler  v.  Punch,  103  S.  W. 
Rep.  1001   (Mo.  1907). 

1  Way  p.  American,  etc.  Co.,  60  N. 
J.  Eq.  263  (1900).  See  also  §614, 
infra.  Dissenting  stockholders  may 
file  a  bill  to  obtain  a  cancellation  of 
stock  issued  in  payment  for  patents 
to  engage  in  business  outside  of  the 
territory  described  in  the  charter,  the 
real  purpose  being  to  obtain  the  vote 
on  the  stock.  Kimball  v.  New  Eng- 
land, etc.  Co.,  69  N.  H.  485  (1899). 
Where  unissued  shares  of  the  par 
value  of  11.  each  are  worth  about  11. 
each  and  a  portion  thereof  are  of- 
fered to  the  stockholders  at  21.  10s. 
each,  and  an  option  on  the  balance  is 
given  to  underwriters  at  the  same 
price  in  consideration  of  the  under- 
writers agreeing  to  take  such  of  the 
stock  as  is  offered  to  the  stockholders 
and  is  not  taken  by  the  latter,  a  mi- 


147 


41.] 


"watered"  stock. 


[en.  in. 


were  aot  to  pay  anything  for  their  stock.1  A  stockholder  in  a 
New  Jersey  corporation  may  bring  suit  in  the  New  York  state 
courts  to  compel  persons  holding  a  majority  of  the  stock  to  return  to 
the  corporation  for  cancellation  a  largo  amount  of  stock  which  was 
issued  to  them  illegally  and  without  consideration,  but  the  legality 
of  such  issue  will  not  be  determined  by  the  statutes  of  New  Xork.2 
The  dissenting  stockholders'  rights  and  remedies  herein,  in  their 
scope  and  details,  are  similar  to  the  rights  and  remedies  of  stock- 
holders in  other  eases  of  ultra  vires  acts  or  fraud  to  the  injury  of  the 
corporation — a  subject  fully  treated  in  the  fourth  part  of  this 
work?  A  suit  to  determine  what  Btock  is  watered  stock  and  also 
to  set  aside  transactions  by  which  the  corporate  property  has  been 
misapplied  ia  multifarious.4  Laches  i-  a  bar  to  a  dissenting  stock- 
bolder's  suit.6     A  dissenting  stockholder  cannot  obtain  a  dissolution 


nority  stockholder  may  enjoin  the 
carrying  out  of  such  option  to  the 
underwriters,  it  being  in  violation  of 
the  English  statute  prohibiting  the 
payment  of  a  commission  for  under- 
writing subscriptions.  Burrows  v. 
Matabele,  etc.  Co.,  [1901],  2  Ch.  23. 
i  Alabama,  etc.  Works  v.  Dallas, 
127  Ala.  513   (1900). 

2  Ernst   v.   Rutherford,    etc.  Co.,  38 
N.  Y.  App.  Div.  388  (1899). 

3  See  Ch.  XL,  infra. 

4  Church  v.  Citizens'  Street  R.  R., 
78  Fed.  Rep.  526  (1897).  Subscrib- 
ers to  stock  may  rescind  the  same  on 
the  ground  that  promoters,  who  sold 
property  to  the  company,  had  mis- 
represented the  character  of  the  prop- 
erty. This  suit  may  be  in  equity  and 
is  not  multifarious,  although  the  re- 
lief demanded  is  a  cancellation  of 
the  sale  of  the  property  and  for  dam- 
ages against  the  vendors  and  co-con- 
spirators, and  also  for  rescission  of 
the  subscription.  Such  a  suit  lies,  al- 
though the  subscribers  paid  in  only 
$150,000  of  cash  for  $450,000  of  stock. 
Rule  94  of  the  federal  courts  does  not 
apply  to  such  a  case.  Barcus  v. 
Gates,  89  Fed.  Rep.  783    (1898). 

5  Where  the  directors  sell  unissued 
stock  at  a  discount  to  a  party  who 
resells  part  of  it  to  a  director,  other 
stockholders  cannot,  ten  years  after- 


wards,  hold   him    liable.      Keeney   v. 
Converse,   99   Mich.   316    (1894). 

Where  a  worthless  equity  of  re- 
demption in  land  is  turned  in  for 
stock  and  then  the  stock  is  pledged 
with  the  mortgagee  of  the  land,  and 
then  "scrip"  is  taken  from  the  cor- 
poration by  the  parties  pledging  the 
stock,  this  scrip  reciting  that  it  rep- 
resented the  equity  of  the  right  to  the 
certificates  of  stock  when  the  mort- 
gage was  paid  off,  such  scrip  is  valid 
and  may  be  sold,  even  though  it  was 
issued  without  consideration,  it  hav- 
ing been  treated  as  valid  for  twenty 
years.  Higgins  v.  Lansingh,  154  111. 
301   (1895). 

A  party  who  has  invested  $15,000 
in  obtaining  a  bridge  franchise,  and 
for  plans  and  specifications,  and  who 
transfers  the  same  to  another  party 
on  an  agreement  of  the  latter  to  or- 
ganize a  corporation  to  build  the 
bridge  and  to  give  to  the  former  $15,- 
000  out  of  $80,000  preferred  stock, 
the  common  stock  to  be  such  sum  as 
the  latter  may  desire,  may  object  to 
the  latter  causing  the  corporation  to 
issue  $95,000  in  bonds,  $80,000  in  pre- 
ferred stock,  and  $60,000  in  common 
stock  for  building  the  bridge  at  a 
cost  of  $71,000;  but  if  the  former 
takes  his  $15,000  preferred  stock  and 
keeps  it  for  six  years,  he  cannot  then 


148 


en.  iit-1  "watered"  stock.  [§  42 

of  the  company  on  the  ground  that  stock  has  been  issued  at  a  dis- 
count for  cash.1 

§  42.  Corporate  creditors  as  complainants  where  the  issue  is  for 
money— Bonus  of  stock  with  bonds— Issue  of  stock  by  embarrassed 
corporation— What  creditors  may  complain. — According  to  well- 
established  rules  of  law  in  America,  corporate  creditors  may  ob- 
ject to  certain  transactions,  which,  as  between  the  corporation  and 
its  stockholders  and  third  persons,  may  be  valid  and  binding.  This 
right  of  corporate  creditors  is  firmly  established  in  law.  It  is  based 
on  the  contract,  express  or  implied,  that  a  subscription  for  or  taking 
of  stock  creates  an  obligation  to  pay  for  the  same  at  par,  except  as 
to  parties  who  have  expressly  or  impliedly  waived  this  obligation. 
Where  stock  is  issued  for  property  the  above  principle  of  law  does 
not  afford  much  protection  to  corporate  creditors,  inasmuch  as  the 
prevailing  rule  is  thai  even  though  the  property  is  overvalued,  yet 
that  rescission  is  the  only  remedy,  the  stock  being  returned  and  can- 
<••  led  and  the  property  returned  to  the  vendor.2  That  subject  is 
considered  elsewhere;  the  subjecl  now  under  consideration  being  an 
issue  of  stock  for  cash  at  less  than  its  par  value.  The  law  is  well 
settled  that  although  an  issue  of  stock  is  for  cash,  under  an  agree- 
ment that  only  pari  of  the  par  value  need  he  paid,  yet  that  corpo- 
rate creditors  may  compel  the  persons  receiving  the  stock  to  pay  the 
unpaid   par  value.''     The   fact  that  the  corporation  issued  the  stock 

complain.     Jutte   v.   Hutchinson,   1S9  not  to  make  any  further  calls  upon 

Pa.  St.  218   (1899).  the    shares    was    unavailing    to    dis- 

Laches     on    the    part    of    the    dis-  charge   his   obligation    in    respect   of 

senting  stockholder  will  bar  his  rem-  the    association    and    its    creditors." 

edy.       Taylor  r.  South,  etc.  R.  R.,  13  Where  the  stockholders  increase  the 

Fed.  Rep.  152   (1882).  stock  and  distribute  part  of  it  among 

Thirty  years'  delay  on  the  part  of  themselves  as  full-paid  stock,  but  give 

a     dissenting    stockholder     is     fatal,  nothing  for  it,  they  may  be  held  lia- 

Foster  r.  Belcher's,  etc.  Co.,  US  Mo.  ble    by    corporate    creditors    for    the 

238  (1S93).   See  also  ch.  XLIV,  infra,  par  value  thereof.     Handley  v.  Stutz, 

lA'e    Pioneers'    etc.    Syndicate,     68  139  U.   S.  417    (1891).     In  Scovill  v. 

L.  T.  Rep.  163   (1893);  Re  Gold  Co.,  Thayer,    105    U.    S.    143    (1881),    the 

L.  R.  11  Ch.  D.  701  (1879);  Morrison  court   said   that   a  contract   whereby 

r.  Globe  Panorama  Co.,  28  Fed.  Rep.  stockholders   are  to  pay  but  part  of 

817     (1SS6);     Re    Mashonaland    Pio-  the   par  value   of  their  stock  to  the 

neers,  L.  R.  1  Ch.  731  (1893).  corporation,  "though   binding  on  the 

2  See  §  46,  infra.  company,   is   a   fraud   in   law   on   its 

3  The  leading  case  on  this  point  is  creditors,  which  they  can  set  aside; 
Sagory  v.  Dubois,  3  Sandf.  Ch.  466,  when  their  rights  intervene  and  their 
499  (1846),  where  the  court  said:  claims  are  to  be  satisfied,  the  stock- 
"The  defendant  being  liable  by  force  holders  can  be  required  to  pay  their 
of  his  subscription  for  the  stock,  the  stock  in  full."  Upton  v.  Tribilcock, 
resolution   of   the    directors     .     .     .  91  U.  S.  45   (1875),  is  the  first  of  a 

149 


§  42.] 


"watered"  stock. 


I  Mi.    III. 


Milk  paid  does  no1  prevent  creditors  holding  liable  for  1 1 1 « -  unpaid 

par  valiu-  the  person  t<>  whom  it  was  issued.1 


series  of  cases  growing  out  of  the 
failure  of  the  Great  Western  Insur- 
ance Company  of  Illinois.  The  other 
eases  are  Sanger  r.  Upton,  91  U.  S. 
5G  (1875);  Webster  v.  Upton,  91  U. 
S.  G5  (1875);  Chubb  V.  Upton,  95  U. 
S.  6C5  (1877);  Pullman  o.  Kpton,  9G 
U.  S.  328  (1877);  Hawley  v.  Upton, 
102  U.  S.  314  (1S80);  Upton  v.  Burn- 
ham,  3  Diss.  431  (1873)  ;  s.  c,  3  Biss. 
;  s.  c.  28  Fed.  Cas.  831,  and  Upton 
v.  Hansbrough,  3  Biss.  417  (1873); 
s.  c,  28  Fed.  Cas.  839;  Great  Western 
Tel.  Co.  v.  Gray,  122  111.  630  (18S7). 
This  series  of  cases  established  for 
the  federal  courts  tin'  rule  given 
ove.  A  stockholder  may  file  a  bill 
in  equity  to  review  an  assessment  ob- 
tained by  a  receiver  of  an  insolvent 
corporation  where  the  claim  upon 
which  the  receivership  is  based  and 
all  the  proceedings  subsequent  thereto 
are  permeated  with  fraud.  Farwell 
v.  Great  West.  Tel.  Co.,  lf,l  111.  522 
(1896),  reviewing  in  full  the  twenty 
years'  litigation  growing  out  of  the 
insolvency  of  the  Great  Western  Tele- 
graph Company.  Even  though  there 
is  no  written  contract  of  subscription, 
but  the  stock  is  issued  on  an  oral 
agreement  that  the  parties  taking  it 
should  pay  only  twenty  cents  on  a 
dollar,  yet  this  is  a  subscription,  and 
not  a  sale,  and  on  the  insolvency  of 
the  corporation  the  parties  are  liable 
for  the  remaining  eighty  cents  on  a 
dollar.  Vermont,  etc.  Co.  v.  Declez, 
etc.  Co.,  135  Cal.  579  (1902).  An 
original  issue  of  stock  at  fifty  per 
cent,  of  its  par  value  does  not  pre- 
vent a  receiver  of  the  corporation  col- 
lecting the  remaining  fifty  per  cent. 
New  Haven  T.  Co.  v.  Gaffney,  73  Conn. 
4S0  (1901).  Where  a  corporation  is- 
sues stock  for  cash  at  twenty-five 
cents  on  the  dollar  and  agrees  not  to 


call  for  more,  a  trustee  in  bankruptcy 
cannot  collect,  except  the  amount 
necessary  to  pay  debts,  and  his  suit 
must  be  in  equity  in  order  that  the 
contract  may  first  be  set  aside  for 
fraud.  Felker  v.  Sullivan,  34  Colo. 
212  (1905).  A  sale  of  stock  by  the 
corporation  for  cash  at  less  than  par 
leaves  tin'  holders  liable  for  the  dif- 
ference between  the  par  value  and 
tin'  amount  paid.  McConey  v.  Belton, 
97  Minn.  190  (190G).  Where  stock 
was  issued  for  rah  at  less  than  par 
the  holder  is  liable  for  the  differ- 
ence to  corporate  creditors,  and  this 
liability  may  be  enforced  in  the  bank- 
ruptcy court.  In  re  Remington,  etc. 
Co.,  139  Fed.  Rep.  766  (1905);  aff'd 
on  this  point  in  153  Fed.  Rep.  345. 
Where  stock  is  issued  for  cash  at 
fifty  cents  on  a  dollar,  the  remainder 
may  be  collected  in  behalf  of  cor- 
porate creditors.  Vaughn  v.  Alabama 
Nat.  Bank,  143  Ala.  572  (1905).  As 
against  a  receiver  it  is  no  defense 
that  the  corporation  agreed  that  the 
subscriber  need  pay  only  fifty  per 
cent,  of  the  par  value  of  the  stock,  or 
that  fraudulent  representations  in- 
duced him  to  subscribe,  or  that  the 
full  capital  stock  was  not  subscribed, 
or  that  the  company  was  defectively 
organized,  or  that  the  name  of  the 
company  was  different  from  the  one 
contemplated.  Cox  v.  Dickie,  93  Pac. 
Rep.  523   (Wash.  1908). 

A  person  to  whom  paid-up  shares 
have  been  issued  without  considera- 
tion and  who  transfers  them  to  a  bona 
fide  purchaser  is  not  liable  thereon, 
but  if  he  was  a  director  he  is  liable 
for  breach  of  trust.  Freeman's  case, 
7  Ont.  W.  R.  (Can.)  613  (1906).  A 
person  subscribing  for  stock  with  a 
bonus  of  twenty-five  per  cent,  in  stock 
is  liable  for  the  bonus  on  winding  up. 


l  Dickerman    v. 


Northern     T.     Co.,     176  U.  S.  181,  203    (1900). 
150 


OH.   III.  J 


' '  WATERED ' '  STOCK. 


[§42. 


,\  ,-,  3olution  by  a  corporal  ion  that  upon  the  stockholders  paying 
in  a  portion  of  the  par  value  of  the  stock  the  capital  shall  be  deemed 
to  be  fully  paid  is  wholly  ineffectual  as  against  the  creditors  of  the 
company.1     Bui   after  stibscriptions  to  stock  have  been  made,  pay- 

Kydd's  case,  6  Ont.  W.  R.  (Can.)  491  as    compensation.      Their    transferee 

(1905).     Where    stock   is   issued   for  with  notice  was  held  liable.    Freeman 

!i   at  less  than  par,  the  party  re  v.    Stine,    15    Phila.    37    (1881).     An 

celving  it  is  liable  to  corporate  cred-  agreement  between  a  corporation  and 

itors  for  the  difference.     Re  Thunder  subscribers    for    its    stock   that   only 

Hill    .Min.    Co.,    4    British    Columbia  a  certain  portion  of  the  par  value  of 

It. -p.   i;i    i  iv.:,).     Flinn   v.  Bagley,  7  the  stock  shall  be  collected   by   the 

Fed.    Rep.    78  t),    gives   a   full  corporation,     is     binding     upon     the 

review  of  the  American  and   English  corporation,  but  not  upon  the  corpo- 

Re  Glen  rate  creditors,  unless  such  agreement 

Iron  Works,  17  F<  d.  Ri  p.  324   (  1883);  was  made  a  part  of  the  recorded  ar- 

rjnlon,   e1  Co.    v.    Prear  Stone  tides  of  incorporation,  under  the  In- 

Mfg.   Co.,    97    ill-    537    (1881);    Hick-  -liana  statutes.     Bent  v.  Underdown, 

llng    r.    Wilson,    104    111.    54    I  !  156  Ind.  516  (1901).     Where  stock  is 

Northrop    v.    Buahnell,   38   Conn.  498  issued  for  property,  but  at  an  agreed 

(1871);     i:.  •  :  I      Krleckhaus,    7  price  of  fifty  cents  on  the  dollar  for 

Mo.  Ain. .   (56  (1879);  Bkrainka  • .  Al-  the    stock,    the   certificates    of   stock 

1,  „,  t  mo.  AmP.   i:i   (1879);  affd,  76  not  purporting  to  be  full  paid,  the 

Mo    384;     PI  mpleton,  2  party  is  liable  to  corporate  creditors 

Mo.  Api'.  424   (  1876);  Mann  v.  Cooke,  for  the  other  fifty  cents  on  the  dol- 

20  Conn.  178  v.  Seeley,  lar.    Stockton,  etc.  Co.  v.  Houser,  109 


10  Nat  Bank  Reg.   ill    (1874);   s.  a, 
17  Fed.  Cas.  1118.    Although  the  Btat 


Cal.  1  (1895) 
i  "It  is  the  settled  doctrine  of  this 


tttea   anthi  rs   to   dis-  court  that  the  trust  arising  in  favor 

pose  of  the  capita       oca  at  any  time  of  creditors  by  subscriptions  to  the 

ialning  unpaid  In  Buch  manner  as  stock  of  a  corporation  cannot  be  de- 

by-lawa   may   prescribe,   yet  this  feated   by   a   simulated    payment  of 

does  not  authorise  the  Issue  of  stock  such  subscription,  nor  by  any  device 

for  cash  at  b-ss  than  par.    Mathis  v.  short  of  an  actual  payment  in  good 

Pridham,   I  T«  t  I  Iv.  App.  58  (1892).  faith.     And  while  any  settlement  or 

A  resolution  d  atockhold-  satisfaction  of  such  subscription  may 

ers  from  all  Hal  on  stock  after  be  good  as  between  the  corpora  ion 

thirty  per  cent,  of  the  ,  and  the  stockholders,  it  is  unavailing 

,,,„■„,!.   :mil   tI:,„    Bering  a  for-  as  against  the  claims  of  the ,  creditors 

teiture  of  the  stock,   Is  void,  so  far  Nothing  that  was  said  in  the  recent 

as  corporate  creditors  are  concerned,  cases  of  Clark  v.  Beyer ,139  U.  S .96 

Slee  r.  Bloom,  19  Johns.  456   (1822).  (1891);    Fogg  v   Blair,  139  U.  S.  IIS 

•  •re   the    directors   of   an    insur-  (1891);   or  Handler  *.  Stat*  139  U 

ance  company  issue  to  themselves  all  S.  417   (1891),  was  intended  to  o.c 

the  stock  at  one-third  of  its  par  value,  rule  or  qualify  m  any  w  the  who.e- 

and  upon  an   Increase  of  the  capital  some  principle  adopted  by Jhia .  co^. 

vote    to    themselves,    for   services   in  in    the    earlier    cases     espec^  as 

Belling    the    increase,    one    share    for  applied  to  the  origins  1  suhscr rb eia  to 

every  two  shares  sold,  they  are  liable  stock.     The  later  cases  were ,  on^ ^  in 

upon  corporate  insolvency  for  the  un-  tended  to  draw  a  ^  T"  7n  at 

paid  par  value  of  the  first  issue,  and  the  court  was  unwilling  to  go  in  af 

[he  par  value  of   the  stock  received  fixing  a  liability  upon  those  who  had 

151 


§42.] 


"wateked"  stuck. 


[(•II.  III. 


able  in  cash,  the  company  may  receive  land  from  a  third  party  in 
payment  of  the  balance  dne  on  such  subscriptions,  and  such  pay- 
menl  may  be  sufficient,  even  though  the  land  turns  out  t<>  have  been 
overvalued.1  A  corporation  in  order  to  retain  tin'  services  of  em- 
ployees to  be  rendered  thereafter  may  issue  stock  at  eightj  five 
cents  in  cash,  the  remaining  fifteen  cents  to  be  paid  fur  by  such 
services.2  Such  a  transaction  is  the  same  a;  issuing  stock  for  prop- 
erty, services  being  property  in  thai  connection.8  A  representation 
of  the  corporate  agents  to  the  person  receiving  the  stock,  thai  full 
payment  will  not  !»•  required,  is  immaterial,  and  constitutes  no  de- 
fense.4 


purchased  stock  of  the  corporation, 
or  had  taken  it  in  good  faith  in  sat- 
isfaction of  their  demands."  Cam- 
den v.  Stuart,  144  U.  S.  104  (1892); 
Mathis  v.  Pridhaiu,  1  Tex.  Civ.  App. 
58  (1892);  Libby  v.  Mt.  Monadnock, 
etc.  Co.,  32  Atl.  Rep.  772  (N.  H.  1S9  I ) ; 
Nenny  v.  Waddill,  6  Tex.  Civ.  App. 
244   (1894). 

Persons  taking  stock  from  the  cor- 
poration  for   cash   at   forty   cents  on 


to  the  financial  affairs  of  the  com- 
pany,  even  though  the  Btock  was  first 
subscribed  for  by  promoters  and  then 
a  portion  of  it  donated  to  the  com- 
pany as  treasury  stock.  Campbell  v. 
M.  l'hee,  3G   Wash.   593    (1905). 

Win  re  property  is  sold  to  the  com- 
pany for  stock  and  cash,  the  cash 
may  by  the  terms  of  the  sale  be  ap- 
plied In  payment  of  other  subscrip- 
tions.    Re  Jones,   etc.   Co.,  L.  R.   41 


the   dollar   cannot   avoid    liability   to     Ch.  D.  159  (1889) 


corporate  creditors  for  the  remaining 
sixty  cents  by  setting  up  that  un- 
known to  them  the  stock  had  pre- 
viously been  issued  to  a  contractor 
for  work  to  be  done,  and  that  he  ap- 


Where  stock  is  issued  for  cash  at 
fifty  cents  on  the  dollar  by  a  corpora- 
tion, corporate  creditors  may  comp<  1 
the  stockholders  to  pay  the  remain- 
ing  fifty   cents.     Guerney   v.   Moore, 


pointed  the  corporation  his  agent  to  131  Mo.  G50    (1895);    Barron  v.  Bur- 
sell   the  stock  at  forty  cents  on  the  rill,  86  Me.  66  (1S93). 
dollar.    The  subscription  to  the  stock  i  Carr  v.  Le  Fevre,  27  Pa.  St.  413 
was     an     original     subscription     and  (1S56).     In  the  case  of  Siegel  v.  An- 
bound  them.     Bates  v.  Great  Western  drews  &  Co.,  181  111.  350  (1899),  where 
Tel.   Co.,  134   111.   536    (1S90).     Even  the  purchasers  of  a  patent  right  for 
though  a  certificate  of  incorporation  $15,000   organized   a  corporation  and 
which  is  filed  under  the  laws  of  West  personally  subscribed  for  $100,000  of 
Virginia    provides    that    stockholders  its  stock  and  subsequently  paid  there- 
who  are  paying  fifty  cents  on  a  dol-  for  by   turning  in   the  patent  right, 
lar  to  the  company  for  their  stock,  the  court  held  that  each  stockholder 
shall  not  be  liable  for  the  remaining  was  liable  for  the  par  value  of  his 
fifty  per  cent.,  this  is  not  binding  on  stock  less  fifteen  per  cent.,  and  that 
corporate    creditors,    under    the    con-  a   judgment  creditor  might  sue  any 
stitution  of  Wrest  Virginia.     Security  one  or  more  of  the  stockholders. 
T.  Co.  v.  Ford,  75  Ohio  St.  322  (1906).  2  Potter   v.    Necedah,    etc.    Co.,    105 
A    person    who    purchases    stock    for  Wis.  25   (1899). 
cash  from  the  corporation  at  twenty-  3  See  §  20,  supra. 
five  cents  on  the  dollar  cannot  claim  4  Upton   v.  Tribilcock,   91  U.   S.   45 
that    he   supposed    it   was    full    paid  (1875);    Ogilyie  v.  Knox  Ins.  Co.,  22 
stock  where  he  was  fully  informed  as  How.  3S0  (1S59). 

152 


C'll.    III. J 


' '  WATERED  ' ' 


STOCK. 


[§  42. 


In  order  to  enforce  a  liability  where  stock  is  issued  as  full-paid 
stock  for  cash  at  less  than  the  par  value,  it  is  not  necessary  to  prove 
that  fraud  enter  into  the  transaction,  since  there  is  no  possibility 
of  mistaken  judgment  as  to  the  value  of  the  cash  received  in  pay- 
ment.1 "Treasury  Btock,"  however,  may  be  sold  below  par.2  Par- 
tially paid-up  stock  may  be  made  fully  paid-up  stock  by  applying 
profits  thereto  instead  of  declaring  dividends.3  But  a  payment  of 
the  subscription  price  by  what  purports  to  be  a  dividend  or  distri- 
bution of  profits  i-  invalid  as  against  creditors,  where  such  profits 
do  not  exist.4 

It  is  legal  for  the  company  to  pay  a  cash  commission  to  a  person 
uh<.  procures  subscriptions,  even  though  that  commission  is  de- 
ducted from  the  subscription  price.6     A  corporation  may  maintain 


i  Flinn  p.  Bagley,  7  Fed.  Rep.  7S5 
(1881). 

It  has  been  held  that  the  custom 
of  the  country  will  exempt  stockhold- 
ers from  liability  on  stock  issued  as 
paid  up  when  it  was  not  paid  up. 
Such  a  decision,  however,  i-s  inconsist- 
ent with  the  great  weight  of  author- 
ity, and  must  be  considered  poor 
law. 

He  South  Mountain,  etc.  Co.,  7 
Sawyer,  30  (1881);  >  Fed.  Rep. 

403.  In  this  case  it  is  Btated  that 
corporate  creditors  were  protected 
"by  the  personal  liability  of  each 
shareholder  for  his  \m>  rata  share  of 
the  indebtedness  of  the  corporation." 
See  comments  on  this  case,  supra, 
§  30.  The  English  rule  is  now  the 
same  as  the  American.  See  §  42, 
tttpro. 

Where  the  capital  stock  is  reduced, 
and  subscribers  cancel  unpaid  sub- 
scriptions and  take  paid-up  stock  to 
the  extent  of  their  payments  on  the 
old  stock,  old  corporate  creditors  may 
hold  them  liable  on  the  former.  Re 
State  Ins.  Co.,  14  Fed.  Rep.  28  (1S82). 

2  See  §  46,  infra. 

3  Kryger  v.  Andrews,  65  Mich.  405 
(1887);  Kenton,  etc.  Co.  V.  McAlpin, 
5  Fed.  Rep.  737  (1S80).  See  also 
§  170.  infra.  A  bonus  paid  by  citi- 
zens may  be  used  by  subscribers  for 
stock  in  partial  payment  for  their 
stock,  unless  the  bonus  was  made  di- 

1 


rectly  to  the  corporation.    McDermott 
v.   Squier,   124   Mich.   523    (1900). 

4  Gager  v.  Paul,  111  Wis.  638 
(1901). 

z>  In  Metropolitan,  etc.  Assoc,  v. 
Scrimgeour,  [1895]  2  Q.  B.  604,  a  com- 
mission of  five  shillings  per  share  on 
preferred  stock  and  sixpence  per 
share  on  common  stock  paid  to  brok- 
ers was  held  to  be  legal  although  the 
practical  result  was  the  issue  of  stock 
below  par.  A  corporation  may  legally 
agree  to  pay  to  a  person  a  commis- 
sion of  ten  per  cent,  in  stock  on  all 
subscriptions  to  stock  which  he  ob- 
tains. Zabel  v.  New  State,  etc.  Co., 
127  Mich.402  (1901),  160  Fed.Rep.  573. 

Even  though  a  promoter  by  agree- 
ment made  with  a  foreign  corpora- 
tion, before  the  incorporation  of  a 
mining  company,  was  to  have  one 
share  of  stock  for  his  services  for 
every  ten  shares  which  he  obtained 
subscriptions  for,  and  the  company 
accepted  the  subscriptions,  yet  ho 
cannot  hold  it  liable  for  the  value 
of  the  stock  to  be  received  by  him  as 
commissions  where  he  merely  de- 
manded it  by  letter  and  the  company 
offered  to  deliver  it  after  suit  was 
brought.  Teeple  v.  Hawkeye,  etc.  Co., 
114  N.  W.  Rep.  906   (Iowa,  1908). 

A   corporation   may   agree  to  give 
$5,000  of  stock  to  one  who  will  bor- 
row $15,000  for  it.    Arapahoe,  etc.  Co. 
v.  Stevens,  13  Colo.  534  (1889). 
53 


§  42.] 


"watered"  sto 


[CH.    III. 


a  suit  to  cancel  stock  which  the  dii  and  presidenl   voted   to 

themselves  as  commissions  for  Belling  the  stock  of  the  company.1 

Where  one  company  Bells  property  to  another  company,  the  con- 
sideration may  be  stock  of  the  latter  company  and  also  a  righl  on 
the  part  of  stockholders  in  the  former  company  to  subscribe  for 
stock  in  the  latter  company  below  par.2 

Where  stock  is  given  by  the  company  gratuitously  as  a  "bonus"  to 
persons  who  are  induced  thereby  to  purchase  the  bonds  of  the  com- 
pany, it  has  been  held  thai  Buch  persons  are  liable  to  corporate  cred- 
itors for  the  par  value  of  Buch  Btock;8  but  in  New  York  a  different 


A  commission  of  fifteen  per  cent, 
may  be  paid  by  the  company  to  those 
who  agree  to  take  all  the  stock  not 
subscribed  for  by  the  public.  Be 
Licensed  Victuallers',  etc.  Assoc,  L. 
It.  42  Ch.  D.  1   (1889). 

A  company  may  pay  a  reasonable 
commission  on  the  sale  of  its  stock, 
but  where  a  promoter  takes  twelve 
and  one-half  per  cent,  and  pays  his 
agents  but  live  per  cent.,  the  promoter 
will  be  compelled  to  pay  back  the 
seven  and  one-half  per  cent.  Stickney 
v.  Buckel,  6  Ont.  W.  R.  (Can.)  751 
(1905).  Cf.  9G  Pac.  Rep.  7S7. 

Stock  for  $59,800  issued  to  a  person 
as   a   commission   for   selling  $S5,000 
of  bonds  does  not  necessarily  render 
him   liable,   there   being  no  subscrip- 
tion by  him.     Unless  fraudulent  over- 
valuation is  proven  he  is  not  liable, 
and,  even  if  liable,  is  liable  only  for 
the  market  value  of  the  stock.    Jones 
v.   Whitworth,   94   Tenn.   602    (1895). 
In  McNulta  v.  Corn  Belt  Bank,  1G4 
111.  427  (1S97),  the  president  sued  to 
recover  a  two  and  a  half  per  cent, 
commission  which  had  been  voted  by 
the    directors    to    him    on    unissued 
stock   for   services.     The   suit   failed 
on  several  grounds  of  illegality,  par- 
ticularly that  his  vote  was  necessary 
to  carry  the  same.     A  ratification  by 
the    same    directors    as    stockholders 
does  not  cure  the  defect. 

A  company  may  be  liable  for  a 
commission  which  it  agrees  to  pay 
for  the  sale  of  its  stock.  Mason  v. 
Morin,  42  S.  W.  Rep.  88   (Ky.  1897). 


i  Central,    etc.    Co.    r.    Madden,    C8 
Ail.   Rep.   777    I  X.  J.  1908). 

^  Re  Common   Petroleum   Eng.   Co., 
[1895]  2  Ch.  759. 

3  A  "bonus"  of  paid-up  stock  to  a 
director  who  loans  money  to  the  com- 
pany and  takes  its  notes  and  bond:? 
as  collateral  is  not  legal,  the  issue 
of  the  stock  being  the  original  issue. 
The  court,  in  a  dictum,  stated  that 
the  din.  tor  was  liable  for  the  full 
par  value  of  the  stock.  Richardson 
Green,  133  U.  S.  30  (1S90) : 
Skrainka  r.  Allen,  76  Mo.  384   (18S2). 

A  person  who  purchases,  for  $1,000 
h,  a  mortgage  bond  for  $1,000  and 
$G00  bonus  in  stock,  in  a  company  in 
process  of  formation  is  thereby  put 
on  notice  that  the  stock  has  not  been 
fully  paid  for,  and  is  liable  to  cred- 
itors under  the  statutes  of  New  Jer- 
sey to  the  effect  that  stockholders  are 
liable  until  the  whole  capital  stock  is 
paid  in.  See  v.  Heppenheimer,  G9  X. 
J.   Eq.   36    (1905). 

"Stock  issued  as  a  bonus  with  the 
sale  of  bonds,  or  stock  issued  through 
the'  means  of  overvaluation  of  prop- 
erty, cannot  properly  be  regarded  as 
necessarily  issued  fraudulently.  In 
the  absence  of  intervening  rights  of 
creditors,  such  transactions  appear  to 
have  been  generally  supported  by  the 
courts,  unless  positive  fraud  has  been 
clearly  established,  notwithstanding 
the  constitutional  and  statutory  pro- 
visions of  many  of  the  states  designed 
to  secure  a  proper  relationship  be- 
tween the  capital  stock  and  the  as- 

:i 


CH.   III.  J 


' '  WATERED  ' '   STOCK. 


f§   42. 


rule  prevails  and  the  stockholder  is  not  liable.1     YThere  a  railroad 
corporation    is    in    financial   straits   and   its   stock   worth   nothing, 


sets  of  corporations."  Arnold  v. 
Searing,  67  Atl.  Rep.  831  (N.  J.  1907). 
The  New  York  courts  will,  at  the 
instance  of  a  New  York  stockholder 
in  a  New  Jersey  corporation,  enjoin 
the  latter  from  issuing  stock  as  a 
honus  with  bonds  in  violation  of  the 
New  Jersey  statute  requiring  stock 
to  be   I  for  money  or  property, 

D  though  the  actual   value  of  the 
stork   and    bonds  bo  i   does  not 

the    par  bonds 

and  the  amount   re<  eived  by  the  i 
poration  is  the  par  value  of  ihe  bonds. 
The   tact   that    the  i  la   in  a 

falling  condition  doea  not  change  the 
of  the  Kiaft   r.  Grif- 

fon Co.,  82  N.  V.  App.  DlT.  29   i  L9I 

It  t:  q  held  thai  a  p<  rson  pur- 

chasing bunds  of  a  newly  formed  cor- 
poration at  par,  with  a  bonus  of 
stock,   is  not  a  bona   '■'>■    purchaser, 

n  though  he  made  Bucb  purchi 
not    from    thi  ration,   but  from 

a  third  person.    Bee  v.  Heppenheimer, 

N.  .1.  Eq.  36  I  1905)  :  b  il     le  Dick- 
man   r.  Northern  T.  Co.,  176  U.  S. 
181,    202    (  i:< In    th<     Bee    < 

.  k  and  bonds  wei  el  »r  prop- 

erty at  an  overvaluation  and  then  a 
$1,000  bond  and  $600  worth  of  Btock 
were  sold  for  $1,000  In  cash  and  th-3 
court  held  the  purchaser  liable  for 
the  $600  worth  of  stock. 

Bond  purchasers  who  receive  an 
equal  amount  of  stock,  the  entire 
pri  e  par  value  of  the  bonds 

only,  are  liable  on  the  stock  if  tl 

!    notice   of   the    fart   that    it   had 

for    worthless    property, 

and    it    is    immaterial    that    some    of 

them    after  signing  the   contract  ac- 

>d   the  bonds  without   taking  the 

certificate    of    stock.      Gillett    v.    Chi- 

;o  Title  &  T.  Co.,  S2  N.  E.  Rep. 
891  (111.  1907).  In  this  case  it  was 
also  held  that  where  bonds  were  sold 
with  a  bonus  of  stock,  and  the  pur- 
chasers were  held  liable  on  the  stock, 


they  were  held  to  be  entitled  to  par- 
ticipate as  bondholders  in  the  fund 
which  the  court  compelled  them  to 
pay  in  on  their  stock. 

A  failing  corporation  in  issuing  its 
bonds  may  give  a  bonus  of  stock  as 
full  paid,  and  the  parties  receiving 
the  same  will  not  be  liable  thereon  if 
the  corporation  becomes  insolvent. 
Kinsey  v.  Mt.  Auburn  Cable  Co.,  Ohio 
Circuits    (1905),   633. 

Persons  purchasing  bonds  from  a 
company  and  taking  stock  as  a 
"bonus."  the  stock  being  unissued  un- 
til that  time,  are  liable  for  the  par 
value  of  the  stock.  Stutz  v.  Handley, 
41  Fed.  Rep.  531  (1890);  reversed  on 
other  grounds;  Handley  v.  Stutz,  139 
U.  S.  117  (1891);  Haldeman  v.  Ains- 
lie,    82   Ky.   395    (1S84). 

In  Ilebberd  v.  Southwestern,  etc. 
Co.,  55  N.  J.  Eq.  18  (1896),  where 
bonds  with  a  bonus  of  stock  had  been 
issued,  the  court  held  that  as  against 
the  parties  receiving  the  bonds  the 
liability  on  the  stock  could  be  offset 
against  the  amount  due  on  the  bonds, 
the  company  having  become  insolvent. 

In  a  suit  for  contribution  in  the 
federal  court  by  a  Missouri  stock- 
holder, who  has  been  compelled  by 
the  Missouri  courts  to  pay  for  stock 
issued  to  him  as  a  "bonus,"  the  court 
will  follow  the  Missouri  decision 
rather  than  a  New  York  decision 
holding  that  the  same  "bonus"  cre- 
ated no  liability.  Allen  v.  Fairbanks, 
Fed.    Rep.   445    (1891). 

"Where  for  every  dollar  par  value 
of  bonds  sold  at  par  the  company 
gives  to  the  purchaser  an  equal 
amount  of  stock  as  a  bonus,  the  per- 
sons receiving  such  stock  are  liable 
on  it  in  case  of  corporate  insolvency. 
Re  Railway,  etc.  Pub.  Co.,  68  L.  T. 
Rep.  649  (1S93);  aff'd,  71  L.  T.  Rep. 
682.  See  also  46  S.  Rep.  285  (Fla.  1908). 

i  In  New  York  it  is  held  that  un- 
issued shares  of  stock  may  be  issued 


155 


§  42.] 


"watered"  stock. 


[en.  in. 


it  is  legal  for  the  corporation  to  settle  with  one  of  its  credi- 
tors   by    issuing    stock    to    him    at    twenty    centa    on    the    dollar. 

Other  corporate  creditors   cannot  afterwards   hold    him    liable   for 

gratuitously  to  stockholders;  also  assign  the  underwriting  agreement 
honds  of  the  company;  and  they  are  to  the  pledgee,  and  the  pledgee  in 
not  liable  for  the  par  value  or  any  order  to  enforce  the  underwriting 
part  thereof  to  the  corporation  or  agreement  may  compel  the  corpora- 
corporate  creditors,  unless  they  agree  tion  to  furnish  the  seventy-five  per 
to  pay  therefor  or  the  statute  requires  cent,  in  stock  for  that  purpose.  Kirk- 
payment.  A  subscription  is  otherwise,  Patrick  v.  Eastern,  etc.  Co.,  135  Fed. 
since  it  is  a  contract.  Even  though  Rep.  14G  (1904);  aff'd,  137  Fed.  Rep. 
the  stockholder  has  sold   such  stock  387. 

and    bonds,   he   is   not  liable   to   cor-  Even    though    a    corporation    sells 

porate   creditors    for   the   amount    re-  $161,500  of  bonds  and  $130,000  of  its 

ceived    from    the    sale.      He    has    re-  stock  for  $145,350,  yet  the  remaining 

ceived   nothing  from   the   corporation  bondholders   cannot  complain  on  the 

except  a  promise   to   pay.     Christen-  foreclosure,    and    even    if    there    was 

sen  v.  Eno,  106  N.  Y.  97  (1887),  rev'g  any  liability  on  the  stock  as  an  un- 

21   Week.   Dig.   202,   and   refusing   to  paid  subscription  the  statute  of  limi- 

follow  Skrainka  v.  Allen,  7  Mo.  App.  tations  may  be  a  bar,  and  the  same 

434   (1S79);  s.  c,  76  Mo.  384   (18S2).  is  true  as  to  any  forfeiture  for  usury. 

"Where   a   corporation    issued    certain  Weed   v.   Gainesville,   etc.  R.  R.,   119 

stock   as   paid   up   to   forty  per  cent.  Ga.  576   (1904). 

and    induced   the   holder   to   pay   the  Even  though   in   a  foreclosure  suit 

other  sixty  per  cent,  by  transferring  judgment  creditors  petition  the  court 

to  him  second  mortgage  bonds  of  the  to   direct   the   receiver   to   bring  suit 

company,    no    right    of   action    exists  to   hold   stockholders   liable  on   stock 

against   him   either    in   favor   of   the  issued  as  a  bonus,  yet  the  court  need 

corporation   or  its  judgment  creditor  not   order    such    suit    absolutely    and 

for  the  forty  per  cent,  unpaid  on  the  may  leave  it  in  the  discretion  of  the 

shares,  or  for  the  value  of  the  bonds,  receiver  to  do  so,  if  there  is  any  rea- 

Christensen  v.  Quintard,  8  N.  Y.  Supp.  sonable  prospect  of  collecting  a  judg- 

400    (1890),  overruling  s.  c,  36  Hun,  ment  if  obtained.     Sterling,  etc.  Co.  v. 

334.     See  also  §73,  infra.  Augusta,  etc.  Co.,  124  Ga.  371  (1905). 

A  corporation  having  charter  power  In    the    case    Hudson,    etc.    Ry.    v. 

to  purchase   the   stock   of   other  cor-  O'Connor,  95  N.  Y.  App.  Div.  6  (1904), 

porations  may  give  its  certificates  of  an  underwriting  syndicate  agreement 

indebtedness  in  payment  therefor,  and  was  construed  where  bonds  were  sold 

may  also  issue  with  such  certificates  at  eighty  cents  on  the  dollar  with  a 

its  preferred  stock,  the  dividends  to  stock   bonus,    and    it   was    held   that 

be  used  to  pay  the  principal  and  in-  coupons    attached    to    the    bonds    be- 

terest    of   such   certificates,    the   pre-  longed     to     the     underwriters,     even 

ferred   stock   then   to   belong   to   the  though  the  bonds  were  not  delivered 

vendors.     Ingraham  v.  National  Salt  for  some  time  after  the  coupons  be- 

Co.,  130  Fed.  Rep.   676    (1904),  over-  came  due. 

ruling  122  Fed.  Rep.  40.  A    corporate    creditor    who    knows 

Where  underwriters  have  agreed  to  that  the  bonds  and  stock  of  the  cor- 
purchase  the  bonds  of  the  corpora-  poration  have  been  issued  on  the 
tion  at  a  certain  price  with  a  bonus  basis  of  seventy-seven  and  a  half  for 
of  seventy-five  per  cent,  in  stock,  the  the  bonds,  with  a  bonus  of  one  nun- 
corporation  may  pledge  the  bonds  and  dred  per  cent,  of  stock,  cannot  hold 

156 


CH.   III.] 


"watered"  stock. 


[§42. 


the  remaining  eighty  cents  on  the  dollar.1  And  it  is  now  estab- 
lished law  thai  an  embarrassed  corporation  may,  upon  an  increase 
of  its  stock,  put  such  stock  upon  the  market  and  sell  it  for  the  best 
price  that  can  be  obtained,  and  that  the  corporation  may  throw  in 
as  a  bonus  a  certain  amount  of  full-paid  stock  to  the  purchaser  of 
its  bonds,  and  tin  re  will  be  no  liability  on  the  stock.2     In  England 


the  stockholders  liable  on  the  ground 
that   the   stock   had   been   issued   for 
property   at  an  overvaluation.     Colo- 
nial,  etc.    Co.    v.   McMillan,   1SS   Mo. 
547  (1905),  the  court  saying:     "Now, 
turning  to   the  prospectus,   it  flew   a 
danger  signal,  in  that  it  proposed  to 
sell   a   $l,0ou   5   per  cent,   gold   mort- 
gage   bond    for    $77.".    and    to   give   10 
shares    of    capital    stock    in    a    new 
fledged  corporation,  of  the  par  value 
of  $1,000  as  a  bonus.     On  BUCh  tacts, 
it  would  disturb,  it  seems  to  us,  all 
normal   nut  hods  of  reasoning  to  con- 
clude  that   a   creditor   who   knew   of 
such   offer,   and    whose  experience  in 
corporate  stock  and  bond  dealing  en- 
abled   him   to   appr<  elate    its   signifi- 
came,    and    who,    as   a    part  of   the 
very    inception   of  his  debt,  as  here, 
undertook  to  finance  such  a  company 
and   to   foist   such   a   bond   and   stock 
sale  upon  a  confiding  public,  extended 
credit  on  the   faith  of  the  fact  that 
the  corporate  stock  was  fully  paid  in 
money,  or  what   iniuht  fairly  be  con- 
sidered  a   money's   worth.     One  who 
knows  cannot  be  misled." 

A  stockholder  cannot  avoid  a  statu- 
tory liability  on  the  ground  that  the 
stock  was  given  to  him  for  nothing 
by  the  corporation.  Hallett  v.  Metro- 
politan, etc.  Co.,  35  X.  Y.  Misc.  Rep. 
659  (1901);  s.  c,  69  X.  V.  App.  Div. 
258.  Stock  given  as  a  bonus  to  a 
person  loaning  money  to  a  corpora- 
tion does  not  render  the  holder  liable 
thereon,  he  never  having  subscribed 
for  it  nor  agreed  to  pay  for  it,  and 
there  being  no  proof  that  any  creditor 
was  injured  by  the  transaction.  Sea- 
board, etc.  Bank  v.  Slater,  117  Fed. 
Rep.  1002  (1902).  It  is  sufficient  to 
allege  that  the  defendant  holds  stock 


which  has  never  been  paid  up.  The 
defense  that  the  defendant  did  not 
subscribe  for  the  stock  or  did  not 
agree  to  pay  for  it  or  that  he  is 
not  liable  must  be  set  up  in  the  an- 
swer. Atlantic  T.  Co.  v.  Osgood,  116 
Fed.  Rep.  1019   (1902). 

l  Clark  v.  Bever,  139  U.  S.  96 
(1891).  After  deciding  that  nothing 
in  the  Iowa  statute  forbids  the  issue 
of  stock  below  par,  the  court  said: 

"If  the  legislature  had  intended 
that  the  acquisition  of  stock  at  less 
than  its  face  value  should  be  conclu- 
sive evidence  in  every  case  that  the 
stock,  as  between  creditors  and  stock- 
holders, is  'unpaid,'  it  would  have 
been  easy  to  so  declare,  as  has  been 
done  in  some  of  the  states.  If  such 
a  rule  be  demanded  by  considerations 
of  public  policy,  the  remedy  is  with 
the  legislative  department  of  the  gov- 
ernment creating  the  corporation.  A 
rule  so  explicit  and  unbending  could 
be  enforced  without  injustice  to  any 
one,  for  all  would  have  notice  from 
the  statute  of  the  will  of  the  legis- 
lature." 

A  limitation  on  the  extent  of  this 
case  is  laid  down  in  that  the  stock- 
holders are  liable  "unless  it  appears 
that  they  acquired  the  stock  under 
circumstances  that  did  not  give  cred- 
itors and  other  stockholders  just 
ground  for  complaint."  Affirming 
Clark  v.  Bever,  31  Fed.  Rep.  670 
(1887).  To  same  effect,  Morrow  v. 
Nashville,  etc.  Co.,  87  Tenn.  262,  276 
(1888). 

2  Quoted  and  approved  in  Speer 
v.  Bordeleau,  20  Colo.  App.  413 
(1905).  In  Handley  v.  Stutz,  139  U. 
S.  417  (1891),  the  court  said:  "To 
say  that  a  corporation  may  not,  un- 


157 


§  42.] 


"watered"  stock.  [cu.  hi. 


it  is  held  that  a  creditor  of  a  company  who  takes  its  stock  as  fully 
paid-up  sto.k  in  payment  of  bis  debt,  the  debt,  however,  being  Less 
than  the  par  value  of  the  stock,  is  liable  for  the  unpaid  par  value 

der  the  circumstances  above  Indi-  bonds  for  sixty  cents  on  the  dollar 
cated,  put  its  stock  upon  the  market  It  may  sell  them  together  with  a 
and  sell  it  to  the  highest  bidder,  is  bonus  of  stock  equal  to  fifty  per  cent, 
practically  to  declare  that  a  corpora-  of  the  par  value  of  the  bonds,  tor 
tion  can  never  increase  its  capital  by  eighty-five  cents  on  the  dollar  for  the 
a  sale  of  shares,  if  the  original  stock  bonds,  and  such  transaction  is  legal, 
has  fallen  below  par.  ...  The  lia-  even  though  one-half  of  the  stock  was 
bility  of  a  subscriber  for  the  par  contributed  by  the  stockholders  who 
value  of  increased  stock  taken  by  were  reimbursed  by  a  stock  dividend 
him  may  depend  somewhat  upon  the  to  that  amount.  Neither  the  cor- 
circumstances  under  which,  and  the  poration  nor  its  receiver  can  coin- 
purposes  for  which,  such  Increase  wa  I  plain  of  the  transaction,  and  creditors 
made.  If  it  be  merely  Cor  the  purpose  who  were  not  deceived  and  fraudu- 
of  adding  to  the  original  capital  stock  lently  Induced  to  purchase  the  stock 
of  the  corporation,  and  enabling  it  or  bonds  cannot  complain.  Great 
to  do  a  larger  and  more  profitable  Western,  etc.  Co.  v.  Harris,  128  Fed. 
business,  such  subscriber  would  Rep.  321  (1903);  aff'd,  198  U.  S. 
stand  practically  upon  the  same  basis  561. 

as  a  subscriber  to  the  original  capi-  Where   property   mortgaged   to   se- 
tal.    But  we  think  that  an  active  cor-  cure  bonds  is  of  doubtful  value  and 
poration  may,  for  the  purpose  of  pay-  there  is  a  financial  stringency  in  the 
ing   its    debts,   and    obtaining   money  market,  a  corporation  may  sell  $40,- 
for  the  successful   prosecution   of  its  000  of  its  mortgage  bonds  and  $5,000 
business,  issue  its  stock  and  dispose  of  its  stock  for  $33,000,  and  a  subse- 
of  it  for  the  best  price  that  can  be  quent  purchaser  of  stock  of  the  corn- 
obtained  "  Pany  witn  notice  of  the  facts  cannot 
An    embarrassed    corporation    may  attack  the  validity  of  the  mortgage, 
sell   its  stock  at   sixty  cents   on  the  The    defense    of    usury    is    not   good 
dollar  and  a  Bono  fide  purchaser  is  where   the   issue   was   made  in   New 
not    liable   for    the     difference,     even  York  state,  although  the  corporation 
though  the  statute  of  West  Virginia  was  organized  in  New  Jersey.    Frank- 
where  the  issue  was  made  stated  that  lin  T.  Co.  v.  Rutherford,  etc.  Co.,  57 
a  sale  of  stock  at  less  than  par  should  N.  J.  Eq.  42   (1898). 
be  only  after  a  publication  of  a  no-  A  failing  corporation  in  issuing  its 
tice     and    no    such    publication    was  bonds  may  give  a  bonus  of  stock  as 
made,  such  publication,  however,  be-  full   paid,   and  the   parties   receiving 
ing  merely  directory.  The  court  said  the  same  will  not  be  liable  thereon  if 
it&was   immaterial   whether  the  cor-  the    corporation    becomes    insolvent, 
porate  creditors  who  brought  the  suit  Kinsey  r.  Mt.  Auburn  Cable  Co.,  Ohio 
were  such  before  or  after  the  issue  Circuits    (1905),  633. 
because-       "If     before,     no     reliance  In    Rickerson,   etc.    Co.   v.    Farrell, 
could  have  been  placed  on  the  stock  etc.  Co.,  75  Fed.  Rep.  554  (1896),  the 
as  full  paid,  and  if  after,  they  cannot  court   held   that   an   issue   of   an   in- 
complain,  as  the  transaction  was  open  crease  of  capital  stock  at  fifty  cents 
to  them."     McDowell  v.  Lindsay,  213  on  the  dollar  renders  the  holders  lia- 
Pa    St    591   (1906).  Dle   to    subsequent   creditors   for   the 
Where  a  corporation  cannot  sell  its  remaining  fifty  cents  on  the  dollar, 

158 


C1I.   III.] 


"watered" 


STOCK. 


[§  42. 


of  such  stock  in  case  the  company  becomes  insolvent.  But  on  the 
other  hand,  the  company  not  having  fulfilled  its  contract  in  giving 
him  fully-paid  Btock,  he  may  offset  the  same  amount  as  the  amount 
still  due  him  from  the  company.1 

The  amount  collected  must  be  to  the  extent  and  for  the  purpose 
of  paying  corporate  creditors'  claims  only.2  And  only  those  cred- 
itors who  complain  are  entitled  to  the  benefit  of  a  decree.3  More- 
over, only  those  creditors  who  become  such  after  the  issue  of  watered 

■  k  was  made  can  complain  of  the  issue  and  hold  the  stockholders 
liable  Trior  corporate  creditors  could  not  have  extended  credit  on 
the  faith  of  a  subsequent  issue  of  stock.4 


even  though  the  capital  stock  of  the 
corporation,  at  the  time  of  the  issue, 
had    become    impaired  and  the  stock 

3  worth  only  fifty  cents  on  the  dol- 
lar. The  court  distinguished  Hand- 
le y  p.  Stutz,  on  the  ground  that  in  the 
latter  case  the  corporation  was  in- 
solvent and  the  stock  was  issued  to  a 
creditor  in  cancellation  of  his  d 
and  at  a  value  In  ex  -  of  the  actual 
market  value,  and  that  the  corpora- 
tion in  that  case  was  not  a  going  one. 
The  court  held  that  subsequent  cred- 
itors who  became  such,  knowing  of 
the  issue  b<  low  par.  could  not  enforce 
collection  of  anything  further,  but 
that  subsequent  creditors  who  became 
such  without  notice  could  enfon.. 
the  payment  of  the  balance.  The 
court  in  a  dictum  stated  that  stock 
issued  for  property  as  full  paid  would 
be  considered  full  paid  unless  there 
was  actual  fraud  and  that  gross  and 
obvious  overvaluation  of  property 
would  be  merely  strong  evidence  of 
fraud.  In  the  case  Toledo,  etc.  R.  R. 
r.  Continental  Trust  Co.,  95  Fed.  Rep. 

;.  526  (1899),  the  court  said: 
"There  is  no  statute  in  Ohio  prohib- 
iting a  corporation  from  disposing  of 
its  capital  stock  at  its  fair  market 
value,  t  xeept  to  a  director.  Neither 
is  there  any  policy  to  be  discovered 
from  the  statute  of  that  state  regu- 
lating the  organization  of  railroad 
corporations  from  which  we  might 
Infer  a  purpose  to  compel  sales  of 
corporate  stock  at  par  only." 


An  issue  of  increased  capital  stock 
for  cash  at  twenty  cents  on  the  dollar 
is  legal  where  the  corporation  is  in- 
solvent and  the  issue  was  largely  in 
payment  of  debts.  Peter  v.  Union, 
etc.  Co.,  56  Ohio  St.  1S1   (1897). 

The  bonds  of  a  failing  corporation 
and  the  mortgage  securing  them  are 
valid,  although  when  the  bonds  were 
issued  a  large  amount  of  increased 
capital  stock  was  given  by  the  cor- 
poration as  a  bonus  with  the  bonds. 
The  giving  of  the  bonus  is  no  defense 
to  a  foreclosure  of  the  mortgage,  it 
being  shown  that  the  corporation  was 
nearly  insolvent  at  the  time  such  in- 
creased capital  stock  was  issued. 
Dummer  v.  Smedley,  110  Mich.  466 
(1896),  the  court  relying  on  the  au- 
thority of  Handley  v.  Stutz,  139  U.  S. 
417. 

i  Re  Railway,  etc.  Co.,  [1S99]  1 
Ch.  108. 

2  Scovill  v.  Thayer,  105  U.  S.  143, 
155  (1881). 

3  See  §  §  735  and  848fc,  infra. 

4  Handley  v.  Stutz,  139  U.  S.  417 
(1891).  See  also  cases  cited  in  §46, 
infra.  As  to  whether  subsequent 
creditors  can  complain,  see  §  848fc,  in- 
fra. Even  though  a  stock  dividend  is 
declared  without  a  proper  basis  there- 
for, yet  the  stockholders  receiving 
the  same  are  not  liable  thereon  to 
corporate  creditors  except  to  subse- 
quent creditors.  Anglo-American,  etc. 
Co.  v.  Lombard,  132  Fed.  Rep.  721 
(1904).     A   statute    releasing   stock- 

159 


§42.] 


"watered"  stock. 


[CH.   III. 


In  Minnesota  and  elsewhere  the  doctrine  is  clearly  and  boldly 
announced  that  the  issue  of  stock  for  cash  at  less  than  par  is  legal, 
and  that  nothing  more  can  bo  collected  on  such  stock,  except  by  cor- 
porate creditors  who  have  relied,  or  can  fairly  be  presumed  to  have 
relied,  on  the  representation  that  the  capital  stock  is  as  stated;  in 
other  words,  that  it  was  paid  in  full.1  A  corporate  creditor,  who 
became  such  with  knowledge  of  the  issue  of  watered  stock,  cannot 
complain  thereof.2 


holders  from  paying  one-half  of  the 
par  value  of  the  stock  and  declaring 
the  stock  paid  up,  although  but  50% 
had  been  paid  thereon,  is  unconstitu- 
tional as  regards  creditors  existing  at 
the  time  such  statute  was  enacted. 
Williams  v.  Watters,  97  Md.  113 
(1903).  A  creditor  of  a  corporation 
may  object  to  a  mortgage  given  to 
secure  the  individual  debts  of  its 
stockholders  incurred  in  purchasing 
stock  in  the  corporation,  even  though 
the  creditor  became  such  after  the 
transaction.  In  re  Haas.  Co.,  131  Fed. 
Rep.  232   (1904). 

i  The  basis  of  the  creditor's  suit  is 
not  contract,  but  fraud.  Creditors 
who  were  such  before  the  watered 
stock  was  issued  cannot  complain  of 
it.  Nor  can  a  subsequent  creditor 
complain  if  he  knew  of  the  issue  of 
watered  stock.  Nor  will  one  who 
purchased  claims  after  the  corpora- 
tion became  insolvent  and  a  receiver 
was  appointed  be  allowed  to  com- 
plain. Hospes  v.  Northwestern,  etc. 
Co.,  48  Minn.  174  (1S92).  Even  though 
a  bonus  of  stock  is  given  by  the  cor- 
poration upon  the  sale  of  bonds,  yet 
creditors  cannot  complain  thereof 
unless  they  were  deceived  thereby. 
Great  Western,  etc.  Co.  v.  Harris,  128 
Fed.  Rep.  321  (1903);  aff'd,  198  U. 
S.  561,  the  court  saying  (p.  329) : 
"This  right  is  one  existing  not  in 
favor  of  all  creditors  of  a  corpora- 
tion, but  in  favor  of  a  particular  class 
of  creditors  only,  namely,  those  cred- 
itors who  were  defrauded  by  said 
transaction."  See  also  McDowell  v. 
Lindsay,  213  Pa.  St.  591  (1906). 
Although    for    every   share    of  stock 


subscribed  and  paid  a  corpora- 
tion issues  five  shares,  yet  a 
subscriber  who  pays  for  his  stock 
but  does  not  receive  any  certificate 
at  all  is  not  liable  to  corporate  cred- 
itors on  the  watered  stock,  which  he 
supposed  he  was  entitled  to,  and  be 
is  not  liable,  even  though  other  sub- 
scribers who  actually  took  their  cer- 
tificates have  been  held  liable  on  the 
whole  of  them.  Rogers  v.  Gross,  67 
Minn.  224  (1S97);  Rickerson,  etc. 
Co.  v.  Farrell,  etc.  Co.,  75  Fed.  Rep. 
554  (1S96);  Mathis  v.  Pridham,  1 
Tex.  Civ.  App.  58  (1892).  A  subse- 
quent creditor  cannot  complain  that 
the  corporation  has  released  its  sub- 
scribers from  a  portion  of  their  sub- 
scriptions, their  holdings  of  stock 
being  reduced  proportionately.  Vroo- 
man  v.  Vansant,  etc.  Co.  215  Pa.  St. 
75  (1906).  Where  a  person,  to  whom 
stock  Las  been  issued  as  fully  paid 
for  nothing,  surrenders  the  same  to 
the  company,  and  it  is  then  issued 
to  other  subscribers,  a  subsequent 
creditor  cannot  complain.  Erskine  v. 
Peck,  33  Mo.  465  (1884).  Where  stock 
is  issued  for  no  consideration  what- 
ever, the  transaction  is  void  and  the 
holder  of  the  stock  is  not  liable  there- 
on. Kellerman  v.  Maier,  116  Cal.  416 
(1897).  In  Canada  it  is  held  that 
subscribers  for  stock  at  a  discount 
are  not  liable  even  in  winding-up 
proceedings,  where  such  issue  of  stock 
was  in  violation  of  the  charter.  Re 
Ontario  Ex.  &  Trans.  Co.,  21  App. 
Rep.   (Can.)   646   (1894). 

2  A  corporate  creditor  who  knows 
that  the  bonds  and  stock  of  the  cor- 
poration have  been  issued  on  the  ba- 


160 


CH.    Ml.  I 


"watered"  stock. 


[§42 


A  creditor  may,  by  express  contract,  waive  his  right  to  compel 
stockholders  to  pay  their  unpaid  subscriptions.1  As  affecting  cor- 
porate creditors  herein,  the  statute  of  limitations  does  not  commence 
to  run  until  judgment  is  recovered  by  the  corporate  creditors  against 
the  corporation.2 

[nasmuch  as  a  corporation  may  pledge  its  unissued  stock  to  a  cor- 
porate creditor,  the  pledgee  cannot  be  held  liable  thereon  on  the 
ground  that  the  stock  was  "watered."3 

Where  -t<>ck  has  been  issued  as  full  paid,  without  any  money  or 
property  being  paid  therefor,  a  judgment  creditor's  remedy  is  in 
equity  and  not  al  law.4 

In  England  there  has  been  great  doubt  on  this  subject.  It  for- 
merly was  held  that,  where  a  contract  for  the  issue  of  stock  for  cash 
a1  a  discounl  Is  regularly  registered  with  the  public  registrar,  as 
provided  by  statute,  then  the  person  to  whom  the  stock  was  thus  is- 
sued by  contracl  a-  paid-up  stock  was  not  liable  to  the  corporation, 
nor  corporate  creditors,  nor  any  other  person  for  the  unpaid  par 
value  of  the  stock,  and  his  transferee  was  likewise  protected.5 


sis   of   seventy-seven    and   a   half   for     sidered  as  money's  worth.     One  who 


the  bonds,  with  a  bonus  of  one  hun- 
dred per  cent,  of  stock,  cannot  hold 
the  stockholders  liable  on  the  ground 
thai  the  stock  had  been  issued  for 
property  at  an  overvaluation.  Co- 
lonial,  etc.   Co.   v.  McMillan,  1SS  Mo. 


knows  cannot  be  misled." 

Even  though  $2,000,000  of  stock 
was  issued  as  full  paid  to  thirteen 
persons  for  $28,600  cash,  yet  if  it  was 
agreed  between  them  and  the  cor- 
poration that  no  more  should  be  paid, 


547   (1905),  the  court  saying:    "Now,  a   corporate  creditor  who   contracted 

turning  to   the   prospectus,   it  flew  a  his  debt  with  knowledge  of  this  fact, 

danger  signal,  in  that  it  proposed  to  cannot  enforce  any  further  liability, 

sell   a  $1,000   5   per  cent,  gold  mort-  Miller  v.    Higginbotham's  Adm'r,   93 

gage   bond   for   $775    and   to   give   10  S.  W.  Rep.  655  (Ky.  1906).    See  also 

shares    of    capital    stock    in    a    new  §  46,  infra. 


fledged  corporation,  of  the  par  value 
of  $1,000,  as  a  bonus.  On  such  facts, 
it  would  disturb,  it  seems  to  us,  all 
normal  methods  of  reasoning  to  con- 


1  Bush    v.    Robinson,    95    Ky.     492 
(1894). 

2  Christensen  v.  Quintard,  36  Hun, 
334     (1885).      Overruled    on    another 


elude    that   a   creditor   who   knew   of  point  in  s.  c,  8  N.  Y.  Supp.  400.    Cf. 

such  offer,  and   whose  experience   in  Weed  v.  Gainesville,   etc.   R.  R.,  119 

corporate  stock  and  bond  dealing  en-  Ga.   576    (1904),   and   §§46   and   195, 

abled    him    to    appreciate   its   signifi-  infra,  and  Ch.  XLIV,  infra. 

cance,  and  who,  as  a  part  of  the  very  3  See  §  247,  infra. 

inception  of  his  debt,  as  here,  under-  4  First   Nat.    Bank   v.     Peavey,     69 

took  to  finance  such  a  company  and  Fed.  Rep.  455  (1895).    See  same  case 

to  foist  such   a  bond  and   stock  sale  in  75  Fed.  Rep.  154. 

upon     a    confiding    public,    extended  5  Re   Ince   Hall   Rolling   Mills   Co., 

credit  on  the  faith   of  the  fact  that  L.  R.  23  Ch.  D.  545,  n.  (1882).    The 

the  corporate  stock  was  fully  paid  in  court  refused  to  hold  liable  the  per- 

monev,  or  what  might  fairly  be  con-  son  receiving  the  stock,  but  in  a  dic- 
(11)                                                    161 


§  420 


"  watered"  stock. 


[ch.  in. 


The  latest  authority  in  England,  is  in  accord  with  the 

American  rule,  and  bolds  thai  stock  cann  i  I"  issued  for  cash  at  a 
discount.1      A  stock  dividend   may   take  the  shape  of  an  oi 

stock  for  cash  at  less  than    the  par   valu<  .- 


turn  said:  "Assuming  that  the  con- 
tract was  ultra  vires,  what  would  he 
the  result?  If  it  is  ultra  vires  it  muse 
he  set  aside  i  the  consequence 

being  that  these  gentlemen  would  be 
entitled  to  be  relieved  of  their  shares 
and  receive  back  the  money  paid  upon 
them."      In     the     case    of     Guest 
Worcester,   etc.  Ry.,   L.   R.   4  C.   P.   9 
(1868),  where  stock  had  been  issued 
as  paid-up  stock  to  a  corporate  credit- 
or  as  security   for  his   debt,   nothing 
having  been  paid  on  such  stock,  the 
court  said  it  did  "not  entertain  a  shad- 
ow of  doubt,"  and  that  the  holder  v 
not   liable   thereon.      In   De  Beville's 
Case,    L.    R.    7    Eq.    Cas.    11    (181 
"paid-up"  shares   had  been  issued   to 
De   Beville,    who   had   subscribed   for 
"paid-up"    shares,    but    had    paid    no 
part  of  the   par  value   thereof.     The 
court   held    him    not   liable.      In    this 
case  the  corporation  had  authority  to 
issue   ordinary   shares   for   cash,   and 
"paid-up"  shares  for  property  or  serv- 
ices.    See  also  Re  Gold  Co.,  L.  R.  11 
Ch.  D.  701    (1878);    James  v.  Eve,  6 
H.  L.  Cas.  335  (1873)  ;    Re  Plaskynas- 
ton   Tube    Co.,   L.   R.    23    Ch.    D.    542 
(1883).     Ex  parte  Daniell,  1  De  G.  & 
J.   372    (1857),  is  not  strictly  in  ac- 
cordance with  the  preceding  authori- 
ties,  but  in   Daniell's  case  the  issue 
was  to  a  director  who  was  acting  in 
a  fiduciary  capacity.     The  case  is  so 
distinguished  in  Carling's  Case,  L.  R. 
1    Ch.    D.    115    (1875). 

In  Re  Dronfield  Silkstone  Coal  Co., 
L.  R.  17  Ch.  D.  76,  97  (18S0),  the 
court  says:  "If  the  company  could 
not  question  it,  neither  can  a  cred- 
itor; for  he  can  obtain  nothing  but 
what  the  company  can  get  from  the 
shareholders."     See  also  Re  Ambrose 


Lake,   etc.    Min.   Co.,  L.  R.    It    Ch.D. 

■      (1SS0);      Re     Ince     Hall,     el 
L.      R.      23      Ch.      D.      545      n. 
(1SS2),    where    the    court    said    the 
same     as     in     the     preceding     case. 
In    Waterhouse  v.  Jamieson,  L.  R.   - 
II.  L.    (Sc.)   29,  37    (1870),  the  court 
said:     "I    take   it   to  be  quite  sett; 
that   the   rights   of  creditors   a 
the  shareholders  of  a  company,  wh<  a 
enforced  by  a  liquidator,  must  be  i 
forced  by   him  In   right  of  the  com- 
YVbat    is   to    be    paid   by   the 
shareholders    is    to    be    recovered    in 
that  right."     Cf.  remarks  of  the  lord 
chancellor,  page 

i  Ooregum,  etc.  Co  v.  Roper,  [1 
A.  C.   125;     Welton   v.  Saffery,   [1897] 
A.    C.    299;     Re   Addlestone,   etc.   Co.. 
L.  R.  37   Ch.   D.   191    (1887).      In   E  s 
parte    Stephenson,    15    L.    R.    Ir.    51 
(1885),   it   was   held   that,    upon   d 
solution  of  the  corporation,  the  sto 
holders  are  entitled  to  the  remaining 
assets  in   proportion  to  the  amounls 
paid  by  them,  without  regard  to  the 
"water"  in  the  stock.     Where  deben- 
tures  are   issued   at  eighty   cents   on 
the    dollar    and    by    their    terms   the 
holder  may  convert  them   Into  stock 
equal    to    the    par    value   of    the    de- 
bentures, this  is  the  same  as  issuing 
stock  at  a  discount  for  cash,  and  may 
be     enjoined     by     its     shareholders. 
Moseley  v.  Koffyfontein  Mines,  Ltd., 
[1904]    2  Ch.  108. 

An  issue  of  stock  in  England  for 
cash  at  less  than  par  is  invalid, 
even  though  the  contract  is  duly  reg- 
istered under  the  Companies  Act.  The 
holders  are  liable  for  the  unpaid  par 
value.  Re  London  Celluloid  Co.,  L. 
R.  39  Ch.  D.  190   (1888). 

In   England   an   issue  of  stock   for 


2  Re   Owen,   etc.   Co.,    21   Ont.   Rep.     (Can.)    349    (1891). 

162 


CII.    III.] 


"watered"  stock. 


[§§  43,  44. 


§  43.  Corporate  creditors  as  complainants  where  the  issue  is  for 
property  or  construction  work.  — The  rights  of  corporate  creditors, 
where  stock  has  been  issued  for  property  taken  at  an  overvalua- 
tion, are  considered  elsewhi  re.1 

§  44.  Who  is  liable  and  the  character  of  the  liability— Liability 
of  the  corporation.  — The  corporation  itself,  it  has  been  intimated, 
is  not  liable  to  any  person  by  reason  of  the  issue  of  its  stock  as 
Cull-paid  stock,  when,  as  a  matter  of  fact,  it  has  not  been  fully  paid.2 
Of  course  a  subsequent  subscriber  for 'stock  from  the  corporation 
may  complain,  if  any  misrepresentations  were  made.3  And  a  stock- 
holder who  i-  such  at  the  time,  of  the  objectionable  issue  may  enjoin 
it.'  A-  regards  corporate  creditors,  they  cannot  complain  provided 
the  corporation  remains  solvent  and  aide  to  pay  its  debts.  If,  on 
the  other  hand,  it  becomes  insolvent,  it  would  bo  no  object  to  them 


h   at  a  discount   is   illegal,  and   a    on  a  dissolution  and  distribution,  even 


holder  may  Bue  to   r<  3cind  the  Issue 

to  him  and  for  repayment  of  the 
money  paid.  Be  Almada,  etc.  Co.,  L. 
R.  38  Ch.  D..115  (1888),  overruling 
Be  Ince  Hall,  etc.  Co.,  L.  R.  23  Ch. 
D.  54.",,  n.  (1882),  and  Be  1'laskynas- 
ton.  etc.  Co.,  L.  R.  23  Ch.  D.  542 
(1883). 

A  person  subscribing  for  and  tak- 
ing stock  for  cash  at  less  than  par 
cannol  r<  pudiate  the  same  and  cancel 
the  subscription  on  the  ground  that 
he  supposed  that  the  issue  was  legal. 
Re  Railway,  etc.  Pub.  Co.,  L.  R.  42 
Ch.  D.  9S  (1SS9).  Cf.  Be  Zoedone 
Co.,  60  L.  T.  Rep.  3S3  (18S9)  ;  Re 
Midland,  etc.  Co.,  60  L.  T.  Rep.  6GG 
(1SS9). 

An  agreement  of  the  company  that 
stock  may  be  issued  at  a  certain  fig- 
ure below  par  is  not  such  a  "con- 
tract" as  upon  being  duly  filed  au- 
thorizes such  an  issue.  Re  New  Eber- 
hardt  Co..  L.  R.  43  Ch.  D.  118  (18S9). 
A  subscriber  for  one  share  of  stock 
is  liable  thereon,  although  afterwards 
a  contractor  to  whom  stock  is  issued 
property  transfers  to  the  former 
one  full-paid  share  of  stock  to  fulfill 
the  subscription.  Dalton  Time  Lock 
Co.  r.  Dalton,  66  L.  T.  704  (1892). 
Pi  reon  t  iking  stock  for  cash  at  a 
discount  are  liable  for  the  difference 


though  all  creditors'  have  been  paid. 
Re  Railway,   etc.   Pub.   Co.,  71  L.   T. 
Rep.  682   (1894). 
i  See  §  §  46,  47,  and  848,  infra. 

2  In  the  case  of  In  re  Ambrose 
Lake,  etc.  Min.  Co.,  L.  R.  14  Ch.  D. 
390,  397  (1880),  the  court  says: 
"There  would  be  no  liability  on  the 
part  of  the  company  as  such."  In 
Re  Gold  Co.,  L.  R.  11  Ch.  D.  701 
(1879),  where  the  proceeding  was  to 
compel  a  winding  up  of  the  company 
on  account  of  an  improper  issue  of 
paid-up  stock,  the  court  refused  to 
support  the  proceeding  and  said  (p. 
713):  "It  was  not  a  wrong  done  by 
the  company  or  to  the  company."  See 
also  Lewis  v.  Meier,  14  Fed.  Rep.  31.1 
(18S2).     Cf.  §§    157,  163,  infra. 

3  A  person  induced  to  purchase 
stock  and  bonds  from  a  corporation, 
by  fraudulent  statements  in  a  pros- 
pectus as  to  the  value  of  property  for 
which  the  bonds  and  stock  have  been 
issued  by  a  Pennsylvania  corporation 
at  a  fraudulent  overvaluation,  may 
maintain  a  bill  in  equity  to  cancel  a 
note  given  in  payment,  and  to  enjoin 
a  suit  at  law  on  such  note  in  the 
hands  of  a  purchaser  with  notice. 
Hanning  v.  Berdan,  135  Fed.  Rep. 
159    (1905).     See  also  §40,  supra. 

4  See  §  41,  supra. 


163 


§§45,  46.]  "WATERED"  STOCK.  [CII.   III. 

to  bring  suit  against  the  corporation  on  this  ground,  because  a  judg- 
ment thereon  would  have  no  preference  over  a  judgment  on  their 
regular  claim. 

§  45.  Liability  of  persons  to  whom  stock  is  issued  for  cash  at 
less  than  par.  —  Where  Btock  is  issued  for  cash  at  less  than  par,  the 
parties  taking  it  are  liable-  to  corporate  creditors  for  the  unpaid  par 
value  thereof,1  unless  the  issue  was  Buhsequenl  to  the  commence- 
ment of  business  and  the  real  value  of  the  stock  was  paid  in  to  the 
corporation  in  order  to  enable  it  to  go  on  with  its  business  instead 
of  becoming  insolvent.2 

§  Hi.  Liability  of  persons  to  ivhom  stock  is  issued  for  property 
taken  by  the  corporation  at  an  overvaluation'  — Treasury  stock.— 
A  dissenting  stockholder  may  ohject  to  Buch  an  issue,  inasmuch  as 
it,  decreases  the  value  of  his  Btock.  Be  may  have  the  transaction 
set  aside,  and  the  person  receiving  the  Btock  compelled  to  return  it.1 
The  person  receiving  stock  ai  a  discount  is  liable  also  to  a  bona  fide 
transferee  of  that  stock  where  fraud  enters  into  the  transaction." 

Corporate  creditors,  however,  are  the  persons  who  generally  com- 
plain. The  company  becomes  bankrupt  and  they  are  nol  paid.  They 
then  End  that  the  capital  Btock  did  not  represenl  cash;  it  was  paid 
for  by  property  taken  by  the  corporation  at  a  valuation  much  greater 
than  its  real  value.  The  company  being  insolvenl  and  its  property 
gone,  the  corporate  creditors  seek  to  hold  the  stockholders  liable. 
They  seek  to  hold  the  stockholders  liable  for  the  par  value  of  the 
stock,  less  the  real  value  of  the  property  which  was  turned  in  to 
the  corporation.  During  the  past  thirty  years  there  has  keen  a  vast 
amount  of  litigation  on  this  subject.  The  courts  still  disagree  in 
their  conclusions,  but  a  careful  study  of  the  cases  will  show  that 
upon  authority  as  well  as  principle  the  stockholders  cannot  be  held 
liable  in  such  a  case.6  In  England  and  New  York  they  cannot  be 
held  liable,  except  on  the  basis  of  a  rescission.  And  under  all  the 
well-considered  decisions  they  cannot  be  held  liable  unless  the  prop- 
erty was  of  so  trifling  a  character  that  it  practically  had  no  value 
whatever.  This  class  of  cases  has  arisen  under  two  aspects:  first, 
at  common  law;  and  second,  under  statutes. 

At  common  law  it  is  well  settled  that  corporate  creditors  cannot 
hold  stockholders  liable  on  stock  which  has  been  issued  for  prop- 
erty, even  though  the  property  was  turned  over  to  the  corporation 

i  See  §  42.  *  See   §  41. 

2  Quoted  and  approved  in  Speer  v.        5  See  §  40. 

Bordeleau,  20  Colo.  App.  413   (1905).  g  Quoted  and  approved  in  Orton  v. 

See  §  42.  Edson  Reduction,  etc.  Co.,  Ohio  Cir- 

3  For    the    decisions    upholding    is-  cuits    (1905),   p.   107;     aff'd,   75  Ohio 
sues  of  stock  for  property  at  a  fair  St.  580. 

valuation,  see  §§  18,  etc.,  supra. 

164 


en.  in.]  "watered"  stock.  [§  45. 

at  an  agreed  valuation  which  was  largely  in  excess  of  the  real  value 
of  the  property.  There  have  been  cases  which  refuse  to  fol- 
low this  rule,  but  it  is  clearly  established  by  the  great  weight  of 
authority.  The  reason  of  the  rule  is  that  if  the  payment  by  prop- 
erty was  fraudulent,  then  the  contract  is  to  be  treated  like  other 
fraudulent  contracts.  It  is  to  be  adopted  in  toto,  or  rescinded  in 
toto  and  set  aside.  Both  parties  are  to  be  restored  as  nearly  as  pos- 
sible to  their  original  positions.  The  property  or  its  value  is  to  be 
returned  to  the  person  receiving  the  stock,  and  he  must  return  the 
stock  or  its  real  value1  In  New  York  and  in  England,  as  stated 
above,  at  common  law  the  stockholder  is  not  liable  at  all  to  corpo- 
rate creditors,  even  though  the  overvaluation  was  gross  and  clearly 
known  so  to  be.  The  remedy  is  rescission,  and  not  the  making  of 
a  new  contract  by  the  court.  There  are  other  cases,  however,  Avhich 
hold  that  where  the  property  so  turned  in  had  no  substantial  value, 
0T  where  the  overvaluation  was  "fraudulent,"  the  court  will  hold 
the  stockholders  liable  for  the  par  value  of  the  stock,  less  the  value  of 
the  property.  Still  other  cases  hold  that  where  the  stock  has  no 
value  when  it  i-  issu<  '1  for  property,  the  creditors  are  not  deprived 
of  anything  and  hence  cannot  complain.  "If,  when  disposed  of  by 
the  railroad  company,  it  was  without  value,  no  wrong  was  done  to 
<■]•!  .liters."  Such  is  the  language  of  the  supreme  court  of  the  United 
States.2     The  common  law  decisions  on  this  subject  in  the  federal 

i  Quoted  and  approved  in  Orton  v.  343    (1886),   aff'g  Coit  v.  North  Car. 

Edson  Reduction,   etc.   Co.,  Ohio  Cir-  Gold    Amal.    Co.,    14    Fed.    Rep.    12 

cuits    (1905);    aff'd,  75  Ohio  St.  580.  (18S2),   where   this    question   clearly 

2  Federal  courts:   Fogg  v.  Blair,  139  arose,   the  court  said   that  the  cred- 

U.  S.  118   (1891),  holding  that  where  itors  could  not  hold  the  stockholders 

all  the  stock  and  a  large  quantity  of  liable  unless  there  was  an  intentional 

bonds   are   issued   by  a  railroad  cor-  and    fraudulent    overvaluation.      The 

poration  to  its  contractor  in  payment  court  said  that  "where  full-paid  stock 

for  the  construction  of  the  road,  the  is  issued  for  property  received,  there 

contractor  is  not  liable  to  corporate  must  be  actual  fraud  in  t'he  transac- 

creditors   on  the  stock,   even   though  tion   to   enable   creditors   of  the   cor- 

the  bonds  without  the  stock  were  a  poration   to   call   the  stockholders  to 

sufficient    consideration    for    building  account;     a   gross   and  obvious  over- 

the   road,   unless   the  corporate  cred-  valuation  of  property  would  be  strong 

itors  prove  that  the  stock  at  the  time  evidence  of  fraud."     The  court  held 

of    its    issue   had    a    real    or    market  that   although    a   machine   and   a   li- 

value.     The  court  said  (p.  12G)  :    "If,  cense  to  use  a  patent  were  put  into 

when    disposed    of    by    the    railroad  the  company  in  payment  for  $100,000 

company,    it    was    without   value,    no  of  stock,  yet  there  was  no  fraud.   The 

wrong  was  done  to  creditors."     Even  lower   court  said   corporators   "ought 

the  Missouri  constitution  and  statutes  not  to  be  made  liable  individually  for 

do  not  change  this  rule.     Cf.  cases  in  the  debts  of  the  company  at  the  in- 

note  3,  p.  190.  infra.  stance  of  creditors,  because,  at  a  later 

In  Coit  v.  Gold  Amal.  Co.,  119  U.  S.  day,  the  estimates  fairly  put  upon  the 

165 


§  4C]  "watered"  [oh.  hi. 

and  the  various  sti  re  given  in  the  notes  below  in  the  al- 

phabetical order  of  the  stat<   . 

property   at   that   time    have   hecome     reconveyed    to   the    defendants,   upon 
modified    by    si  lent   events,    and     unapt  by  the  complainant  of  the  con- 

will   not  amount  to  the  value  which     si<!  a  paid  therefor;  second,  that 

they  set  upon  it."  s  return  to  the  complainant 

Before  any  recovery  can  be  had  in     the  consideration   paid   by  complain- 
this    class    of    cases    the    transaction     ant.  for  said   property,   namely  30,000 
must  be  set  aside.     Scovill  v.  Thayer,     shares  of  its  capital  stock,  or  account 
.    u.    S.    I!  Even     therefor;     third,    that,    if    the    court 

though    only    $2,788,000    is    paid    for     shall   d  that  the  complainant  is 

thirty-nine  par  r  mills;  and  the  pur-  not  entitled  to  rescind  the  sale  of 
chaser  then  turned  the  property  over  said  real  estate  to  it,  then  and  in  that 
to  a  corporation  for  $3,ono,000,  pay-  event  that  the  court  ascertain  the 
able   pa  Ln    bonds   and   partly   in     amount  of  damages  sustained  by  coin- 

stock,    yet    this    does    not    affect    the     plainant   and    direct   the   defenda 
validity  of  the  mortgage  securing  the     as   executors,   to   pay   the   amount   to 
bou,  pur-     complainant.     We  are  unable  to  per- 

chasers  of  the  bonds  received   there-     ceive    how    this    relief,    or    any    part 
h  a  bonus  of  stock,  yet  their  claims     thereof,  can  be  granted  the  complain- 
based    on    the    bonds   cannot   be    de-     ant  upon  the  facts  alleged  in  the  bill, 
creased  by  the  par  value  of  the  stock     The   fundamental   difficulty  with   the 
so   received  by  them,  they   being  in-     bill  is  that  it  fails  to  state  any  facts 
nocent  purchasers,  the  promoters  se-     showing  that  the  complainant  was  in 
cretly   receiving  a  large   quantity  of     any  way  injured  or  defrauded  by  the 
additional  profit.     The  remedy  of  the     transactions   complained    of.     At  the 
parties  who  so  turned  in  their  prop-     time  of  the  transfer  by  Bigelow  and 
erties   is   against  the   promoters   and     Lewisohn    to    the    company,    Bigelow 
not  in  defense  of  a  suit  to  foreclose     and   Lewisohn   and   their   representa- 
the  mortgage.     Dickerman  v.   North-     tives  owned  the  entire  issue  of  stock 
ern  T.  Co.,  176  U.  S.  1S1   (1900).     In     of  the  corporation.    The  sale  by  them 
this   case  the   court  said   it   was  not     to  the  corporation  was  in  effect  a  sale 
called    upon    to    decide   whether   pro-     by  them  to  Bigelow  and  Lewisohn.    A 
meters  who  receive  a  large  quantity     corporation  can  only  act  through  the 
of   bonds    and   stock   as    their    profit     human   beings    who    compose    it.      It 
are   liable   for  the   par   value   of   the     cannot  be  deceived  or  defrauded  lin- 
stock,   or   whether    the   remedy    is    a     less    its    stockholders    and    directors 
rescission    of    the    transaction.      The     are  deceived  or  defrauded.     The  cor- 
United    States   Circuit   Court   of    Ap-    poration  knew  all  that    Bigelow    and 
peals,  in  affirming  the  decision  of  the     Lewisohn   knew,   and   no   one   of  the 
court  below,  in  Old  Dominion  Copper,     original   parties  to  the   transfer  was 
etc.  Co.  v.  Lewisohn,  being  a  suit  by     defrauded    by    the    exchange    of    the 
the    corporation    against    its    promot-     stock  controlled  by  Bigelow  and  Lew- 
ers,  said   (148  Feci.  Rep.  1020):  "The     isohn   for   the   real   estate   controlled 
hill  prays  for  relief  as  follows:  First,     by    them.      It    may    be    that    such    a 
that  the  sale  of  the  mining  claims  to     large  overcapitalization  as  is  alleged 
the    complainant    by    Leonard    Lew-     in    the    bill    might    mislead    and    de- 
isohn,    the    defendants'    testator,   and     ceive  careless  and  credulous  purchas- 
Albert  S.  Bigelow,  a  citizen  of  Massa-     ers  of  the  stock;    but  we  are  not  now 
chusetts  and  not  a  party  to  this  ac-     dealing  with  the  case  of  a  stockholder 
tion,  be  rescinded,  and  the  real  estate    alleging  concealment,  fraud,  and  mis- 

1GG 


OH.  in.]  "watered"  STOCK.  [§  46. 

At  common  law  there  is  no  contract,  express  or  implied,  to  pay 
to  the  corporation  or  to  corporate  creditors  the  par  value  of  stock 

representation.  The  stockholders,  ap-  for  $2,500  and  worth  not  over  $5,000 
parently,  have  no  complaint.  At  is  turned  in  for  $13,500  of  stock,  yet 
least  they  have  not  propounded  any.  the  bankruptcy  court  where  the  com- 
.  .  .  The  subscribers  for  the  20,000  pany  is  organized  cannot  hold  a  non- 
shares  subsequently  issued  were  not  resident  stockholder  liable  on  the 
deceived.  They  asked  for  no  state-  stock  by  service  by  publication.  In  re 
ment,  and  received  none.  They  got  Haley,  158  Fed.  Rep.  74  (1908). 
what  they  purchased,  and  are  not  Even  though  there  is  a  gross  over- 
complainants  here."  And  2  1"  U.  S.  HOG.  valuation  of  property  turned  in  for 
K.  D  though  the  owners  of  mining  stock,  yet  this  merely  places  the  bur- 
claims  organize  a  corporation  in  New  den  of  proof  upon  the  stockholders  to 
,ey,    and    they    th  es    as    di-     show  that  they  acted  in  good  faith. 

ore,   toget!  direc-     Creditors  trying  to  hold  them  liable 

tors,    cause    the    i  i    to    pur-     must  show  that  they  became  creditors 

chase  the  claims  for  $750,000  par  on  the  faith  that  the  stock  was  paid 
value  of  stock,  although  the  mining  up  and  that  such  overvaluation  was 
clai  fraudulent  with  intent  to  cheat  the 

even     though     th  ■  r     additional     creditors.    Hence,  where  a  mercantile 

iltal   stock   is  sold   by  the  corpora-     firm  owned  property  worth  $2,700,000 
tion  to  t  par.  yet     and    owed    $1,800,000,    and    sold    the 

the  corporation  cannot  rescind  the  property  subject  to  the  debt,  to  a 
transaction,    [j  "re     corporation,    for    $1,500,000    of    stock, 

no  oth.  of     there  was  a  gross  overvaluation,  and 

the    ti.  and    hence    no    one     yet   if   the   parties   acted   in   reliance 

was  ,],  ii.  etc.  Co.     upon  the  books  of  the  concern,  and 

p.  Lewisohn,  136  I  i     the  system   of  bookkeeping  used  did 

.,,-,  .  io  U.S.206     not  show  the  actual  condition  of  the 

A  contrary  coi  reached     firm,  they  are  not  liable,  they  having 

in  regard  to  tiori  in     acted  in  good  faith.    Taylor  v.  Walk- 

Old  Dominion,  188     er,   117  Fed.  Rep.  737   (1902);    aff'd, 

Mass.  315   (IS  127   Fed.   Rep.   108.     Stock  given   as 

Where  i  property  to  a    a  bonus  to  a  person  loaning  money 

corporation  for  all  of  its  stock,  ex-  to  a  corporation  does  not  render  the 
..ting  seven  qualification  shares,  holder  liable  thereon,  he  never  hav- 
and  such  property  is  the  only  prop-  ing  subscribed  for  it  nor  agreed  to 
erty  the  corporation  owns,  it  cannot  pay  for  it,  and  there  being  no  proof 
hold  him  liable  in  damages  for  de-  that  any  creditor  was  injured  by  the 
ceit  as  to  the  value  of  the  property,  transaction.  Seaboard,  etc.  Bank  v. 
even  though  he  afterwards  sells  the  Slater,  117  Fed.  Rep.  1002  (1902). 
stock  to  outside  parties  at  a  high  At  common  law  stock  may  be  issued 
price.  The  court  said  that  there  was  in  payment  for  the  construction  of  a 
no  damage  because  there  was  no  dif-  railroad  at  less  than  its  par  value, 
ference  between  the  value  of  the  and  may  in  fact  be  issued  at  its  actual 
stock  and  the  value  of  the  property,  value.  Continental  Trust  Co.  v.  To_ 
the  cornoration  having  given  back  "in  ledo,  etc.  R.  R.,  86  Fed.  Rep.  9.9 
substance  that  which  it  received  and  (1898).  See  161  Fed.  Rep.  540. 
no  more."    Stratton's  Independence  In  passing  upon  the  validity  of  a 

Dines,  135  Fed.  Rep.  449   (1905).  railroad  construction  contract  where- 

n    though    property    purchased     by    bonds    and   preferred   stock   and 

167 


§46.] 


"watered"  stock. 


[CH.   III. 


which  is  issued  for  properly.     Not  only  is  tliere  no  such  contract, 
hut  there  is  no  implied   fraud  even  though  the  property  was  over- 


common  stock  were  issued  for  con- 
struction work,  the  court  in  figuring 
the  actual  value  received  by  the  rail- 
road for  these  securities  figured  the 
common  stock  at  fifteen  cents  on  a 
dollar,  and  the  preferred  stock  at 
thirty  cents  on  the  dollar,  and  the 
bonds  at  seventy-six  cents  on  the  dol- 
lar, and  held  that  this  was  legal,  even 
under  the  Ohio  statutes.  Toledo,  etc. 
R.  R.  v.  Continental  Trust  Co.,  95 
Fed.  Rep.  497  (1899).  In  Phelan  v. 
Hazard,  5  Dill.  45  (1878);  B.C.,  19 
Fed.  Cas.  429,  Judge  Dillon  thorough- 
ly reviewed  the  authorities  and  said: 
"The  contract  is  valid  and  binding 
upon  the  corporation  and  the  original 
sharetakers  unless  it  is  rescinded  or 
set  aside  for  fraud;  and 
while  the  contract  stands  unim- 
peached,  the  courts,  even  where  the 
rights  of  creditors  are  involved,  will 
treat  that  as  a  payment  which  the 
parties  have  agreed  should  be  pay- 
ment." See  also  Morrison  v.  Globe 
Panorama  Co.,  28  Fed.  Rep.  817 
(188G);  Coe  v.  East,  etc.  R.  R.,  52 
Fed.  Rep.   531    (1892). 

In  Northwestern,  etc.  Ins.  Co.  /•. 
Cotton,  etc.  Co.,  70  Fed.  Rep.  155 
(1895),  a  building  company  having 
invested  $SS,000  in  a  building  sold  it 
to  a  new  corporation  having  the  same 
stockholders  for  $125,000  stock  and 
$75,000  of  bonds.  The  property  on 
foreclosure  brought  only  $50,000.  A 
creditor  sued  to  hold  a  stockholder 
liable  on  his  stock.  The  court  held 
that  he  could  not  recover,  because, 
(1)  "if  the  real  estate  transferred 
for  the  stock  in  the  new  corporation 
was  honestly  believed  by  the  parties 
to  the  transaction  to  be  equivalent 
in  value  to  the  face  of  the  stock 
issued,  a  creditor  of  the  corporation 
may  not  assail  the  transaction,  al- 
though it  should  subsequently  trans- 
pire that  the  property  in  fact  was 
overvalued;"    and    (2)    the    creditor, 


"when    it    became   the    purchaser   of 

the  bonds,  was  advised  of  the  valua- 
tion placed  on  the  property  by  the 
directors,  and  was  in  possession  of 
other  important  facts,  which,  if  pur- 
sued, would  have  led  to  full  know  1- 
edge  of  the  method  pursued  by 
>rs  in  the  said  transfer,  the 
fixing  of  the  valuation,  and  the  man- 
ner of  payment  of  the  cash  subscrip- 
tion." 

Whore  an  agent  is  entitled  to  all 
that  land  is  sold  for  above  $50,000, 
and  a  sale  is  made  for  $10,000  cash 
and  $44,000  in  stock,  par  value,  ho 
must  prove  what  the  stock  was  worth. 
He  cannot  assume  that  it  was  worth 
par.  Anderson  v.  Avis,  C2  Fed.  Rep. 
227   (1894). 

Where  a  corporation  issues  its 
stock,  as  full  paid,  in  payment  for 
coal  lands,  and  the  stock  is  sold  to 
a  purchaser  for  value,  the  purchaser 
is  not  liable  to  creditors  of  the  cor- 
poration on  the  stock  on  the  ground 
that  it  is  not  full-paid  stock,  even 
though  the  land  was  taken  at  a  great 
overvaluation,  there  being  no  actual 
fraud  in  the  transaction.  The  text 
above  was  quoted  with  approval.  Du 
Pont  r.  Tilden,  42  Fed.  Rep.  87 
(1890). 

In  the  case  of  Stewart  v.  St.  Louis, 
etc.  R.  R.,  41  Fed.  Rep.  736  (1887), 
where  a  railroad  road-bed  worth 
$2,000  was  turned  in  to  a  corporation 
for  $200,000  of  its  notes  and  $3,600,000 
of  its  stock,  the  court  held  that  the 
notes  were  good  and  could  be  col- 
lected. There  is  a  class  of  cases,  how- 
ever, which  are  to  be  distinguished 
from  the  cases  contained  in  this  note. 
A  promoter  of  a  corporation  occupies 
a  fiduciary  relation  towards  it,  and 
where  a  promoter  has  purchased 
merely  the  option  on  property  and 
then  sells  that  option  to  the  corpora- 
tion at  a  largely  increased  price  (the 
corporation  at  the  same  time  agree- 


168 


CH.   III.] 


"watered"  STOCK. 


[§  46. 


valued.  If  there  is  express  fraud  the  law  provides  ample  remedies, 
but  such  a  fraud  must  be  clearly  proven  and  is  not  implied  from  proof 
that  the  property  was  worth  less  than  the  par  value  of  the  stock. 

ing    to    pay    the    original    purchase    York  City  is  entitled  to   6  per  cent. 
price),  the  promoter  may  be  compelled    The  value  of  the  good-will  may  be  in- 
by  the  corporation  to  pay  over  to  it    eluded,    and    the    capital    issued    for 
the  profit  made  by  him.    And  in  still    good-will    or    franchises    will    be    in- 
other  cases,  where  the  promoter  con-    eluded,    dividends    having   been   paid 
cealed  his  profit,  he  may  be  liable  to    upon   it,  and  the  price  paid  in  pur- 
the  corporation   for  his  profit,  where    chasing  franchises  may  be  included, 
the  board  of  directors  consists  merely    An  excessive  penalty  for  not  obeying 
of    dummies    representing   such    pro-    the  statute   is   unconstitutional  as  a 
moter.       See      8  651,      infra.       Even    denial  of  the  equal  protection  of  the 
though  stock  of  a  plantation  company    laws.     Consolidated   Gas   Co.   v.   City 
has   been   issued   for   property   at   an    of    New    York,    157    Fed.    Rep.    849 
overvaluation  and  sold  to  the  public,     (1907).     Inasmuch  as   the  franchise, 
and  a  receiver  has  been  appointed  at    earning   power   or   good-will    is   gen- 
the  instance  of  stockholders,  yet  if  a    erally  turned  in  at  a  high  valuation, 
great    majority    of    the    stockholders    it  is  well  to  state  that  the  law  sus- 
wish  to  reorganize  the  company  and    tains   a    fair   valuation   of   the   fran- 
pay  in  more  money  and  continue  the    chise.    Thus,  where  the  national  gov- 
buslness,    it   still    being   solvent,   the    ernment  condemns  a  dam  and  lock 
court     will     discharge    the     receiver,    of  a  canal  company,  it  must  pay  not 
Tolman   v.   Ubero,   etc.   Co.,   142   Fed.    only   the  cost  of  the   dam  and  lock, 
Rep.    270     (1905).      The    bankruptcy    but   compensation   for   the   taking  of 
court   will   not  compel   a   creditor  to    the    franchise    to    exact    and    collect 
accept    in    "composition,"    under    the    tolls.   "The  whole  value  must  be  paid, 
bankrupt  act,  stock  in  a  corporation,    and  that  value  depends  largely  upon 
which    was    issued    for   good    will   of    the    productiveness    of    the   property, 
the  business  of  the  bankrupt,   it  ap-    the  franchise  to  take  tolls."     Monon- 
pearing    that    such    good     will    was    gahela  Nav.  Co.  v.  United  States,  148 
worthless.     In   re  Woodend,  133  Fed.    U.  S.  312   (1893). 
Rep.  593   (1904).  California:    Even   though   stock   is 

In  determining  whether  a  statutory  issued  for  property  which  is  worth 
reduction  in  the  price  of  gas  is  con-  but  one-tenth  of  the  par  value  of  the 
fiscatory  and  unconstitutional,  the  stock,  yet  if  all  the  stockholders  as- 
actual'  or  reproductive  value  of  the  sent  thereto  a  subsequent  purchaser 
property  is  taken  without  regard  to  of  the  stock  cannot  maintain  a  suit 
its  original  cost.  Land  not  needed  in  in  behalf  of  the  corporation  to  cancel 
the  business  is  excluded,  but  a  rea-  the  stock  on  the  ground  of  fraud 
sonable  working  capital  is  included.  His  remedy,  if  any,  is  a  personal  suit 
Stock  of  subsidiary  companies  is  not  for  false  representations.  <f rretson 
included  if  their  business  is  collat-  r.  Pacific,  etc.  Co.,  146  Cal.  184  (1905). 
eral.  The  value  of  the  capital  stock  Georgia:  Where  stock  is  issued  for 
of  the  parent  company  has  little  bear-  property  worth  only  ten  per  cent,  of 
ing  on  the  subject,  and  an  abnormal  the  par  value  of  the  stock  and  known 
depreciation  fund  will  not  be  allowed,  so  to  be  to  the  s  ockholders  h  s  is 
The  company  is  entitled  to  a  profit  a  legal  fraud  as  to  subsequent ^red- 
based  not  on  the  legal  rate  of  inter-  iters,  and  the  ^e\}n ^^ 
est,  but  on  investments  of  the  same  may  enforce  the >  stockho ders  liabi I- 
character  as  its  business,  and  in  New    ity.      Allen    V.    Grant,    122    Ga.    552 

169 


§46.] 


WATERE 


[OH.    III. 


This  principle  of  law,  thai   ther<  liability  on  st<  aed 

for  property  the  value  of  which  is  less  than  the  par  value  of 


(  L90   ).     The   co  Id:     "In    Eng- 

land, the  contract  of  subscription   i; 
an  entirety.    There  LI    I  r  good 

or  it  is  bad.  If  void,  there  is  no  con- 
tract of  subscription,  and  at- 
ly  no  liability  thereon.  If  good,  it 
is  good  a<  cording  to  it  and 
the  com]  anj  mot  rec<  e  sub- 
bi  ription  |  in  spe<  and 
afterwards  by  Itself,  creditors  or  llqui- 
or  bold  i  be  si  be  dif- 
ference i '  the  value  of  the 
property  and  the  face  of  the  shai 
But  the                                            it  a 

;si    pay    i 
be  relieved  from  liability  to  the  w 
itors   of    the   con 
how<  ver,  some  difference  In  the  mi 
od  of  determining    ..  lent 

where  other  than  money  is  the  medi- 
um. In  those  states  \\  i  <he 
'true  value'  rule,  motive.  Intent,  and 
good  faith  are  disregarded.  In  order 
for  a  subscriber  to  relieve  h 
he  must  show  that  the  property  con- 
veyed in  sati:  i  of  the  subsi  rip- 
tion was  its  equivalent  in  money,  and 
was  worth  in  dollars  the  face  of  the 
shares.  In  those  states  which  adopt 
the  'good  faith'  rule  it  is  recogniz  i 
that  value  is  a  matter  about  which 
men  may  honestly  differ.  In  them  it 
is  therefore  held  that,  if  the  parties 
fairly  and  in  good  faith  value  the 
property  conveyed  in  payment  of  the 
subscription,  the  courts  will  not  go 
behind   their   assessment." 

Connecticut :  In  declaring  divi- 
dends the  directors  are  not  justified 
in  assuming  that  the  value  of  prop- 
erty which  was  originally  received  in 
payment  for  stock  is  still  worth  that 
value,  and  if  such  property  at  the 
time  of  the  dividend  was  not  actually 
worth  the  par  value  of  the  stock 
which  was  issued  for  it,  the  dividend 
is  illegal  and  a  director  receiving 
such  dividend  as  a  stockholder  may 
be  compelled  to  pay  it  back  at  the 


i  Iver  of  the  corpoi  a- 
tion.  Davenport  V.  Lines,  72  Conn. 
L18   0  78   Cmn.   575. 

Illinois:   See      17, 

a:    Where   $107,000    in   stock 

000   in  bonds  .  I   to 

tractors    for    the    c<  Ion    of 

i   the  time 
having   no   d  and*        rybody   i 

!  to  it,  and  lie  o  proof 

of  fraud,  the  transaction  is  ;:nd 

■  annot   enforce  any  liability 

on  the  stock.     Bran  Irown,  139 

Ind  i). 

Where  stoi  ir  constrac- 

og  the 
stock    cannot   be    held    liable    on    the 
of  the  stock  not  havin 
1  up,  i  I '  au  i  i,  in  1 

The  statements  of  one  of  the 
officers  to  immissioners  are  not 

adn  i he  cost  of 

work.    The  act  of  the  company  In 
liting  each  of  the  directors  with 
one    thousand    dollars    on    their   sub- 
in     payment     of     services 
>'d    and    money    advanced    was 
upheld.     Clow  v.  Brown,  31  N.  E.  R 
3G1    (Ind.    1892).     But  see   s.  c,   134 
Ind.  287   (1893),  and  150  Ind.  185. 

In  Coffin  v.  Ransdell,  110  Ind.  417 
(1SS7),  the  court  sustained  the  rule 
given  in  the  text  and  said:  "Suppose 
it  to  be  true  that,  in  consummating 
the  arrangement,  the  property  of  Un- 
thank  &  Coffin  was  turned  in  to  the 
corporation  at  an  overvaluation,  and 
that  the  defendant  and  the  other  cor- 
porators participated  in  the  alleged 
wrong.  The  transaction  was  the  re- 
sult of  an  agreement  which  the  par- 
ties had  the  right,  as  between  them- 
selves, to  make.  .  .  .  Shall  [de- 
fendant] be  capriciously  punished  by 
being  made  liable  ex  contractu  upon 
a  contract  which  he  never  made?  If 
the  defendant  has  participated  in  a 
fraud  whereby  the  creditors  of  the 
corporation    who    exercised    ordinary 


170 


CH.   III.  j 


WATERED       STOCK. 


[§  46. 


ck,  seems  a  self-evident  principle  of  law.     Moreover,  this  prin 
ciple  is  based  on  business  usage  and  is  sound  practice.     The 


business  sagacity  have  suffered  dam- 
age, whatever  redress  such  creditors 
may  now  obtain,  while  their  repre- 
sentative retains  the  defendant's  prop- 
erty, must  be  sought  by  an  action  ex 
delicto." 

As  to  the  statutory  law  in  Indiana, 
see  8  47,   infra. 

Maryland:    Even  though  promoters 
turn  in  property  ry  high  value, 

yet  if  all  the  parties  were  aware  of 
all   the    (acta   ;t  r   of  the  cor- 

poration   cannot   hold    i  >moters 

liable.    Tompkins  v.  Sp 
96  Aid.  560  (1903).     -  o  Branl 

Md.  1    «  '  In  this  case 

the  trans- 
tor  fraud, 
courts   will   ti  it  that 

which 

ill  be  a  paym  snt,  and  this, 
too.    :-i    ca  ■  a     - 1  tits    of 

ere  :  are  in\ 

husetts:      In  husetts 

tin 

I  where  a  person  buys  property 
for  the  purpose  of  Forming  a  cor- 
poration to  take  it  over,  anil  (his  plan 
Is  carried  out  by 

there- 
for, thi  B  of  w  many 
tin.  iter  than  th  ■  actual  value 
of  tile  property,  the  corporation  it- 
self may  thereafter  rescind  the  trans- 
action and  return  the  pre  <nd 
deman d  the  stock.  though 
all  the  stockholders,  directors  and  of- 
ficers .  iion  wl 
it  was  carried  out,  it  appearing,  how- 

r,  that  the  property  received  was 
worthless  and  that  it  was  a  part  of 
the  original  plan  to  sell  a  large  part 
of  the  stock  to  the  public,  which  plan 
was    i  out,    and    it    appearing 

also  that  the  original  stockholders 
and  officers  were  merely  representa- 
tives of  the  vendor,  and  that  there 
was  no  independent  judgment  on  the 


re  is 


part  of  the  board  of  directors.  The 
court  pointed  out  that  this  was  a 
different  case  from  one  where  it  was 
not  contemplated  that  the  public 
should  become  interested,  except  by 
purchase  from  the  original  stockhold- 
ers. 

Where  a  person  buys  all  the  stock 
of  a  corporation  for  about  $613,000, 
and  some  real  estate  for  about  $175,- 
000,  and  sells  the  former  to  a  cor- 
poration formed  by  him  for  that  pur- 
pose for  $2,500,000  par  value  of  stock, 
having  also  an  actual  value  of  $2,500,- 
000,  and  sells  the  real  estate  for  $750,- 
000  par  value  of  stock,  having  also 
the  same  actual  value,  but  it  turns 
out  that  the  real  estate  was  worth- 
less, the  corporation  so  issuing  the 
stock  may  maintain  a  separate  suit 
for  rescinding  the  sale  and  issue  of 
stock  for  the  real  estate,  or  for  dam- 
ages, if  the  stock  cannot  be  returned, 
it  appearing  that  the  promoter  was 
a  director  at  the  time  of  the  sales, 
and  that  the  fair  market  value  of  the 
stock  at  the  time  of  issue  was  par, 
and  so  continued  to  be  for  a  long 
time  thereafter;  it  further  appearing 
that  he  made  no  disclosure  of  the 
facts  to  the  corporation  and  did  not 
see  to  it  that  the  corporation  had 
adequate  independent  advice.  The 
court  said  "that  is  an  obligation  rest- 
ing upon  every  fiduciary  who  makes 
a  sale  of  his  own  property  to  his 
beneficiary,  no  matter  whether  it  is 
a  case  of  trustee  and  cestui  que  trust, 
guardian  and  ward,  solicitor  and 
client,  or  promoter  of  a  corporation 
and  the  corporation  itself.  There  is 
no  pretense  that  in  the  transaction 
in  question  the  plaintiff  corporation 
was  represented  by  an  independent 
board."  It  is  no  defense  that  every 
stockholder  and  director  knew  of  and 
acquiesced  in  the  transaction  at  the 
time,  it  appearing  that  the  stock  was 
afterwards   sold   to   the   public   with- 


171 


§46.] 


"watered"  stock. 


[CH.    III. 


no  more  harm  in  the  issue  of  stock  below  par  than  there  is  in  the 
issue  of  a  note  or  bond  below  par.     The  extent  to  which  the  courts 

out  any  disclosure  of  the  facts.     Old     disbursements  and  to  be  charged  with 


Dominion,  etc.  Co.  v.  Bigelow,  188 
Mass.  315  (1905),  the  court  refusing 
to  follow  Old  Dominion,  etc.  Co.  v. 
Lewisohn,  136  Fed.  Rep.  915;  aff'd, 
145  Fed.  Rep.  1020,  and  210  U.  S.  206, 
involving  the  same  issue  of  stock.  Tha 
court  pointed  out  that  in  cases  to  the 
contrary  it  was  not  contemplated  that 
other  parties  should  become  inter- 
ested in  the  stock,  except  by  purchase 
from  the  original  stockholders.  If 
there  are  two  such  promoters  it  seems 
that  in  a  suit  against  one,  he  is  liable 
for  the  whole  stock  so  issued. 

A  statute  that  the  commissioner  of 
corporations  must  pass  upon  the 
value  of  property,  which  is  turned  in 
for  stock,  cannot  be  evaded  by  the 
parties  paying  cash  to  the  corpora- 
tion for  the  stock  and  then  using 
that  cash  to  buy  the  property  from 
themselves.  Yet  if  they  do  so  under 
advice  of  counsel,  they  are  not  liable 
for  the  penalty  for  doing  so.  Harvey- 
Watts  Co.  v.  Worcester,  etc.  Co.,  193 
Mass.  138  (1906). 

Where  promoters  pay  out  less  than 
$30,000  to  secure  options  on  land  and 
then  sell  the  options  to  a  corporation 
for  $700,000  of  stock  of  the  latter, 
the  corporation  assuming  the  pur- 
chase price  of  the  land,  and  then  is- 
sue a  prospectus  which  is  misleading 
and  does  not  state  the  facts  about 
the  issue  of  stock,  and  the  corpora- 
tion becomes  insolvent,  they  are  lia- 
ble to  the  corporation  for  the  fair 
market  value  of  the  stock  at  the  time 
the  stock  was  issued,  or  as  soon  there- 
after as  it  had  a  market  value.  The 
liability  is  not  for  unpaid  stock,  but 
for  fraud  as  promoters  in  making  a 
secret  profit  in  services  and  not  mak- 
ing a  full  disclosure  to  the  stockhold- 
ers. The  promoters  owe  a  duty  to 
future  stockholders.  The  land  need 
not  be  tendered  back.  The  promoters 
are  to  be  credited  with  their  actual 


the  fair  market  value  of  the  stock 
with  interest,  and  also  with  dividends. 
The  suit  should  be  brought  by  the 
corporation  itself  and  not  by  its  re- 
ceiver, according  to  the  Massachu- 
setts decisions.  Hayward  v.  Leeson, 
176  Mass.  310  (1900).  See  also  New 
Haven,  etc.  Co.  v.  Linden  Spring  Co., 
142  Mass.   349    (1886). 

Michigan:  Stock  which  is  paid  for 
by  the  worthless  assets  of  an  insolv- 
ent corporation  and  a  transfer  of 
stock  in  such  corporation,  is  not  full 
paid  and  the  stockholder  may  be  held 
liable  by  corporate  creditors.  Die- 
ti  rlc  v.  Ann  Arbor,  etc.  Co.,  143  Mich. 
416  (1906).  Stock  may  be  issued  for 
services  but  not  for  influence.  A 
person  receiving  $2,500  of  paid-up 
stock  for  recommending  the  com- 
pany's product  and  using  his  influ- 
ence to  sell  the  product,  but  not  de- 
voting appreciable  time,  must  pay  the 
$2,500  to  corporate  creditors,  upon 
corporate  insolvency.  Peninsular 
Sav.  Bank  v.  Black  Flag,  etc.  Co.,  105 
Mich.  535  (1895).  Where  a  mine  Is 
turned  in  at  a  large  valuation  for 
stock,  no  fraud  is  proved  by  the  mere 
fact  that  the  mine  subsequently  turns 
out  to  have  been  worth  only  one-fifth 
of  that  amount.  Fraud  exists  only  in 
case  of  intentional  overvaluation,  "or 
such  reckless  conduct  in  the  placing 
of  this  value,  without  regard  to  its 
real  worth,  as  would  indicate,  with- 
out explanation,  an  intent  to  de- 
fraud." Young  v.  Erie  Iron  Co.,  65 
Mich.  Ill  (1S87).  Although  patents 
which  the  court  finds  were  worth 
$20,000  were  turned  in  for  $100,000 
of  stock,  nevertheless  the  parties  re- 
ceiving the  stock  are  not  liable  on 
the  same  where  there  is  no  proof  of 
intentional  fraud  or  of  recklessness 
in  fixing  the  value.  Graves  v .  Brooks, 
117  Mich.  424  (1898).  In  a  suit  by 
a  judgment  creditor  to  enforce  a  lia- 


172 


CH.   III.] 


"watered"  stock. 


[§46. 


have  gone  in  sustaining  such  issues  of  stock  for  property  is  shown 
by    the    fact    that    even    constitutional    and    statutory    prohibitions 


bility  for  stock  issued  for  property 
at  an  overvaluation,  a  stockholder 
may  attack  the  judgment  against  the 
corporation  on  the  ground  that  it  was 
on  a  claim  for  property  purchased, 
which  property  had  been  taken  back 
by  the  vendor.  McBryan  v.  Universal, 
etc.  Co.,  130  Mich.  Ill  (1902).  Where 
$500,000  of  stock  is  issued  for  $2  cash 
and  a  formula  for  cereal  breakfast 
food,  and  the  stock  is  then  sold  at 
less  than  par  to  the  public,  and  the 
company  fails,  stockholders  by  st 
ute  being  liable  only  to  the  extent  of 
their  unpaid  subscriptions,  the  par- 
ties to  whom  the  stock  was  originally 
issued  may  be  held  liable.  Wood  v. 
Sloman,  111  X.  W.  Rep.  317  (Mich. 
1907). 

Mississippi:  Where  by  a  contract 
between  promoters  of  a  street  railway 
one  of  them  was  to  have  one-fourth 
of  all  the  profits  and  the  others  pro- 
ceed with  the  enterprise  and  transfer 
the  franchise  to  a  corporation  and 
afterwards  fraudulently  cause  the 
corporation  to  be  sold  out  to  a  new 
corporation,  the  first  named  party 
may  hold  the  other  promoters  and 
the  two  corporations  personally  liable 
for  one-fourth  of  the  value  of  the 
property,  less  the  amount  which  has 
been  expended,  and  it  is  no  defense 
that  .the  original  plan  contemplated 
issuing  stock  without  paying  the  full 
par  value  thereof.  Mulvihill  r.  Vicks- 
burg,  etc.  Co.,  SS  Miss.  689   (1906). 

Missouri:  In  the  case  Colonial  T. 
Co.  r.  McMillan,  18!  Mo.  547  (1905), 
the 


old  patriarch  Jacob  in  dealing  with 
Laban  (Genesis,  xxx,  30  et  seq.,  q.  v.), 
is  parodied  and  brought  to  blush, 
may  concern  the  legislative  branch  of 
the  government,  but  cannot  be  reme- 
died by  the  courts  except  in  sporadic 
cases,  where  some  relief  may  be  ad- 
ministered if  the  facts  allow." 

For  other    Missouri    decisions,    see 
§  47,  infra. 

New  Jersey:  Where  the  stock  of  a 
cemetery  company  of  the  par  value  of 
$50  is  worth  but  $5,  the  directors  may 
issue  it  for  land  which  is  liable  to 
come  into  competition  with  the  com- 
pany, even  though  one  motive  of  the 
directors  is  thereby  to  control  an  elec- 
tion. Rural  Homestead  Co.  v.  Wildes, 
54  X.  J.  Eq.  668  (1896),  rev'g  53  X.  J. 
Eq.   452    (1S95). 

Stockholders  cannot  be  held  liable 
for  the  difference  between  the  par 
value  of  their  stock  and  the  actual 
value  of  property  turned  in  to  the 
corporation  in  payment  of  the  stock 
unless  fraud  is  proved.  "If  the  trans- 
action was  an  honest  one,  the  differ- 
ence in  value  between  the  property 
constituting  the  consideration  of  the 
sale  and  the  stock  had  no  legal  sig- 
nificance. .  .  .  The  valuations  of 
property  in  making  the  exchange, 
either  on  the  one  side  or  the  other, 
cannot  be  supervised  or  controlled  by 
the  court  of  chancery;  for,  in  the  ab- 
sence of  deceit,  or  some  other  corrupt 
constituent,  the  bargain  between  the 
parties  cannot  be  disturbed."   Bickley 


v.    Schlag,   46   X.   J.  Eq.    533    (1890). 

in    speaking    of    watered    A  corporation  may  maintain  a  suit  to 

"That  corporations  ere-    cancel  stock  which  the  directors  and 


stock,   said 

ated  to  be  the  owners  of  public  util-  president  voted  to  themselves  as  com- 
ities should  be  born  into  a  sham  and  missions  for  selling  the  stock  of  the 
crippled  life,  and  that  there  seems  company.  Central,  etc.  Co.  »•  Mad- 
to  be  a  call  for  more  adequate  safe-  den,  68  Atl.  Rep.  777  (X.  J.  1908). 
guards  against  the  itching  tempta-  A  purchaser  of  stock  which  has  as- 
tion  to  circumvent  our  corporation  sented  to  the  corporation  purchasing 
laws  by  falsehood,  whereby  the  an-  its  own  stock  cannot  complain.  Where 
cient  plan  for  making  gain  by  'water-  by  statute  the  preferred  stock  shal 
ing  stock,'  conceived  by  the  shrewd  not  exceed  two-thirds  of  the  capital 

173 


§46.] 


"watered"  STUCK. 


[en.  in. 


against    watered    stock   have    been    practically    construed    away    by 
the  courts.     Moreover,  the  laws  of  trade  are  more  powerful  than 


stock  paid  in  for  cash  or  property,  a 
preferred  stockholder  cannot  question 
the  value  of  property  received  in  pay- 
ment for  the  preferred  stock  in  a 
suit  instituted  by  him  to  enjoin  the 
corporation  purchasing  its  own  stock, 
as  allowed  by  statute,  where  the  as- 


issue  is  consented  to  by  all  the  stock- 
holders. It  is  a  bargain  between  the 
contracting  parties  which,  in  the  ab- 
sence of  fraud,  they  cannot  abrogate." 
"Stock  issued  as  a  bonus  with  the 
sale  of  bonds,  or  stock  issued  through 
the  means  of  overvaluation  of  prop- 


sets,    less    the    debts,   equal    the   pre-    erty,    cannot    properly    be    regar 


ferred  stock  outstanding.  Hodge  v. 
United  States  Steel  Corp.,  53  AU. 
Rep.  601  (N.  J.  1902).  This  decision 
was  reversed  on  other  points  in  64 
N.  J.  Eq.  807  (1903).  Where  real 
estate  worth  $125,000  and  an  unsuc- 
cessful patent  are  sold  to  a  corpora- 
tion for  $1,125,000  of  full  paid  stock, 
and  one-half  of  the  stock  is  then 
turned   back  as  treasury   stock,   and 


as  necessarily  issued  fraudulently. 
In  the  absence  of  intervening  rights 
of  creditors,  such  transactions  appear 
to  have  been  generally  supported  by 
the  courts,  unless  positive  fraud  has 
been  clearly  established,  notwith- 
standing the  constitutional  and  statu- 
tory provisions  of  many  of  the  state3 
designed  to  secure  a  proper  relation- 
ship  between   the    capital   stock   and 


the  company  becomes  insolvent,  the  the  assets  of  corporations."  Arnold 
stockholders  are  liable  for  the  cor- 
porate debts  and  expenses  of  admin- 
istration. Honeyman  v.  Haughey,  66 
Atl.  Rep.  582  (N.  J.  1906).  Even 
though  it  is  clear  that  property  was 
transferred  to  a  corporation  for  stock 
and  bonds,  the  par  value  of  which  is 
much  greater  than  the  actual  value 
of  the  property,  yet  a  dividend  on 
the  stock  cannot  be  enjoined  by  a 
stockholder   on  the   ground   that  the 


v.    Searing,    67   Atl.   Rep.   831    (N.    J. 
1907).   See  69  Atl.  Rep.  7SS. 

A  few  cases  seem  to  be  in  conflict 
with  the  above  authorities.  Thus,  in 
Wetherbee  v.  Baker,  35  N.  J.  Eq.  501 
(1882),  the  defendant  neither  owned 
nor  conveyed  to  the  corporation  the 
property  which  he  alleged  constituted 
payment.  Savage  v.  Ball,  17  N.  J.  Eq. 
142  (1S64),  held  that  the  validity  of 
an    election    is    not    affected    by    the 


profits  should  be  used  to  add  to  the    question  whether  the  stock  voted  was 

actual   value   of   the   assets   sufficient 

to  make  them  equal  to  the  par  value 

of  the  stock  and  bonds  so  issued,  even 

though  the  amount  of  "water"  is  $11,- 

000,000,  it  appearing  that  there  were 

no  floating  debts  and  it  not  appearing 

that  any  one   was   defrauded.     Good- 

now  v.  American,  etc.  Co.,  66  Atl.  Rep. 

607    (N.  J.   1907),   the  court  saying: 


issued  for  value  or  not. 

As  to  the  statutory  law  in  New  Jer- 
sey, see  §  47,  infra. 

New  Mexico:  Where  there  is  a  dif- 
ference of  opinion  as  to  the  value  of 
the  land  which  is  deeded  in  payment 
for  stock  and  no  fraudulent  inten- 
tional overvaluation  is  proved,  the 
stockholder  cannot  be  held  liable  on 


"The    rule   seems   to    be    established    the  stock.  Medler  v.  Albuquerque,  etc. 


that  between  stockholders  one  cannot 
be  legally  called  upon  to  make  good 


Co.,  6  N.  M.  331   (1892). 

Neio   York:     In    Van   Cott   v.   Van 


any  shortage  in  value  between  assets  Brunt,  82  N.  Y.  535  (1880),  a  lead- 
and  the  nominal  par  value  of  the 
stock,  when  his  stock  is  issued  under 
a  contract  with  the  company  as  full 
paid,  whether  as  a  bonus,  or  for  prop- 
erty at  an  overvaluation,   when  the 


ing  case,  the  court  said  (p.  542) : 
"The  conclusion  of  law  was  erroneous 
that  the  scheme  was  fraudulent  as 
against  the  company  and  against  the 
creditors,    and    that    the    defendants 


174 


ch.  in.] 


' '  WATERED  ' '   STOCK. 


[§  46. 


the  laws  of  men,  and  in  business  circles  it  has  become  customary 
to  capitalize  property  at  a  reasonably  high  figure.     This  is  due  to 


were  only  entitled  to  credit  for  the 
actual  outlay  paid  or  incurred,  and 
were  liable  for  the  amount  unpaid 
on  the  stock.  The  result  must  be 
that  the  defendant  was  not  liable  to 
pay  the  par  value  of  the  stock  re- 
ceived by  him  under  the  contract  for 
building  and  equipping  a  portion  of 
the  road."  This  case  has  been  se- 
verely criticised  as  being  contrary  to 
established  principles  of  law;  but,  as 
a  matter  of  fact,  it  is  in  strict  ac- 
cordance with  the  law  as  now  estab- 
lished. 

A  stockholder  in  a  holding  corpora- 
tion cannot  maintain  a  suit  in  behalf 
of  the  corporation  on  the  ground  that 
its  promoters  made  large,  unlawful 
and  secret  profits  by  being  interested 
in  the  constituent  company  whose 
stock  was  turned  in  to  the  holding 
company  in  exchange  for  the  stock 
of  the  latter,  it  app<  hat  when 

the  stock  was  so  turned  in  the  pro- 

ters   were   the   only    parties  inter- 
ested.    If  any  of  the  original  parties 

re  defrauded  their  remedy  is  a  suit 
at  law  for  damages  against  the  guilty 
parties.  The  court  said  (p.  241): 
"We  have  here  nothing  more  than 
the  ordinary  transaction  of  parties 
coming  together  and  agreeing  in  writ- 
ing to  form  a  corporation  that  shall 
take  over  from  them  certain  defi- 
nitely understood  properties  and 
cash,  for  which  is  to  be  issued  its 
entire  capital  stock.  It  is  doubtless 
true  that  in  many  instances  there  i3 
great  overcapitalization,  and  that  the 
general  public  is  frequently  misled 
by  the  large  am  cunts  of  preferred 
and  common  stock  issued  by  corpo- 
rations. The  rights  of  the  public  are 
not  involved  in  this  litigation."  .  .  . 
"The  stockholders  of  the  constituent 
companies  and  the  individual  defend- 
ants were  the  organizers  of  the  cor- 
poration and  became  its  first  stock- 
holders;   they   dealt  wholly  between 


themselves  as  sellers  and  buyers,  or- 
ganizers and  corporation;  no  other 
persons  had  any  interest  in  this  in- 
itial transaction;  if  fraud  had  been 
practiced  by  any  one  of  the  organ- 
izers upon  those  associated  with  him, 
the  cause  of  action  would  have  vested 
in  the  party  injured."  Blum  v.  Whit- 
ney, 185  N.  Y.  232   (1906). 

Where  a  suit  by  the  stockholder  in 
behalf  of  the  corporation  is  to  hold 
a  director  liable  for  stock  and  bonds 
issued  illegally  under  a  contract,  and 
is  also  to  hold  a  director  liable  for 
bonds  which  had  been  pledged  by  the 
company  to  secure  a  debt,  which 
pledge  and  bonds  the  director  hail 
acquired,  the  suit  is  multifarious, 
even  though  one  claim  is  not  good. 
O'Connor  v.  Virginia,  etc.  Co.,  184  N. 
Y.  46  (1906). 

Even  though  two  of  the  directors 
sell  to  the  corporation  certain  patents 
for  $3,000,000  full  paid  stock,  being 
the  entire  capital  stock,  and  give  to 
the  corporation  $750,000  of  the  same 
as  treasury  stock,  and  even  though 
the  patents  are  worth  but  $10,000, 
neither  the  corporation  nor  a  pur- 
chaser of  treasury  stock  at  fifty  cents 
on  the  dollar  can  compel  them  to 
return  the  stock  nor  hold  them  lia- 
ble thereon,  but  the  remedy,  if  any, 
is  to  rescind  the  transaction  and  re- 
turn the  patents  and  demand  a  re- 
turn of  the  stock  or  the  value  of 
such  part  of  the  stock  as  they  have 
sold.  Such  is  the  rule,  even  though 
the  statutes  of  the  state  prohibit  the 
issue  of  stock  at  less  than  par.  The 
court  said  (p.  477):  "Whether  they 
knew  that  the  value  of  the  patents 
did  or  did  not  exceed  $10,000  was 
entirely  immaterial.  They  had  a 
right  to  hold  the  letters  patent  until 
they  were  offered  the  price  at  which 
they  were  willing  to  sell.  They  sold 
them  to  this  company  for  its  whole 
capital  stock,  agreeing  with  the  com- 


175 


§  46.] 


"watered"  stock. 


[Cli.   III. 


the  fact  that  it  is  easier  to  Bell  .-tuck  at  less  than  par  than  at  par, 
and  also  to  the  fact  that,  by  a  large  capitalization,  dividenda  are 

pany  that  that  was  the  value  of  the  and  bonds  is  not  a  stock  subscrlp- 
patents.  I  know  of  no  principle  tion  nor  a  sale  of  the  stock,  but  is 
which  would  justify  a  court  of  equity  merely  a  contract,  and  the  receiver 
in  compelling  the  owners  of  these  of  the  railroad  cannot  hold  a  con- 
patents  to  accept  any  consideration  tractor  liable  for  the  alleged  value 
for  their  transfer  to  the  corporation  of  the  ttock  and  bonds,  he  being 
except  that  agreed  on,  and,  upon  the  estopped  the  same  as  the  corporation 
ground  that  the  patents  are  not  worth  itself,  and  there  being  no  promise  to 
the  sum  agreed  on  as  a  consideration  pay  the  par  value  of  the  stock.  Bost- 
for  the  transfer,  decree  that  the  wick  V.  Young.  118  N.  Y.  App.  Div. 
vendors   must   pay   back   to  the  com-     490   (1907). 

pany  the  consideration  they  had  re-  Whore  the  incorporators  subscribe 
ceived,  less  the  real  value."  A  pur-  for  the  entire  capital  stock— $500,- 
chaser'  of  the  treasury  stock  has  of  000,— and  pay  it  in  by  checks,  and 
course  a  remedy  at  law  If  there  the  corporation  then  buys  from  one 
were  false  representations.  Insurance  of  the  directors  a  steel  plant  for  8500,- 
Press  v.  Montauk,  etc.  Co.,  103  N.  Y.  000  cash,  which  he  had  previously 
App.   Div.  472    (1905).  I';1  for    $S5,000,    and    he    thi  n 

Even  though  a  large  quantity  of  distributes  the  $500,000  cash  among 
stock  has  been  issued  for  patents  and  the  stockholders  in  the  proportion  In 
a  portion  thereof  donated  back  to  which  they  had  paid  for  their  stock, 
the  corporation  for  treasury  stock,  they  are  liable  upon  the  bankruptcy 
yet  a  purchaser  of  such  treasury  of  the  corporation,  the  transaction 
stock  cannot  maintain  a  suit  in  New  being  an  unauthorized  disposition  of 
York  to  have  the  entire  issue  de-  the  corporate  assets.  Rathbone  v. 
clared  illegal  and  void,  where  the  Ayer,  121  X.  Y.  App.  Div.  355  (1907). 
corporation  was  organized  under  the  It  is  legal  for  a  railroad  company 
laws  of  West  Virginia  and  there  is  to  issue  bonds  and  stock  in  payment 
no  allegation  that  the  transaction  was  for  the  construction  of  its  road.  If 
void  under  the  laws  of  that  state,  all  the  parties  assent  no  one  can  corn- 
Insurance  Press  v.  Montauk,  etc.  Co.,  plain.  "As  the  stock  was  issued  as 
83  N.  Y.  App.  Div.  259  (1903);  aff'd,  a  part  of  the  consideration  for  con 
178  N.  Y.  623.  struction,   it  cannot   be   said   that   it 

Stock  may  be  issued  for  good-will,  was  taken  without  value  given."  The 
White,  Corbin  &  Co.  v.  Jones,  79  N.  par  value  is  immaterial.  "The  fact 
Y.   App.   Div.   373    (1903).  that  they  were  created  for  an  expen- 

A  contract  by  directors  to  form  a  diture  less  than  the  par  value  of  the 
corporation  to  purchase  patents  and  aggregate  issues  of  capital  stock  and 
pay  therefor  in  stock  is  not  illegal  bonds  does  not  affect  the  question  ■<< 
as  depriving  the  directors  of  the  new  all."  Barr  v.  New  York,  etc.  R.  R., 
corporation  of  their  discretionary  125  N.  Y.  263  (1891). 
power,  inasmuch  as  they  may  refuse  Parties  owning  real  estate  may  con- 
to  carry  out  the  agreement.  Neither  vey  it  to  a  corporation  formed  for 
will  it  be  assumed  that  the  price  that  purpose  and  take  bonds  in  ray- 
placed  upon  the  patent  is  excessive,  ment,  all  assenting.  "No  just  crit- 
Electric,  etc.  Co.  v.  Smith,  113  N.  Y.  icism  is  possible  either  upon  the  le- 
App.  Div.  615   (1906).  gality  or  morality  of  the  transaction. 

A  railroad  construction  contract  by    Evidence  was  given  to  show  that  the 
which  the  work  is  paid  for  by  stock    land  conveyed  was  not  worth  the  sum 

176 


CH.   III.] 


"watered"  stock. 


[§46. 


kept  low  enough  to  avoid  the  cupidity  of  possible  competitors  and 
the  interference  of  legislatures.     To  such  an  extent  is  this  practice 


secured,  but  that  is  a  totally  imma- 
terial fact.  Whatever  the  price,  it 
wronged  no  one  and  could  wrong  no 
one."  Seymour  v.  Spring  Forest  Cem. 
Assoc,    111    X.   Y.   333    (1895);    s.   c, 

157  N.  Y.   697. 

The  issue  is  valid  unless  the  prop- 
erty was  fraudulently  overvalued. 
Powers  v.  Knupp.  85  Hun,  38  (1895); 
aff'd,  158  X.  Y.  T  99).     See  also 

Continental  Tel.  Co.  v.  Nelson,  49  X. 
Y.  Super.  Ct.  197. 

In  Flynn  v.  Brooklyn  City  R.  R., 
9   X.   V.   App.   Dlv.   !  16)  ;   aff'd, 

158  N.  V.  493  (  L899),  where  a  West 
Virginia  corporation  I  its  capi- 
tal stock  of  $:'.'  I  in  payment 
for  the  shares  of  Btock  purchased  by 
it  in  certain  Btrei  t  rally  ipanies 
in  Brooklyn,  New  York,  the  court 
said:  "There  is  di  an  ele- 
ment of  stock-jobbing  or  stock-water- 
ing in  th<  ie  of  $30,- 
,000    of    traction    stock    at    fifteen 

is   on    the   dollar,    btl  not 

ndemned  by  the  laws  of  this  state 
as  to  railroad  companies.  It  is  for- 
bidden as  to  i  uorations,  but 
there  is  no  such  general  legislation 
on  the  subject  that  we  can  say  it  is 
condemned  by  the  public  policy  of 
the  state,  whatever  may  be  our  own 
notions  as  to  its  wisdom  and  pro- 
priety." 

A  purchaser  of  stock  issued  to  a 
contractor  for  work  cannot  attack  the 
Issue  on  the  ground  that  it  was 
watered  stock,  even  though  the  con- 
tractors immediately  sell  a  part  of 
the  stock  and  bonds  at  the  rate  of 
ninety  cents  on  the  dollar  for  the 
bonds  with  nearly  an  equal  amount 
of  stock  thrown  in.  Drake  v.  New 
Fork,  etc.  Co.,  26  X.  Y.  App.  Div. 
4!»9   (1898).     In  the  case  of  Drake  v. 

v  York,  etc  Co..  ?,>\  X.  Y.  App.  Div. 
275  (1899),  where  the  owner  of  ten 
out  of  two  thousand  shares  of  stock 
attacked  a  foreclosure  decree  on  the 


ground  of  fraud,  the  court  refused  to 
grant  relief,  the  purchaser  at  the 
foreclosure  sale  being  willing  to  pay 
to  such  stockholder  his  proportion  of 
the  actual  value  of  the  property,  irre- 
spective of  the  price  realized  at  the 
foreclosure  sale.  The  court  said  that 
the  expense  of  further  litigation 
would  be  many  times  the  actual  value 
of  the  plaintiff's  interest,  and  that 
while  the  plaintiff  in  a  court  of  law 
would  be  entitled  to  the  full  meas- 
ure of  his  legal  rights,  yet  in  a  court 
cf  equity  a  different  rule  prevails  and 
he  may  be  compelled  to  take  his  ac- 
tual interest. 

In  Einstein  v.  Rochester  Gas,  etc. 
Co.,  77  Hun,  149  (1894);  aff'd,  146 
X.  Y.  46  (1895),  a  new  company  is- 
sued five  shares  of  its  stock  for  every 
share  of  an  old  company  purchased 
by  the  former  company. 

Where  a  statute  authorizes  the  con- 
solidation of  gas  companies,  and  pro- 
vides that  the  stock  of  the  new  com- 
pany shall  not  exceed  the  "fair  ag- 
gregate value"  of  the  property  and 
franchises  of  the  old  companies,  a 
stockholder  of  one  of  the  old  com- 
panies may  enjoin  a  consolidation  if 
the  stock  of  the  consolidated  com- 
pany exceeds  the  net  value  of  the 
property  and  franchises  of  the  old 
companies  in  excess  of  their  liabili- 
ties. Langan  v.  Francklyn,  20  N.  Y. 
Supp.    404    (1892). 

In  Re  East  River  Bridge  Co.,  75 
Hun,  119  (1894),  the  court  refused 
to  exercise  its  discretion  given  by 
statute  as  to  authorizing  an  elevated 
road  in  the  streets,  where  the  charter 
allowed  the  company  to  issue  stock 
at  less  than  par  by  allowing  the  issue 
on  such  terms  and  in  such  manner  as 
the  directors  deemed  proper. 

As  to  the  statutory  law  in  New 
York,  see  §  47,  infra. 

North  Carolina:  In  North  Carolina 
it  has   been  held  that  the  value  of 


(12) 


177 


46.] 


' '  WATERED  ' ' 


STOCK. 


[cn.  in. 


carried  of  issuing  stock  for  property  at  an  overvaluation,  that  the 
investing  public  and  persons  who  give  credit  to  corporations  rather 


the  property  turned  in  in  payment 
for  the  stock  may  be  ascertained  by 
the  court,  and  the  stockholders  held 
liable  for  the  par  value  of  the  stock 
less  the  real  value  of  the  property,  if 
such  property  was  fraudulently  over- 
valued. Clayton  v.  Ore  Knob  Co.,  109 
N.  C.  385  (1891).  Where  $100,000  of 
stock  of  a  Delaware  corporation  is 
issued  for  a  lumber  business  and 
actual  value  of  the 
less  than  $1,000  and 
being  worth  little  or 
stockholders  may  be 
the  stock  as  not  hav- 


good-will,    the 
lumber    being 
the    good-will 
nothing,    the 
held  liable  on 


ing  been  paid  up  and  such  liability 
may  be  enforced  in  another  state. 
Hobgood  v.  Ehlen,  141  N.  C.  344 
(1906). 

Ohio:  Where  an  insolvent  partner- 
ship transfers  its  assets  to  a  newly- 
created  corporation  in  payment  for 
its  shares  of  stock,  and  the  corpora- 
tion assumes  all  the  debts  of  the 
partnership,  the  payment  for  the 
stock  is  fraudulent  per  se.  A  corpo- 
rate creditor  may  hold  the  stockhold- 
ers liable  on  the  subscription  as 
though  no  payment  had  been  at- 
tempted. Sayler  r.  Simpson,  4  Ry.  & 
Corp.  L.  J.  195,  Cin.  Sup.  Ct,  Taft,  J. 
(1888). 

It  has  been  held  that  the  person 
receiving  the  stock  becomes  liable  for 
profits  made  thereby.  Four  Mile,  etc. 
It.  R.  v.  Bailey,  18  Ohio  St.  208 
(1868).  In  the  case  of  Toledo,  etc. 
R.  R.  r.  Continental  Trust  Co.,  95 
Fed.  Rep.  497  (1899),  the  court  in 
sustaining  the  validity  of  a  large 
issue  of  bonds  and  stock  by  a  reor- 
ganized railroad  corporation,  the  com- 
mon stock  being  issued  at  fifteen  and 
the  preferred  about  thirty,  said  that 
the  Ohio  statute  does  not  forbid  the 
sale  or  exchange  of  stock  at  its  mar- 
ket value. 

As  to  the  statutory  law  in  Ohio, 
see  §  47,  infra. 


Pennsylvania:  Where  a  person  ob- 
tains a  license  to  use  a  patent  and 
pays  $100,000  therefor  and  then 
causes  the  corporation  organized  for 
that  purpose  to  pay  to  him  $100,000 
cash  and  issue  to  him  $1,400,000  full 
paid  stock  for  the  said  license,  a  re- 
ceiver of  the  corporation  cannot  hold 
him  personally  liable  on  the  stock  as 
unpaid  stock,  under  the  constitution 
of  Pennsylvania,  which  prohibits  the 
issue  of  stock  except  for  property  ac- 
tually received,  it  being  shown  that 
the  patents  were  apparently  very  val- 
uable at  the  time,  and  that  if  the  ex- 
pectations had  been  realized  the  re- 
turns would  have  been  enormous,  and 
there  being  no  evidence  that  the  li- 
cense was  overvalued  at  the  time. 
The  value  is  to  be  determined  as  of 
the  time  of  forming  the  company, 
and  not  after  it  became  insolvent, 
especially  where  the  fact  of  the  issue 
was  set  forth  in  the  application  for 
the  charter,  and  it  is  no  proof  of 
fraud  that  the  person  gave  away 
some  of  the  stock  for  the  experience 
and  skill  of  others.  Finletter  v. 
Acetylene,  etc.  Co.,  215  Pa.  St.  86 
(1906). 

A  subscriber  cannot  defeat  his  sub- 
scription on  the  ground  that  the  agent 
of  the  company  who  obtained  it  told 
him  that  he  would  never  be  called 
upon  to  pay  anything.  Maries,  etc. 
Co.  v.  Stulb,  215  Pa.  St.  91  (1906). 

Where  brokers  and  promoters  issue 
bonds  greatly  in  excess  of  the  value 
of  the  corporate  property  and  by  ficti- 
tious sales  give  a  high  market  quota- 
tion of  the  bonds  and  borrow  money 
thereon,  the  lender  may  hold  them 
liable  in  a  suit  for  loss  due  to  a  con- 
spiracy. McElroy  v.  Harnack,  213  Pa. 
St.   444    (1906). 

In  the  case  Danville,  etc.  R.  R.  v. 
Kase,  39  Atl.  Rep.  301  (Pa.  1898), 
where  stock  and  bonds  had  been  is- 
sued   by    the    corporation    for    land, 


178 


CH.  in.]  "watered"  stock.  [§  46. 

expect  it,  and  they  no  longer  rely  upon  the  nominal  capitalization 


but  the  stock  had  no  market  value, 
and  an  effort  was  made  to  hold  the 
vendor  of  the  land  liable  for  the  par 
value  of  the  stock  and  the  actual 
value  of  the  bonds  less  the  actual 
value  of  the  land,  the  court  refused, 
and  said:  "We  do  not  concur  with 
the  master  in  his  conclusion  that 
Kase  should  refund  to  the  company 
a  large  sum  of  money  in  excess  of 
the  profit  because  of  the  stock  re- 
ceived by  him  in  the  transaction.  Ha 
finds  as  a  fact  that  the  stock  was 
then,  and  is  now,  worthless.  A  court 
of  equity  does  not  perform  the  duties 
of  a  court  of  quarter  sessions;  does 
not  order  restitution  of  that  which  is 
valuable,  and  also  imposes  a  heavy 
fine  on  the  guilty.  The  company  has 
the  land,  Kase  has  a  profit  of  $111,- 
000  bonds,  and  no  profit  in  the  worth- 
less stock.  He  should  account  for 
the  bonds  alone."  In  this  case  the 
court  held  that  at  common  law,  even 
though  a  railroad  corporation  issues 
to  its  president  nearly  $1,400,000  of 
mortgage  bonds  and  $700,000  of  stock 
for  construction  work  which  cost  only 
about  $700,000,  nevertheless  the  pur- 
chasers of  such  stock  and  bonds  can- 
not cause  suit  to  be  brought  by  the 
corporation  after  the  foreclosure  of 
its  property  and  hold  him  liable.  The 
court  held  that  inasmuch  as  the  stock 
had  no  market  value  no  harm  was 
done.  The  court  said:  "Nor  is  it 
true  that  those  who  took  the  stock 
and  bonds,  and  paid  money  for  them, 
were  cheated  by  Kase,  in  any  real 
sense  of  the  word.  Is  any  man  of 
ordinary  judgment  cheated  when  he 
pays  seventy-five  or  eighty  cents  on 
the  dollar  for  a  seven  or  eight  per 
cent,  railroad  bond,  receiving  with 
the  bond  a  gift  of  the  stock,  in  many 
cases  almost  equaling  the  face  value 
of  the  bond?  Such  a  purchaser  knew, 
just  as  Kase  knew,  that  the  value  of 
the  paper  was  speculative.  If  Kase 
lived,  if  he  expended  the  money  in 

17! 


construction,  if  he  completed  the 
road,  if  the  event  then  proved  it  to 
be  a  meretorious  enterprise  (that  is, 
if  it  received  and  developed  traffic 
sufficient  to  pay  operating  expenses, 
fixed  charges,  and  reasonable  divi- 
dends), the  speculative  buyer  would 
probably  more  than  double  his  money. 
If  any  one  of  the  contingencies  did 
not  happen,  the  buyer  lost;  but  he 
was  not  cheated,  except  in  the  senso 
that  all  who  bet  on  the  happening 
of  an  uncertain  event,  and  lose,  are 
cheated."  In  Carr  v.  Le  Fevre,  27 
Pa.  St.  413  (1856),  the  court  said 
that  if  the  directors  "took  lands  at  a 
prospective  value,  never  realized,  it 
is  nothing  more  than  many  individ- 
uals and  corporations  have  done  be- 
fore. Such  an  error  in  management 
or  in  their  judgment  of  the  value 
of  a  purchase,  made  without  fraud, 
forms  no  ground  for  rescinding  the 
contract." 

As  to  the  statutory  law  in  Pennsyl- 
vania, see  §  47,  infra. 

Rhode  Island:  Where  stock  is  sub- 
scribed for,  although  thereafter  it  is 
agreed  that  the  subscription  shall  be 
paid  by  the  transfer  of  property,  yet, 
if  no  actual  transfer  is  made,  a  sub- 
scriber may  be  liable,  even  tho 
he  understood  that  the  property  had 
been  actually  transferred.  Crowley 
v.  Walton,  23  R.  I.   331    (1901). 

Tennessee:  In  a  suit  by  the  re- 
ceiver of  an  insolvent  street  railway 
company  to  hold  a  construction  com- 
pany liable  on  stock  which,  together 
with  bonds,  was  issued  for  the  con- 
struction of  a  street  railway,  i '  • 
claim  being  that  there  was  no  consid- 
eration received  for  the  stock,  the 
bill  in  equity  must  allege  that  the 
construction  company  had  power  to 
acquire  such  stock.  If  such  stock  was 
issued  and  received  as  full-paid  stock 
the  construction  company  is  not  lia- 
ble thereon,  even  though  $63,750  of 
stock  and  $95,000  in  notes  secured  by 


§  4u.]  "watered"  stock.  [ch.  III. 

of  the  company.     Experience  has  taught  them  that  they  must  in- 
bonds    were    issued    for    construction     fully  the  English  authorities  and  held 


work  costing  but  $95,000,  there  being 
no  proof  that  the  stock  ever  had  any 
value.  Doak  v.  Stahlman,  58  S.  W. 
Rep.    741    (Tenn.    1899). 

Wisconsin:  A  corporation  in  order 
to  retain  the  services  of  employees 
to  be  rendered  thereafter  may  issue 
•stock  at  eighty-five  cents  in  cash,  the 
remaining  fifteen  cents  to  be  paid 
for  cash  services.  Potter  v.  Necedah, 
etc.  Co.,  105  Wis.  25   (1899). 

England:  Even  though  by  ar- 
rangement between  promoters  and 
the  owner  of  a  business,  the 
business  is  sold  to  a  corpora- 
tion for  £22,000  in  full  paid 
shares  of  stock  and  £3,000  cash,  the 
latter  to  go  to  the  vendor,  and  all 
the  stock  to  go  to  the  promoters, 
and  thereafter  the  company  is 
wound  up  and  its  assets  sold 
for  £480,  yet  the  promoters  are 
not  liable  to  creditors,  inasmuch  as 
all  the  stockholders  knew  of  the 
transaction  and  no  stock  was  sold  or 
intended  to  be  sold  to  outsiders,  and 
the  creditors  might  have  ascertained 
the  facts  from  the  public  registry  if 
they  desired,  and  even  though  the 
promoters  became  directors.  The 
court  said:  "It  cannot  be  suggested 
that  mere  inadequacy  or  price  was 
sufficient  of  itself  to  invalidate  the 
contract.  You  must  show  that,  these 
shares  not  having  been  paid  for  at 
all,  the  contract  for  purchase  was  a 
colourable  transaction,  and  that  in 
truth  and  in  fact,  qua  value,  these 
shares  were  not  part  of  the  considera- 
tion, but  were  a  gift.  ...  I  see 
nothing  in  these  affidavits  or  in  any- 
thing else  in  the  case  to  lead  me  to 
say  that  this  transaction  was  not  a 
real  transaction,  but  a  colourable 
transaction  hiding  the  real  transac- 
tion behind  it."  Re  Innes  &  Co.  Ltd., 
T1903]  2  Ch.  254,  rev'g  [1903]  1  Ch. 
674.  In  Re  Wragg,  [1897]  1  Ch.  796, 
Mr.    Justice    Lindley    reviewed    care- 


that  although  property  of  the  value 
of  $75,000,  as  all  parties  knew  at  the 
time,  was  sold  to  a  corporation  for 
$100,000  of  stock  issued  as  full  paid, 
yet  that  the  transaction  was  legal, 
there  being  no  actual  value  on  the 
stock  and  there  being  no  actual  fraud. 
The  court  held  that  a  corporation 
could  buy  property  and  pay  for  serv- 
ices at  any  price  it  thought  proper, 
and  pay  for  them  in  fully  paid-up 
shares,  and  provided  that  it  did  so 
honestly  and  not  colorably,  and  pro- 
vided that  it  had  not  been  so  im- 
posed upon  as  to  be  entitled  to  be 
relieved  from  its  bargain,  agreements 
to  pay  for  property  or  services  in 
paid-up  shares  were  valid  and  bind- 
ing on  the  company  and  its  creditors. 
To  the  same  effect,  Larocque  ?;. 
Beauchemin,  [1897]  A.  C.  358,  where 
property  worth  $10,000  was  sold  to  a 
company  and  credit  given  on  sub- 
scriptions to  the  amount  of  $35,000. 
The  statute  in  this  case  required  pay- 
ment in  cash.  Subscriptions  were 
made  and  payment  was  then  made  in 
property. 

In  Anderson's  Case,  L.  R.  7  Ch.  D. 
75  (1877),  stock  was  issued  to  a  pro- 
moter for  property  taken  at  an  over- 
valuation. This  action  was  to  render 
him  liable  for  the  par  value  of  the 
stock,  less  the  real  value  of  the  prop- 
erty. The  court  said,  pp.  94,  95,  104: 
"I  am  not  going  to  alter  men's  con- 
tracts unless  the  provisions  of  an  act 
of  parliament  compel  me  to  do  so. 
.  .  .  .  You  cannot  alter  the  con- 
tract to  such  an  extent  as  to  say, 
Though  you  have  bargained  for  paid- 
up  shares,  we  will  change  that  into  a 
bargain  to  take  shares  not  paid  up, 
and  put  you  on  the  list  of  contribu- 
tories  on  that  ground.  ...  If 
you  set  aside  this  allotment  of  shares, 
you  must  set  it  aside  altogether,  and 
then  you  cannot  make  the  holder  of 
them  a  contributory;   and  if  you  do 


180 


CH#  hi.]                             "watered"  stock.  [§  46. 

vestigate  the  real  financial  condition  of  the  company,  and  invest  or 

not  set  it  aside  altogether  you  must  tract.  The  stock  was  issued  to  the 
adopt  it,  and  the  utmost  you  can  do  lawyer  directly  from  the  company, 
is,  as  I  said  before,  that  you  can  take  The  selling  party  did  not  turn  over 
away  any  profit  from  the  person  who  the  copyrights  and  contracts  as 
has  improperly  made  it."  In  Currie's  agreed.  The  company  thereupon  re- 
Case,  3  De  G.,  J.  &  S.  367  (1863),  scinded  the  agreement  and  canceled 
the  court  said  that  the  transaction  his  stock,  but  did  not  cancel  the  law- 
"was  either  valid  or  invalid.  If  valid,  yer's  stock.  The  court  held  that  there 
it  is  clear  that  neither  he  [the  person  was  no  liability  on  any  of  the  stock, 
receiving  the  stock]  nor  his  alienees  not  even  for  the  benefit  of  creditors, 
can  be  called  upon  to  contribute  in  Where  a  company  issues  fully  paid- 
respect  of  these  shares.  If  invalid,  I  up  stock  to  parties  in  payment  for 
cannot  see  my  way  to  hold  that  either  services  rendered  to  the  company  in 
a  court  of  law  or  a  court  of  equity  its  formation  and  in  establishing  its 
could  do  more  than  treat  the  pur-  business,  such  a  payment  is  a  mere 
chase  as  void,  and  undo  the  transac-  pretense  and  such  persons  are  liable 
tion  altogether.  It  could  not,  as  I  ap-  on  such  stock  as  unpaid  stock,  if  the 
prehend,  be  competent  either  to  a  company  becomes  insolvent.  Re  Ed- 
court  of  law  or  to  a  court  of  equity  dystone  M.  Ins.  Co.,  [1893]  3  Ch.  9. 
to  alter  the  terms  of  the  purchase,  Where  a  manufacturer,  engaged  in 
and  treat  as  shares  not  paid-up  business  which  he  had  carried  on  for 
shares  which  were  given  as  paid-up  thirty  years,  desires  to  turn  it  into  a 
shares  in  part  consideration  of  the  company  so  that  his  estate  may  be 
purchase.  Fraud — assuming  there  handled  more  readily,  and  conse- 
was  fraud — would  of  course  warrant  quently  he  incorporates  a  company 
the  court  in  treating  the  purchase  as  for  the  purchase  of  the  plant  and  busi- 
void,  or  in  undoing  it;  but  it  could  ness  for  £50,000,  including  £15,000  for 
not,  as  I  conceive,  authorize  any  the  good-will,  and  he  himself  is  the 
court  to  substitute  other  terms."  See  sole  director  and  is  practically  the 
also  Barnett's  Case,  L.  R.  18  Eq.  507  only  stockholder,  the  transaction  is 
(1874),  where  the  issue  had  been  can-  legal.  It  is  also  legal  for  him  to  sell 
eeled  by  the  corporation.  See  also  his  stock,  and  he  cannot  be  held  lia- 
Schroder's  Case,  L.  R.  11  Eq.  Cas.  ble  to  the  company  for  turning  the 
131  (1870);  Mege's  Case,  10  W.  N.  property  in  at  an  overvaluation.  Felix, 
(Eng.)  208  (1875);  Wood's  Claim,  30  etc.  Ltd.  v.  Hadley,  77  L.  T.  Rep.  131 
L.  J.  Ch.  373  (1861).  (1897). 

In  the  important  case,  Re  Theatri-  Canada:  Where  property  received 
cal  Trust,  [1895]  1  Ch.  771,  a  party  in  payment  for  stock  has  been  sold, 
sold  to  a  corporation  for  $20,000  in  the  persons  receiving  the  stock  can- 
stock  the  benefit  of  certain  copyrights  not  be  held  liable  on  the  ground  that 
and  all  his  contracts  in  respect  to  the  value  of  the  property  was  not 
theatrical  agencies  and  other  business  equal  to  the  par  value  of  the  stock, 
connected  therewith,  and  he  agreed  Re  Wakefield  Mica  Co.,  7  Ont.  W.  R. 
also  to  pay  the  expense  of  incorpora-  (Can.)  108  (1906). 
tion,  and  to  serve  as  managing  direc-  Even  though  a  written  subscrip- 
tor  for  five  years  at  a  salary  to  be  tion  for  stock  is  made,  yet  if  it  was 
agreed  upon.  He  had  agreed  to  give  understood  that  the  stock  was  to  be 
his  lawyer  $2,000  of  the  stock.  He  paid  for  by  taking  over  certain  prop- 
and  his  lawyer  and  two  others  were  erty,  and  that  understanding  is  car- 
the  directors  who  passed  on  the  con-  ried  out  and  there  are  no  stockholders 

181 


§46.] 


"watered"  stock. 


[CH.   III. 


give  credit  upon  that  alone.1  Even  the  fact  that  a  person  to  whom 
the  stock  is  issued  returns  a  part  of  it  as  a  gift  to  the  corporation 
or  to  trustees  for  the  corporation  to  sell  the  same  below  par  and  put 
the  proceeds  in  the  corporate  treasury  for  a  working  capital  does  not 
necessarily  prove  fraud  in  the  value  put  upon  the  property.  The 
person  receiving  the  stock  may  have  been  willing  to  sacrifice  a  part 
of  his  stock  and  property  in  order  to  make  the  rest  more  valuable. 
Such  stock  is  called  "treasury  stock"  and  the  transaction  has  fre- 
quently been  upheld  by  the  courts.2    As  has  been  well  said  by  a  Xew 


but  those  who  knew  of  the  arrange- 
ment, the  liquidator  on  winding  up 
cannot  hold  the  subscribers  and  it  is 
immaterial  that  the  par  value  of  the 
stock  was  much  greater  than  the  ac- 
tual value  of  the  property.  Hood  v. 
Eden,  36  Can.  S.  C.  Rep.  476   (1905). 

In  Re  Hess  Mfg.  Co.,  23  S.  C.  Rep. 
(Can.)  644,  654  (1894),  the  court 
said  that  there  was  no  liability  on 
stock  which  had  been  issued  for  prop- 
erty "unless  a  case  of  fraud  was 
made  and  proved,  which  could  only 
be  done  in  a  formal  action  to  re- 
scind." 

Even  though  the  property  is  valued 
higher  than  what  the  vendor  paid 
for  it,  yet  he  is  not  liable  on  stock 
turned  out  for  it  under  the  English 
common  law  as  it  existed  prior  to  the 
Companies  Act— 30  &  31  Vict,  ch. 
131.  Jones  v.  Miller,  24  Ont.  Rep. 
(Can.)    268    (1893). 

i  Quoted  and  approved  in  Mer- 
chants, etc.  Bank  v.  Belington,  etc. 
Co.,   51  W.  Va.   60    (1902). 

2  In  many  cases  stock  is  issued  to 
a  patentee  for  his  patent,  and  he  then 
donates  and  turns  back  to  the  cor- 
poration a  part  of  this  stock  to  be 
sold  at  a  reduced  price  for  the  bene- 
fit of  the  corporate  treasury.  This 
transaction  is  legal;  and  it  is  not  at 
all  necessary  that  the  stock  so  do- 
nated be  placed  in  the  names  of 
trustees  for  the  benefit  of  the  corpo- 
ration. It  may  be  transferred  to  the 
corporation  direct.  Lake  Superior 
Iron  Co.  v.  Drexel,  90  N.  Y.  87  (1S82) , 
Williams  r.  Taylor,  120  N.  Y.  244 
(1890);    American   Tube,   etc.    Co.   v. 


182 


Hays,  165  Pa.  St.  489  (1895).  See 
also  Otter  v.  Brevoort  Petroleum  Co., 
50  Barb.  247  (1867);  People  v.  Al- 
bany, etc.  R.  R.,  55  Barb.  344,  371 
(1S69);  aff'd,  57  N.  Y.  161;  and  §  313, 
infra.  125  N.  Y.  App.  Div.  399. 

In  the  case  Insurance  Press  v.  Mon- 
tauk,  etc.  Co.,  103  N.  Y.  App.  Div. 
472  (1905),  the  court  said,  in  regard 
to  treasury  stock  (p.  476):  "The  in- 
dividual defendants  then  transferred 
back  to  the  company  a  certain 
amount  of  stock  which  was  to  become 
the  property  of  the  company  and  to 
be  disposed  of  by  it  for  its  own  bene- 
fit. Such  a  condition  is  not  unusual 
in  companies  of  this  character.  In 
order  to  make  its  stock  of  any  value, 
it  was  essential  that  the  company 
should  have  a  working  capital  in  ad- 
dition to  the  patents,  and  the  persons 
who  had  exchanged  their  patents  for 
the  stock  of  the  company  were  will- 
ing to  give  to  the  company  a  portion 
of  the  stock  so  that  the  working  capi- 
tal could  be  secured  and  thus  give 
value  to  the  remainder  of  the  stock." 
In  the  above  case  the  treasury  stock 
was  sold  at  fifty  cents  on  the  dollar. 

Even  though  the  holders  of  a  ma- 
jority of  the  stock  are  opposed  to  the 
board  of  directors,  yet  the  former  can- 
not obtain  an  injunction  against  the 
board  of  directors  selling  treasury 
stock.  Gillette  v.  Noyes,  92  N.  Y. 
App.  Div.  313    (1904). 

Stock  purchased  by  the  corporation 
itself  and  then  re-issued  is  entitled  to 
all  dividends  subsequently  declared, 
and  this  result  cannot  be  avoided  by 
the  dividend  being  declared  as  pay- 


CH.   III.] 


"watered"  STOCK. 


[§46. 


Jersey  court,  "The  old  theories  in  regard  to  the  status  of  the  capital 
stock  of  a  corporation  have  been  very  greatly  modified  of  late  years, 
and  corporations  engage  in  all  sorts  of  business  now,   practically 


able  to  stockholders  at  a  preceding 
date.  Hartley  v.  Pioneer  Iron  Works, 
181   N.   Y.   73    (1905). 

Where  a  foreign  corporation  has  is- 
sued $2,000,000  capital  stock  for  prop- 
erty, and  one-half  has  been  returned 
to  the  treasury  as  treasury  stock,  and 
the  actual  capital  employed  in  New 
York  is  but  $240,000,  the.  New  York 
tax  is  on  the  latter  amount,  even 
though  the  entire  actual  property  of 
the  company  is  within  the  state  of 
New  York.  People  v.  Kelsey,  105  N. 
Y.  App.  Div.  175  (1905);  aff'd,  182 
N.   Y.    526. 

The  issue  of  stock  and  bonds  for 
property  is  not  necessarily  fraudu- 
lent, even  though  $2,000,000  of  the 
$5,000,000  of  stock  is  turned  back 
into  the  treasury  to  be  sold  for  the 
benefit  of  the  corporation.  Manhattan 
Trust  Co.  v.  Seattle,  etc.  Co.,  19  Wash. 
493  (1898).  A  person  purchasing 
treasury  stock  may  have  the  pur- 
chase rescinded  for  fraudulent  repre- 
sentations. The  fact  that  he  dealt  in 
other  shares  of  the  same  stock  is  no 
defense.  Mulholland  v.  Washington, 
etc.  Co.,  35  Wash.  315  (1904).  A 
person  who  purchases  stock  for  cash 
from  the  corporation  at  twenty-five 
cents  on  the  dollar  cannot  claim  that 
he  supposed  it  was  full  paid  stock 
where  he  was  fully  informed  as  to 
the  financial  affairs  of  the  company, 
even  though  the  stock  was  first  sub- 
scribed for  by  promoters  and  then  a 
portion  of  it  donated  to  the  company 
as  treasury  stock.  Campbell  v.  Mc- 
Phee,  36  Wash.  593  (1905).  Even 
though  stock  is  issued  for  a  nominal 
consideration,  yet  if  it  is  donated 
back  to  the  corporation  and  sold,  the 
corporation  cannot  set  up  that  its 
acts  were  ultra  vires,  and  it  may  be 
held  liable  for  fraud  in  misrepresent- 
ing the  stock  to  the  purchaser. 
Krisch  v.  Interstate,  etc.  Co.,  39  Wash. 


381  (1905).  A  corporation  itself 
cannot  claim  that  a  sale  of  stock  was 
for  its  benefit,  even  though  the  vendor 
fraudulently  misrepresented  to  the 
vendee  that  he  was  selling  treasury 
stock  belonging  to  and  for  the  cor- 
poration. Chilkat,  etc.  Co.  v.  Fos,  42 
Wash.  201  (1906).  The  remedy  of  a 
corporation  against  a  person  who  has 
received  stock  from  a  third  person 
under  an  agreement  to  sell  treasury 
stock  is  not  a  forfeiture  of  the  stock 
so  given.  Falk  v.  Schmitz,  etc.  Co., 
87  Pac.  Rep.  927  (Wash.  1906). 
Where  the  stockholders  transfer  a 
portion  of  their  stock  to  one  of  their 
number  to  be  disposed  of  by  him  for 
the  interests  of  the  company  and  to 
raise  money  to  carry  on  business,  he 
may  use  a  portion  of  the  same  to 
reimburse  one  of  the  stockholders  for 
stock  which  the  latter  used  in  the 
interest  of  the  company.  Playa,  etc. 
Co.  v.  Gage,  60  N.  Y.  App.  Div.  1 
(1901)  ;    aff'd,  172  N.  Y.  630. 

The  person  to  whom  stock  has  been 
issued  in  payment  for  property  may 
donate  a  part  of  it  as  a  bonus  to  go 
with  bonds  sold  at  par  directly  from 
the  corporation  to  the  person  taking 
the  bonus.  The  value  of  the  property 
in  this  case  was  not  proved.  Davis 
v.  Montgomery,  etc.  Co.,  101  Ala.  127 
(1890).  Even  though  persons  who 
have  bought  land  for  $100,000  organ- 
ize a  company  and  turn  in  the  land 
for  $1,250,000  of  stock  and  donate 
$250,000  of  the  same  to  the  company 
as  treasury  stock,  yet  a  corporate 
creditor  who  knew  the  facts  when 
his  debt  was  incurred  cannot  hold 
them  liable  on  the  stock.  Lea  r. 
Iron,  etc.  Co.,  42  S.  Rep.  415  (Ala. 
1906). 

Mandamus  will  not  issue  to  compel 
a  corporation  to  issue  to  a  purchaser 
treasury  stock  which  he  has  pur- 
chased, even  though  he  has  paid  for 


183 


§46.] 


"watered"  stock. 


[cii.  in. 


without  restraint,   and   without  limit  upon  the   amount  of  money 
which  they  get  together.     The  old  idea  that  credit  was  given  upon 


the  same,  unless  the  stock  has  some 
peculiar   and   special    value   different 
from  other  similar  stock  in  that  com- 
pany,   or    unless   the    control    of   the 
corporation    is   at    issue.      The    legal 
right  to  the  stock  must  also  be  clear. 
State  v.  Jumbo,  etc.  Min.  Co.,  94  Pac. 
Rep.  74   (Neb.  1908).     In  the  case  of 
Van    Gestel    v.    "Van    Gestel    Electric 
Street  Car  Co.    (N.  Y.  L.  J.,  July  3, 
1890),  the  court  enjoined  a  company 
from  disposing  of  such  stock  contrary 
to  the  contract.   In  Hey  v.  Dolphin,  92 
Hun,  230   (1895),  patentees  to  whom 
stock  was  issued*  contributed   a  part 
of  it  to  be  sold  on  the  market,  and 
the   proceeds    given    to   the    corpora- 
tion.    In  Kelley  v.  Fletcher,  94  Tenn. 
1  (1894),  part  of  the  stock  which  was 
issued  for  property  was  turned  back 
as  a  gift  to  the  corporation  and  then 
sold  at  less  than  par. 

A  corporation  may  pledge  treasury 
stock  to  a  director.  Where  treasury 
stock,  instead  of  being  given  to  the 
corporation,  is  placed  in  the  hands  of 
trustees  under  a  trust  agreement, 
such  agreement  may  be  modified  by 
a  new  agreement  and  the  stock 
turned  over  to  the  corporation.  Kins- 
man v.  Fisk,  83  Hun,  494   (1895). 

A  sale  of  treasury  stock  to  the 
president  in  payment  of  a  debt  may 
be  set  aside  by  the  corporation.  Cam- 
den Land  Co.  v.  Lewis,  101  Me.  78 
(1905). 

A  corporation  is  bound  by  a  con- 
tract made  in  its  behalf  by  its  sec- 
retary for  the  sale  of  its  treasury 
stock,  where  the  directors  knew  that 
he  was  acting  as  agent  and  had  for- 
merly approved  a  previous  sale  of 
stock  by  him.  Bauersmith  v.  Ex- 
treme, etc.  Co.,  146  Fed.  Rep.  95 
(1906). 

A  subscriber  to  stock  of  the  com- 
pany cannot  defeat  the  subscription 
on  the  ground  that  the  person  to 
whom  other  stock  had  been  issued 
for  patents  gave  him  three  shares  of 


such  stock  for  each  share  that  he  sub- 
scribed for  to  the  company.  Maries, 
etc.  Co.  v.  Stulb,  215  Pa.  St.  91 
(1906). 

Where  promoters  sell  a  mining 
prospect  to  a  corporation  for  its  en- 
tire capital  stock  and  donate  a  part 
to  the  treasury  to  be  sold  as  treasury 
stock,  and  the  property  turns  out  to 
be  worthless,  a  purchaser  of  the 
treasury  stock  may  rescind  and  re- 
cover back  his  money,  although  he 
did  not  bring  suit  for  fully  two  years, 
but  it  appeared  that  he  had  not 
known  of  the  fraud,  and  his  suit  will 
lie  even  though  the  company  is  in- 
solvent, it  appearing  that  no  active 
insolvency  has  occurred.  Hinkley  v. 
Sac  Oil,  etc.  Co.,  107  N.  W.  Rep.  629 
(Iowa  1906). 

A  tax  on  stock  "issued  and  out- 
standing" applies  to  treasury  stock. 
Knickerbocker,  etc.  Co.  v.  State 
Board,  etc.,  65  Atl.  Rep.  913  (N.  J. 
1907).  The  Court  in  the  preceding 
case  intimated  that  the  treasury 
stock  was  illegally  acquired  by  the 
corporation  as  a  gift  because  it  was 
originally  illegally  issued,  there  be- 
ing no  proof  that  it  was  issued  for 
full  value,  but  the  reasoning  of  the 
opinion  in  that  respect  can  hardly  be 
commended. 

If  a  company  has  accepted  a  gift 
of  stock  the  gift  cannot  be  withdrawn. 
Wheeler  v.  Mineral,  etc.  Co.,  31  Colo. 
110    (1903). 

Treasury  stock  in  a  limited  part- 
nership held  in  the  name  of  a  trus- 
tee for  the  purposes  thereof  is  legal. 
Stradley  v.  Cargill,  etc.  Co.,  135  Mich. 
367   (1904).  See  116  N.  W.  Rep.  410. 

Where  promoters  agree  that  treas- 
ury stock  shall  be  sold  for  the  bene- 
fit of  the  corporation  before  they  sell 
their  own  stock,  such  agreement  may 
be  enforced  by  an  injunction  at  the 
instance  of  one  of  them.  Brown  v. 
Bracking,  11  Idaho,  678  (1906). 
A  corporation  is  not  liable  for  a 


184 


CH.   III.] 


''watered"  stock. 


[§  46. 


the  basis  of  the  capital  stock  of  the  corporation  is  largely  discarded, 
and  the  fact  is  very  generally  recognized  that  credit  is  given  on  the 

commission  on  a  sale  of  stock  where  twenty  cents  a  share,  this  is  not  a 

the    stock    had    already    been    issued  misappropriation  of  its  funds  render- 

for  property  and  the  sale  was  made  ing    the    directors    liable    under    the 

for   the    person    to   whom   the   stock  California  statute.     Hercules,  etc.  Co. 

was  issued   and  there  was   no  proof  v.   Hocknell,   91   Pac.  Rep.   341    (Cal. 

that  the  stock  had  been  returned  to  1907). 


the  treasury.    Demarest  v.  Spiral,  etc. 
Co.,  71  N.  J.  L.  14  (1904). 

Where  a  corporation  purchases  its 
own  stock  such  stock  cannot  be  taxed. 
City  of  Worcester  v.  Board  of  Appeal, 
184  Mass.  460    (1904). 


The  price  at  which  treasury  stock 
is  to  be  sold  may  be  reduced.  Gumaer 
v.  Cripple  Creek,  etc.  Co.,  90  Pac. 
Rep.    81    (Col.   1907). 

A  corporation  may  hold  a  promoter 
liable    for    not    selling    its    treasury 


A   street    railway   company    which  stock  in  accordance  with  a  contract 

has    purchased    shares    of    its    own  made  by  the  promoters.     Cummings 

stock    is    liable    for    the    price,    even  v.   Brown,   122   N.  Y.  App.   Div.   505 

though    the    stock    turns    out    to    be  (1907). 

worthless.  Stock  so  purchased  by  the  An  agreement  between  the  corpora- 
company  may  be  reissued  and  does  tion  and  some  of  its  stockholders,  by 
not  amount  to  a  reduction  of  the  which  the  latter  contribute  a  part 
capital  stock.  A  statute  prohibiting  of  their  stock  as  treasury  stock,  on 
street  railways  from  owning  stock  condition  that  they  shall  continue  to 
relates  to  stock  in  other  companies,  be  directors  and  officers  for  a  certain 
Leonard  v.  Draper,  187  Mass.  536  time  is  illegal  under  a  statute  re- 
(1905).  quiring  such  officers  to  be  elected  an- 

A  receiver  will  be  appointed  and  nually  by  the  stockholders,  and  hence 
other  relief  granted,  in  a  suit  by  a  even  if  the  corporation  accepts  the 
stockholder  in  a  mining  company  al-  stock  and  sells  it  and  does  not  re- 
leging  that  the  directors  had  practi-  tain  such  persons  in  their  offices,  they 
cally  abandoned  the  property  and  re-  cannot  hold  it  liable  in  damages,  nor 
fused  to  sell  treasury  stock,  although  in  claim  and  delivery,  nor  for  con- 
it  could  be  sold,  and  had  removed  version,  nor  on  contract.  Glass  v. 
the  books  from  the  state,  and  had  Basin,  etc.  Co.,  31  Mont.  21  (1904). 
refused  all  information  and  were  de-  Even  though  there  is  treasury 
stroying  the  value  of  the  stock.  Such  stock,  the  directors  may  assess  stock 
a  suit  is  not  multifarious.  Glover  v.  if  the  charter  authorizes  assessments. 
Manila,  etc.  Co.,  19  S.  Dak.  559  (1905).  Nelson  v.  Keith,  etc.  Co.,  91  Pac.  Rep. 

In  the  case  Heartt  v.  Sherman,  82  30    (Utah  1907). 
N.  E.  Rep.  417   (111.  1907),  $2,000,000        It   is    legal    for    persons    to    whom 

of  stock  was  issued  for  a  mine,  and  stock  is  issued  for  property  to  donate 

one-half    was    donated    back    to    the  a  part  of  it  to  the  treasury.     John, 

treasury  as  treasury  stock.  etc.   Land   Co.  v.   Cooke,   103   Ky.   96 

A    corporation    cannot    prove    the  (1898).      A   judgment   creditor   of   a 

sale  of  its  treasury  stock  by  entries  corporation    may    cause    its    treasury 

in  its  own  books.     Jacobs  v.  Morgen-  stock  to  be  sold  on  execution.     Coit 

thaler,    112    N.   W.  Rep.    492    (Mich.  v.  Freed,   15  Utah,   426    (1897). 
1907).  Where    five    persons    subscribe    for 

Even  though  the  president  buys  $50,000  of  stock,  and  then  become  di- 
treasury  stock  from  the  company  at  rectors  and  turn  in  property  in  pay- 
two   cents  a  share  and  sells   it  for  ment     for    such     subscriptions,    the 

185 


46.] 


"watered"  stock. 


[en.  in. 


basis  of  the  difference  between  the  assets  and  liabilities  of  the  cor- 
poration."1    In  a  blue  book  published  by  the  English  Government 


transaction  is  legal,  they  being  the 
only  stockholders;  and  even  though 
they  donate  the  stock  to  the  treasury 
and  cause  it  to  be  sold  at  less  than 
par,  the  purchasers  are  not  liable  on 
the  stock.  Kellerman  v.  Maier,  116 
Cal.  416    (1897). 

In  Louisiana  the  purchase  by  a 
corporation  of  its  own  stock  cancels 
the  stock  until  re-issued.  If,  how- 
ever, in  the  re-issue  the  corporation 
gives  away  the  stock,  the  parties  re- 
ceiving it  are  liable  to  subsequent 
corporate  creditors.  No  formal  con- 
tract of  subscription  is  necessary,  but 
the  mere  taking  of  the  stock  is  suf- 
ficient to  render  them  liable.  Belknap 
v.   Adams,   49   La.  Ann.   1350    (1897). 

Where  the  owner  of  oil  lands 
agrees  to  convey  them  to  a  corpora- 
tion for  stock,  and  to  give  one-half 
of  the  stock  to  another  party,  who 
pays  the  vendor  $5,000  and  pays  to 
the  corporation  $25,000,  the  $25,000  is 
not  to  be  credited  as  a  payment  by 
the  vendor  on  his  stock.  Hardee  v. 
Sunset  Oil  Co.,  56  Fed.  Rep.  51 
(1893). 

A  corporation  cannot  hold  the  di- 
rectors liable  on  stock  which  the 
corporation  issued  to  them  for  serv- 
ices, at  five  cents  on  the  dollar,  in 
lieu  of  salary,  where  all  the  stock- 
holders assented  thereto,  such  stock 
so  issued  to  them  being  treasury 
stock;  that  is,  stock  which  was  issued 
for  property  as  full  paid  and  then  do- 
nated to  the  corporate  treasury.  The 
evidence  showed  that  the  stock  repre- 
sented a  patent  right  and  was  purely 
speculative,  and  had  no  market  value. 
Divine  v.  Universal,  etc.  Co.,  38  S. 
W.  Rep.   93    (Tenn.   1896). 

Even  though  directors  sell  prop- 
erty to  the  corporation  in  exchange 
for  treasury  stock  which  is  issued  to 
them  at  twelve  and  a  half  cents  on  a 
dollar,  yet  if  they  offer  to  allow  all 


the  stockholders  to  purchase  their 
proportion  of  the  stock  at  that  price, 
and  they  all  take  the  stock  excepting 
one  director,  the  latter  cannot  object 
to  the  transaction  where  he  had  him- 
self moved  that  the  stock  be  so  is- 
sued. Mackey  v.  Burns,  16  Colo.  App. 
6    (1901). 

Where  a  corporation  having  treas- 
ury stock  in  its  treasury  sells  all  its 
assets  to  another  corporation,  except- 
ing its  patent  rights,  such  sale  is 
not  a  sale  of  the  treasury  stock  with- 
in the  meaning  of  a  prior  stock  pool- 
ing contract  of  tbe  old  corporation 
that  certain  other  stock  should  be 
sold  before  such  treasury  stock  was 
sold.  Myers  v.  Buell,  67  N.  Y.  App. 
Div.   290    (1901). 

A  sale  by  a  corporation  of  all  its 
property  does  not  entitle  the  vendee 
to  stock  in  the  corporation  which  the 
corporation  itself  has  purchased  on  a 
sale  for  a  delinquent  assessment  and 
not  re-issued.  Tulare,  etc.  Dist.  v. 
Kaweah,  etc.  Co.,  44  Pac.  Rep.  662 
(Cal.  1896). 

Treasury  stock  which  has  been 
once  issued  and  then  donated  to  the 
corporation  to  be  sold  for  the  benefit 
of  the  corporation  must  be  sold  at 
not  less  than  par,  under  the  New 
Hampshire  statute.  Kimball  v.  New 
England,  etc.  Co.,  69  N.  H.  485 
(1899). 

An  agreement  between  two  pro- 
moters that  certain  stock  should  be 
assigned  to  them  jointly  for  the  gen- 
eral promotion  of  the  interests  of 
the  company,  and  if  not  disposed  of 
within  three  months  to  be  divided 
between  them  in  a  certain  way,  does 
not  establish  a  trust  in  favor  of  the 
corporation  and  does  not  make  the 
stock  treasury  stock  for  the  benefit 
of  the  corporation.  Brennan  v.  Vog- 
ler,  174  Mass.  272   (1899). 

Where  a  subscription   is  not  paid. 


i  Rubino  v.  Pressed,  etc.  Co.,  54  Atl.  Rep.  1050   (N.  J.  1903). 

1   6 


en.  in.] 


"watered"  stock. 


[§  46. 


in  June,  1907,  the  Comptroller  of  the  Company's  Department  made 
the  following  statement  in  regard  to  the  Acts  of  Parliament  on  the 
subject  of  corporations: 

"The  trend  of  recent  legislation  in  this  country  has  been  to  en- 
deavour to  afford  information  concerning  joint  stock  companies  to 
all  who  may  seek  for  it,  on  the  ground  that  publicity  is  the  best  pro- 
tection which  can  be  devised  for  the  benefit  of  creditors  and  of  in- 
vestors, and  that,  moreover,  it  is  fair  to  demand  publicity  of  com- 
panies and  to  compel  disclosure  of  material  facts  by  them  in  return 
for  the  privilege  of  limited  liability.  With  regard  to  the  protection 
of  creditors  and  investors  it  has  been  truly  said  that  legislation  can- 
not protect  people  from  the  consequences  of  their  own  imprudence, 
recklessness,  or  want  of  experience.  Nor  can  the  Legislature  sup- 
ply them  with  prudence,  judgment,  or  business  habits.  It  can,  how- 
ever, make  it  possible  for  the  creditor  or  investor  to  obtain  the  in- 
formation necessary  to  enable  him  to  form  a  judgment."  Shares 
which  have  been  forfeited  after  being  partly  paid  for  may  be  re-issued 
at  a  price  equal  to  the  unpaid  subscription  price  or  any  sum  in 
excess  thereof.1  The  question  of  liability  on  stock,  which  has  been 
issued  for  contract  work,  which  is  never  completed,  is  considered 
elsewhere.2 

and   the  stock  is  transferred  to  the  stock  had  been  forfeited.    Execution 

corporation   as   "treasury  stock"   and  against  a  corporation  cannot  be  levied 

then  sold  below  par,  the  purchaser  is  on  stock   owned   by    the    corporation 

liable     for    the     unpaid     par    value,  itself,    such   stock   having   been    pur 

Ailing  v.  Wenzel,  133  111.  264  (1890).  chased  by  it  under  statutory  author 

It   is   not  necessary   that  treasury  ity  at  a  forfeiture  sale  for  non-pay 

stock  be  placed  in  the  names  of  trus-  ment   of   calls.     Robinson  v.   Spauld 

tees  for  the  benefit  of  the  company,  ing,     etc.     Co.,     72     Cal.    32    (1887) 

See   §§  309-313,  infra.  Where  stock  is  forfeited  and  sold  at 

In  Stribbling  v.  Bank  of  the  Valley,  a  price  which  does  not  give  the  com 

5  Rand.   (Va.)  132   (1827),  where  the  pany  the  full  par  value  of  the  sub 

bank  took  a  note  for  its  own  stock  scription  price  of  the  stock,  the  pur 

at  a  price   in   excess  of  the   market  chaser  is  liable  for  the  unpaid  part 

value    of   the    stock,    the    court   held  Randt,   etc.    Co.   v.   New   Balkis,   etc 

the   note   to   be   usurious.     Treasury  Lim.,  85  L.  T.  Rep.  780  (1902);  aff'd 

stock  when  sold  need  not  be  offered  [1903]   1  K.   B.  461;    aff'd,  sub  nom 

proportionately    to   the    stockholders.  New  Balkis  Eersteling  v.  Randt,  etc 

Crosby  v.  Stratton,  17  Colo.  App.  212  Co.  Ltd.,  [1904]  A.  C.  165. 
(1902).     In  England  a  company  can-        2  See  §  766c,  infra.     In  the  case  of 

not    legally    accept    a    surrender    of  Fouche  v.  Merchants',  etc.  Bank,  110 

stock.     Bellerby  v.  Rowland,  etc.  Co.,  Ga.  827  (1900),  where  $50,000  of  stock 

[1902]    2    Ch.    14.      See    also    §  309,  was    issued    in    payment   for   certain 

infra.  bonds   and   property,   and   the   bonds 

i  Morrison  v.  Trustees,   etc.,   79   L.  were  never   delivered,  and  the  prop- 

T.  Rep.  605   (1898) ;  Ramwell's  Case,  erty   that   was   delivered   was    worth 

50  L.  J.  (Ch.)   827  (1881),  where  the  only  $2,500,  the  court  held  the  stock 

187 


§  46.]                              "watered"  stock.  [ch.  m. 

Corporate  creditors  who  become  such  before  an  issue  of  stock  is 
made  for  property  at  an  overvaluation  cannot  hold  the  stockholders 

liable  in  regard  to  such  issue,  inasmuch  as  those  creditors  did 
not  rely  on  that  part  of  the  capital  stock  being  paid  in.1  In  no 
case  can  a  corporate  creditor  complain  where,  at  the  time  when  he 

contracted  with  the  company,  he  knew  that  the  stock  had  been  is- 
sued for  property  taken  at  an  overvaluation.2    In  Illinois  a  contrary 

was  not  full  paid,   even  though  the  tion,  however,  being  merely  directory, 
certificate    recited    that    it    was    full  The    court    said    it    was    immaterial 
paid     and     non-assessable,     and     the  whether  the  corporate  creditors  who 
court  held  that  the  stockholders  and  brought   the    suit    were    such    before 
transferees   with   notice   were   liable  or    after    the    issue    because    "if    be- 
on  such  stock.  fore,    no    reliance    could    have    been 
i  Handley   v.   Stutz,   139   U.   S.   417  placed  on  the  stock  as  full  paid,  and 
(1891);   Coit  v.  North  Carolina  Gold  if  after,    they    cannot    complain,    as 
Amal.   Co.,   14  Fed.  Rep.   12    (1882);  the  transaction   was   open  to  them." 
Coit    v.    Gold    Amal.    Co.,    119    U.    S.  McDowell  v.  Lindsay,  213  Pa.  St.  591 
343    (1886).     Contra,  Sprague  v.  Na-  (1906).  Creditors  who  know  the  basis 
tional  Bank,  172  111.  149   (1898).     "A  on  which  stock  has  been  issued  for 
subsequent    creditor    of   the    corpora-  property  cannot  thereafter  complain, 
tion   has  no   right  to   complain  of  a  Easton   Nat.   Bank  v.  American,   etc. 
fraud    upon    his    debtor    which    the  Co.,  69  N.  J.  Eq.  326    (1905).     Even 
debtor  has  waived  or  refuses  to  liti-  though  persons  who  have  bought  land 
gate,"  and  hence  creditors  of  an  in-  for  $100,000  organize  a  company  and 
solvent    railroad    corporation    cannot  turn    in    the   land    for    $1,250,000    of 
attack  the  validity  of  an  alleged  issue  stock  and  donate  $250,000  of  the  same 
of  stock  and  bonds  for  less  than  their  to    the   company    as   treasury    stock, 
par  value  in  payment  for  construction  yet   a   corporate   creditor   who   knew 
work.    Toledo,  etc.  R.  R.  v.  Continen-  the  facts  when  his  debt  was  incurred 
tal     Trust    Co.,    95     Fed.    Rep.     497  cannot  hold  them  liable  on  the  stock. 
(1899).     As  to  subsequent  creditors,  Lea  v.  Iron,  etc.  Co.,  42  S.  Rep.  415 
see   §84Sfc,   infra.      The    liability    of  (Ala.   1906);  also  69  Atl.  Rep.  788. 
stockholders   cannot  be   enforced   for  Even    though    $2,000,000    of    stock 
the    benefit    of    creditors    who    dealt  was   issued   as   full   paid  to  thirteen 
with    the    corporation    knowing   that  persons    for    $28,600    cash,    yet    if    it 
the  stock  had  been  issued  for  property  was    agreed    between    them   and    the 
taken  at  an  overvaluation.    Adamant  corporation  that  no  more  should  be 
Mfg.    Co.    v.   Wallace,    16  Wash.    614  paid,   a  corporate   creditor   who   con- 
(1897).     See  also  §42,  supra.  tracted   his   debt  with   knowledge   of 
2  Bank   of  Fort  Madison  v.  Alden,  this  fact,  cannot  enforce  any  further 
129    U.    S.    372    (1889).     An    embar-  liability.      Miller    v.    Higginbotham's 
rassed  corporation  may  sell  its  stock  Adm'r,  93  S.  W.  Rep.  655  (Ky.  1906). 
at  sixty   cents   on    the   dollar  and   a  Even   though   a   bonus  of  stock   is 
bona  fide  purchaser  is  not  liable  for  given    by    the   corporation    upon   the 
the  difference,  even  though  the  stat-  sale   of   bonds,    yet   creditors    cannot 
ute  of  West  Virginia  where  the  issue  complain    thereof    unless    they    were 
was  made  stated  that  a  sale  of  stock  deceived  thereby.  Great  Western,  etc. 
at  less  than  par  should  be  only  after  Co.    v.    Harris,    128    Fed.    Rep.    321 
a  publication  of  a  notice,  and  no  such  (1903)   (aff'd,  198  U.  S.  561),  the  court 
publication  was  made,  such  publica-  saying  (p.  329):     "This  right  is  one 

188 


CH.  III.] 


"watered"  stock. 


[§46. 


rule  prevails.1     It  has  even  been  held  that  where  a  creditor  did  not 
investigate  the  financial  condition  of  the  company  and  did  not  rely 


existing  not  in  favor  of  all  creditors 
of  a  corporation,   but  in  favor  of  a 
particular    class    of    creditors    only, 
namely,  those  creditors  who  were  de- 
frauded by  said  transaction."     Even 
though   a  stockholder  in   a  National 
Bank    has    sold    and    transferred   his 
stock  to  avoid  liability  and  the  trans- 
ferees are  irresponsible  he  is  not  lia- 
ble   to    creditors    who    became    such 
after  the   date  of  the   transfer.     Mc- 
Donald   v.    Dewey,     202     U.     S.     510 
(1906).      In    New    Jersey    corporate 
creditors   will    be   presumed   to   have 
known  of  a  statement  filed  with  the 
Secretary   of   State   that  the   capital 
stock  had  all  been  paid  in,  and  are 
presumed    to    have    acted    upon    in- 
formation that  the  capital  stock  has 
been   fully   paid  in.     See  v.  Heppen- 
heimer,  G9  N.  J.  Eq.  36  (1905).    Even 
though   a   stockholder  may  be  liable 
to  corporate  creditors  for  the  differ- 
ence  between    the   par   value   of   his 
stock  and  the   actual  value  of  prop- 
erty transferred  in  payment  for  such 
stock,  yet  if  the   debt  was   incurred 
with   knowledge    by    a   creditor    that 
the   stock  was   so   issued,   he  cannot 
hold    the    stockholder    liable.      State, 
etc.    Co.    v.    Turner,    111    Iowa,    664 
(1900).      A    stockholder    paying    his 
stock  subscription  in  property  at  an 
agreed  value  is  not  liable   in  equity 
to  a  creditor  of  the  corporation,  who 
had  knowledge  of  and  assented  to  the 
transaction  at  the  time  when  it  took 
place,  upon  the  ground  that  the  real 
value  turned  out  to  be  less  than  was 
agreed   upon.     Rickerson,   etc.   Co.  v. 
Farrell,    etc.    Co.,    75    Fed.    Rep.    554 
(1896).     A  creditor  who  knows  that 
stock  has  been  paid  for  by  property 


taken  at  an  overvaluation  cannot  aft- 
erwards complain,  and  if  the  same 
person  is  president  of  both  the  cred- 
itor and  the  debtor,  his  knowledge  is 
notice  to  the  creditor.  Berry  v.  Rood, 
168   Mo.    316    (1902). 

A  corporate  creditor  who  took  the 
note  of  the  corporation  in  payment 
of  an  antecedent  debt,  and  took  with 
full  knowledge  of  the  facts  as  to 
the  issue  of  the  stock  for  property, 
cannot  complain.  A  corporate  cred- 
itor cannot  complain  as  to  stock  is- 
sued subsequently  to  the  debt.  First 
Nat.  Bank  v.  Gustin,  etc.  Co.,  42  Minn. 
327  (1890).  As  against  creditors  the 
company's  agreement  that  stockhold- 
ers would  not  be  called  upon  to  pay 
more  than  thirty  per  cent,  of  their 
subscription  is  not  valid  except  as 
against  creditors  who  had  notice 
thereof.  Martin  v.  South,  etc.  Co.,  94 
Va.  28  (1896);  s.  c,  97  Va.  349.  See 
also  §  848,  infra. 

An  issue  of  stock  for  an  old  fran- 
chise and  uncompleted  road-bed  of  a 
railroad  is  valid  although  the  par 
value  of  the  stock  is  much  more 
than  the  value  of  the  property.  All 
the  stockholders  having  assented 
thereto,  and  there  being  no  creditors, 
the  transaction  is  valid.  A  holder  of 
bonds  issued  long  subsequently,  and 
who  purchased  with  knowledge  of 
the  facts,  cannot  complain  and  hold 
the  stockholders  liable.  Walburn  v. 
Chenault,  43  Kan.  352  (1890).  See 
Mathis  v.  Pridham,  1  Tex.  Civ.  App. 
58    (1892). 

A  stockholder  who  is  also  a  cred- 
itor, and  who  became  such  with  full 
knowledge  that  the  stock  was  paid 
for  by  property  at  an  overvaluation, 


i  In    Illinois    it   is   held    that   it   is     overvaluation  when  he  extended  cred- 
immaterial   whether   or   not  the  cor-     it.     Gillett  v.  Chicago  Title  &  T.  Co., 
porate  creditor  knew  that  the  stock     82  N.  E.  Rep.  891  (111.  1907). 
had  been  issued  for  property  at  an 

189 


§46.] 


"watered"  stock. 


[en.  in. 


on  the  fact  that  the  stock  was  fully  paid,  he  cannot  enforce  a  stock- 
holder's liability  on  watered  stock,  even  though  such  liability  is  de- 
clared in  a  statute.1  A  decree  is  for  the  benefit  of  only  those  stock- 
holders who  complain.2 

There  is  a  limit  beyond  which  the  courts  will  not  go  in  sustaining 
the  issue  of  stock  for  properly  taken  at  an  overvaluation.  If  the 
property  which  is  turned  in  is  practically  worthless,  or  is  unsubstan- 
tial and  shadowy  in  its  nature,  the  courts  will  hold  that  there  has 
been  no  payment  at  all,  and  that  the  stockholders  are  liable  on  the 
stock.3 


cannot,  as  a  creditor,  compel  other 
stockholders  to  make  payments  on 
their  stock  as  being  partly  unpaid. 
Whitehill  v.  Jacobs,  75  Wis.  474 
(1890).  Under  the  Tennessee  stat- 
utes, creditors  prior  to  an  issue  of 
stock  for  property  at  an  overvalua- 
tion may  complain  as  well  as  those 
after.  Jones  v.  Whitworth,  94  Tenn. 
602  (1895).  Under  the  Illinois  stat- 
utes it  is  immaterial  whether  the 
creditor  knew  or  did  not  know  of  the 
issue  of  the  watered  stock,  and  im- 
material as  to  when  he  became  a 
creditor.  Sprague  v.  Nat.  Bank  of 
America,   172   111.   149    (1898). 

i  McBride  v.  Farrington,  131  Fed. 
Rep.   797    (1904). 

2  See  §  §  735  and  8487c,  infra. 

3  The  supreme  court  of  the  United 
States,  in  Camden  v.  Stuart,  144  U. 
S.  104  (1892),  held  liable  for  unpaid 
subscriptions  the  subscribers  to  $150,- 
000  of  stock  who  had  turned  in  there- 
for a  contract  for  real  estate  and  a 
health  resort  which  a  year  prior 
thereto  they  had  taken.  The  court 
did  not  allow  any  value  for  the  con- 
tract and  threw  out  the  good-will, 
and  said  (p.  115):  "The  experience 
and  good-will  of  the  partners,  which 
it  is  claimed  were  transferred  to  the 
corporation,  are  of  too  unsubstantial 
and  shadowy  a  nature  to  be  capable 
of  pecuniary  estimation  in  this  con- 
nection. It  is  not  denied  that  the 
good-will  of  a  business  may  be  the 
subject  of  barter  and  sale  as  between 
the   parties   to   it,   but   in   a   case  of 


this  kind  there  is  no  proper  basis  for 
ascertaining  its  value,  and  the  claim 
is  evidently  an  afterthought.  The 
same  remark  may  be  made  with  re- 
gard to  the  contract  of  January  30th, 
and  the  loss  of  time  and  trouble  to 
which  the  parties  were  subjected, 
which  are  now  claimed  to  be  ele- 
ments of  value  in  the  property  con- 
tributed to  the  corporation,  but  of 
which  no  account  was  made  at  the 
time." 

In  the  case  of  Lloyd  v.  Preston, 
116  U.  S.  630  (1892),  affirming  Pres- 
ton v.  Cincinnati,  etc.  Ry.,  36  Fed. 
Rep.  54  (1888),  where  the  owner  of  a 
railroad  sold  it  to  a  newly-organized 
corporation  for  stock  and  bonds,  the 
par  value  of  which  was  fifty  times 
the  real  value  of  the  railroad,  the 
court  held  that  the  bondholders  and 
other  creditors  who  had  obtained 
judgment  against  the  corporation,  the 
execution  being  returned  unsatisfied, 
might  hold  the  party  receiving  the 
stock  liable  thereon  on  the  ground 
that  the  subscription  price  of  such 
stock  has  never  been  paid.  The  court 
(p.  642)  said:  "The  entire  organ- 
ization was  grossly  fraudulent  from 
first  to  last,  without  a  single  honest 
incident  or  redeeming  feature.  It 
having  been  found,  on  convincing 
evidence,  that  the  overvaluation  of 
the  property  transferred  to  the  rail- 
way company  by  Harper,  in  pretended 
payment  of  the  subscriptions  to  the 
capital  stock,  was  so  gross  and  ob- 
vious as,  in  connection  with  the  other 


190 


CH.  III.] 


"watered"  stock. 


[§46. 


Moreover  it  is  to  be  borne  in  mind  that  the  parties  receiving  wa- 
tered stock  may  be  liable  as  promoters  to  return  profits  which  they 
have  made.  This  is  particularly  the  case  where  the  promoters  merely 
owned  an  option  which  they  have  sold  to  the  corporation  at  an  exor- 
bitant price.1 


facts  in  the  case,  to  clearly  establish  as  a  good-will  or  a  license, — in  fact, 
a  case  of  fraud,  and  to  entitle  bona  all  sorts  of  things,  in  consideration 
fide  creditors  to  enforce  actual  pay-  of  shares  allotted  to  him,  and  thus 
ment  by  the  subscribers,  it  only  re-  pay  for  the  shares.  These  two  cases 
mains  to  consider  the  effect  of  the  decide  that  an  allottee  must  really 
defenses  set  up."  Where  $500,000  of  pay  for  the  shares.  They  go  further 
stock  is  issued  for  $2  cash  and  a  than  that,  and  decide  that  if  the 
formula  for  cereal  breakfast  food,  contract  makes  it  manifest  on  the 
and  the  stock  is  then  sold  at  less  face  of  it  that  an  allottee  is  paying 
than  par  to  the  public,  and  the  com-  less  than  the  nominal  cash  value  of 
pany  fails,  stockholders  by  statute  the  shares,  he  may  be  liable  for  the 
being  liable  only  to  the  extent  of  balance  beyond  what  he  has  paid, 
their  unpaid  subscriptions,  the  par-  I  do  not  think,  however,  that  those 
ties  to  whom  the  stock  was  originally  cases  go  beyond  that.  I  do  not  un- 
issued may  be  held  liable.  Wood  v.  derstand  them  to  decide  that  the 
Sloman,  114  N.  W.  Rep.  317  (Mich,  court  has  any  duty  or  power  to  take 
1907).  Stock  which  is  paid  for  by  each  contract  and  consider  whether 
the  worthless  assets  of  an  insolvent  the  price  which  is  agreed  to  be  given 
corporation  and  a  transfer  of  stock  is  a  fair  and  reasonable  price,  or 
in  such  corporation,  is  not  full  paid  whether  the  thing  which  is  to  be 
and  the  stockholder  may  be  held  taken  in  payment  instead  of  cash  is 
liable  by  corporate  creditors.  Die-  in  the  market  of  a  cash  value  equal 
terle  v.  Ann  Arbor,  etc.  Co.,  143  Mich,  the  nominal  value  of  the  shares." 
416  (190G).  The  bankruptcy  court  Where,  upon  the  increase  of  the 
will  not  compel  a  creditor  to  accept  capital  stock,  $3,000  of  stock  is  is- 
in  "composition,"  under  the  bankrupt  sued  to  a  party  for  a  patent-right, 
act,  stock  in  a  corporation,  which  and  in  about  six  months  the  patent- 
was  issued  for  good-will  of  the  busi-  right  is  assigned  back  to  him  for  $1, 
ness  of  the  bankrupt,  it  appearing  he  will  be  held  liable  for  the  $3,000 
that_  such  good-will  was  worthless,  in  case  the  corporation  becomes  in- 
In  re  Woodend,  133  Fed.  Rep.  593  solvent.  Peck  v.  Elliott,  79  Fed.  Rep. 
(1904).  In  Re  Theatrical  Trust,  etc.,  10  (1S97).  Where  $2,500  of  stock  is 
[1895]  1  Ch.  771,  the  court  in  a  issued  for  $5,000  cash  and  services 
dictum  laid  down  the  rule  in  regard  as  an  officer  and  manager,  the  court 
to  payment  for  stock  by  property  as  will  allow  the  fair  value  of  his  serv- 
follows:  "The  conclusion  I  come  to  ices  and  hold  him  liable  for  the  dif- 
is  this:  that  if  the  consideration  is  ference  in  aid  of  corporate  creditors. 
illusory,  or  if  it  presents  an  obvious  Addison  v.  Pacific,  etc.  Co.,  79  Fed. 
money  measure  which  shows  that  the  Rep.   459    (1897). 

shares  were  issued  at  a  discount,  or  i  See   §  38,  supra,  and   §  §   651  and 

if  the  shares  are  openly  issued  at  a  48,  infra. 

discount,  in  all  these  cases"  the  party  Promoters  who  obtain  an  option 
receiving  the  stock  is  liable.  "He  and  then  sell  the  property  to  a  cor- 
may  give  goods,  he  may  give  things  poration  at  a  secret  profit  in  pay- 
that  have  no  physical  existence,  such  ment  for  stock  may  be  held  liable  by 

191 


46.] 


"watered"  stock. 


[CH.   II!, 


The  remedy  of  the  corporate  creditor  is  in  equity.1     The  right  of 
a  receiver  to  bring  suit  in  a  foreign  jurisdiction  to  hold  a  stock- 


the  receiver  upon  the  insolvency  of 
the  corporation  for  the  difference  be- 
tween what  they  paid  and  what  they 
received,  without  regard  to  the  actual 
value.  Central  T.  Co.  v.  East  Ten- 
nessee, etc.  Co.,  116  Fed.  Rep.  743 
(1902).  Where  the  promoters  paid 
to  a  person  who  is  to  act  as  chairman 
of  the  directors,  and  his  firm  who 
underwrote  10,000  shares,  a  commis- 
sion of  12,000  shares,  the  court  held 
that  10,000  of  the  12,000  was  for  the 
use  of  his  name  and  only  2,000  shares 
for  the  commission,  and  hence  he 
was  liable,  at  the  instance  of  an  in- 
vestor in  the  stock,  to  pay  to  the 
corporation  the  difference  between 
the  amount  paid  for  the  stock  and  its 
actual  value  the  day  after  an  allot- 
ment, the  transaction  not  being  fully 
disclosed  in  the  prospectus.  A  clause 
in  the  prospectus  that  there  "may" 
be  various  trade  contracts  and  busi- 
ness arrangements  and  underwriters' 
agreements,  followed  by  the  usual 
waiver  as  to  them,  does  not  apply  to 
such  a  contract,  inasmuch  as  the 
word  "may"  was  misleading.  Cackett 
v.  Keswick,  85  L.  T.  Rep.  14  (1901); 
aff'd,  [1902]  2  Ch.  456.  Where  pro- 
moters pay  out  less  than  $30,000  to 
secure  options  on  land  and  then  sell 
the  options  to  a  corporation  for  $700,- 
000  of  stock  of  the  latter,  the  cor- 
poration assuming  the  purchase  price 
of  the  land,  and  then  issue  a  pros- 
pectus which  is  misleading  and  does 
not  state  the  facts  about  the  issue  of 
stock,  and  the  corporation  becomes 
insolvent,  they  are  liable  to  the  cor- 
poration for  the  fair  market  value 
of  the  stock  at  the  time  the  stock 
was  issued  or  as  soon  thereafter  as  it 
had  a  market  value.  The  liability  is 
not  for  unpaid  stock  but  for  fraud  as 
promoters  in  making  a  secret  profit 
in  services  and  not  making  a  full 
disclosure  to  the  stockholders.  The 
promoters  owe  a  duty  to  future  stock- 


holders. The  land  need  not  be  ten- 
dered back.  The  promoters  are  to 
be  credited  with  their  actual  disburse- 
ments and  to  be  charged  with  the 
fair  market  value  of  the  stock  with 
interest,  and  also  with  dividends. 
The  suit  should  be  brought  by  the 
corporation  itself  and  not  by  its  re- 
ceiver, according  to  the  Massachu- 
setts decisions.  Hayward  v.  Leeson, 
176  Mass.  310   (1900). 

l  The  corporate  creditor's  remedy 
herein  is  not  by  an  action  at  law  for 
fraud  and  deceit.  Priest  v.  White,  89 
Mo.    609    (1886). 

In  a  suit  to  enforce  the  liability  of 
the  stockholder  on  stock  issued  for 
property  at  an  overvaluation  it  is  not 
necessary  to  make  all  of  the  stock- 
holders defendants,  but  any  defendant 
to  the  creditor's  bill  may  file  a  cross- 
bill and  bring  in  the  stockholders 
who  are  not  parties.  Coleman  v. 
Howe,  154  111.  458    (1895). 

A  bill  to  compel  an  assignee  for  the 
benefit  of  creditors  of  an  insolvent 
corporation  to  account;  and  to  hold 
stockholders  liable  on  stock  issued 
for  property;  and  to  reach  corporate 
assets  in  third  parties'  hands,  is  mul- 
tifarious. O'Bear  Jewelry  Co.  v. 
Volfer,    106    Ala.    205    (1895). 

Where  the  assignee  of  an  insolvent 
corporation,  in  attacking  the  payment 
for  stock  by  property,  sues  the  stock- 
holders as  though  no  payment  at  all 
had  been  made,  he  cannot  prove  over- 
valuation of  property  turned  in  in 
payment.  His  pleading  is  wrong. 
Smith  v.  Prior,  58  Minn.  247   (1894). 

The  corporate  creditor's  bill  may 
be  by  one,  but  must  be  in  behalf  of 
all.  Cleveland  Rolling-Mill  Co.  v. 
Texas,  etc.  Ry.,  27  Fed.  Rep.  250 
(1886). 

In  a  creditor's  suit  to  enforce  sub- 
scriptions for  stock  it  is  not  sufficient 
to  put  in  evidence  a  contract  show- 
ing that  the  stock  had  been  issued  for 


192 


CH.   III.] 


"watered"  stock. 


[§  46. 


holder  liable  for  stock  and  bonds  illegally  issued  is  limited.1 
Neither  is  a  foreclosure  suit  the  proper  place  for  an  adjustment  of 
such  claims.2  An  action  at  law  for  conspiracy  is  difficult  to  main- 
tain.3 The  liability  on  stock  issued  for  property  at  an  overvalua- 
tion commences  only  upon  insolvency  of  the  corporation.  Hence  the 
statute  of  limitations  runs  from  that  date,4  or  from  the  date  when 
judgment  is  obtained  against  the  corporation.5  Laches  may  be  a 
bar  to  the  collection  of  what  is  claimed  to  be  due  on  watered  stock.6 


work  and  services  to  be  performed. 
Proof  must  be  given  of  tbe  perform- 
ance. Clow  v.  Brown,  134  Ind.  287 
(1893)  and  150  Ind.  2S5.  See  s.  c, 
31  N.  E.  Rep.  361    (Ind.  1892). 

i  Great   Western,    etc.    Co.    v.    Har- 
ris, 198  U.  S.  561  (1905). 


5  The  statute  of  limitations  does 
not  begin  to  run  against  tbe  liability 
of  a  stockholder  on  stock  fraudu- 
lently issued  for  property  at  an  over- 
valuation until  tbe  corporate  creditor 
has  reduced  his  claim  to  a  judgment. 
Kelly  v.  Clark,  21  Mont.  291    (1898). 


2  A  promoter's  possible  liability  As  affecting  corporate  creditors  here- 
and  the  liability  of  stockholders  on  in,  the  statute  of  limitations  does 
unpaid  stock  will  not  be  adjusted  not  commence  to  run  until  judgment 
and  offset  in  the  distribution  among  is  recovered  by  the  corporate  cred- 
bondholders  after  foreclosure  sale,  itors  against  the  corporation.  Chris- 
even  though  the  bondholders  were  tensen  v.  Quintard,  36  Hun,  334 
promoters  and  stockholders.  Inde-  (18S5),  overruled  on  another  point 
pendent  suits  must  be  instituted  for  in  s.  c,  8  N.  Y.  Supp.  400.  See  also 
that  purpose,  especially  as  general  §  42,  supra,  and  §  195,  infra.  The 
creditors  are  interested.  Land,  etc.  statute  of  limitations  does  not  begin 
Co.  v.  Tatnall,  132  Fed.  Rep.  305  to  run  against  an  unpaid  subscrip- 
(1904).     See  also   §848,  infra.  tion    until    judgment    and    execution 

3  It  is  difficult  for  a  corporate  are  returned  unsatisfied,  even  though 
creditor  to  seek  collection  by  making  the  stockholders  have  turned  in  prop- 
out  a  conspiracy.  Brackett  v.  Gris-  erty  in  what  they  considered  full  pay- 
wold,  13   N.  Y.  Supp.  192    (1891).  ment  for  the  stock.    Montgomery,  etc. 

4  Jones  v.  Whitworth,  94  Tenn.  602  Works  v.  Roman,  41  S.  Rep.  811  (Ala. 
(1895),    holding   also    that   the   time  1906).     See  also  ch.  XLIV,  infra.    As 


may  be  shorter  as  to  deceased  stock- 
holders.    As  to  the  statute  of  limita- 


to  the  statute  of  limitations  in   Illi- 
nois against  liability  on  stock  issued 


tions,   see   also    §  225,   infra.     Where  for    property    at   a    fraudulent   over- 

$1,000,000  of  stock  is  issued  for  pat-  valuation,  see  Parmelee  v.  Price,  208 

ents,   which    by   the   papers   seem   to  111.  544    (1904). 

have  been  valued  at  less  than  half  of  6  Thus,  where    stock  is    issued    for 

the  stock,  the  stockholders  are  liable,  services,  and  its  actual  value  is  worth 

under  the  New  Jersey  statute,  even  much    less    than    the    services,    and 

though  seventeen  years  have  elapsed,  seven  years  elapse,  a  creditor  cannot 

especially    where    no    formal    action  complain,  especially  when  he  bought 

seems    to    have    been    taken    by   the  up  a  claim.    Wilson  v.  St.  Louis,  etc. 

directors   in  purchasing  the   patents.  R.   R.,   120   Mo.   45    (1894).     Cf.   San 

Easton   Nat.   Bank   v.   American,   etc.  Antonio  St.  Ry.  v.  Adams,  87  Tex.  125 

Co.,   70   N.   J.    Eq.    722    (1906).     See  (1894),  reversing  25  S.  W.  Rep.  639. 
also  ch.  XLIV,  infra. 

(13)  193 


§  47.]  "watered"  stock.  [cii.  hi. 

§  47.  Liability  of  such  persons  under  various  constitutional  pro- 
visions in  Pennsylvania,  Elinois,  California,  Kentucky,  Nebraska, 
Alabama,  Arkansas,  Missouri,  Texas,  Louisiana,  Colorado,  South 
Dakota  and  other  states,  and  under  statutory  provisions  in  Neiv 
York,  Maine,  Ohio,  Wisconsin,  Minnesota,  Tennessee,  Indiana,  New 
Jersey,  Washington,  Iowa,  Massachusetts,  Oregon  and  Utah.  — The 
preceding  section  contains  the  common  law  on  the  liability  of  per- 
sons who  pay  for  stock  in  property  taken  at  an  overvaluation.  The 
ease  with  which  watered  stock  could  be  legally  issued  under  the 
common  law  led  to  the  enactment  of  statutory  and  constitutional 
prohibitions  against  such  issues.  It  was  believed  that  watered  stock 
did  much  harm ;  that  it  deceived  people  and  induced  them  to  buy  the 
stock  or  bonds,  or  to  extend  credit  to  the  company,  on  the  supposi- 
tion that  the  capital  stock  had  really  been  paid  for  at  actual  par 
value.  Hence,  when  it  became  clear  that  the  common  law  did  not 
prevent  the  issue  of  watered  stock,  but  compelled  the  public  to  rely, 
not  upon  statements  of  the  capital  stock,  but  on  an  investigation  of 
the  actual  condition  of  the  company,  a  demand  arose  for  statutes 
and  constitutional  provisions  to  protect  the  people  from  watered 
stock. 

This  demand  gave  rise  to  certain  constitutional  provisions  which 
have  been  enacted  in  several  states.  These  provisions  are  very  simi- 
lar in  their  wording,  and  are  substantially  as  follows:  "No  corpora- 
tion shall  issue  stocks  or  bonds  except  for  money,  labor  done  or 
money  or  property  actually  received;  and  all  fictitious  increase  of 
stock  or  indebtedness  shall  be  void.1 

It  is  now  over  thirty  years  since  the  first  of  these  provisions  was 
enacted,  and  yet  it  may  be  said  that  these  constitutional  provisions 
have  decidedly  failed  to  remedy  the  evil  which  they  were  expected 
to  cure.  They  are  so  sweeping  in  their  effects,  and  so  disastrous  to 
innocent  holders  of  corporate  securities,  that  the  courts  are  reluctant 
to  declare  void  the  stock  and  bonds  which  have  passed  into  bona  fide 
hands.  The  provision  is  held  to  be  applicable  and  effective  only 
when  the  issue  is  entirely  fictitious.  It  does  not  interfere  with  the 
customary  methods  of  starting  the  corporate  enterprise  by  the  issue 
of  stock  and  bonds  in  payment  for  the  construction  of  the  corporate 

i  See  the  constitutions  of  Alabama,  XII,  §  S;  Montana,  art.  XV,  §  10;  Ne- 

art.  XIV,  §  6;  Arkansas,  art.  XII,  §  8;  braska,   art.   XI,    §5;    North   Dakota, 

California,    art.   XII,    §11;    Colorado,  §138;    Pennsylvania,    art.    XVI,    §7; 

art.   XV,    §9;     Idaho,   art.  VIII,   §9;  South  Dakota,  art.  XVII,   §8;  Texas, 

Illinois,    art.    XII,     §13;     Kentucky,  art.  XII,    §6;    Washington,   art.  XII, 

§193;     Louisiana,    art    CCXXXVIII;  §6. 
Mississippi,      §  19G;      Missouri,      art. 

194 


CH.   III.] 


"watered"  stock. 


[§47. 


works,  and,  except  in  Alabama  and  Missouri,  it  may  be  said  that 
the  courts  have  construed  away  the  language  and  purpose  of  the 


provision.1 

l  Federal  courts:  The  supreme 
court  of  the  United  States,  in  Mem- 
phis, etc.  R.  R.  v.  Dow,  120  U.  S.  287 
(1887),  held  that  this  provision  did 
not  invalidate  a  transaction  upon  the 
reorganization  of  a  company  after  a 
foreclosure  of  its  property,  and  a  pur- 
chase of  the  property  by  a  committee 
for  the  bondholders,  whereby  they 
took  in  payment  of  such  property  the 
bonds  and  stock  of  the  new  corpora- 
tion, even  though  the  stock  alone  of 
the  new  company  thus  taken  was,  at 
its  par  value,  equal  to  the  value  of 
the  property  involved. 

Where   all    the   stock   and   a   large 
quantity  of  bonds  are  issued  by  a  rail- 
road corporation  to  its  contractor  in 
payment  for  the  construction  of  the 
road,  the  contractor  is  not  liable  to 
corporate  creditors  on  the  stock,  even 
though  the  bonds  were  a  sufficient  con- 
sideration for  building  the  road,  un- 
less   the    corporate    creditors    prove 
that  the    stock  at    the    time    of    its 
issue   had    a    real    or   market   value. 
"If  when  disposed  of  by  the  railroad 
company    it    was    without   value,    no 
wrong  was  done  to  creditors."     Even 
the  Missouri  constitution  and  statutes 
do    not   change    this    rule.      Fogg   v. 
Blair,    139    U.    S.    118    (1891).      Even 
though  a  bonus  of  stock  is  given  by 
the    corporation    upon    the    sale    of 
bonds,  yet  creditors  cannot  complain 
thereof    unless    they    were    deceived 
thereby.     Great  Western,   etc.  Co.  v. 
Harris,    128    Fed.     Rep.     321    (1903) 
(aff'd  198  U.  S.  561),  the  court  saying 
(p.    329)    "this    right    is    one    exist- 
ing not  in  favor  of  all  creditors  of 
a  corporation,  but  in  favor  of  a  par- 
ticular     class      of      creditors      only, 
namely,  those  creditors  who  were  de- 
frauded    by     said     transaction."      A 
statutory   provision   that   subscribers 
to  stock  not  fully  paid  shall  be  liable 
thereon     is     merely     declaratory     of 


the    common   law.     Even    under   the 
Illinois  decisions,  the  members  of  a 
firm  are  not  liable  on  stock  issued  for 
their    property    where    the   valuation 
was  made  by  their  manager  and  no 
intent  on  their  part  to  overvalue  the 
same  is  proved.    Taylor  v.  Cummings, 
127  Fed.  Rep.  108    (1903).     A  stock- 
holder cannot  after  ten  years'  delay, 
maintain   a   suit   to   cancel   stock   is- 
sued for  patents,  and  to  compel  the 
holder  of  such  stock  to  refund  divi- 
dends thereon,  the  transaction  having 
been    spread   on   the    records    of   the 
company     and     open     to     the    stock- 
holders.      An     allegation     that     the 
patents   were   of  no   value  is   insuffi- 
cient,   even    though    the    constitution 
of  the  state  (Missouri)   required  that 
stock  be  issued  only  for  "money  paid, 
labor  done,  or  money  or  property  ac- 
tually received,"  there  being  no  alle- 
gation that  the  patents  were  known 
to  be  valueless  at  the  time.     Kimbell 
v.    Chicago,    etc.    Co.,    119    Fed.    Rep. 
102   (1902).     As  against  the  claim  of 
a  creditor  of  an  insolvent  corporation 
in  the  bankrupt  court  the  trustee  may 
set  off  a  claim  that  the  creditor  is  a 
stockholder   and    that   stock    was    is- 
sued to  him  for  property  at  an  un- 
reasonable valuation,  the  corporation 
being  a  Missouri  corporation  and  the 
Missouri   decisions  being  to  that  ef- 
fect.    In  Re  Royce,  etc.  Co.,  133  Fed. 
Rep.  100  (1904)   the  court  said:     "In 
other   words,   as   the   declared   policy 
of  this   state    is   to   require   absolute 
payment  by  stockholders,  so  that  they 
shall    represent   to   the   creditors   an 
actual   asset,   and   the   temptation   is 
great   among   stockholders   to   put   a 
fictitious   or   exaggerated   value,   like 
an    old    and    abused   stock   of    goods 
substituted  for  a  money  payment  for 
stock  by  the  incorporators,  the  courts 
will   scrutinize   with   care   the   integ- 
rity and  fairness  of  such  payments, 


195 


47.] 


"watered"  stock. 


[en.  in. 


The  supreme  court  of  Alabama  and  the  supreme  court  of  Missouri 
take  issue  with  the  above  statement  of  law  and  assert  that  these 


in  favor  of  the  creditors  of  the  cor-  if  the  corporation  receives  the  stock 
poration."  and   pledges   it  and   receives   a   divi- 
Where   for    six   years   an   issue   of  dend  thereon  and  retains  it  two  years 
stock  for  services  has  appeared  fully  until  it  depreciates  in  value,  it  can- 
on the  books  of  the  company  and  has  not   then    repudiate    the   transaction, 
not   been   objected   to,   a   stockholder  Southern  Trust,  etc.  Co.  v.  Yeatman, 
cannot  have  it  set  aside,  even  under  130   Fed.   Rep.   798    (1904);    aff'd   134 
the    constitution    of     Colorado,     espe-  Fed.  Rep.  810.     Under  the  New  York 
cially    where   all  the   stockholders   at  statute  which  requires  that  stock  or 
the  time  of  the  issue  assented  thereto  bonds  shall  be  issued  only  for  money 
and    the    party    receiving    the    stock  paid    or    property,    the    purchaser    of 
used  a  large  portion  of  it  to  interest  bonds    from    the    corporation    cannot 
other   persons    in   the   company,   and  make  payment  in  the  note  of  a  third 
even   though   the   stock  so   issued   to  person   where   the   note   is  not  good, 
him   was   $125,000,   being  one-half   of  In   re  Waterloo,    etc.    Co.,    134    Fed. 
the    entire    stock,    and    was    in    con-  Rep.  341   (1904),  rev'g  128  Fed  Rep. 
sideration  of  services  rendered  in  ob-  517    (1904).      Where    a   creditor    did 
taining  contracts  and  options,  which  not    investigate    the    financial    condi- 
were    turned    over    to    the    company,  tion    of    the    company    and    did    not 
Calivada,  etc.  Co.  v.  Hays,  119  Fed.  rely  on  the  fact  that  the  stock  was 
Rep.  202   (1902).  fully  paid,  he  cannot  enforce  a  stock- 
Even  though  the  owners  of  mining  holder's    liability   on    watered    stock, 
claims     organize     a     corporation     in  even    though    such    liability    is    de- 
New  Jersey,  and  they  themselves  as  clared  in  a  statute.     McBride  v.  Far- 
directors,  together  with  dummy  direc-  rington,    131    Fed.    Rep.    797    (1904); 
tors,    cause   the    corporation    to    pur-  aff'd    149    Fed.   Rep.    114.     The   case 
chase    the    claims    for    $750,000    par  In  re  Remington,   etc.   Co.,   119   Fed. 
value  of  stock,  although  the  mining  Rep.    441     (1902),    involved    a    suit 
claims    were    worth    but    $5,000,    and  brought  in  the  federal  court  in  New 
even     though     thereafter     additional  York  by  a  creditor  of  a  New  Jersey 
capital  stock  is  sold  by  the  corpora-  corporation  against  the  stockholders 
tion   to  the  public  for  cash  at  par,  to  hold  them  liable  on  stock,  which 
yet    the    corporation    cannot    rescind  was     alleged    to    have    been    issued 
the    transaction,    inasmuch    as    there  for    an    insufficient    consideration    in 
were    no    other    stockholders    at    the  the  way  of  property.     Where  a  pro- 
time  of  the  transaction,  and  hence  no  moter  purchases   all   the   stock   of  a 
one    was    deceived.      Old    Dominion,  corporation  for  $75,000,  and  then  pur- 
etc.   Co.  v.   Lewisohn,   136   Fed.   Rep.  chases    and    transfers    to    it    options 
915     (1905);     aff'd     148     Fed.     Rep.  on  the  business  and  property  of  other 
1020    and    210    U.    S.    206.    Under    a  companies  at  a  cost  to  him  of  about 
charter    power    to    receive,    in    pay-  $17,500,  and  receives  therefor  $90,000 
ment    for    stock,    property    "for    the  of   bonds,   and    $200,000   of   stock    in 
advancement     of     the     purposes     for  the     first     named)     company,     which 
which"  the  corporation  was  organized,  then  becomes  insolvent,  the  bonds  are 
a   trust   company   may   receive   stock  illegal   under  the   Pennsylvania   stat- 
in   a    savings    association,    and    even  ute   that    mortgage   bonds    shall    not 
though    by   statute   the    payment    of  exceed  one-half  the  capital  stock,  the 
stock     by     property     must     first     be  issue  of  the  stock  itself  being  illegal, 
authorized   by   the   stockholders,   yet  the  court  refusing  to  allow  anything 

196 


CH.  III.] 


it 


WATERED"  STOCK 


[§47. 


constitutional   prohibitions   have   been   effective.     In   reply   to   this 
the  author  refers  to  the  decisions  of  the  supreme  court  of  the  United 

for  a  prospective  and  problematical  act  was  ultra  vires  the  corporation, 
removal  of  competition,  the  basis  of  and  the  stock  was  void,  not  merely 
the  decision  being  that  the  value  of  voidable.  It  had  no  validity  in  the 
the  property  was  so  slight  compared  hands  of  a  bona  fide  purchaser^  for 
with  the  par  value  of  the  stock  and 
bonds,  that  the  bonds  and  stocks  were 
void,  under  the  constitution  of  Penn- 
sylvania. Creditors  may  object  to 
such  bonds  in  the  hands  of  original 
holders,  except  to  the  extent  that  the 
money  was  actually  advanced  there- 
on, and  hence  such  bonds  cannot  be 
turned  in  in  part  payment  of  the 
purchase  price  on  the  foreclosure 
sale.  In  re  Wyoming,  etc.  Co.,  153 
Fed.  Rep.  787  (1907),  aff'd  158  Id.  608. 
In  the  case  Lake,  etc.  R.  R.  v. 
Ziegler,  99  Fed.  Rep.  114  (1900),  where 


value,  without  notice.  The  complain- 
ant has  not  suffered  pecuniary  injury 
by  its  issue,  and  cannot  call  upon 
Ziegler  to  account  for  what  he  re- 
ceived upon  its  sale,  for  that  would 
be  to  affirm  a  void  transaction ;  to 
both  reprobate  and  approbate."  The 
Illinois  constitutional  provision  does 
not  render  invalid  the  issue  of 
$9,000,000  of  bonds  and  $18,000,000  of 
stock  for  property  purchased  at  fore- 
closure sale  for  $1,500,000,  there  hav- 
ing been  added  to  the  property 
$6,000,000    worth    of     improvements. 


an  Illinois  corporation  issued  $6,500,-    The  court  pointed  out  that  the  issue 


000  of  stock  and  $5,150,000  in  bonds 
for    the   construction   of   an   elevated 
road  of  about  seven  miles  in  length, 
the  cost  of  which  was  about  $3,500,- 
000,  the  court  held  that  the  constitu- 
tion   of    Illinois    did    not    invalidate 
such    issue,    and    furthermore,    that 
the  corporation  itself  could  not  hold 
liable  the  contractor  to  whom  the  is- 
sue was  made,  inasmuch  as  the  stock 
and  bonds  if  invalid  were  void.    The 
court   said    (p.   128):      "It  must  not 
be  forgotten  that  men  will  not  invest 
large  capital  in  speculative  and  haz- 
ardous enterprises   without  being  as- 
sured that,   in   case  of  success,  they 
shall    receive    a    profit    coresponding 
relatively  to  the  risk  assumed.    What- 
ever may  be  the  correct  solution   of 
the  problem,  the  law  does  not  require 
payment  of  subscription  of  stock  to 
be  in  cash.     It  may  be   paid  for  in 
work,  labor,  material,  or  service  ren- 
dered.     We    sit    to    declare,    not    to 
make,  the  law,  and  are  unable  to  con- 
demn the  transaction  in  question  as 
within  the  ban  of  the  constitutional 
provision.      But   if    this    were    other- 
wise, and  the  constitutional  provision 
denounces    this    issue    of    stock,    th3 


of    the    stock   did    not    interfere   with 
creditors  collecting  their  claims,  inas- 
much as  their  claims  were  ahead  of 
the  stock,   and    the    bonds   by   them- 
selves   were    not    in    excess    of    the 
property    itself.      Continental    T.    Co. 
v.    Toledo,    etc.    R.   R.,    82    Fed.   Rep. 
642    (1897),   affirmed   in    Toledo,   etc. 
R.  R.  v.  Continental  T.  Co.,  95  Fed. 
Rep.  497   (1899).     Even  though  there 
is  a  gross  overvaluation  of  property 
turned  in  for  stock,  yet  this  merely 
places  the  burden  of  proof  upon  the 
stockholders  to  show  that  they  acted 
in    good    faith.      Creditors   trying   to 
hold    them    liable    must    show    that 
they   became   creditors    on   the   faith 
that  the  stock  was  paid  up  and  that 
such    overvaluation    was    fraudulent 
with    intent   to    cheat    the    creditors. 
Hence,     where     a     mercantile     firm 
owned  property  worth  $2,700,000  and 
owed  $1,800,000,  and  sold  the  property 
subject  to  the  debt,  to  a  corporation, 
for  $1,500,000   of  stock,   there  was  a 
gross   overvaluation,   and   yet   if   the 
parties    acted    in    reliance    upon    the 
books  of  the  concern,  and  the  system 
of    book-keeping   used    did   not    show 
the  actual  condition  of  the  firm,  they 


197 


§47.] 


"watered"  stock. 


[CH.  III. 


States  and  of  the  supreme  courts  of  various  states  set  forth  in  the 
notes  below.     The  trouble  with  these  constitutional  prohibitions  is 


are  not  liable,  they  having  acted  in 
good  faith.  Taylor  v.  Walker,  117 
Fed.  Rep.  737  (1902);  aff'd  127  Fed. 
Rep.  108. 

The  California  constitutional  prohi- 
tion  against  the  issue  of  fictitious 
bonds  or  stock  does  not  prevent  the 
company  pledging  its  bonds  for  a  debt 
less  than  the  par  value  of  such  bonds. 
Atlantic,  etc.  Co.  v.  Woodbridge,  etc. 
Co.,   79  Fed.  Rep.  842    (1897). 

It  is  legal  for  a  company  to  issue 
$67,000  of  bonds  and  $67,000  of  full- 
paid  stock  even  to  one  of  its  directors 
for  $67,000  in  cash,  if  this  was  all 
that  the  whole  $134,000  of  securities 
were  worth,  and  if  all  the  directors 
and  stockholders  knew  of  it  and 
agreed  to  it.  The  provision  in  the 
California  constitution  relative  to 
watered  stock  and  bonds  does  not 
invalidate  them.  Union  L.  &  T.  Co. 
v.  Southern  California,  etc.  Co.,  51 
Fed.  Rep.   840    (1892). 

Although  watered  stock  and  bonds 
are  issued  in  Pennsylvania,  yet  a 
bona  fide  purchaser  of  the  bonds  may 
foreclose  the  mortgage  securing  them 
in  order  to  obtain  payment.  Wood- 
bury v.  Allegheny,  etc.  R.  R.,  72  Fed. 
Rep. 371  (1895).    See  159  Fed.  Rep.  783. 

In  New  Castle,  etc.  Ry.  v.  Simpson, 
21  Fed.  Rep.  533  (1884),  the  court, 
in  passing  on  the  provision  in  the 
Pennsylvania  constitution,  held  that 
a  contract  giving  a  construction 
company  $300,000  of  stock  and  $300,- 
000  of  bonds  for  work  worth  but 
$180,000  would  be  set  aside,  although 
$40,000  of  work  had  been  done;  but 
that  the  construction  company  should 
be  paid  the  $40,000  in  cash.  See 
s.  c,  23  Fed.  Rep.  214  (1885),  holding 
that  the  contractor  may  recover  back 
not  only  this,  but  also  a  reasonable 
compensation  and  interest. 

Where  $100,000  of  bonds  and  $125,- 
000  of  stock  are  issued  in  payment 
of  construction  work  of  the  value  of 


$121,000,  the  bonds  are  valid  and  may 
be  enforced  by  bona  fide  purchasers. 
Wood  v.  Corry,  etc.  Co.,  44  Fed.  Rep. 
146  (1890).  This  last  case  held  also 
that  only  the  state  could  object  to 
an  issue  of  "watered"  stock  and 
bonds  as  being  in  violation  of  this 
constitutional  provision. 

Where  stock  is  issued  as  full  paid 
for  labor  done,  and  the  good  faith 
is  not  questioned  and  the  considera- 
tion was  performed,  the  stockholders 
cannot  be  held  liable  on  the  stock  as 
not  being  paid  up  in  full.  Holly 
Mfg.  Co.  v.  New  Chester  Water  Co., 
48  Fed.  Rep.  879  (1891).  Where 
bonds  have  been  given  to  the  stock- 
holders for  nothing,  the  issue  being 
in  payment  for  construction  work, 
which,  however,  at  the  time  of  the 
contract,  had  already  been  completed 
and  delivered,  the  corporation  may 
enjoin  the  foreclosure  of  a  mortgage 
securing  such  bonds,  the  bonds  being 
still  in  the  stockholders'  hands,  and 
may  cause  the  bonds  themselves  to 
be  canceled  under  the  Colorado  con- 
stitutional prohibition  against  such 
an  issue.  Gunnison,  etc.  Co.  v.  Whit- 
aker,  91  Fed.  Rep.  191  (1898).  Even 
though  the  stock  of  a  street  railway 
company  is  issued  for  property  and 
franchises  at  an  overvaluation,  yet 
the  stockholder  is  not  liable,  under 
the  Nebraska  constitution  rendering 
subscribers  liable  to  the  extent  of 
unpaid  subscriptions,  inasmuch  as 
there  was  no  subscription  in  such 
case,  there  having  never  been  any 
promise  to  pay  for  the  stock,  and 
there  being  no  allegation  of  fraud  to 
the  injury  of  creditors,  and  no  allega- 
tion that  the  stock  ever  had  any 
actual  value.  Seaboard,  etc.  Bank  v. 
Slater,  105  Fed.  Rep.  179  (1900).  The 
Nebraska  prohibition  does  not  render 
void  an  issue  of  $5,940,000  stock  and 
bonds  for  a  railroad  purchased  at  a 
foreclosure   sale,   where   the   old   cor- 


198 


CH.  III.] 


"watered"  stock. 


[§47. 


tliat  they  attempt  to  cure  the  evil  after  the  harm  has  been  done,  in- 
stead of   attempting  to  superintend   the   issue   of  stock   and  bonds 


poration  had  over  $5,000,000  stock  and  cost  much  less  than  $20,000  cash  per 

bonds  outstanding,  even  though  it  is  mile. 

claimed  that  the  property  did  not  cost  The  Texas  prohibition  is  not  appli- 

over  $2,000,000.     The  court  held  that  cable  to  a  contract  of  a  land  improve- 

the    transaction    was   valid    although  ment  company  to  issue  bonds  to  aid 

"the     cash     value     of     the     physical  in    building   a    bridge.      Fort   Worth 

property   and   franchises   which  were  City  Co.  v.  Smith  Bridge  Co.,  151  U. 

acquired  by  the  reorganized  company  S.  294   (1894). 

was  not  fully  equal  to  the  par  value  Under  the  Texas  statute,  providing 

of    its    securities."      Sioux    City,    etc.  for  bringing  in  the  stockholder  and 

Ry.  v.  Manhattan  T.  Co.,  92  Fed.  Rep.  holding    him    liable    on    his    unpaid 

428   (1899).  subscription    in    the   same    action    in 

In  the  case  of  Northwestern,  etc.  which  the  corporation  itself  is  sued, 
Ins.  Co.  v.  Cotton,  etc.  Co.,  46  Fed.  the  stockholder  will  not  be  held  liable 
Rep.  22  (1891),  the  court  held  that  although  he  sold  the  company  $55,000 
where  property  worth  $157,000  is  worth  of  property  for  $32,500  in  cash 
turned  in  to  a  corporation  for  $200,-  and  $45,000  in  stocks  and  bonds. 
000,  payable  in  $125,000  of  stock  and  Thomson-Houston,  etc.  Co.  v.  Dallas, 
$75,000  of  bonds,  the  creditors  of  the  etc.  Co.,  54  Fed.  Rep.  1001  (1893). 
company  might  hold  the  parties  Under  the  peculiar  wording  of  the 
liable  on  the  stock,  as  though  it  were  Kentucky  constitution,  to  the  effect 
unpaid  stock,  and  the  creditor  is  pre-  that  property  or  labor  shall  not  be  re- 
sumed not  to  have  known  of  the  ceived  in  payment  of  stock  or  bonds 
transaction  when  he  contracted  the  "at  a  greater  value  than  the  market 
debt.  price  at  the  time  the  said  labor  was 

The  constitutional  provision  in  Ala-  done   or   property   delivered,"   a   con- 

bama  forbidding  the  issue  of  stock  or  tract,  by  which  the  assets  of  one  cor- 

bonds  except  for  value,  and  the  stat-  poration  are  to  be  turned  over  to  a 

utory    provision    requiring    subscrip-  new    corporation,    so   that    the   stock- 

tions  to  railroad  stock  to  be  paid  in  holders  of  the   old   corporation  shall 

money,    labor    or    property    at    their  receive   preferred   stock    in    the   new 

money  value,    does   not   prevent   one  corporation  dollar  for  dollar  for  their 

railroad  company  selling  its  property  old   stock,  and  that  then   $235,000  of 

to    -another     railroad     company     for  common    stock    is    to    be    given    to 

bonds   and   stock   of   the   latter,   and  brokers  who  agree  to  sell  $100,000  of 

the   value   placed   upon   the   property  bonds  at  ninety  cents  on  the  dollar, 

may    be   its   net   earning  power   and  is    illegal,    and    an    action    by    the 

the   cost  of  rebuilding  it.     It  is  im-  brokers    for   damages    for   breach    of 

material    that  the   original   cost   was  such  contract  will  not  lie.     Altenberg 


much  less.     Grant  v.  East,  R.  R.,  54 
Fed.  Rep.  569   (1893). 

In    the    case    of   Coe   v.    East,    etc. 


v.  Grant,  85  Fed.  Rep.  345  (1898). 

Illinois:  The  supreme  court  of  Illi- 
nois   settled    this    question    for    that 


R.  R.,   52   Fed.  Rep.   531    (1892),  the  state  properly  when   it  rendered  the 

court  held  that  the  above   provision  decision    in    Peoria,    etc.    R.    R.    v. 

in    Alabama    against    watered    stock  Thompson,    103    111.   187    (1882).      In 

and  bonds  did  not  invalidate  bonds,  this  case  bonds  and  cash  were  given 

although  $10,000  of  bonds  and  $10,000  to  the  contractors  in  payment  for  the 

of  stock  were  issued  for  every  mile  construction  of  the  road.     The  trans- 

of  road  constructed,   even   though   it  action  was  upheld. 

199 


§47.] 


"watered"  stock. 


[CH.  III. 


before  the  issue  is  made.     There  is  but  one  state  in  the  Union  which 
has  succeeded   in  eliminating  most  of  the  evils  of  stock-watering. 

This    decision    was   practically   the  from  a   supplemental    decree  to  that 

first  important  decision  in  the  country  effect.     Even   under   the    Illinois   de- 

on  this  constitutional  provision  now  cision,  the  members  of  a  firm  are  not 

so  common,  and  the  supreme  court  of  liable     on     stock     issued     for     their 

Illinois  wisely  held  that  the  provision  property    where    the    valuation    was 

was   not   intended   to   interfere   with  made  by  their  manager  and  no  intent 

the  usual  business  method  of  issuing  on  their  part  to  overvalue  the  same 

the  stock  and  bonds  of  corporations,  is  proved.     Taylor  v.  Cummings,  127 

Even    though    bonds    and    stock    are  Fed.  Rep.   10S    (1903). 

issued  for  the  construction  of  a  road,  In   Coleman  v.  Howe,   154   111.   458 

the  face  value  of  which  is  twice  the  (1895),    the    court   held    that,    where 

cost  of  the  road,  yet  if  all  the  stock-  property  of  known  value  and  worth 

holders    consented   and    none    of   the  but  $75,000  is  sold  to   a  corporation 

creditors   then    existing   are   injured,  for     $150,000     capital     stock     and     a 

transferees     of     such     stock     cannot  mortgage    for   $70,000,    fraud   is   pre- 

complain    on   the   foreclosure   of   the  sumed,  and  the  stockholders  are  liable 

mortgage  securing  the  bonds.     Wells  for  the  par  value  of   the   stock  less 

v.  Northern  T.  Co.,  195  111.  288  (1902).  the   $5,000.     The  court  said:      "Some 

In  the  case  Parmelee  v.  Price,  208  of  the  cases  hold  that  overvaluation 

111.    544    (1904),    property   purchased  will  not  render  the  stockholder  liable 

at    an    insolvent's    sale    for    $25,000,  for  the  difference  between  the  actual 

and  worth  no  more  than  that  sum  at  and    accepted    values    unles    there    is 

any  time,  was  turned  over  to  a  cor-  an  affirmative  proof  of  fraud  aliunde. 

poration  for  $100,000  full  paid  stock  But  other  cases  hold  what  we  regard 

out    of    $125,000    capital    stock,    the  as     the     better    view,    namely,    that 

remaining  $25,000,  being  paid  in  cash,  where  property  whose  value  is  well 

The  transaction  was  in  May,  1890.    In  known,  or  can  be   easily  learned,   is 

May,    1895,    judgments    were   entered  taken    at    an    exaggerated    estimate, 

against  the  corporation,   and   a   cred-  a  strong  presumption  is  raised,  that 

itor's     suit    commenced    to    hold    the  the   valuation   is   not   in   good    faith, 

stockholders   liable.     The   court  held  and  is  made  for  a  fraudulent  purpose, 

that  the  statute  of  limitations  was  a  This  presumption  will  be  conclusive 

bar.  unless    rebutted   by   satisfactory    evi- 

Where  $2,000,000  of  stock  is  issued  dence  explanatory  of  the  apparent 
for  a  worthless  unpatented  invention  fraud.  Where  the  overvaluation  is 
and  an  unwritten  play,  the  stock  is  so  great  that  the  fraudulent  intent 
not  paid  up,  and  the  parties  receiving  appears  on  its  face,  and  is  not  ex- 
the  same  are  liable  thereon  to  cor-  plained,  the  court  will  hold  it  to  be 
porate  creditors.  Gillett  v.  Chicago  fraudulent  as  matter  of  law."  See 
Title  &  T.  Co.,  222  111.  254  (1907),  also  People  v.  Sterling,  etc.  Co.,  82 
the  court  saying  that  in  taking  111.  457  (1876),  holding  that  the  cor- 
property  in  payment  for  stock  the  poration  may  refuse  to  allow  a  trans- 
property  must  be  valued  at  its  market  fer  of  watered  stock.  In  the  case 
value,  if  it  has  any,  and  at  its  sell-  of  Siegel  v.  Andrews  &  Co.,  181  111. 
ing  cash  price,  if  it  has  not  a  market  350  (1899),  where  the  purchasers  of 
value.  In  this  case  interest  was  not  a  patent-right  for  $15,000  organized 
allowed  from  the  commencement  of  a  corporation  and  personally  sub- 
the  suit  to  the  time  of  decree,  it  scribed  for  $100,000  of  its  stock,  and 
appearing  that  no  appeal  was  taken  subsequently   paid   therefor  by  turn- 

200 


CH.   III.] 


"watered"  stock. 


[§47. 


That  state  is  the  commonwealth  of  Massachusetts.       The  remedy 
there  is  a  prohibition  against  the  issue  of  any  stock  or  bonds  for 


ing  in  the  patent-right,  the  court  held 
that  each  stockholder  was  liable  for 
the  par  value  of  his  stock  less  fifteen 
per  cent.,  and  that  a  judgment  credi- 
tor might  sue  any  one  or  more  of  the 
stockholders. 

The  fact  that  a  contractor  received 
stock  and  bonds  four  times  in  par 
value  the  value  of  the  work  is  not 
fatal,  where  no  fraud  is  alleged  and 
the  actual  cost  of  the  work  is  not 
alleged.  But  where  the  contractor 
then  entered  into  a  contract  whereby 
the  mortgage  was  to  be  foreclosed, 
and  he  was  to  participate  in  the 
property  purchased  at  the  sale,  all 
for  the  purpose  of  cutting  off  other 
creditors,  he  is  liable  to  them.  Cleve- 
land, etc.  Co.  v.  Crawford,  9  Ry.  & 
Corp.  L.  J.  171  (Chicago,  1891). 

Where   the   stockholders   in   an   in- 
solvent California  corporation  formed 
an  Illinois  corporation  and  exchanged 
their   stock   for   stock   in   the   latter, 
in  order  to  avoid  the  California  statu- 
tory   liability,    and   then    transferred 
the    property   of    the    California   cor- 
poration  to   the   Illinois  corporation, 
the  Illinois  court  held  them  liable  on 
the  new  stock  to  the  extent  that  the 
actual  value  of  the  property  was  less 
than    the    par    value    of    the    stock. 
Sprague    v.    Nat.    Bank    of    America, 
172  .111.    149    (1898).      It  appears   in 
the  case  of  Foote  v.  Illinois,  etc.  Bank, 
194    111.    600     (1902),    that    only    $32 
per    share    had    been    paid    on    the 
original  stock  in  the  Los  Angeles  Cable 
Railway  Company,  and  that  then  this 
partially    paid    stock    had    been    ex- 
changed share  for  share  for  full-paid 
stock  in  the  Pacific  Railway  Company. 
The  court  held  that  such  a  transac- 
tion did  not  pay  up  fully  the  Pacific 
Railway  Company  stock,  even  though 
it  purported  to  do  so. 

The  fact  that  a  contractor  receives 
stock  and  bonds  much  greater  in  par 
value  than  the  cost  of  the  work  does 


not  make  the  issue  illegal,  inasmuch 
as  he  is  entitled  to  a  margin  to  cover 
the  risks  and  also  make  a  profit. 
Chicago  R.  R.  v.  Northern  Trust  Co., 
90   111.  App.   60    (1899). 

Pennsylvania:    Where  a  person  ob- 
tains a  license  to  use  a  patent  and 
pays     $100,000     therefor     and     then 
causes  the  corporation  organized  for 
that  purpose  to  pay  to  him  $100,000 
cash  and  issue  to  him  $1,400,000  full- 
paid  stock  for  the  said  license,  a  re- 
ceiver of  the  corporation  cannot  hold 
him    personally    liable   on    the   stock 
as  unpaid  stock,  under  the  constitu- 
tion of  Pennsylvania,  which  prohibits 
the  issue  of  stock  except  for  property 
actually  received,  it  being  shown  that 
the  patents  were  apparently  very  valu- 
able at  the  time,  and  that  if  the  ex- 
pectations had  been  realized  the  re- 
turns   would    have    been    enormous, 
and  there  being  no  evidence  that  the 
license  was  overvalued   at  the  time. 
The  value  is  to  be  determined  as  of 
the    time    of    forming    the    company, 
and    not    after    it   became    insolvent, 
especially  where  the  fact  of  the  issue 
was  set  forth  in  the  application  for 
the   charter,   and    it   is   no   proof   of 
fraud    that    the    person    gave    away 
some  of  the  stock  for  the  experience 
and    skill    of    others.      Finletter    o. 
Acetylene,    etc.    Co.,    215    Pa.    St.    86 
(1906).     Where  a   water-works  com- 
pany issues  all   its  stock  and   bonds 
to  a  contractor  for  construction  work 
in  advance  of  the  work,  and  the  con- 
tractor pledges  them  to  a  banker  for 
advances,  the  other  creditors  of  tha 
water-works  company  cannot  claim  an 
interest     in     such     securities,     even 
though  the  banker  had  assumed  the 
contractor's   obligation   to   one   other 
creditor.    McNeal,  etc.  Co.  v.  Bullock, 
174   Pa.   St.   93    (1896). 

It  is  legal  for  a  corporation  to  is- 
sue stock  as  full  paid  to  a  person  in 
consideration  of  his  leaving  an  em- 


201 


47.] 


"watered"  stock. 


[CH.    III. 


property  until  after  state  commissioners  have  passed  upon  the  pro- 
posed issue.     That  state  does  not  wait  until  the  stock  and  bonds 


ployment  in  which  he  is  engaged  and 
of  assuming  the  presidency  of  the 
corporation.  Shannon  v.  Stevenson, 
173  Pa.  St.  419    (1S96). 

In  the  important  case,  American 
Tube,  etc.  Co.  v.  Hays,  165  Pa.  St. 
489  (1895),  the  members  of  a  firm 
engaged  in  operating  gas  wells  formed 
a  corporation  with  a  capital  stock  of 
$500,000.  They  agreed  with  the  cor- 
poration to  transfer  the  firm's  prop- 
erty to  it  in  payment  of  the  $500,000 
of  stock,  and  also  that  they  should 
retain  only  $175,000  of  such  stock, 
and  turn  into  the  company's  treasury 
the  remainder  as  a  working  capital. 
The  contracts  were  performed  in  good 
faith.  The  court  held  that  the  stock 
was  paid  up,  and  that  the  subscribers 
were  not  liable  to  creditors  for  the 
amount  subscribed  by  them. 

It  was  also  held  that  the  fact  that 
the  property  transferred  to  the  com- 
pany afterwards  proved  to  be  much 
less  in  value  than  $175,000  did  not 
render  the  stockholders  liable,  there 
being  no  proof  of  fraud  or  bad  faith, 
and  the  value  of  the  property  at  the 
time  of  the  transaction  having  been 
largely  speculative,  it  being  natural- 
gas  property. 

Where  stock  is  actually  issued  for 
property,  it  is  useless  to  check  money 
in  and  out  in  payment.  "Not  a  dollar 
in  actual  money  was  used  in  the 
transaction,  and  what  end  was  ac- 
complished by  all  this  idle  ceremony 
it  is  impossible  for  us  to  see.  But, 
if  it  did  no  good,  we  cannot  see,  in 
the  absence  of  any  finding  of  fraud 
intended  or  practised,  that  it  did  any 
serious  harm."  American  Tube,  etc. 
Co.  v.  Hays,  165  Pa.   St.  4S9    (1895). 

Even  though  a  person  who  has  a 
contract  with  a  street  railway  com- 
pany that  the  latter  will  lease  its 
street  railway  on  certain  terms,  turns 
over  such  contract  to  a  new  corpora- 
tion for  $900,000  of  stock  of  the  lat- 


ter, and  the  latter  then  assumes  the 
lease,  and  even  though  such  stock  is 
illegal  under  the  constitution  and 
statues  of  Pennsylvania,  yet  where  the 
state  delays  three  years  in  filing  a  bill 
to  declare  it  void,  and  meanwhile  the 
stock  has  passed  into  bona  fide  hands, 
and  not  until  five  years  thereafter  are 
the  real  owners  of  the  stock  made 
parties  defendant,  the  bill  will  be  dis- 
missed. Commonwealth  v.  Reading, 
etc.  Co.,  204  Pa.  St.  151   (1902). 

The  constitutional  provision  in 
Pennsylvania  against  the  issue  of 
stock  for  property  at  an  overvalua- 
tion is  not  self-executing,  and  the 
statute  which  puts  it  into  force  as  to 
railroads,  by  providing  that  the  presi- 
dent shall  file  a  statement  with  the 
secretary  of  state,  and  that  then  the 
Attorney-General,  on  the  complaint  of 
any  stockholder,  shall  test  the  validity 
of  the  same,  is  exclusive  as  to  the 
remedy,  and  hence  a  stockholder  can- 
not himself  file  such  a  bill  to  en- 
force the  statute,,  Yetter  v.  Delaware 
R.  R.  206  Pa.  St.  485  (1903). 

A  court  of  equity  has  no  power, 
prior  to  an  interlocutory  decree  or 
order,  to  appoint  a  master  to  conduct 
an  election,  and  to  finally  decide 
whether  certain  stock  should  be  al- 
lowed to  vote  or  not,  on  the  ground 
that  such  stock  had  been  illegally  is- 
sued for  property  in  violation  of  the 
statute,  especially  where  other  stock- 
holders are  not  made  parties  defend- 
ant. Yetter  v.  Delaware,  etc.  R.  R., 
206  Pa.  St.  485    (1903). 

An  embarrassed  corporation  may 
sell  its  stock  at  sixty  cents  on  the 
dollar  and  a  bona  fide  purchaser  is 
not  liable  for  the  difference,  even 
though  the  statute  of  West  Virginia 
where  the  issue  was  made  stated  that 
a  sale  of  stock  at  less  than  par  should 
be  only  after  a  publication  of  a  no- 
tice, and  no  such  publication  was 
made,     such     publication,     however, 


202 


CH.  III.] 


"watered"  stock. 


[§47. 


have  been  issued  and  either  sold  or  vised  as  collateral  security.     The 

remedy  is  applied  in  the  origin  of  the  transaction,  and  has  been 

being    merely    directory.      The    court  Glared  void.     Pittsburgh,  etc.  R.  R.  v. 

said  it  was  immaterial  whether  the  Rothschild,  4  Cent.  Rep.  107   (1SS6). 

corporate  creditors  who  brought  the  In  passing  upon  the  legality  of  an 

suit   were   such   before   or   after    the  issue  of  $500,000  of  stock  for  a  road 

issue,    because    "if    before,    no    reli-  that    had    just    been    sold    under    a 

ance  could  have  been  placed  on  the  mortgage  for  $100,000,  the  court  said 

stock  as  full  paid,  and  if  after,  they  in  Commonwealth  v.  Central  Passen- 

cannot  complain,  as    the    transaction  ger  Ry.,  52  Pa.  St.  506)  515    (1886): 

was    open    to    them."      McDowell    v.  "In  all  such  cases  the  determination  of 

Lindsay,  213  Pa.  St.  591  (1906).  the  amount  of  stock  must  be  an  arbi- 

A   land-owner   who   agrees   to  take  trary  adjustment.     As  we  have  said, 

pay   from   a   railroad   for   a  right  of  the   cost  of   the   property  is   no   fair 

way  in  shares  of  stock  must  take  the  measure  of  what  the  stock  represents, 

stock  at  its  par  value  and  not  at  its  and  if  the  real  value  be  adopted  as 

market    value.      Hoffman    v.    Blooms-  the    standard,    it    is    no    standard    at 


burg,    etc.    R.    R.    157    Pa.     St.    174 
(1893). 


all.     M.  varies  with  the  estimates  of 
witnesses,  and  the  franchises  are  in- 


Where  the  president  of  a  railroad     capable  of  valuation. 


If  that 


corporation  secretly  owns  land  in  the  was  a  sum  greater  than  the  actual 
name  of  another  person,  and  causes  value  of  the  company's  franchises 
the  corporation  to  purchase  it  and  and  property,  as  it  was  greater  than 
issues  stock  and  bonds  in  payment  the  cost,  we  are  unable  to  see  how 
without  disclosing  his  interest  in  the  the  public  was  affected  by  the  ex- 
land,  he  is  liable  to  the  corporation  aggerated  estimate." 
for  the  difference  between  the  actual  As  to  the  common  law  of  Pennsyl- 
market  value  of  the  stock  and  bonds  vania  on  this  subject,  see  §  46,  supra. 
and  the  actual  value  of  the  land.  Arkansas:  Payment  for  stock  in  a 
Danville,  etc.  R.  R.  v.  Kase,  39  Atl.  lumber  company  cannot  be  made  by 
Rep.  301   (Pa.  1898).  turning     in     the     stock     of     another 

Land  may  be  turned  in  in  payment  lumber  company  and  where  the  stock 

for  stock,   even  at  an  overvaluation,  of  the  latter  was  issued  for  property 

where   the   valuation   is   set  forth   in  at  a  palpable   overvaluation  the  sub- 

the   incorporation  papers,   under  the  scriber  to  the  former  is  entitled  only 

Pennsylvania  act.    Cock  v.  Bailey,  146  to  credit  for  the  actual  value  of  the 
Pa.  St.  328  (1892). 

A  contractor  who  receives  bonds  in 
payment    of    construction    work    and 


latter    stock.     Lester,    etc.   v.   Bemis, 
etc.  Co.,  71  Ark.  379    (1903). 

California:     In    California    the    su- 
sells  them  cannot  claim  that  they  are     preme  court,  in   Stein  v.  Howard,  65 


void  as  contrary  to  the  statute  pro- 
hibiting "watered"  bonds.  Reed's 
Appeal,  122  Pa.   St.  505    (1888). 


Cal.  616  (1884),  has  held  that  the  con- 
stitutional prohibition  does  not  pre- 
vent the  issue  of  stock  at  less  than 


Where   a   consolidated   company   of  its     par     value.       The     meaning     of 

New    York   and    Pennsylvania   issues  "fictitious"  is  defined  to  be  that  given 

bonds  in  New  York  fictitiously,  such  in  Webster's   Dictionary.     The   court 

bonds  cannot  be  enforced  in  Pennsyl-  said:     "Of  the  stock  proposed  to  be 

vania,  since  they  are  void  by  its  con-  issued    there   is   no    one   share   upon 

stitution.    A  foreclosure  in  New  York  which  a  person  can  place  his  finger 

of   the   mortgage   securing  the   bonds  and    say    that    share    is    or    will    bo 

may  be  set  aside  and  the  bonds  de-  feigned,  imaginary,  not  real;  counter- 

203 


§  47.]  "watered"  stock.  [ch.  in. 

found  to  be  effective  as  well  as  just.     There  are  few  Massachusetts 


feit,  false,  not  genuine."  An  injunc- 
tion to  restrain  such  an  issue  of  new 
increased  stock  was  refused. 

Even  though  stock  is  issued  for 
property  which  is  worth  but  one-tenth 
of  the  par  value  of  the  stock,  yet  if 
all  the  stockholders  assent  thereto  a 
subsequent  purchaser  of  the  stock  can- 
not maintain  a  suit  in  behalf  of  the 
corporation  to  cancel  the  stock  on  the 
ground  of  fraud.  His  remedy,  if  any, 
is  a  personal  suit  for  false  representa- 
tions. Garretson  v.  Pacific,  etc.  Co., 
146  Cal.  184   (1905). 

Receiving  the  subscriber's  note  in 
payment  for  stock  does  not  render  the 
stock  void,  under  this  constitutional 
provision.  Pacific  Trust  Co.  v.  Dor- 
sey,  72  Cal.  55   (1887). 

Where  a  corporation  that  has  no 
property  issues  $2,475,000  of  full-paid 
stock  as  the  purchase  price  of  prop- 
erty worth  $1,200,000,  and  also  as- 
sumes mortgage  bonds  on  such  prop- 
erty to  the  amount  of  $1,050,000,  such 
stock  is  not  fictitious,  and  a  stock- 
holder in  the  purchasing  corporation 
cannot  complain,  inasmuch  as  he  is 
not  injured.  Smith  v.  Ferries,  etc. 
Ry.,  51  Pac.  Rep.  710  (Cal.  1897).  The 
supreme  court  of  California,  however, 
in  the  case  of  Smith  v.  Martin,  135 
Cal.  247  (1901),  adopted  the  reason- 
ing of  the  dissenting  opinion  in  the 
preceding  case.  Even  though  stock 
was  issued  for  property  taken  at  an 
overvaluation,  yet  such  stock  in  the 
hands  of  a  bona  fide  purchaser  is 
valid,  notwithstanding  the  constitu- 
tional provision  in  California  against 
such  an  issue.  Smith  v.  Martin,  135 
Cal.  247  (1901). 

Where  stock  is  issued  for  property, 
but  at  an  agreed  price  of  fifty  cents 
on  the  dollar  for  the  stock,  the  certifi- 
cates of  stock  not  purporting  to  be 
full  paid,  the  party  is  liable  to  cor- 
porate creditors  for  the  other  fifty 
cents  on  the  dollar.  Stockton,  etc. 
Co.  v.  Houser,  109  Cal.  1  (1895). 


Under  the  California  constitution,  a 
note  conditioned  upon  the  completion 
of  the  road  in  a  given  time,  and  given 
to  the  corporation  for  stock,  is  void. 
Jefferson  v.  Hewitt,  103  Cal.  624 
(1894);   s.  c,  95  Cal.  535. 

Colorado:  Stock  issued  as  full-paid 
for  no  consideration  whatsoever  is 
void  under  the  constitutional  provi- 
sion that  stock  shall  be  issued  only 
"for  labor  done,  services  performed,  or 
money  or  property  actually  received." 
The  original  holder  of  such  stock 
cannot  institute  a  suit  to  remedy  a 
wrong  done  to  the  corporation  by  its 
president.  Arkansas  River,  etc.  Co. 
v.  Farmers'  L.  &  T.  Co.,  13  Colo.  587 
(1889). 

Where  a  mining  location  is  allowed 
only  after  discovery  of  ore  a  mining 
location  without  such  discovery  is 
not  a  good  consideration  for  the  issue 
of  stock,  and  hence  the  stockholders 
are  personally  liable.  Buck  v.  Jones, 
18  Colo.  App.  250  (1902). 

The  Colorado  constitutional  pro- 
vision does  not  invalidate  a  statute 
authorizing  the  issue  of  full  paid 
stock  in  payment  for  mining  property. 
Speer  v.  Bordeleau,  20  Colo.  App. 
413   (1905). 

Where  for  six  years  an  issue  of 
stock  for  services  has  appeared  fully 
on  the  books  of  the  company  and 
has  not  been  objected  to,  a  stock- 
holder cannot  have  it  set  aside,  even 
under  the  constitution  of  Colorado, 
especially  where  all  the  stockholders 
at  the  time  of  the  issue  assented 
thereto  and  the  party  receiving  the 
stock  used  a  large  portion  of  it  to 
interest  other  persons  in  the  company, 
and  even  though  the  stock  so  issued 
to  him  was  $125,000,  being  one-half 
of  the  entire  stock,  and  was  in  con- 
sideration of  services  rendered  in  ob- 
taining contracts  and  options,  which 
were  turned  over  to  the  company. 
Calivada,  etc.  Co.  v.  Hays,  119  Fed. 
Rep.  202   (1902). 


204 


CH.  III.] 


' '  WATERED  ' ' 


STOCK. 


[§47. 


cases  in  this  chapter — a  proof  of  the  justice   and  efficacy  of  the 


Connecticut :  A  creditor  of  a  dis- 
solved Missouri  corporation  may 
maintain  a  suit  in  equity  in  Connecti- 
cut against  citizens  of  Connecticut 
who  were  stockholders  in  such  cor- 
poration, to  collect  unpaid  subscrip- 
tions, it  being  alleged  that  the  di- 
rectors refused  to  collect  the  same; 
and  where  $100,000  capital  stock  was 
issued  for  land  worth  only  $10,000 
the  stockholders  are  liable  for  the 
difference  under  the  laws  of  Missouri, 
and  hence  may  be  held  liable  iu  Con- 
necticut. Lewisohn  v.  Stoddard,  78 
Conn.  575   (1906). 

Kentucky:  Even  though  stock  is 
issued  on  the  understanding  that  it 
is  to  be  paid  for  by  stock  in  another 
corporation,  yet  the  parties  receiving 
the  stock  may  be  held  liable  to  cor- 
porate creditors,  under  the  Kentucky 
statute,  for  the  difference  between  its 
par  value  and  the  value  of  the  other 
stock  turned  in  as  payment.  Ken- 
tucky, etc.  v.  Schaefer,  120  Ky.  227 
(1905). 

Stockholders  are  not  liable  as  part- 
ners on  the  ground  that  the  stock 
was  watered.  Louisville  Bkg.  Co.  v. 
Eisenman,  94  Ky.  83   (1S93). 

Where  a  person  buys  land  for  $5,000 
and  pays  down  one-half  thereof,  then 
through  friends  sells  it  to  a  corpora- 
tion formed  for  that  purpose  for 
$10,000  of  stock,  the  corporation  as- 
suming the  other  two-thirds  of  the 
original  purchase  price,  the  transac- 
tion is  legal  if  the  land  is  worth 
$10,000,  and  the  stockholders  are  not 
liable  on  the  stock  even  though  they 
received  their  stock  from  the  vendor 
for  nothing,  and  even  though  the  land 
finally  sold  on  foreclosure  sale  for 
$3,000  and  the  original  vendor 
brought  suit  as  a  creditor  of  the  cor- 
poration. Mercer  v.  Park,  etc.  Co., 
38   S.   W.  Rep.  841    (Ky.   1897). 

Louisiana:  In  the  case  of  Davies  v. 
Monroe,  etc.  Co.,  107  La.  145  (1901), 
where      the      entire     capital      stock, 


$125,000,  had  been  issued  in  considera- 
tion of  the  transfer  of  a  franchise 
from  the  city  to  construct  a  water- 
works and  electric  light  plant,  the 
court  said,  "this  is  not  the  way  to 
launch  corporations  upon  the  business 
world  in  the  state  of  Louisiana,  nor 
was  it  at  the  time  this  company  was 
organized.  This  is  said,  merely,  in 
passing."  Where  a  worthless  lease  is 
turned  in  for  stock  the  party  receiv- 
ing the  stock  and  also  the  promoters 
with  whom  he  divided  the  stock  are 
liable  thereon  under  the  Louisiana 
constitution.  Dilzell,  etc.  Co.  v.  Leh- 
mann,  45  S.  Rep.  138  (La.  1907). 

Montana:  Under  the  constitution 
and  statutes  of  Montana,  where  a 
mine  known  to  be  worth  not  over 
$125,000  is  sold  to  a  corporation  for 
$7,500,000  of  stock,  and  then  this 
stock  is  sold  by  the  party  receiving 
the  same  to  the  parties  interested  in 
the  project  at  two  and  one-half  cents 
on  the  dollar,  the  transaction  is 
fraudulent  as  to  corporate  creditors, 
and  the  holders  are  liable  for  the 
difference  between  the  par  value  of 
the  stock  and  the  actual  value  of  the 
mine.  Kelly  v.  Clark,  21  Mont.  291 
(1898). 

Nebraska:  In  the  case  of  Troup  v. 
Horbach,  53  Neb.  795  (1898),  the  su- 
preme court  reversed  the  court  below 
and  held  that  although  $20,000  par 
value  of  stock  was  issued  for  real  es- 
tate worth  only  $6,000,  yet  that 
neither  the  party  receiving  the  stock 
nor  his  transferees  with  notice  were 
liable  for  the  remaining  $14,000,  no 
fraud  or  misrepresentation  being 
shown,     s.  c,  57  Neb.  644    (1899). 

The  issue  of  stock  in  violation  of1 
this  provision  of  the  constitution 
renders  the  charter  liable  to  for- 
feiture by  the  state.  State  v.  Atchi- 
son, etc.  R.  R.,  24  Neb.  143  (1888); 
s.  c,  38  Neb.  437. 

In  Gilkie,  etc.  Co.  v.  Dawson,  etc. 
Co.,     46     Neb.     333      (1895),     where 


205 


47.] 


" watered"  stock. 


[en.  in. 


Massachusetts  remedy.     On  the  other  hand,  the  flood  of  litigation 


$240,000  par  value  of  stock  was  issued 
for  an  equity  in  land,  such  equity 
being  worth  only  $20,000,  the  court 
held  that  the  transaction  was  fraudu- 
lent per  se,  and  the  holders  of  the 
stock  were  liable  for  the  difference  be- 
tween its  par  value  and  the  $20,000, 
and  the  court  also  held  that  the  trans- 
ferees, taking  with  full  knowledge 
of  the  facts,  were  also  liable.  In  the 
case,  however,  of  Penfield  v.  Dawson, 
etc.  Co.,  57  Neb.  231  (189S),  this 
same  transaction  came  again  before 
the  court,  and  the  court  practically 
overruled  the  latter  case  and  held 
that  the  stockholders  were  not  liable, 
the  lower  court  having  held  that  they 
had  acted  in  good  faith  and  without 
any  attempt  to  defraud  the  corpora- 
tion. 

Washington:  Although  coal  land 
which  is  purchased  for  $100,000  is 
immediately  turned  in  to  a  corpora- 
tion for  $5,000,000  of  stock  and  $320,- 
000  of  mortgage  bonds,  yet  the  trans- 
action is  not  fraudulent  per  se  and 
the  stockholders  are  not  liable  to  cor- 
porate creditors.  Manhattan  Trust 
Co.  v.  Seattle,  etc.  Co.,  19  Wash.  493 
(1898),  practically  overruling  16 
Wash.  499.  Where  a  suit  is  brought 
by  creditors  to  invalidate  mortgage 
bonds  and  such  suit  fails,  but  an  ap- 
peal is  taken  by  a  part  of  such  cred- 
itors and  the  decision  reversed,  only 
those  creditors  who  appealed  are  en- 
titled to  have  their  claims  paid  in 
priority  to  the  bonds.  Manhattan 
Trust  Co.  v.  Seattle,  etc.  Co.,  19  Wash. 
493  (1898).  In  the  case  of  Dunlap  v. 
Rauch,  24  Wash.  620  (1901),  the  court 
approved  the  rule  laid  down  in  Ad- 
amant Mfg.  Co.  v.  Wallace,  16  Wash. 
614,  and  held  "that  the  estimate  of 
the  company  placed  upon  the  property 
by  the  stockholders  of  the  corporation 
is  not  conclusive  upon  the  courts." 

Where  stock  is  issued  to  an  attor- 
ney and  on  its  face  is  marked  "Paid 
up,"   it  may  nevertheless  be  a  ques- 


tion for  the  jury  whether  it  was  paid 
for  by  agreement  by  services.  Elder- 
kin  v.  Peterson,  8  Wash.  674    (1894). 

A  creditor  cannot  object  where  the 
stock  was  issued  for  property  honest- 
ly believed  to  be  worth  the  par  value 
of  the  stock.  Turner  v.  Bailey,  12 
Wash.  634   (1S95). 

Even  though  real  estate  worth  but 
$2,000  is  deeded  to  a  corporation  in 
payment  for  $4,000  of  stock,  yet  the 
holder  of  the  stock  is  not  liable  for 
the  remaining  $2,000,  under  the  stat- 
utes of  Washington,  the  court  saying 
that  no  actual  intention  of  fraud  was 
proved,  and  that  no  proof  was  given 
that  the  corporation  was  formed  to 
issue  paper  or  obligations  to  third 
parties,  or  to  incur  any  indebtedness 
at  all,  and  that  mere  overvaluation 
did  not  constitute  fraud.  Kroenert  v. 
Johnston,  19  Wash.  96  (1898),  limit- 
ing prior  decisions.  A  dissenting 
stockholder  in  a  New  Jersey  corpora- 
tion owning  a  street  railway  in  Wash- 
ington may  enjoin  a  sale  of  the  prop- 
erty to  a  Washington  street  railway 
company  for  20,000  shares  of  the  full 
paid  stock  of  the  latter  where  dis- 
senting stockholders  of  the  former 
are  to  be  paid  only  $35  cash  in  lieu 
of  each  share  of  the  Washington  cor- 
poration, which  he  would  be  entitled 
to.  On  its  face  this  is  an  issue  of 
the  Washington  stock  at  $35  per 
share,  and  is  in  violation  of  the  Wash- 
ington statutes.  Coler  v.  Tacoma  Ry. 
etc.,  65  N.  J.  Eq.  347   (1903). 

Texas:  If  the  contract  does  not  ex- 
pressly state  that  the  stock  is  to  be 
paid-up  stock  in  consideration  of  the 
property  received,  the  court  will  not 
presume  that  such  was  the  contract. 
Keating  v.  McCutcheon,  14  Tex.  Civ. 
App.  150  (1896).  The  liability  of 
stockholders  on  watered  stock  may  be 
decreased  by  profits  of  the  company 
which  have  not  been  used  for  divi- 
dends. Cole  v.  Adams,  92  Tex.  171 
(1898).      Under    the    Texas    statutes 


206 


CH.  III.]                                              "  WATERED  "  STOCK.  [§47. 

in  the  courts  of  Alabama,  Missouri  and  the  other  states,   on  this 

the  railroad  commissioners  have  no  cash  and  $60,000  of  the  paid-up  stock 
authority  to  pass  upon  the  legality  of  a  company  to  be  organized  to  take 
of  a  proposed  issue  of  stock  for  prop-  over  the  property,  and  the  purchasers 
erty  nor  to  declare  an  issue  of  stock  turn  the  property  in  to  a  corporation 
to  be  illegal.  Davis  v.  San  Antonio,  for  $219,000,  and  sell  $100,000  thereof 
etc.  Ry.,  92  Tex.  642  (1S99).  In  the  at  a  discount  to  pay  certain  debts, 
case  of  Thayer  v.  Wathem,  17  Tex.  and  the  corporation  becomes  insolv- 
Civ.  App.  382  (1897),  the  court  re-  ent,  none  of  the  parties  are  liable  on 
ferred  to  the  statute  allowing  a  re-  the  stock  as  having  been  fraudulently 
organized  corporation  to  issue  bonds  issued  without  full  payment  therefor, 
and  stock  in  payment  for  the  prop-  Merchants,  etc.  Bank  v.  Belington,  etc. 
erty  to  an  amount  fifty  per  cent,  over  Co.,  51  W.  Va.  60  (1902).  Even  though 
the  value  of  the  property,  provided  a  certificate  of  incorporation  which 
the  railroad  commission  consent,  and  is  filed  under  the  laws  of  West  Vir- 
practically  held  such  statute  not  to  ginia  provides  that  stockholders  pay- 
be  a  violation  of  the  constitutional  ing  fifty  cents  on  a  dollar  to  the  corn- 
prohibition.     See  108  S.  W.  Rep.  967.  pany   for    their   stock,    shall    not   be 

In  Texas  parties  to  whom  stock  is  liable  for  the  remaining  fifty  per 
issued  for  property  are  liable  to  cred-  cent.,  this  is  not  binding  on  corporate 
itors  for  the  difference  between  the  creditors,  under  the  constitution  of 
actual  value  of  the  property  and  the  West  Virginia.  Security  T.  Co.  v. 
par  value  of  the  stock,  even  though  Ford,  75  Ohio  St.  322  (1906).  An 
the  overvaluation  was  in  good  faith  embarrassed  corporation  may  sell  its 
and  without  intent  to  defraud.  Any  stock  at  sixty  cents  on  the  dollar 
increase  in  the  value  of  the  property  and  a  bona  fide  purchaser  is  not  lia- 
after  the  contract  of  transfer  is  made  ble  for  the  difference,  even  though 
and  before  the  transfer  is  actually  the  statute  of  West  Virginia  where 
made  is  taken  into  consideration.  A  the  issue  was  made  stated  that  a  sale 
grant  from  a  municipality  for  a  water-  of  stock  at  less  than  par  should  be 
works  system  may  be  turned  in  for  only  after  a  publication  of  a  notice, 
stock.  Profits  earned  after  the  cor-  and  no  such  publication  was  made, 
poration  was  organized  and  not  paid  such  publication,  however,  being 
out  as  dividends  may  also  be  cred-  merely  directory.  The  court  said  it 
ited  on  the  stock.  Where  a  receiver  was  immaterial  whether  the  corpo- 
brings  suit  he  need  not  show  that  rate  creditors  who  brought  the  suit 
the  creditors  whom  he  represents  did  were  such  before  or  after  the  issue 
not  know  of  the  manner  in  which  the  because  "if  before,  no  reliance  could 
stock  was  issued.  Cole  v.  Adams,  19  have  been  placed  on  the  stock  as  full 
Tex.  Civ.  App.  507  (1898),  holding  paid,  and  if  after,  they  cannot  corn- 
also  that  a  person  to  whom  stock  is  plain,  as  the  transaction  was  open  to 
issued  for  property,  and  who  trans-  them."  McDowell  v.  Lindsay,  213  Pa. 
fers  the  same  while  the  corporation  St.  591   (1906). 

is   solvent,   cannot  be  held  liable  on  South   Dakota:    Under   the   consti- 

such  stock,  even  though  the  property  tution  of  South  Dakota  a  corporation 

was  taken  at  an  overvaluation.  may  not  dispose  of  stock  except  for 

West    Virginia:     Where    a    person  labor,  money  or  property,  and  a  per- 

buys  land  for  $60,000,  and  pays  $6,000  son  cannot  enforce  the  agreement  of 

cash  and  agrees  to  pay  the  remainder  a  corporation  to  issue  stock  to  him 

in  instalments,  and  then  sells  his  in-  for     services     rendered     to     another 

terest   to    other   parties   for   $120,000  stockholder    in    selling    the    stock   of 

207 


§  47.] 


11  watered"  stock. 


[CH.  III. 


subject,  is  similar  proof  of  the  injustice  and  failure  of  the  policy  of 
repudiation.  Moreover,  the  bewildering  currents  of  conflicting  de- 
cisions, even  in  those  states  where  the  most  earnest  efforts  are  made 
to  enforce  the  constitutional  provisions,  leave  the  investor  on  an 
unknown  sea,   without  chart,   compass,   landmark  or  pilot.1      Even 


the  company  and  in  making  assays. 
Rogers  v.  Gladiator,  etc.  Co.,  113  N. 
W.  Rep.  86   (S.  Dak.  1907). 

i  Alabama:  Where  promoters  pur- 
chase for  $29,000  property  worth  not 
more  than  $50,000  and  sell  it  to  a 
corporation  which  they  organize  for 
that  purpose  for  $50,000  of  stock  and 
$30,000  of  mortgage  bonds,  and  the 
property  is  foreclosed  and  the  bond- 
holders realize  only  twenty  per  cent, 
of  their  bonds,  they  may  hold  the 
promoters  liable  and  the  latter  are 
not  entitled  to  have  the  value  of  the 
property  apply  altogether  to  the 
stock.  Montgomery  Iron  Works  v. 
Roman,  41  S.  Rep.  811  (Ala.  1906). 
A  stockholder  may  enjoin  the  com- 
pany from  issuing  $50,000  of  bonds  to 
the  stockholders  as  a  bonus,  the  same 
being  in  violation  of  the  constitution, 
there  being  no  proof  of  undivided 
profits  to  that  amount.  American, 
etc.  Co.  v.  Crane,  142  Ala.  620  (1905). 
In  a  suit  to  hold  stockholders  liable 
on  watered  stock  they  may  also  be 
held  liable  for  corporate  assets  il- 
legally transferred  to  them.  Mont- 
gomery, etc.  Works  v.  Capital  City 
Ins.  Co.,  137  Ala.  134  (1903).  Where 
persons  buy  a  property  for  $50,000 
and  make  some  improvements,  and 
then  convey  it  to  a  corporation  for 
$50,000  of  stock  and  $25,000  of  bonds, 
the  stock  is  full  paid,  and  a  creditor 
cannot  reach  the  bonds  by  garnishee 
process,  inasmuch  as  there  was  no 
promise  to  pay  for  the  bonds,  and 
if  they  are  invalid  they  cannot  be 
enforced.  Roman  v.  Dimmick,  123 
Ala.  366  (1899).  Where  $1,250,000 
of  stock  is  issued  for  real  estate 
which  the  vendors  had  just  bought 
for  $90,000  and  which  is  worth  not 


over  $100,000,  the  parties  receiving 
the  stock  are  liable  for  the  differ- 
ence; in  other  words,  for  $1,150,000. 
It  is  no  defense  that  the  charter 
showed  that  the  stock  was  to  be  so 
issued  for  the  real  estate.  Lea  v. 
Iron,  etc.  Co.,  119  Ala.  271  (189S). 
In  the  case  Pickering  v.  Townsend, 
118  Ala.  351  (1898),  the  court  states 
that  where  merely  the  franchise  to 
build  a  street  railway  and  an  option 
to  purchase  land,  the  entire  value  of 
the  same  not  being  over  $10,000,  are 
turned  in  to  a  corporation  for  $350,- 
000  of  stock,  the  transaction  is  illegal 
upon  its  face.  A  promoter  who  takes 
part  in  selling  property  to  the  cor- 
poration for  stock,  the  par  value  of 
which  is  five  times  the  amount  paid 
by  the  promoters  for  the  property, 
and  who  afterwards  becomes  a  di- 
rector and  then  sells  his  stock  and 
becomes  a  creditor  of  the  corporation, 
cannot  hold  the  stockholders  liable 
for  the  difference  between  its  par 
value  and  the  value  of  the  property. 
Nicrosi  v.  Calera  L.  Co.,  115  Ala.  429 
(1896). 

Although  $50,000  of  stock,  issued 
as  full  paid,  and  $25,000  of  mortgage 
bonds  are  issued  for  $2,500  worth  of 
property,  yet  the  parties  receiving 
the  same  are  not  liable  to  corporate 
creditors  for  the  value  of  the  bonds, 
the  bonds  still  being  in  the  posses- 
sion of  the  parties  receiving  the 
same.  The  parties  receiving  the 
stock,  however,  are  liable  to  corpo- 
rate creditors  on  the  stock  as  being 
unpaid.  Roman  v.  Dimmick,  115  Ala. 
233  (1896).  A  promissory  note  given 
to  a  corporation  to  pay  for  stock  is- 
sued at  fifty  cents  on  the  dollar  can- 
not be  enforced,  and  even  a  renewal 


208 


CH.  III.] 


" watered"  stock. 


[§  47. 


in  Alabama  and  Missouri  the  courts  feel  obliged  to  construe  this, 
constitutional  provision  in  such  a  way  as  to  protect  the  equities  of 
innocent  stockholders. 


note  in  such  a  transaction  cannot  be 
enforced.  Alabama  Nat.  Bank  v. 
Halsey,   109  Ala.  196    (1895). 

If  the  tangible  property  of  the  cor- 
poration is  actually  in  excess  of  the 
par  value  of  the  capital  stock,  then 
a  stock  dividend  to  the  extent  of  that 
excess  would  be  legal,  but  the  pro- 
ceedings to  declare  the  stock  divi- 
dend must  show  these  facts  or  the 
dividend  will  be  enjoined.  Fitzpat- 
rick  v.  Dispatch  Pub.  Co.,  83  Ala.  604 
(1887).  The  court  changed  the  rea- 
soning of  its  opinion  as  reported  in 
2  S.  Rep.  727. 

A  contract  by  a  corporation  that  it 
will  issue  its  stock  for  one-fifth  of  its 
par  value  is  void  under  the  Alabama 
constitutional  prohibition.  The  sub- 
scriber having  sold  his  contract  to 
another  person  cannot  collect  on  such 
sale.  Williams  v.  Evans,  87  Ala.  725 
(1889).  See  also  concerning  the  rule 
in  Alabama,  Knox  v.  Cbildersburg 
Land  Co.,  S6  Ala.  ISO  (1889),  34  S. 
Rep.  210. 

The  person  to  whom  stock  has  been 
issued  in  payment  for  property  may 
donate  a  part  of  it  as  a  bonus  to  go 
with  bonds  sold  at  par  directly  from 
the  corporation  to  the  person  taking 
the  bonus.  The  value  of  the  property 
in  this  case  was  not  proved.  Davis 
r.  Montgomery,  etc.  Co.,  101  Ala.  127 
(1890). 

Where  parties  pay  $5,000  on  a  $53,- 
000  contract  to  buy  land,  and  then 
organize  a  corporation  and  turn  this 
contract  in  to  the  corporation  for 
$250,000  of  stock  issued  as  full  paid, 
the  company  agreeing  to  pay  the 
other  $50,000,  they  are  liable  to  cor- 
porate creditors  for  the  difference  be- 
tween $250,000  and  the  value  of  the 
property.  The  constitution  and  stat- 
ute of  Alabama  forbid  such  a  trans- 
action. Elyton  Land  Co.  v.  Birming- 
ham, etc.  Co.,  92  Ala.  407   (1S91). 


A  contract  calling  for  "original, 
ground  floor,  or  treasury  stock," 
means  any  of  the  stock  that  is  issued, 
where  the  statutes  prohibit  fictitious 
stock.  All  the  stock  is  then  pre- 
sumed to  be  "ground  floor"  stock  and 
to  represent  at  par  the  actual  value 
received.  Williams  v.  Searcy,  94  Ala. 
360  (1891). 

In  regard  to  the  constitutional  pro- 
vision against  the  issue  of  fictitious 
bonds  and  stock,  the  supreme  court 
of  Alabama  has  said:  "The  constitu- 
tional provision,  standing  by  itself, 
does  not  require  that  the  amount  of 
money,  or  the  value  of  the  labor  or 
property  for  which  stock  or  bonds 
are  issued,  shall  correspond  with  the 
face  value  of  the  stock  or  bonds  for 
which  it  is  issued."  Hence  the  court 
held  that  bonds  might  be  issued  at 
less  than  their  par  value,  provided 
that  some  substantial  value  was  paid 
for  them,  such  value  to  be  fair  and 
reasonable,  and  "not  a  mere  trick  or 
device  to  evade  the  law."  Nelson  v. 
Hubbard,  96  Ala.  238    (1892). 

A  contract  for  the  sale  of  stock  is 
valid,  although  the  stock  is  watered 
stock  issued  at  one-half  its  par  value, 
in  violation  of  the  statute.  Beitman 
r.  Steiner,  98  Ala.  241  (1893).  See 
also  cases  in  next  note.  The  agree- 
ment of  a  corporation  to  pay  a  speci- 
fied sum  of  money,  with  the  provision 
that  it  shall  not  be  chargeable  against 
a  certain  part  of  the  capital  stock, 
can  be  enforced  in  equity  only,  inas- 
much as  an  accounting  is  involved. 
Heflin,  etc.  Co.,  v.  Hilton,  124  Ala. 
365   (1899). 

Missouri:  In  the  case  Colonial  T. 
Co.  v.  McMillan,  188  Mo.  547  (1905), 
the  court,  in  speaking  of  watered 
stock,  said:  "That  corporations  cre- 
ated to  be  the  owners  of,  public  utili- 
ties should  be  born  into  a  sham  and 
crippled  life,  and  that  there  seems  to 


(14) 


209 


§  47.] 


"watered"  stock. 


[CII.  III. 


In  fact,  in  Alabama  the  supreme  court  has  lately  intimated  that 
it  will  go  no  further  in  creating,  by  reason  of  this  constitutional 


be  a  call  for  more  adequate  safe- 
guards against  the  itching  temptation 
to  circumvent  our  corporation  laws 
by  falsehood,  whereby  the  ancient 
plan  for  making  gain  by  'watering 
stock,'  conceived  by  the  shrewd  old 
patriarch  Jacob  in  dealing  with 
Laban  (Genesis  xxx.  30  et  seq.,  q.  v.), 
is  parodied  and  brought  to  blush, 
may  concern  the  legislative  branch 
of  the  government,  but  cannot  be 
remedied  by  the  courts  except  in 
sporadic  cases,  where  some  relief  may 
be   administered   if   the   facts   allow." 

Where  $9,200  of  stock  is  issued  for 
a  lease  which  is  terminable  at  any 
time  at  the  option  of  the  lessor,  the 
stock  is  not  full  paid,  there  being 
no  value  to  the  lease.  The  holder 
with  notice  is  liable.  Anheuser,  etc. 
Ass'n  v.  Park  Novelty  Co.,  120  Mo. 
App.    513    (1906). 

Where  an  option  which  has  been 
purchased  at  $125,000,  of  which 
amount  $30,000  has  been  paid,  is  sold 
to  an  Illinois  corporation  for  $S,000,- 
000  par  value  of  stock,  persons  tak- 
ing the  stock  with  notice  are  liable 
proportionately  to  bona  fide  corporate 
creditors  for  the  difference  between 
the  actual  value  of  the  property  and 
the  par  value  of  the  stock.  One  of 
the  promoters,  however,  cannot  en- 
force such  liability  to  repay  money 
which  he  has  loaned  to  the  company. 
Meyer  v.  Ruby,  etc.  Co.,  192  Mo.  162 
(1905). 

A  corporate  creditor  who  knows 
that  the  bonds  and  stock  of  the  cor- 
poration have  been  issued  on  the 
basis  of  seventy-seven  and  a  half  for 
the  bonds,  with  a  bonus  of  one  hun- 
dred per  cent,  of  stock,  cannot  hold 
the  stockholders  liable  on  the  ground 
that  the  stock  had  been  issued  for 
property  at  an  overvaluation.  Co- 
lonial, etc.  Co.  v.  McMillan,  18S  Mo. 
547  (1905),  the  court  saying:  "Now, 
turning  to  the  prospectus,  it  flew  a 


danger  signal,  in  that  it  proposed 
to  sell  a  $1,000  5  per  cent,  gold  mort- 
gage bond  for  $775  and  to  give  10 
shares  of  capital  stock  in  a  new  fledged 
corporation,  of  the  par  value  of  $1,000 
as  a  bonus.  On  such  facts,  it  would 
disturb,  it  seems  to  us,  all  normal 
methods  of  reasoning  to  conclude 
that  a  creditor  who  knew  of  such 
offer,  and  whose  experience  in  cor- 
porate stock  and  bond  dealing  en- 
abled him  to  appreciate  its  signifi- 
cance, and  who,  as  a  part  of  the  very 
inception  of  his  debt,  as  here,  under- 
took to  finance  such  a  company  and 
to  foist  such  a  bond  and  stock  sale 
upon  a  confiding  public,  extended 
credit  on  the  faith  of  the  fact  that 
the  corporate  stock  was  fully  paid  in 
money,  or  what  might  fairly  be  con- 
sidered as  money's  worth.  One  who 
knows  cannot  be  misled." 

Where  a  stock  of  goods  is  turned 
in  to  a  corporation  for  $75,000  of  full 
paid  stock,  when,  in  fact,  the  goods 
were  worth  only  $57,000,  the  parties 
receiving  the  stock  are  liable  for  the 
remaining  $18,000.  Rumsey  Mfg.  Co 
v.  Kaime,  173  Mo.  551   (1903). 

Where  parties  purchase  land  for 
$26,000  and  immediately  turn  it  over 
to  a  corporation  in  payment  for 
$100,000  of  stock,  they  are  liable  to 
corporate  creditors  for  the  difference. 
The  court  held  that  it  was  unneces- 
sary to  allege  fraud.  Shields  v.  Ho- 
bart,  172  Mo.  491,  521    (1903). 

A  creditor  of  a  dissolved  Missouri 
corporation  may  maintain  a  suit  in 
equity  in  Connecticut  against  citizens 
of  Connecticut  who  were  stockholders 
in  such  corporation,  to  collect  unpaid 
subscriptions,  it  being  alleged  that 
the  directors  refused  to  collect  the 
same;  and  where  $100,000  capital 
stock  was  issued  for  land  worth  only 
$10,000  the  stockholders  are  liable 
for  the  difference  under  the  laws  of 
Missouri,    and    hence    may    be    held 


210 


CH    IIL]  ''WATERED"  STOCK.  [§    47. 

provision,  a  liability  which  none  of  the  parties  contemplated  at  the 


liable    in    Connecticut.     Lewisohn   v. 
Stoddard,  78  Conn.  575   (1906). 

A  stockholder  cannot  after  ten 
years'  delay,  maintain  a  suit  to  can- 
cel stock  issued  for  patents,  and  to 
compel  the  holder  of  such  stock  to 
refund  dividends  thereon,  the  trans- 
action having  been  spread  on  the 
records  of  the  company  and  open  to 
the  stockholders.  An  allegation  that 
the  patents  were  of  no  value  is  in- 
sufficient, even  though  the  constitu- 
tion of  the  state  (Missouri)  required 
that  stock  be  issued  only  for  "money 
paid,  labor  done,  or  money  or  prop- 
erty actually  received,"  there  being 
no  allegation  that  the  patents  were 
known  to  be  valueless  at  the  time. 
Kimbell  v.  Chicago,  etc.  Co.,  119  Fed. 
Rep.  102   (1902). 

As  against  the  claim  of  a  creditor 
of  an  insolvent  corporation  in  the 
bankrupt  court  the  trustee  may  set- 
off a  claim  that  the  creditor  is  a 
stockholder  and  that  stock  was  is- 
sued to  him  for  property  at  an  un- 
reasonable valuation,  the  corporation 
being  a  Missouri  corporation  and  the 
Missouri  decisions  being  to  that  ef- 
fect. In  re  Royce,  etc.  Co.,  133  Fed. 
Rep.  100  (1904).  The  court  said: 
"In  other  words,  as  the  declared  poli- 
cy of  this  state  is  to  require  absolute 
payment  by  stockholders,  so  that  they 
shall  -  represent  to  the  creditors  an 
actual  asset,  and  the  temptation  is 
great  among  stockholders  to  put  a 
fictitious  or  exaggerated  value,  like 
an  old  and  abused  stock  of  goods 
substituted  for  a  money  payment  for 
stock  by  the  incorporators,  the  court3 
will  scrutinize  with  care  the  integrity 
and  fairness  of  such  payments,  in 
favor  of  the  creditors  of  the  corpora- 
tion." 

In  the  case  State  v.  Hogan,  1G3  Mo. 
43  (1901),  it  was  held  that  an  option 
to  buy  a  mine  is  not  property  for 
which  stock  may  be  issued,  under  the 
constitution  and  statutes  of  the  state 


of  Missouri,  there  being  no  proof  that 
the  person  giving  the  option  owned 
it.  Hence  where  $90,000  of  stock  was 
issued  for  the  option  and  for  services 
in  inspecting  the  mine,  and  $30,000 
of  the  stock  was  turned  back  for 
treasury  stock,  the  court  held  that  the 
state  might  maintain  a  bill  to  forfeit 
the  charter. 

Where  a  stone  quarry  is  turned  in 
for  stock  at  ten  times  its  actual  value, 
the  persons  receiving  the  stock  are 
liable  to  corporate  creditors  for  the 
difference,  and  the  value  of  the  prop- 
erty may  be  shown  by  experts  and  by 
tax  assessments.  Under  the  Missouri 
statute  declaring  stockholders  liable 
to  pay  for  their  stock  the  suit  may 
be  at  law.  Steam,  etc.  Co.  v.  Scott, 
157  Mo.   520    (1900). 

A  purchaser  of  stock  which  has 
been  issued  for  property  taken  at  an 
overvaluation  is  not  liable  thereon 
where  he  took  without  knowledge  of 
such  overvaluation.  Berry  v.  Rood, 
1GS  Mo.  316  (1902).  In  this  case, 
where  lands  which  cost  the  promot- 
ers $20,000  were  sold  to  the  corpora- 
tion for  $290,000  of  stock,  the  court 
held  that  they  were  liable  for  the 
difference,  even  though  they  believed 
the  land  had  valuable  onyx  deposits 
and  believed  they  were  worth  the  par 
value  of  the  stock,  where  it  turned 
out  afterwards  that  such  deposits  did 
not  exist.  The  court  held  that  the 
property  so  received  might  be  sold  by 
the  receiver  and  applied  on  the  debts, 
and  that  the  subscribers  could  not 
claim  that  the  transaction  must 
either  be  rescinded  in  toto  and  tho 
property  returned,  or  else  confirmed 
in  toto.  The  court  said  that  under 
any  other  rule  "there  will  be  no  ne- 
cessity for  men  to  shun  Missouri  as 
a  forum  in  which  to  organize  the 
wildest  and  most  visionary  schemes, 
for  by  such  interpretation  we  break 
down  all  the  safeguards  that  dis- 
tinguish ours  from  any  other  laws." 


211 


§  47.] 


"watered"  stock. 


[en.  in. 


time  of  the  transaction.1     As  already  stated,  the  time  has  gone  by 

when  the  capitalist,  the  business  man  and  the  investor  rely  upon 

The  court  further  said  that  no  actual  stock,  the  court  held  that  it  would 

fraud  need  he  shown.    The  court  held,  not  order  the  issue  of  the  stock  at 

however,  that  a  purchaser  of   treas-  all,    the    contract    being    still    execu- 

ury  stock  at  fifty  cents  on  the  dollar  tory.      Garrett    v.    Kansas    City,    etc. 

is  not  liable  for  the  remaining  fifty  Co.,  113  Mo.  330   (1892). 

cents   even  though  it  turned  out  that  In  Missouri  a  contractor  who  was 

originally  the   stock  was  issued   for  paid  in  bonds  and  stock  was  held  lia- 

property  taken  at  an  overvaluation,  ble  to  corporate  creditors  for  the  par 

such  purchaser  having  no  knowledge  value   of   the   stock   over  and   above 

of  such  overvaluation.  the  market  price  of  all  the  bonds  and 

The  stockholders  were  held  liable  stock  so  given,  where  such  value  was 

in  McClure  v.  Paducah,  90  Mo.  App.  greater   than   a  reasonable   price   for 

567    (1901).     Where   $100,000   of  the  the   contract  work.     The   court   said 

stock   of    an    Illinois   corporation   is  "that  where  an  agreement  is  entered 

issued   to  parties  who  agree  to  turn  into  between  a  contractor  and  a  cor- 

in  a  patent  therefor,  and  the  patent  poration,   whereby   the   former   is   to 

is  never  turned  in,  and  in  fact  turns  perform  work  for,  or  furnish  material 

out   to   be   of   no   value,   the   parties  to,    the    latter,   and   to   take    unpaid 

receiving   the   stock   with   notice   are  stock  in  part  or  in  full  payment,  that 

liable  thereon  to  bona  fide  corporate  such  contractor,  whether  for  labor  or 

creditors,  even  though  such  stock  re-  material,    can    only    charge    therefor 

cites  on  its  face  that  it  is  fully  paid,  the  reasonable  market  value  for  sucn 

Van    Cleve    v.    Berkey,    143    Mo.    109  labor  or   material   thus  given   in   ex- 

(189S).      In     this     case     the     court  change;    and  that  all  agreements  by 

claimed   that   the   constitutional   pro-  the    corporation    to    pay    more    than 

hibition  against  watered  stock  in  that  such  reasonable  compensation  will  be 

state  had  proved  to  be  effective,  and  disregarded  and  held  for  naught  by 

the  court  reviewed  the  Missouri  de-  the  courts,  when  the  rights  of  cred- 


cisions  on  this  subject.  The  court 
declared  that  certain  statements  in 
the  opinion  in  Woolfolk  v.  January, 
131  Mo.  620  (1895),  were  obiter  dicta 


itors  intervene;  and  this  is  the  case 
even  though  no  fraud  be  proven." 
Shickle  v.  Watts,  94  Mo.  410  (18S8). 
Where  a  person,  to  whom  stock  has 


The  latter  case  disapproved  of  Shickle  been  issued  as  fully  paid  for  nothing, 

v.  Watts,  94  Mo.  410,  and  upheld  an  surrenders  the  same  to  the  company 

issue  of  '$60,000  of  stock  and  $20,000  and  it  is  then  issued  to  other  sub- 

of  bonds   for  a  gas   plant  and  fran-  scribers,    a   subsequent   creditor   can- 

chise   that  cost  about  $35,000.  not   complain.     Erskine   v.    Peck,    33 

Parties  who  have  an  option  to  pur-  Mo.  465  (1884). 
chase  certain  coal  lands  cannot  legal-  i  In  State  v.  Webb,  110  Ala.  214 
ly,  under  the  Missouri  constitution,  (1896),  the  supreme  court  of  Ala- 
sell  that  option  to  a  corporation  for  bama  stated  with  great  clearness  the 
$1,000,000  full-paid  stock  of  the  corpo-  difficulties  of  applying  the  above-men- 
ration,  the  corporation  agreeing,  in  tioned  constitutional  provision,  and 
addition  thereto,  to  pay,  by  means  of  the  court  stated  many  questions 
bonds,  the  full  actual  cost  of  the  land,  which  remain  to  be  adjudicated,  and 
the  option  for  which  the  promoters  which  would  have  to  be  carefully  con- 
have  turned  over  to  the  corporation,  sidered  when  they  arise. 
On  a  bill  filed  by  the  corporation  to  In  Nicrosi  v.  Irvine,  102  Ala.  648 
ascertain    who    was    entitled    to   the  (1894),  where  land  was  turned  in  for 

212 


ch.  in.]  " watered"  stock.  [§47. 

the  nominal  capitalization  of  a  corporation.  They  investigate  its 
real  financial  condition.  In  some  of  the  states  there  may  be  doubt 
as  to  the  constitutionality  of  a  statute  delegating  to  a  commission 
the  terms  upon  which  capital  stock  may  be  issued,1  but  the  better 
opinion  is  that  such  a  delegation  of  authority  is  constitutional,  where 
the  statute  prescribes  that  the  commission  shall  act  within  the  "limits 
prescribed  by  law,"  which  at  common  law  would  require  them  to  be 
reasonable,  and  is  a  sufficient  standard  and  guard  against  arbitrary 
action.2 

Statutes  are  found  in  some  of  the  states  on  this  subject.  There 
have  been  a  large  number  of  decisions  under  these  varied  statutes, 
and  those  decisions  have  been  confused  with  the  cases  which  were 
decided  on  the  common  law  alone.  The  following  are  some  of  these 
statutes : 

In  New  York  directors  in  manufacturing  corporations  were  for- 
merly made  personally  liable  for  all  corporate  debts,  if,  in  the  re- 
ports which  they  were  required  to  file,  they  misstated  facts.  Ac- 
cordingly, if  they  stated  the  capital  stock  to  have  been  paid  up, 
when  in  fact  it  was  paid  for  by  property  taken  at  a  fraudulent 
overvaluation,  then  the  penalty  applied.  Most  of  the  Xew  York 
cases  on  watered  stock  arose  under  this  statute.  Under  this  statute 
the  court  of  appeals  was  at  first  in  doubt  whether  proof  of  a  mere 
overvaluation  of  the  property  was  sufficient  to  set  aside  the  pay- 
ment as  a  full  payment,  or  whether  it  was  necessary  for  the  plain- 
tiff to  prove  also  that  the  overvaluation  was  intentional  and  fraud- 
ulent.3 Later  cases,  however,  firmly  established  the  principle  that 
not  only  must  proof  be  given  that  there  was  an  overvaluation  of 

stock  at  five  times  its  value  and  cost,  allow  such   increase.     State  v.  Great 

a     corporate     creditor     garnished     a  Northern    Ry.,    Ill    N.    W.   Rep.    289 

stockholder    as    being    liable    on    his  (Minn.   1907).     The  court  held  that 

stock  .so  issued.     The  process  failed,  this  was  different  from  delegating  to 

the  court  holding  that  the  creditor's  the  commission  the  ascertainment  of 

remedy    was    in    equity    alone.      The  facts  and  deciding  whether  the  facts 

court  also  disapproved  of  some  of  the  bring  the  application  within  the  spec- 

dicta  contained  in  Parsons  v.  Joseph,  ifications    of    a    statute    authorizing 

92  Ala.  403,  and  Joseph  v.  Davis,  10  such  an  increase. 

S.  Rep.  830   (Ala.  1892).  2  Trustees,  etc.  v.  Saratoga  Gas,  etc. 

i  The  Supreme  Court  of  Minnesota  Co.,   191  N.  Y.   123    (1908),  aff'g  122 

has  held  that  it  is  an  unconstitutional  N.  Y.  App.  Div.  203. 

delegation   of   authority   for   a   legis-  3  Boynton  v.   Hatch,   47   N.  Y.   225 

lature    to    authorize    state    railroad  (1872).  Three  of  the  judges  held  that 

commissioners  in   their  judgment  to  proof    of    fraud    was    necessary,    and 

allow    an    increase    of    capital    stock  three  that  it  was  not  necessary.     All 

only  for  such  purposes  and  on  such  concurred    in    holding   that   proof   of 

terms    as   they   may    deem    advisable  overvaluation     was     competent     and 

or    in    their    discretion   to    refuse   to  necessary. 

213 


§  47.] 


"watered"  stock. 


[CH.  III. 


the  property  or  services  rendered,  but  proof  also  must  be  given  that 
such   overvaluation    was   intentional   and   consequently   fraudulent.1 

Moreover,  the  -property  was  not  to  be  considered  as  overvalued 
merely  because,  subsequently,  it  turned  out  to  be  so.  The  various 
circumstances  under  which  the  valuation  was  made  were  consid- 
ered in  determining  the  bona  fides  of  the  transaction.2  The  ques- 
tions as  to  whether  there  was  an  overvaluation  of  the  projDerty, 
and  whether  that  overvaluation  was  intentional  and  fraudulent,  were 
generally  questions  of  fact  to  be  submitted  to  the  jury.3 

Where,  however,  the  overvaluation  was  so  great  as  to  bear  evi- 
dence upon  its  face  that  it  was  intentional  and  fraudulent,  the 
court  held  that,  unless  the  transaction  was  reasonably  explained, 
there  was  no  question  of  fact  for  the  jury,  but  that,  as  a  matter  of 
law,  the  overvaluation  was  fraudulent.  Various  cases  which  arose 
under  that  statute  are  given  in  the  notes  below.4 


i  Douglass  v.  Ireland,  73  N.  Y.  100 
(1878);  Schenck  v.  Andrews,  57  N. 
Y.  133  (1874);  Boynton  v.  Andrews. 
63  N.  Y.  93  (1875);  Lake  Superior 
Iron  Co.  v.  Drexel,  90  N.  Y.  87 
(1882). 

2  Schenck  v.  Andrews,  57  N.  Y.  133 
(1874);  Coit  v.  North  Carolina,  etc. 
Co.,  14  Fed.  Rep.  12  (18S2);  aff'd, 
Coit  v.  Gold  Amal.  Co.,  119  U.  S.  343 
(1886). 

3  Boynton  v.  Hatch,  47  N.  Y.  225 
(1872)  ;    Lake    Superior    Iron    Co.    v. 

Drexel,  90  N.  Y.  87  (1882). 

■i  Thus,  where  stock  for  $300,000 
was  issued  for  property  which  the 
jury  found  to  be  worth  $64,000,  the 
court  held,  as  a  presumption  of  law, 
that  the  transaction  was  fraudulent. 
Douglass  v.  Ireland,  73  N.  Y.  100 
(1878).  In  another  case,  involving 
the  same  facts,  the  trial  court  sub- 
mitted the  question  to  the  jury. 
Brockway  v.  Ireland,  61  How.  Pr.  372 
(1880). 

In  another  case,  where  stock  for 
$100,000  was  issued  for  property 
worth  not  more  than  $50,000,  the 
court  held  that,  in  the  absence  of  evi- 
dence to  explain  the  presumption  of 
fraud,  there  was  no  question  for  the 
jury,  and  that  the  transaction  was 
fraudulent    upon    its    face.      Boynton 


v.  Andrews,  63  N.  Y.  93  (1875).  The 
case  of  Lake  Superior  Iron  Co.  v. 
Drexel,  90  N.  Y.  87  (1882),  tended 
to  make  the  valuation  of  the  prop- 
erty a  question  for  the  jury  exclu- 
sively. In  that  case  stock  for  $2,500,- 
000  was  issued  for  property  in  a 
patent;  $900,000  of  the  stock  was 
returned  to  the  corporation  as  a  gift. 
The  court  held  that  the  question  of 
fraud  was  for  the  jury.  This  case 
was  followed  in  Draper  v.  Beadle,  16 
Weekly  Dig.  475  (18S3).  In  Bolz  v. 
Ridder,  19  Weekly  Dig.  463  (18S4), 
N.  Y.  Com.  PL,  the  remarkable  rise 
in  value  of  a  patent-right  from  $1,000 
to  $100,000,  when  sold  for  stock  is- 
sued in  payment  therefor,  was  held 
to  be  only  presumptively  fraudulent-, 
and  might  be  explained  sufficiently 
to  raise  a  question  for  the  jury.  The 
directors  in  estimating  the  value  of 
property  may  take  the  opinion  of  ex- 
perts and  rely  thereon.  Brockway  v. 
Ireland,  61  How.  Pr.  372  (1880).  See 
also  Knowles  v.  Duffy,  40  Hun,  485 
(1886);  Van  Vleet  v.  Jones,  75  Hun, 
340  (1894).  Cf.  Thurston  v.  Duffy, 
38  Hun,  327   (1885). 

Under  the  New  York  statute, 
where  patents  worth  $75,000  were 
transferred  to  the  corporation  in  pay- 
ment    for     $300,000     of     stock,     and 


214 


CH.  III.] 


"watered"  stock. 


[§47. 


Formerly  under  the  Xew  York  statutes,  stockholders  were  also 
liable  in  certain  companies  to  double  the  amount  of  .their  stock  un- 
less a  certificate  was  filed  to  the  effect  that  the  capital  stock  was 


$100,000  of  the  stock  was  at  once 
donated  to  the  company  by  the  in- 
ventor, and  other  stock  at  once  sold 
by  him  for  about  one-third  of  the  par 
value,  the  only  fraudulent  intent  that 
needed  to  be  proved  was  that  the  di- 
rectors knew  that  the  patents  were 
not  worth  $300,000.  National  Tube 
Works  Co.  v.  Gilfillan,  124  N.  Y.  302 
(1891). 

In  determining  whether  property  is 
worth  the  par  value  of  stock  which 
is  issued  for  it,  the  intrinsic  or  mar- 
ket value  is  the  test,  but  the  jury 
may  consider  also  "its  value  for  the 
use  to  which  it  was  to  be  put,  and 
the  adaptability  of  it  to  any  specific 
purpose,  and  any  peculiar  advan- 
tages" it  then  had.  Huntington  p. 
Attrill,  118  N.  Y.  365  (1890).  The 
evidence  of  experts  as  to  the  value 
of  similar  property  is  not  admissible. 
Huntington  v.  Attrill,  118  N.  Y.  365 
(1890). 

Under  the  New  York  statute,  where 
property  worth  but  $60,000  was 
turned  in  for  $1,000,000  of  stock  and 
$200,000  of  bonds,  the  act  was  held 
to  be  fraudulent.  Blake  v.  Griswold, 
103  N.  Y.  429  (1886),  sustaining  a 
finding  of  the  special  term  to  that 
effect.  See  also  Hatch  v.  Attrill,  118 
N.  Y.  383   (1890). 

In  the  case  of  Chittenden  v.  Thann- 
hauser,  47  Fed.  Rep.  410  (1891),  the 
court  held  the  directors  liable  under 
the  statute  for  a  false  report  where 
$1,500,000  of  stock  was  issued  for 
mines  and  property  which  were  of- 
fered for  sale  at  about  the  same  time 
for  $150,000.  See  also  155  N.  Y.  475. 
In  Ferguson  v.  Gill,  64  Hun,  284 
(1892),  $100,000  of  stock  was  issued 
for  a  patent  which  turned  out  to  be 
worthless.  The  statute  made  the  di- 
rectors liable  if  they  knew  this  fact. 
The  court  held  that  the  officers  were 
entitled  to  prove  the  conversation  at 
which  the  value  was  fixed  upon. 


In  Thurber  v.  Thompson,  21  Hun, 
472  (1880),  the  court  said  the  jury 
should  have  before  them  "evidence 
of  the  probable  enhanced  value  grow- 
ing out  of  the  contemplated  improve- 
ments made  and  to  be  made  by  the 
company,  and  of  the  public  improve- 
ments which  were  expected  to  add 
largely  to  the  value  of  the  land  for 
the  new  objects  and  purposes  to 
which  it  was  to  be  devoted.  It  would 
be  extremely  unjust  to  such  a  com- 
pany as  this  to  hold  that  farming 
lands  upon  which  the  site  of  a  city 
or  town  is  about  to  be  established, 
and  which  are  bought  for  that  pur- 
pose, and  mapped,  plotted,  and  sub- 
divided into  city  or  village  lots,  are 
to  be  viewed,  upon  a  question  of  over- 
valuation, merely  as  agricultural 
lands." 

See  also  Huntington  v.  Attrill,  42 
Hun,  459  (1886) ;  aff'd,  118  N.  Y.  365, 
where  land  costing  $80,000  was 
turned  in  for  $700,000  of  stock.  The 
finding  of  the  jury  that  the  act  was 
fraudulent  was  sustained  on  appeal. 

In  New  York,  under  the  statute  al- 
lowing the  incorporation  of  manu- 
facturing companies,  it  was  assumed 
that  an  issue  of  stock  as  paid  up  for 
cash,  at  less  than  its  par  value,  is 
void.  Spring  Co.  v.  Knowlton,  103  U. 
S.  49  (1880),  aff'g  Knowlton  v.  Con- 
gress, etc.  Co.,  14  Blatchf.  364  (1877) ; 
s.  c,  14  Fed.  Cas.  797;  Knowlton  v. 
Congress,  etc.  Co.,  57  N.  Y.  518  (1874). 
These  three  decisions  arose  from  the 
litigation  of  a  single  case.  After  be- 
ing reversed  in  the  New  York  court 
it  was  removed  into  the  federal  court. 
In  all  three  decisions  the  invalidity 
of  the  stock  was  conceded  by  both 
parties.  The  federal  courts  differed 
from  the  state  courts,  and  held  that 
a  person  partly  paying  for  such  ille- 
gal stock  might  recover  back  such 
payment,    although    he    had    allowed 


215 


§  47.] 


"watered"  stock. 


[ch.  III. 


all  paid  in.1  All  of  these  statutes  were  repealed  in  1001,  however, 
and  the  decisions  under  them  are  no  longer  valuable,  except  as 
showing  to  what  results  a  mistaken  policy  sometimes  leads.     Under 

the  stock  to  be  forfeited  for  non-pay-  Gilfillan,   46   Hun,   248    (1887);    aff'd, 

ment  of  further  calls.  124  N.  Y.  302    (1891). 

Under  the   New  York  Manufactur-  Under  the  statute  creating  a  double 

ing  Company  Act,  providing  for  the  liability    until    the    stock    was    fully 

issue   of   stock   for   property   "to   the  paid,    a    creditor    might    show    that 

amount  of  the  value  thereof,"  it  was  property  was  taken  at  an  overvalua- 

held  that  the  value  of  the  property  tion  knowingly  and  fraudulently,  and 

must    equal    the    par    value    of    the  might     then     enforce     the     liability, 

stock.     Gamble   v.   Queen's,   etc.    Co.,  Goodrich  v.  Dorman,  14  N.  Y.  Supp. 

123   N.   Y.   91    (1890);    the   court   re-  879   (1S91). 

ferring  to  and  approving  Van  Cott  Under  the  former  New  York  stat- 
v.  Van  Brunt,  82  N.  Y.  535  (1880),  ute  making  stockholders  liable,  the 
as  being  a  decision  sustaining  the  creditor  was  bound  to  prove  that  the 
common-law  right  to  issue  stock  be-  directors  overvalued  the  property  de- 
low  par.  liberately  and  with  knowledge  of  the 

In  estimating  the  value  of  property  real   value   of   the   property.     White, 

turned    in    to   a   corporation    in    pay-  etc.  Co.  v.  Jones,  86  Hun,  57   (1895), 

ment  of  stock,  a  fair  profit  to  the  con-  rev'd  on  another  point  in  155  N.  Y. 

tractor     was     allowed.       Gamble     v.  475;  s.  c,  167  N.  Y.  158. 

Queen's,  etc.  Co.,  123  N.  Y.  91  (1890).  In  Powell  v.  Murray,  3  N.  Y.  App. 

Even  though  a  corporation  accepted  Div.  273   (1896);  aff'd,  157  N.  Y.  717. 

a   note   instead   of   cash   in   payment  where  a  company,  formed   to   manu- 

for  a  subscription  in  violation  of  the  facture  electric  appliances  and  plant, 

statute    which     provided     that    only  issued  stock  in  payment  for  a  license 

money,    labor    done    or    property    ac-  to  sell  the  product  of  a  foreign  cor- 

tually  received  should  be  accepted  in  poration,  it  was  held  that  the  parties 

payment  for  stocks  and  bonds,  yet  a  so    receiving    the    stock    were    liable 

bank  which  discounted  such  note  for  thereon  under  the  New  York  statute 

a  corporation  held  the  corporation  lia-  as  not  being  paid-up  stock,  such  con- 

ble  thereon.     First  Nat.  Bank  v.  Cor-  tract  being  ultra  vires. 

nell,   8   N.   Y.   App.  Div.  427    (1896).  In  Herbert  v.  Uhl,  20  N.  Y.  Supp. 

The  common  law  on  this  subject  as  743   (1892),  the  court  seemed  to  hold 

laid   down  by  the   New  York  courts  that  at  common  law  the  question  of 

is  given  in  §  46,  supra.     An  issue  of  whether  services  rendered  in  consid- 

$190,000  of  stock  for  property  worth  eration    of   stock   were    fairly    worth 

$27,500  was  held  to  be  a  fraudulent  the    amount   of   stock   so    issued    for 

overvaluation,    as    a   matter    of    law.  such  services  should  be  submitted  to 

Osgood  v.  King,  42  Iowa,  478  (1876).  the    jury.      The    New    York    statute 

l  It  was  held  that  an  issue  of  $300,-  against  the  issue  of  stock  below  par 

000  of  full-paid  stock  for  a  right  to  and   the   issue   of  bonds   below  their 

apply    for    patents,    which    the    jury  fair  market   value   does  not  prevent 

found   were   worth   but   $75,000,   sub-  the   issue   of   stock   and   bonds   by   a 

jected    a    stockholder    to    this    statu-  railroad    company     for    construction 

tory    liability    in  "New    York    to    an  work,  and  such  stock  and  bonds  may 

amount   equal    to    the    par    value   of  be  delivered  in  advance  of  the  work 

the   stock,   even   though  the   creditor  being  done.    Hudson  River,  etc.  R.  R. 

knew    all    the    facts    when    he    gave  v.   Hanfleld,  36  N.   Y.  App.   Div.   605 

credit.     National  Tube  Works  Co.  v.  (1899).     The    statute   of   New   York 

216 


CH.  III.] 


' '  WATERED  ' '  STOCK. 


[§47. 


the  present  statutes  of  New  York  a  stockholder  is  not  liable  (except 
for  certain  labor  claims)  if  his  stock  has  been  fully  paid.1 


prohibiting  the  issue  of  stock  at  less 
than  par  and  of  bonds  at  less  than 
their  fair  market  value  does  not  pro- 
hibit the  issue  of  stock  and  bonds 
by  a  gas  company  in  payment  for 
the  stock  and  bonds  of  a  competing 
gas  company,  even  though  a  high 
value  is  placed  upon  the  franchise  of 
such  competing  company  as  a  part 
of  the  purchase  price.  Such  a  trans- 
action is  not  illegal  on  the  ground 
of  creating  a  monopoly,  nor  is  it  ultra 
vires,  provided  the  charter  of  the 
first  company  allowed  it  to  purchase 
stock  and  bonds,  as  provided  in  the 
New  York  statutes.  Rafferty  v.  Buf- 
falo, etc.  Co.,  37  N.  Y.  App.  Div.  618 
(1899).  In  enforcing  the  liability  of 
stockholders  under  the  New  York 
statute  requiring  the  capital  stock  to 
be  paid  in,  fraud  did  not  have  to 
be  alleged  or  proved  if  stock  was 
issued  for  services  rendered  before 
incorporation  under  a  statute  which 
authorized  the  issue  of  stock  only  for 
money  or  property.  Herbert  v. 
Duryea,  34  N.  Y.  App.  Div.  478 
(1898);  aff'd,  164  N.  Y.  595  and  596. 
A  stockholder  cannot  avoid  a  statu- 
tory liability  on  the  ground  that  the 
stock  was  given  to  him  for  nothing 
by  the  corporation.  Where  a  creditor 
sues  in  behalf  of  himself  and  others, 
yet  eyen  if  no  other  creditor  comes 
into  the  suit  the  court  cannot  impose 
the  payment  of  his  claim  alone  upon 
the  solvent  stockholders  whose  stock 
is  not  full  paid.  Hallett  v.  Metro- 
politan, etc.  Co.,  69  N.  Y.  App.  Div. 
258    (1902). 

i  See  §  54  Stock  Corp.  Law. 

Stock  subscribed  for  by  the  incor- 
porators in  the  certificate  of  incor- 
poration may  be  paid  for  by  property 
subsequently  transferred  by  the  cor- 
poration, but  if  the  property  is  taken 
at  a  willful  and  fraudulent  overvalua- 
tion such  stock  is  not  "fully  paid" 
within  the  meaning  of  the  New  York 


statute  rendering  stockholders  liable 
for  corporate  debts  to  the  amount  of 
their  stock  until  the  whole  capital 
stock  issued  and  outstanding  has 
been  fully  paid.  Flour  City,  etc.  Bank 
v.  Shire,  88  N.  Y.  App.  Div.  401 
(1903) ;  aff'd,  179  N.  Y.  587,  the  court 
saying:  "In  passing  upon  such  a 
question  as  this  the  law  makes  due 
allowance  not  only  for  variations  in 
the  judgment  of  different  men  pass- 
ing upon  the  values  of  properties  but 
makes  allowance  for  errors  and  mis- 
takes of  judgment  when  honestly 
made,  but  it  does  not  countenance  or 
excuse  intentional  or  fraudulent 
overvaluations,  and  when  a  claim 
that  capital  stock  has  been  fully 
paid  is  based  upon  such  valuations  it 
must  fail  and  fall  as  it  has  in  this 
case." 

Even  though  two  of  the  directors 
sell  to  the  corporation  certain  pat- 
ents for  $3,000,000  full  paid  stock, 
being  the  entire  capital  stock,  and 
give  to  the  corporation  $750,000  of 
the  same  as  treasury  stock,  and  even 
though  the  patents  are  worth  but 
$10,000,  neither  the  corporation  nor 
a  purchaser  of  treasury  stock  at  fifty 
cents  on  the  dollar  can  compel  them 
to  return  the  stock  nor  hold  them 
liable  thereon,  but  the  remedy,  if 
any,  is  to  rescind  the  transaction  and 
return  the  patents  and  demand  a  re- 
turn of  the  stock  or  the  value  of 
such  part  of  the  stock  as  they  have 
sold.  Such  is  the  rule,  even  though 
the  statutes  of  the  state  prohibit  the 
issue  of  stock  at  less  than  par.  The 
court  said  (p.  477) :  "Whether  they 
knew  that  the  value  of  the  patents 
did  or  did  not  exceed  $10,000  was 
entirely  immaterial.  They  had  a 
right  to  hold  the  letters  patent  until 
they  were  offered  the  price  at  which 
they  were  willing  to  sell.  They  sold 
them  to  this  company  for  its  whole 
capital  stock,  agreeing  with  the  com- 


217 


47.] 


"watered"  stock. 


[en.  in. 


In  Ohio,  by  statute,  an  issue  of  stock  to  a  director,  directly  or  in- 
directly, for  less  than  the  par  value  thereof,  is  void,1  and  the  gen- 


pany  that  that  was  the  value  of  the 
patents.  I  know  of  no  principle 
which  would  justify  a  court  of  equity 
in  compelling  the  owners  of  these 
patents  to  accept  any  consideration 
for  their  transfer  to  the  corporation 
except  that  agreed  on,  and,  upon  the 
ground  that  the  patents  are  not  worth 
the  sum  agreed  on  as  a  consideration 
for  the  transfer,  decree  that  the 
vendors  must  pay  back  to  the  com- 
pany the  consideration  they  had  re- 
ceived, less  the  real  value."  A  pur- 
chaser of  the  treasury  stock  has  of 
course  a  remedy  at  law  if  there 
were  false  representations.  Insurance 
Press  v.  Montauk,  etc.  Co.,  103  N.  Y. 
App.  Div.  472    (1905). 

A  stockholder  is  not  liable  to  a 
corporate  creditor,  under  the  New 
York  statute  relative  to  stock  not 
fully  paid,  on  stock  issued  to  him 
at  less  than  par,  unless  such  stock- 
holder's liability  existed  when  the 
creditor  recovered  judgment  against 
the  company.  Dyer  v.  Drucker,  108 
N.  Y.  App.   Div.  238    (1905). 

In  a  suit  by  a  corporate  creditor 
to  hold  a  stockholder  liable  on 
watered  stock,  an  allegation  that  the 
stockholder  owned  stock  of  the  par 
value  of  $4,800,  and  that  he  had  paid 
the  company  "a  sum  not  exceeding 
$3,000,  leaving  a  balance  due  on  said 
stock  of  at  least  $1,800,"  is  merely  a 
legal  conclusion,  where  the  stock 
might  have  been  issued  for  property 
or  services.  Dyer  v.  Drucker,  108  N. 
Y.  App.  Div.  238   (1905). 

The  New  York  courts  will,  at  the 
instance  of  a  New  York  stockholder 
in  a  New  Jersey  corporation,  enjoin 
the  latter  from  issuing  stock  as  a 
bonus  with  bonds  in  violation  of  the 
New  Jersey  statute  requiring  stock  to 
be  issued  for  money  or  property,  even 
though  the  actual  value  of  the  stock 
and  bonds  so  issued  does  not  exceed 
the  par  value  of  the  bonds  and  the 


amount  received  by  the  corporation 
is  the  par  value  of  the  bonds.  The 
fact  that  the  company  is  in  a  failing 
condition  does  not  change  the  effect 
of  the  statute.  Kraft  v.  Griffon  Co., 
82    N.   Y.   App.   Div.   29    (1903). 

Under  the  New  York  statute  which 
requires  that  stock  or  bonds  shall  be 
issued  only  for  money  paid  or  prop- 
erty, the  purchaser  of  bonds  from 
the  corporation  cannot  make  pay- 
ment in  the  note  of  a  third  person 
where  the  note  is  not  good.  In  re 
Waterloo,  etc.  Co.,  134  Fed.  Rep.  341 
(1904),  rev'g  128  Fed.  Rep.  517 
(1904). 

A  railroad  construction  contract 
by  which  the  work  is  paid  for  by 
stock  and  bonds  is  not  a  stock  sub- 
scription nor  a  sale  of  the  stock,  but 
xS  merely  a  contract,  and  the  re- 
ceiver of  the  railroad  cannot  hold  a 
contractor  liable  for  the  alleged 
value  of  the  stock  and  bonds,  he 
being  estopped  the  same  as  the  cor- 
poration itself,  and  there  being  no 
promise  to  pay  the  par  value  of  the 
stock.  Bostwick  v.  Young,  118  N.  Y. 
App.   Div.  490    (1907). 

Where  the  incorporators  subscribe 
for  the  entire  capital  stock— $500,000 
— and  pay  it  in  by  checks,  and  the 
corporation  then  buys  from  one  of 
the  directors  a  steel  plant  for  $500,- 
000  cash,  which  he  had  previously 
purchased  for  $85,000,  and  he  then 
distributes  the  $500,000  cash  among 
the  stockholders,  in  the  proportion 
in  which  they  had  paid  for  their 
stock,  they  are  liable  upon  the  bank- 
ruptcy of  the  corporation,  the  trans- 
action being  an  unauthorized  dispo- 
sition of  the  corporate  assets.  Rath- 
bone  v.  Ayer,  121  N.  Y.  App.  Div.  355 
(1907). 

l  Ohio     Rev.     Stat,     §  3313,     sets 
forth  that  "all  capital  stocks,  bonds, 
notes,   or  other  securities   of  a  com- 
pany purchased  of  a  company  by  a 
18 


CH.   III.] 


"watered"  stock. 


[§  47. 


eral  statutes  of  the  state  are  construed  as  invalidating  an  issue  of 
stock  for  property  taken  at  an  overvaluation.1  In  Indiana  the  di- 
rectors are  liable  if  certain  statutory  provisions  are  violated  in  the 
issue  of  stock.2 

In  Maine  the  former  statutes  were  construed  so  as  to  render  stock- 
holders liable  to  corporate  creditors  where  property  was  taken  in 

director    thereof,    either    directly    or  New   Jersey    corporation    has    issued 

indirectly,     for     less    than    the     par  its  stock  in  exchange  for  stock  of  a 

value     thereof,     shall     be     null     and  foreign  corporation  and  paid  money 

void."      In    Zabriskie    v.    Cleveland,  in    addition    thereto,    and    an    Ohio 

etc.  R.  R.,  23  How.  381   (1S59),  this  court   has   held   that  the  transaction 

provision  was  held  not  to  affect  the  was    illegal,    the    money    to   be    paid 

liability  of  a  guarantor  of  such  bonds,  cannot  be  collected  by  a  suit  in  New 

See  §  766,  infra.  Jersey.      Strickland   v.   National    Salt 

But    in    Union    Trust    Co.    v.    New  Co.,  64  Atl.  Rep.  982  (N.  J.  1906). 

York,  etc.  R.  R.,  17  Weekly  Law  Bui!.  2  Where     a    water-works    company 

176   (Ohio,  1887),  the  court,  in  apply-  issues  $197,000  of  stock  as  full  paid 

ing    this    statute,    held    that    where  and  $150,000  of  mortgage  bonds  to  a 

$50,000,000  of  paid-up  stock  and  $15,-  contractor  for  construction  work,  the 

000,000  of  bonds  are  given  to  a  syndi-  work  actually  costing  less  than  $150,- 

cate,  of  which  a  director  is  a  mem-  000,  and  the  contractor  pays  to  one 

ber,    for    $18,000,000    of    money,    the  of   the   directors   $6,000   in  cash  and 

stock  and  bonds  and  the  mortgage  se-  gives  to  the  two  others  $20,000  each 

curing  the  bonds  are  void.  of  the  stock,  such  directors  are  liable 

i  Under  the   Ohio  constitution  and  to  corporate   creditors   for  the   debts 

statutes,  where  a  partnership  having  of  the  latter,  under  the  Indiana  stat- 

property  worth  $37,500  turns  it  over  ute    rendering    the    directors    liable 

to  a  corporation  in  payment  for  $75,-  where   the   provisions  of   the  statute 

000  of  stock  issued  as  full  paid,  and  have  been  violated.     Clow  v.  Brown, 

the    corporation    becomes    insolvent,  150  Ind.  185  (1898).    Where  a  water- 

the  partners  are  liable  on  their  stock  works    company    issues    $197,000    of 

to  corporate  creditors  for  the  remain-  stock  and  $150,000  of  bonds,  for  work 

ing    $37,500.       Gates    v.    Tippecanoe  which  is  worth   only  the  amount  of 

Stone  Co.,  57  Ohio  St.  60  (1897).     In  the   bonds,   the   Indiana  statute   ren- 

passing  upon  the  validity   of  a  rail-  dering  directors  personally  liable  for 

road    construction    contract    whereby  not  causing   the  capital   stock   to  be 

bonds  and  preferred  stock  and  com-  paid    up   within   eighteen   months    is 

mon  stock  were  issued  for  construe-  applicable.     The  court  said  "the  plan 

tion  work,  the  court  in  figuring  the  of    the    promoters,    stockholders    and 

actual  value  received  by  the  railroad  directors  of  the  company  was  to  build 

for  these  securities  figured  the  com-  a    water-works    without    capital    and 

mon  stock  at  fifteen  cents  on  a  dol-  without    risk    of    expense    to    them- 

lar  and  the  preferred  stock  at  thirty  selves,"   and   that   by   taking  all   the 

cents  on  a  dollar  and  the  bonds  at  stock    and    all    the    bonds    they    left 

seventy-six    cents    on    a    dollar,    and  the  corporation  where  it  was  unable 

held  that  this  was  legal,  even  under  to  pay  any  other  debts,  either  by  the 

the  Ohio  statutes.    Toledo,  etc.  R.  R.  sale    of    stock    or   bonds.      Brown   v. 

r.  Continental  Trust  Co.,  95  Fed.  Rep.  Clow,  158  Ind.  403  (1902).    As  to  the 

497    (1S99).     As  to  the  common  law  common    law    in    Indiana,    see    §46, 

in   Ohio,   see   §  46,   supra.     Where  a  supra. 

219 


§  47.] 


"watered"  stock. 


[CH.   III. 


payment  at  an  overvaluation  ;a  but  in  1901  these  statutes  were  mod- 
ified so  as  to  protect  the  stockholders  under  such  circumstances. 

In  Wisconsin  the  statute  prohibits  the  issue  of  stock  at  less  than 
par,  and  prohibits  the  issue  of  bonds  at  less  than  seventy-five  cents 
on  the  dollar.2 


1  In  Maine  it  was  held  that  where 
property  purchased  by  individuals  for 
$6,666.67  was  turned  in  to  the  cor- 
poration for  $240,000  of  fuil-paid 
stock,  the  stockholders  are  liable  on 
the  stock  as  though  the  subscription 
price  had  not  been  paid.  This  de- 
cision was  made  under  the  statute 
that  property  shall  be  taken  "at  a 
bona  fide  and  fair  valuation  thereof." 
In  this  case  a  part  of  the  stock  was 
turned  back  as  treasury  stock  and 
sold  at  a  small  figure.  The  court 
•expressly  stated  that  its  decision  was 
based  on  the  statute  and  that  alone. 
Libby  v.  Tobey,  82  Me.  397  (1890). 
The  liability  of  subscribers  for  stock 
under  the  Maine  statutes  where  the 
stock  is  not  properly  paid  up  cannot 
bo  enforced  in  the  federal  courts  by 
a  suit  in  equity,  even  though  the 
statutes  of  Maine  authorize  such  a 
suit.  Alderson  v.  Dole,  74  Fed.  Rep. 
29  (1896).  Under  the  statutes  of 
Maine  a  corporate  creditor  was  able, 
to  the  extent  of  his  claim,  to  re- 
cover from  a  person  to  whom  stock 
was  issued  for  property  the  differ- 
ence between  the  par  value  of  the 
stock  and  the  actual  value  of  the 
property,  even  though  such  property 
was  taken  in  good  faith.  It  was  held 
that  the  creditors  were  entitled  to  go 
behind  even  the  honest  opinion  of 
the  parties  as  to  the  value  of  the 
property.  Such  liability  may  be  en- 
forced by  the  creditors  or  by  assignees 
appointed  by  the  court,  but  such  lia- 
bility is  secondary  and  can  be  en- 
forced only  after  the  corporate  as- 
sets have  been  exhausted  and  the  ex- 
act deficiency  ascertained.  Gillin  v. 
Sawyer,  93  Me.  151   (1899). 

2  The  issue  of  fictitious  or  watered 
stock  is  a  felony  in  Wisconsin.     See 


Rev.  Laws  1905,  §  2911.  The  Wis- 
consin statute  that  bonds  should  not 
be  issued  for  less  than  seventy-five 
per  cent,  of  their  par  value  does  not 
apply  to  a  transaction  where  old 
bonds  are  placed  under  a  new  mort- 
gage and  the  holders  of  the  old  bonds 
receive  new  bonds  in  lieu  thereof. 
Mowry  v.  Farmers'  L.  &  T.  Co.,  76 
Fed.   Rep.    38    (1896). 

Under  the  Wisconsin  statute,  if  an 
issue  of  stock  as  collateral  for  a  debt 
of  the  company  is  illegal,  the  stock 
is  void,  and  the  holder  thereof  is  not 
liable  to  corporate  creditors  who 
were  not  especially  misled  by  his  con- 
duct. Andrews  v.  National,  etc. 
Works,  76  Fed.  Rep.  166   (1896). 

Even  though  a  statute  declares  that 
stock  not  issued  at  its  par  value  shall 
be  void,  yet  this  refers  to  the  certifi- 
cate and  not  to  the  stock  itself. 
Pietsch  v.  Krause,  116  Wis.  344 
(1903). 

Where  promoters  buy  property  with 
a  view  to  organizing  a  corporation  to 
take  it  over,  and  it  is  taken  over 
with  a  purchase-money  mortgage 
nearly  equal  to  the  price  paid,  to- 
gether with  a  large  bonus  of  stock, 
yet,  even  though  they  are  the  only 
stockholders,  if  thereafter  the  bal- 
ance of  the  capital  stock  was  sold  to 
outsiders  to  whom  misrepresenta- 
tions were  made  as  to  the  cost  of 
the  land,  the  promoters  are  liable 
to  the  corporation  for  their  profits. 
The  suit  must  be  at  law  and  is  barred 
by  the  six  years'  statute  of  limita- 
tions. Pietsch  v.  Milbrath,  123  Wis. 
647    (1904). 

Bonds  issued  by  a  corporation  as 
collateral  for  a  debt  will  not  be  or- 
dered to  be  canceled  because  issued 
in  violation  of  the  state  statute  re- 
20 


ch.  m.]  "watered"  stock.  [§  47. 

A  statute  prohibiting  the  sale  of  stock  below  par  does  not  prevent 


quiring  payment  in  money  or  prop- 
erty of  a  certain  percentage  of  their 
face  value,  unless  the  money  received 
by  the  company  upon  the  pledge  of 
the  bonds  had  been  repaid  or  other- 
wise secured.  Andrews  v.  National, 
etc.  Works,  76  Fed.  Rep.  166  (1896). 
Under  this  statute  stockholders 
who  paid  for  their  stock  by  turning 
in  mining  property  known  to  them  to 
be  worth  only  one-tenth  of  the  par 
•value  of  the  stock  are  liable  for  the 
remaining  nine-tenths  of  the  par 
value  to  corporate  creditors.  The 
question  of  whether  the  creditors 
knew  all  the  facts  is  a  matter  to  be 
set  up  in  defense.  Gogebic  Inv.  Co. 
v.  Iron  Chief  Min.  Co.,  78  Wis.  427 
(1891). 

Where  a  statute  declares  that 
stock  issued  for  money  or  labor  or 
property  estimated  at  less  than  its 
true  money  value,  actually  received, 
equal  to  the  par  value  of  the  stock, 
shall  be  void,  and  the  secretary  issues 
to  himself  and  the  president  some 
stock  for  no  consideration,  and  then 
sells  such  stock,  the  bondsmen  for 
such  secretary  are  not  liable  on  ac- 
count of  such  issue  of  stock,  there 
being  no  sufficient  allegation  that  the 
purchasers  relied  on  the  certificates 
and  were  innocent  of  their  general 
character  and  that  they  exercised  or- 
dinary care.  First  Ave.  etc.  Co.  v. 
Parker,  111  Wis.  1  (1901).  Where 
a  person  owns  land  subject  to  a 
mortgage  for  its  full  value,  and  trans- 
fers his  equity  to  a  new  corporation 
for  $700,000,  the  fact  that  the  board 
of  directors  had  authorized  the  pur- 
chase of  the  land  for  $1,000,000  of 
stock  does  not  prove  that  $700,000  of 
stock  was  legally  issued  for  such 
equity.  Heinze  v.  South,  etc.  Co.,  109 
Wis.  99  (1901).  Where  parties  who 
suppose  they  own  a  timber  tract 
worth  $500,000  sell  the  same  to  a 
corporation  for  $500,000  full-paid 
stock,    and   it   afterwards   transpires 


that  their  title   is   defective  as  to  a 
part    of    the    property,    and   the    cor- 
poration in  order  to  perfect  the  title 
pays  out  $215,000,  although  the  stock 
actually  issued  for  that  part  of  the 
property  was  only  $55,000,  the  parties 
to  whom  the  stock  was  so  issued  are 
liable  only  for  the  $55,000,  especially 
where   a   settlement   has  been   made 
with  some  of  them  on  that  basis.     A 
contract  between  the  original  parties 
by    which    some    guaranteed    others 
against   liability   on   account  of   any 
defects    in    the    title    cannot    be    en- 
forced by  the  corporation,  and  hence 
cannot  be  made  the  basis  of  the  meas- 
ure of  damages.     On  the  other  hand, 
the  parties   receiving  the   $55,000   of 
stock  cannot  return  it  and  avoid  lia- 
bility on  the  ground  that  the  consid- 
eration for  the  issue  of  the  stock  had 
failed.     If  the  stockholders  are  few 
in  number  the  court  may  decree  pay- 
ment directly  to  the  stockholders  who 
complain  and  directly  to  such  of  the 
stockholders  who  are  entitled  to  par- 
ticipate   in    the    distribution    of    the 
$55,000.    Jenkins  v.  Bradley,  104  Wis. 
540    (1S99).     Where  a  national  bank 
and  two  of  the  directors  are  secretly 
interested  in  the  profit  made  by  sell- 
ing   property    to    a    corporation    for 
stock  the  corporation  may  hold  them 
liable    for   such   profit.      The   defense 
of    ultra    vires    on    the    part    of    the 
bank   is  not  good.     Zinc,   etc.  Co.  v. 
First,  etc.  Bank,  103  Wis.  125  (1899). 
Where  promoters  purchase  a  saw-mill 
plant  for  $20,000,  and  pay  therefor  in 
a     purchase-money     mortgage,      and 
then    sell    the   equity    of   redemption 
to  a  corporation  for  $60,000  of  stock, 
the  corporation  assuming  the  $20,000 
mortgage,    it  is   for  the  jury  to   say 
whether  the  property  was  fraudulent- 
ly  and    substantially   overvalued   for 
the  purpose  of  imposing  on  the  busi- 
ness public,  and  if  so,  such  promoters 
are  liable  to  corporate  creditors,  but 
if  not,  they  are  not  liable  even  though 


221 


§47.] 


" watered"  stock. 


[CH.    III. 


the  corporation  from  pledging  it,  and  a  sale  of  the  stock  by  the 
pledgee  below  its  par  value  is  legal.1 

Minnesota  also  has  a  statute  on  this  subject,2  and  in  Tennessee, 


the  equity  of  redemption  was  not 
worth  the  par  value  of  the  stock. 
National  Bank  v.  Illinois,  etc.  Lum- 
ber Co.,  101  Wis.  247    (1898). 

i  See  §  465,  infra. 

2  In  the  case  of  Brown  v.  Duluth, 
etc.  Ry.,  53  Fed.  Rep.  889  (1893), 
the  court  refused  to  enjoin  an  issue 
of  stock  and  refused  to  cancel  stock 
already  issued,  although  $900,000  of 
bonds  and  $945,000  of  stock  were  is- 
sued for  construction  work  which 
cost  $580,000.  The  court  so  held, 
although  the  statute  required  the 
stock  to  be  fully  paid,  and  pro- 
hibited issues  except  for  property 
actually  received.  The  plaintiff, 
however,  v/as  a  holder  who  purchased 
with  full  knowledge  of  the  facts.  The 
court  said:  "This  statute  was  not 
intended  to  prevent  or  interfere  with 
the  usual  method  of  raising  money 
to  build  railroads  or  for  any  legiti- 
mate corporate  purpose.  It  is  not 
to  be  construed  as  obstructive  to  the 
extent  of  restricting  and  hampering 
corporations  in  their  internal  man- 
agement, and  embarrass  them  in  pro- 
curing means  to  carry  out  the  legiti- 
mate purposes  of  the  corporation; 
and  unless  it  appears  that,  under  the 
guise  of  building  its  road,  bonds  and 
stock  of  the  defendant  company  are 
to  be  issued  and  put  upon  the  /nar- 
ket  fraudulently  that  do  not  and  are 
not  intended  to  represent  money  and 
property,  this  corporation  is  not  pro- 
hibited from  entering  into  a  real 
transaction  based  upon  a  present  con- 
sideration, and  having  reference  to 
legitimate  corporate  purposes."  The 
court  also  said  that  "such  a  pro- 
vision does  not  necessarily  indicate 
a  purpose  to  make  the  validity  of 
every  issue  of  stock  or  bonds  by  a 
corporation  depend  upon  the  inquiry 
whether  the  money,  property,  or  labor 
actually    received    therefor    was    of 

22: 


equal  value  in  the  market  with  the 
stock  or  bonds  so  issued." 

In  First  Nat.  Bank  v.  Gustin,  etc. 
Co.,  42  Minn.  327  (1890),  there  is  a 
dictum  to  the  effect  that  in  certain 
cases  bona  fide  creditors  may  en- 
force payment  of  the  difference  be- 
tween par  value  of  the  stock  and  the 
real  value  of  the  property  turned  in 
as  payment  for  it  in  full. 

In  Minnesota  it  is  held  that  where 
stock  is  issued  for  property  material- 
ly overvalued,  to  the  knowledge  of 
the  contracting  parties,  the  stock- 
holders are  liable  to  subsequent  cor- 
porate creditors  (who  became  such 
without  notice)  for  the  difference  be- 
tween the  par  value  of  the  stock  and 
the  real  value  of  the  property.  Hast- 
ings Malting  Co.  v.  Iron  Range  Brew- 
ing Co.,  65  Minn.  28  (1896).  In  this 
case  the  property  received  was  worth 
$18,000  and  was  paid  for  by  the 
issue  of  $30,000  par  value  of  stock. 

A  subscriber  for  stock  who  has  not 
paid  therefor,  except  by  turning  in 
worthless  property,  and  who  after- 
wards then  transfers  his  stock  to 
another  person  after  the  company  be- 
comes insolvent,  is  still  liable  on  the 
stock.  McConey  v.  Belton,  etc.  Co., 
97  Minn.  190    (1906). 

Holding  also  that  where  incor- 
porators subscribe  for  stock  and 
subsequently  attempt  to  pay  there- 
for by  leases,  which  are  of  no 
value,  they  may  be  held  liable  in 
Minnesota  by  a  subsequent  creditor 
in  good  faith  of  the  corporation,  and 
no  previous  judgment  need  be  ob- 
tained in  Arizona,  where  the  com- 
pany was  incorporated,  it  appearing 
that  it  had  no  assets  in  Arizona  and 
its  principal  office  was  in  Minnesota, 
where  suit  was  brought. 

A  person  who  takes  part  in  a  re- 
organization by  which  stock  is  issued 
to  old  stockholders  who  pay  seventy- 


ch.  in.] 


"watered"  stock. 


[§  47. 


by  statute,  the  property  received  must  be  "at  a  fair  valuation."1 
In  !N"ew  Jersey  there  is  a  statute  applicable  to  stock  in  railroad 
corporations,2  and  there  is  also  the  usual  statutory  provision  that 


five  cents  on  the  dollar  therefor,  can- 
not afterwards  claim  that  the  reor- 
ganization was  illegal.  State  v.  Ger- 
mania  Bank,  90  Minn.  150  (1903). 

A  person  purchasing  stock  issued 
for  cash  at  less  than  par  is  liable 
thereon  if  he  purchased  with  knowl- 
edge of  the  facts,  even  though  the 
stock  purports  to  be  paid  up.  The 
statute  of  Minnesota  which  appar- 
ently authorized  the  issue  of  stock  at 
less  than  par  was  construed  away  by 
the  court  and  the  issue  of  stock  at 
less  than  par  declared  illegal.  Hence, 
where  a  company  issues  $400,000  of 
stock  for  $5,000  and  a  license  to 
manufacture  and  sell  machinery  un- 
der certain  patents,  the  entire  value 
of  the  latter  being  not  more  than 
$130,000,  the  issue  is  fraudulent  and 
the  stockholders  are  liable  for  the 
$270,000  difference.  Wallace  v.  Car- 
penter Electric,  etc.  Co.,  70  Minn.  321 
(1897). 

i  Under  the  Tennessee  statutes 
that  only  cash  or  land  "at  a  fair  val- 
uation" shall  be  received  in  payment 
for  stock,  the  fact  that  the  land  was 
overvalued  is  insufficient.  There 
must  be  proof  of  an  "overvaluation 
which  was  intentionally  fraudulent, 
or  which  was  so  gross  as  to  be  con- 
structively fraudulent,  as  against 
corporate  creditors."  Jones  v.  Whit- 
worth,  94  Tenn.  602    (1895). 

Where  land  is  bought  for  $125,000, 
and  $35,000  thereof  is  paid,  and  then 
the  land  is  conveyed  to  a  corpora- 
tion, subject  to  the  $90,000  lien,  for 
$250,000  of  stock,  this  amounts  to 
turning  out  $250,000  of  stock  for  an 
equity  that  cost  $35,000.  Neverthe- 
less, the  stockholders  are  not  liable 
unless  overvaluation  is  alleged  and 
proved.  Shields  v.  Clifton  Hill  Land 
Co.,  94  Tenn.  123  (1894).  To  same 
effect,  Kelley  v.  Fletcher,  94  Tenn.  1 
(1894).     A  receiver  must  obtain  spe- 


cial permission  from  the  court  be- 
fore commencing  suit  against  di- 
rectors for  negligence  and  against 
stockholders  to  hold  them  liable  on 
stock  issued  in  payment  for  property 
at  an  alleged  overvaluation.  Sim- 
mons v.  Taylor,  106  Tenn.  729  (1901). 
In  a  suit  by  the  receiver  of  an  in- 
solvent street  railway  company  to 
hold  a  construction  company  liable 
on  stock  which,  together  with  bonds, 
was  issued  for  the  construction  of  a 
street  railway,  the  claim  being  that 
there  was  no  consideration  received 
for  the  stock,  the  bill  in  equity  must 
allege  that  the  construction  company 
had  power  to  acquire  such  stock.  If 
such  stock  was  issued  and  received 
as  full-paid  stock  the  construction 
company  is  not  liable  thereon,  even 
though  $63,750  of  stock  and  $95,000 
in  notes  secured  by  bonds  were  issued 
for  construction  work  costing  but 
$95,000.  Doak  v.  Stahlman,  58  S.  W. 
Rep.  741  (Tenn.  1899).  A  corpora- 
tion cannot  hold  the  directors  liable 
on  stock  which  the  corporation  is- 
sued to  them  for  services,  being  taken 
by  the  directors  at  five  cents  on  the 
dollar  in  lieu  of  salary,  where  all  the 
stockholders  assented  thereto,  such 
stock  so  issued  to  them  being  treas- 
ury stock,  that  is,  stock  which  was 
issued  for  property  as  full  paid  and 
then  donated  to  the  corporate  treas- 
ury. The  evidence  showed  that  the 
stock  represented  a  patent  right  and 
was  purely  speculative  and  had  no 
market  value.  Divine  v.  Universal, 
etc.  Co.,  38  S.  W.  Rep.  93  (Tenn. 
1896). 

2  A  railroad  mortgage  in  New  Jer- 
sey is  not  valid  if  it  exceeds  the 
amount  of  cash  paid  in  on  its  capital 
stock.  The  mortgage,  however,  may 
be  made  in  advance  of  construction. 
Where  $900,000  of  bonds  and  $900,- 
000    of   stock    are    issued   to   a   con- 


22^ 


§47.] 


"watered"  stock. 


[ch.  in. 


stock  must  be  paid  for.  This  statute,  however,  has  in  recent  years 
been  given  a  rather  drastic  application  and  it  is  now  somewhat  dan- 
gerous to  issue  watered  stock   in   the  state   of  New  Jersey.1      In 


tractor  for  work  costing  only  $900,- 
000,  the  bonds  are  invalid,  except  in 
bona  fide  hands.  On  a  bill  filed  by 
the  receiver  to  cancel  the  mortgage 
the  court  so  decreed,  upon  condition, 
however,  that  bona  fide  holders  were 
first  paid  the  amounts  they  paid  for 
their  bonds.  Various  parties'  rights 
were  passed  on  by  the  court.  Di- 
rectors and  other  participating  par- 
ties holding  bonds  were  allowed 
nothing.  Baker  v.  Guarantee,  etc. 
Co.,  31  Atl.  Rep.  174  (N.  J.  1895). 
On  appeal  the  court  held  that  where 
the  statutes  prohibit  debts  in  ex- 
cess of  the  capital  stock  actually  paid 
in,  the  excessive  bonds  in  the  hands 
of  a  director  cannot  be  enforced. 
Steelman  v.  Baker,  53  N.  J.  Eq.  672 
(1896).  But  where  one  issue  of 
bonds  was  legal  and  a  second  issue 
was  illegal,  a  director  holding  bonds 
of  the  first  issue  may  enforce  them. 
Physick  v.  Baker,  53  N.  J.  Eq.  673 
(1896). 

i  A  bill  in  equity  is  not  multi- 
farious when  filed  by  a  receiver  of  an 
insolvent  corporation  against  the 
stockholders  and  bondholders,  alleg- 
ing that  some  of  them  as  owners  of 
a  large  number  of  paper  mills,  and 
others  as  promoters  of  the  same, 
caused  them  to  be  conveyed  to  the 
corporation  for  bonds  and  preferred 
stock  and  common  stock,  the  par 
value  of  all  of  which  was  much 
greater  than  the  actual  value  of  the 
property  so  conveyed,  even  though 
such  bill  asks  that  the  claims  of  the 
bondholders  be  reduced  to  the  amount 
actually  paid  for  the  bonds,  and  that 
the  stockholders  be  held  liable  for 
such  part  of  the  par  value  as  was 
not  fairly  paid  for  by  the  property, 
and  even  though  such  bill  asks  that 
the  promoters  be  held  liable  on  loss 
due  to  stock  and  bonds  which  passed 
into  bona  fide  hands.    See  v.  Heppen- 


heimer,  55  N.  J.  Eq.  240  (1897); 
aff'd,  56  N.  J.  Eq.  453.  This  same 
transaction  was  involved  in  the  case 
of  Dickerman  v.  Northern  T.  Co.,  17C 
U.  S.  181  (1900),  and  the  court  theie 
held  that  the  mortgage  was  legal 
and  could  be  enforced,  yet  the  court 
intimated  that  the  promoters  could 
be  held  personally  liable. 

On  the  final  hearing  of  the  See 
case,  mentioned  above,  the  following 
points  were  passed  upon: 

Where  promoters  purchase  various 
industrial  plants  for  $2,250,000  and 
turn  them  into  a  corporation,  organ- 
ized by  them  for  that  purpose,  for 
$1,000,000  bonds  and  $4,000,000  stock 
and  then  sell  part  of  the  bonds  and 
stock  on  the  basis  of  $1,000  of  bonds 
and  $600  stock  for  $1,000,  such  issue 
of  stock  is  illegal,  and  hence  upon 
the  company  becoming  insolvent  sucli 
stock  is  not  paid  up  and,  as  required 
by  the  New  Jersey  statute,  the  stock- 
holders must  pay  up  enough  to  pay 
the  debts,  not  exceeding  the  amount 
still  unpaid  on  such  stock,  whether 
the  holder  of  the  stock  was  an  orig- 
inal holder  or  not.  Where  stock  and 
bonds  were  issued  for  property  at  an 
overvaluation,  and  then  a  $1,000 
bond  and  $600  of  stock  were  sold 
for  $1,000  in  cash,  the  court  held 
the  purchaser  liable  for  the  $600 
worth  of  stock.  The  court  held  that 
under  the  New  Jersey  statute  stock 
could  not  be  issued  for  good-will  or 
contemplated  profits.  Where  promo- 
ters organize  a  corporation  and 
through  a  dummy  board  of  directors 
cause  stock  to  be  issued  for  property 
at  an  overvaluation,  the  stock  will 
not  be  considered  fully  paid  up  and 
the  promoters  will  be  held  liable  as 
such  stockholders.  It  is  the  duty 
of  promoters  to  furnish  the  corpora- 
tion with  a  competent  and  indepen- 
dent board  of  directors  to  negotiate 


224 


CH.  III.] 


"watered"  stock. 


[§  47. 


New  Jersey,  at  the  instance  of  a  dissenting  stockholder,  a  court  of 


the  purchase   of   property   for   which 
stock    is    issued,   and    such    directors 
should  act  wholly  in  the  interest  of 
future    stockholders    and    not    be    bi- 
ased or  influenced  by  the  persuasions 
or  friendship  of  the  proposed  vendors. 
It   is   the   duty   of   promoters   to   tell 
all  the  facts  to  the  board  of  directors, 
including   the  actual   cost  of  proper- 
ties which  are  to  be  sold,  and  they 
should    ask    for    investigation    as    to 
the  value   and   cost  of   reproduction. 
An    attorney    who    receives    a    large 
amount  of  stock,  which  has  been  is- 
sued   for   property    at   an   overvalua- 
tion may  be  liable  thereon.     A  court 
of   equity   may   enforce   the   liability 
of  stockholders   who  have  turned  in 
property  in   payment  for  their  stock 
at   a   fraudulent   overvaluation,   even 
though   the   creditors   did   not  obtain 
judgments    and    have    executions    re- 
turned   unsatisfied.      It    is    doubtful 
whether  a  holder  of  stock  which  pur- 
ports to  be  fully  paid  up  can  be  held 
liable   thereon   in   an   action   at  law, 
because  the  certificate  of  stock  must 
first  be  disposed  of  and  annulled  as 
having  been  fraudulently  issued.   The 


that  he  is  liable  on  stock  issued  for 
property  at  an  overvaluation  is  sub- 
ject to  a  decree  rendered  against  him. 
In  holding  stockholders  liable  on 
stock  fraudulently  issued  for  prop- 
erty at  an  overvaluation,  the  court 
may  hold  liable  to  the  full  extent  of 
their  liability  stockholders  who  re- 
side in  the  state,  leaving  the  latter 
to  seek  contribution  from  stockhold- 
ers outside  of  the  state.  Stockhold- 
ers who  are  held  liable  on  their  stock 
by  reason  of  its  not  being  paid  up 
may  have  contribution  from  other 
stockholders,  even  though  all  the 
stock  was  originally  issued  for  prop- 
erty taken  at  an  overvaluation.  See 
v.  Heppenheimer,  69  N.  J.  Eq.  36 
(1905).  See  69  Atl.  Rep.  643. 

Where  stock  is  issued  for  property 
at  what  is  known  to  be  an  overvalua- 
tion, and  a  part  of  the  stock  is  then 
distributed  among  the  directors  with- 
out payment  therefor,  the  transaction 
is  a  fraud  as  regards  corporate  cred- 
itors, and  the  stockholders  are  liable 
for  the  difference  between  the  value 
of  the  property  and  the  par  value 
of  the  stock.     Mere  overvaluation  is 


liability  on  stock  issued  for  property     not  sufficient.    It  must  also  be  proved 


at  an  overvaluation  may  be  enforced 
by  a  receiver.  Where  the  amount 
still  due  on  unpaid  stock  is  sufficient 
the  judgment  against  the  stockhold- 
ers may  include  the  claims  proved 
and  allowed  with  interest;  also  fees 
for  creditors  in  winding  up  the  com- 
pany and  in  the  suit  to  recover  from 
the  stockholders;  also  counsel  fees 
and  compensation  to  the  receiver  and 


that  the  transaction  was  a  fraud  on 
corporate  creditors.  Where  $1,000,- 
000  of  stock  is  issued  for  patents 
without  a  meeting  of  the  board  of 
directors,  and  the  stock  is  subse- 
quently divided  in  such  a  way  as  to 
show  that  the  parties  knew  the  pat- 
ents were  not  worth  that  amount,  the 
stockholders  may  be  held  liable  by  a 
receiver   seventeen   years   afterwards. 


expenses    incurred    in    enforcing   the     The  issue  was  valid  as  between  the 


decree.  As  against  a  liability  on 
stock  issued  for  property  at  an  over- 
valuation a  stockholder  cannot  set 
off  bonds  which  he  holds  but  which 
had  not  been  filed  as  a  claim  against 
the  corporation  and  which  have  been 
barred  by  the  decree  barring  cred- 
itors. A  non-resident  stockholder 
who    appears    and    contests   a   claim 


corporation  and  the  stockholders,  but 
was  not  binding  on  corporate  cred- 
itors. The  remedy  of  the  receiver  to 
hold  stockholders  liable  on  the  stock 
is  by  bill  in  equity  and  not  by  peti- 
tion. Easton  Nat.  Bank  v.  American, 
etc.  Co.,  69  N.  J.  Eq.  326    (1905). 

Where  $1,000,000  of  stock  is  issued 
for  patents,  which  by  the  papers  seem 


(15) 


225 


§  47.]  "watered"  stock.  [en.  m. 

equity  has  power  to  review  the  judgment  of  the  board  of  directors 


to  have  been  valued  at  less  than 
half  of  the  stock,  the  stockholders 
are  liable,  under  the  New  Jersey- 
statute,  even  though  seventeen  years 
have  elapsed,  especially  where  no 
formal  action  seems  to  have  been 
taken  by  the  directors  in  purchasing 
the  patents.  Where  stock  is  issued 
for  property  taken  at  a  fraudulent 
overvaluation,  the  contract  need  not 
be  set  aside  before  holding  the  stock- 
holders liable  for  the  benefit  of  cor- 
porate creditors.  Under  the  New  Jer- 
sey statute  corporate  creditors  exist- 
ing at  the  time  stock  is  issued  as  well 
as  creditors  who  become  such  after- 
wards with  notice  of  the  character 
of  the  issue  may  hold  the  stockhold- 
ers liable  if  the  stock  is  issued  for 
property  taken  at  an  illegal  valua- 
tion. Under  the  New  Jersey  statute 
where  stockholders  are  held  liable  to 
corporate  creditors  on  stock  issued 
for  property  taken  at  a  fraudulent 
overvaluation,  a  creditor  is  entitled 
to  participate,  even  though  he  is  also 
one  of  the  stockholders  and  took  part 
in  the  illegal  issue.  Easton  Nat. 
Bank  v.  American,  etc.  Co.,  64  Atl. 
Rep.  917  (N.  J.  1906),  rev'g  in  part 
69  N.  J.  Eq.  326. 

Where  real  estate  worth  $125,000 
and  an  unsuccessful  patent  are  sold 
to  a  corporation  for  $1,125,000  of  full 
paid  stock,  and  one-half  of  the  stock 
is  then  turned  back  as  treasury 
stock,  and  the  company  becomes  in- 
solvent, the  stockholders  are  liable 
for  the  corporate  debts  and  expenses 
of  administration.  Honeyman  v. 
Haughey,  66  Atl.  Rep.  582  (N.  J. 
1906). 

Even  though  it  is  clear  that  prop- 
erty was  transferred  to  a  corporation 
for  stock  and  bonds,  the  par  value 
of  which  is  much  greater  than  the 
actual  value  of  the  property,  yet  a 
dividend  on  the  stock  cannot  be  en- 
joined by  a  stockholder  on  the  ground 
that  the  profits  should  be  used  to  add 


to  the  actual  value  of  the  assets  suf- 
ficient to  make  them  equal  to  the 
par  value  of  the  stock  and  bonds  so 
issued,  even  though  the  amount  of 
"water"  is  $11,000,000,  it  appearing 
that  there  were  no  floating  debts  and 
it  not  appearing  that  any  one  was 
defrauded.  Goodnow  v.  American, 
etc.  Co.,  66  Atl.  Rep.  607  (N.  J.  1907), 
the  court  saying:  "The  rule  seems 
to  be  established  that  between  stock- 
holders one  cannot  be  legally  called 
upon  to  make  good  any  shortage  in 
value  between  assets  and  the  nominal 
par  value  of  the  stock,  when  his 
stock  is  issued  under  a  contract  with 
the  company  as  full  paid,  whether  as 
a  bonus,  or  for  property  at  an  over- 
valuation, when  the  issue  is  con- 
sented to  by  all  the  stockholders.  It 
is  a  bargain  between  the  contracting 
parties  which,  in  the  absence  of 
fraud,   they   cannot   abrogate." 

"Stock  issued  as  a  bonus  with  the 
sale  of  bonds,  or  stock  issued  through 
the  means  of  overvaluation  of  prop- 
erty, cannot  properly  be  regarded  as 
necessarily  issued  fraudulently.  In 
the  absence  of  intervening  rights  of 
creditors,  such  transactions  appear  to 
have  been  generally  supported  by  the 
courts,  unless  positive  fraud  has  been 
clearly  established,  notwithstanding 
the  constitutional  and  statutory  pro- 
visions of  many  of  the  states  de- 
signed to  secure  a  proper  relation- 
ship between  the  capital  stock  and 
the  assets  of  corporations."  Arnold 
v.  Searing,  67  Atl.  Rep.  831  (N.  J. 
1907) ;  also  69  Atl.  Rep.  788. 

Where  stock  is  issued  for  property 
and  the  transaction  is  set  aside,  a 
suit  lies  by  the  receiver  of  the  com- 
pany to  have  the  stock  cancelled. 
McMaster  v.  Drew,  68  Atl.  Rep.  771 
(N.    J.    1908). 

Where  a  person  subscribes  for 
stock  and  afterwards  payment  is 
made  in  property  at  a  gross  overval- 
uation, the  court  may  hold  him  liable 


226 


CH.    III.]                                            ''WATERED"    STOCK.  [§    47. 

in  valuing  property  which,  the  company  is  about  to  purchase  and 

for  the  difference  between  the  actual  stock  at  $35  per  share,  and  is  in  vio- 

value   of    the    property    and   the   par  lation    of    the    Washington    statutes, 

value  of  the  stock,  even  though  the  Coler   v.   Tacoma   Ry.    etc.,   65   N.   J. 

company   went   through   the   form   of  Eq.    347    (1903). 

canceling   the   subscription   and   issu-  Where    by    statute    the    preferred 
ing  the  stock  as  an  original  issue  for  stock  shall   not  exceed  two-thirds  of 
property.     Hebberd   v.   Southwestern,  the  capital  stock  paid  in  for  cash  or 
etc.  Co.,  55  N.  J.  Eq.  18    (1896).     In  property,     a     preferred     stockholder 
the  case  of  Short  v.  Post,  58  N.  J.  Eq.  cannot   question    the   value   of   prop- 
130  (1899),  where  two  mortgages  and  erty  received  in  payment  for  the  pre- 
a  large  amount  of  stock  were  issued  ferred  stock  in  a   suit  instituted   by 
by  a  corporation  for  property  worth  him   to    enjoin    the   corporation   pur- 
no  more  than  the  first  mortgage,  and  chasing  its  own  stock,  as  allowed  by 
the    receiver    of    the    corporation    de-  statute,    where    the    assets,    less    the 
fended    against    such    first    mortgage  debts,  equal  the  preferred  stock  out- 
on  the  ground  that  the  mortgage  was  standing.      Hodge    v.    United    States 
usurious,  because  some  of  the  stock  Steel  Corp.,  64  N.  J.  Eq.  90   (1902). 
had    been    given    to    the    mortgagee  Where  two  parties  make  an  agree- 
without  consideration,  the  court  held  ment  by  which  one  turns  in  property 
the  defense  not  good  under  the  facts  to    a    New    Jersey    corporation    for 
in  that  case.  stock,    the   par  value   of   which  they 
Although    the    incorporators    of    a  know  is  many  times  greater  than  the 
New  Jersey  company  have  contracted  actual    value    of    the    property,    such 
to  issue  sixty  per  cent,  of  its  stock  an  issue  is  in  violation  of  the  New 
to  a  person  for  two  patents,  yet  the  Jersey  statute,  and  neither  party  can 
board    of    directors    after    the    com-  enforce   the   contract   as   against   the 
pany  is  organized  may  refuse  to  carry  other,  nor   compel   a   division  of  the 
out  the  agreement,  one  patent  being  stock  so  obtained.     Volney  v.  Nixon, 
worthless   and  the  other  not  having  68  N.  J.  Eq.  605    (1905),  aff'g  67  N. 
been  perfected.    The  court  said:     "To  J.  Eq.  457. 

justify  a  corporation  in  issuing  stock  Where  a  promoter  causes  the  stock- 
under  our  act  for  property  purchased,  holders  in  various  electric  companies 
there  should  be  an  approximation,  to  turn  in  their  stock  to  a  new  cor- 
at  least,  in  true  value  of  the  thing  poration  in  exchange  for  bonds  of 
purchased  to  the  amount  of  the  stock  the  latter,  and  also  gives  to  such 
which  it  is  supposed  it  represents."  stockholders  the  right  to  purchase,  at 
Edgerton  v.  Electric,  etc.  Co.,  50  N.  $30  a  share,  stock  in  the  latter,  a 
J.  Eq.  354,  361  (1892).  stockholder,  who  has  done  so  and 
A  dissenting  stockholder  in  a  New  then  discovers  that  the  promoter  has 
Jersey  corporation  owning  a  street  made  $20,000,000  profit  in  stock  of 
railway  in  Washington  may  enjoin  a  the  new  company,  may  bring  suit  to 
sale  of  the  property  to  a  Washington  compel  the  promoter  to  turn  over  the 
street  railway  company  for  20,000  profit  to  the  corporation  and  may 
shares  of  the  full  paid  stock  of  the  join  the  new  corporation  as  a  party 
latter  where  dissenting  stockholders  defendant.  It  is  no  defense  that  the 
of  the  former  are  to  be  paid  only  board  cf  directors  of  the  latter  thinks 
$35  cash  in  lieu  of  each  share  of  it  inexpedient  that  the  suit  be 
the  Washington  corporation,  which  brought.  Groel  v.  United,  etc.  Co.,  69 
he  would  be  entitled  to.  On  its  face  N.  J.  Eq.  39  (1905);  s.  c,  69  N.  J. 
this   is   an   issue   of  the  Washington  Eq.  397    (1905).     The  court  said   (p. 

227 


8  47.]  "watered"  stock.  [cii.  hi. 

pay  for  in  increased  capital  stock,  but  after  the  stock  has  been  issued 

1064) :      "The    authorities    hold   that  was  not  equal   to   such  par  value,   a 

it   is   a   matter   of   discretion   in   the  bill  by  the  party  owning  the  property 

court  whether  to  permit  a  suit  to  be  for  specific  performance  will   not  be 

brought  by   a   stockholder  on  behalf  upheld.     Ecuadorian   Assoc,  v.   Ecua- 

of  his  corporation,  and  that  the  court  dor    Co.,    65    Atl.    Rep.    1051    (N.    J. 

will  exercise  its  discretion,  having  in  1907). 

view   the   circumstances   of   the   par-  The  case  In  re  Remington,  etc.  Co., 
ties,  their  relationships  to  each  other  119  Fed.  Rep.  441   (1902),  involved  a 
and'  to   the  cause   of   action,   the  re-  suit  brought  in  the  federal  court  in 
fusal  to  sue  "  etc.  ^"ew   York   by   a   creditor   of   a   New 
A  state  may   tax  capital  stock  is-  Jersey  corporation  against  the  stock- 
sued  for  letters  patent,  the  issue  for  holders  to  hold  them  liable  on  stock 
patents  in  this  case  being  the  entire  which   was   alleged   to  have  been   is- 
capital     stock     of     $2,000,000     except  sued  for  an  insufficient  consideration 
$2,500    which    was    issued    for    cash,  in  the  way  of  property. 
American,   etc.   Co.   v.   State,   etc.,   70  Even  though  the  owners  of  mining 
N.  J.  L.  172    (1903).  claims  organize  a  corporation  in  New 
While     a     corporation     may     issue  Jersey,    and    they    themselves    as    di- 
stock   for   labor   and   services,  yet   it  rectors,  together  with  dummy   direc- 
must  be  at  a  fair  and  bona  fide  valua-  tors,    cause    the    corporation    to    pur- 
tion,    and    the    proof    that   the    issue  chase    the    claims    for    $750,000    par 
was   made   for   labor  must   be   clear,  value  of  stock,  although  the  mining 
Clevenger  v..  Moore,  71  N.  J.  L.  148  claims    were    worth    but    $5,000,    and 
(1904).  even     though     thereafter     additional 
Where  a  court  has  declared  void  a  capital  stock  is  sold  by  the  corpora- 
conveyance  of  property  to  a  corpora-  tion   to   the   public   for  cash   at   par, 
tion   in   payment   for   stock   and   the  yet    the    corporation    cannot    rescind 
corporation  becomes  insolvent,  the  re-  the    transaction,    inasmuch    as    there 
ceiver    may    file   a   bill    to    ascertain  were    no    other    stockholders    at    the 
the  rights  of  the  existing  stockhold-  time   of    the   transaction,    and    hence 
ers   and   he   need   not  set   forth   the  no  one  was  deceived.    Old  Dominion, 
condition  of  the  company.    McMaster  etc.   Co.   v.  Lewisohn,   136   Fed.   Rep. 
v.  Drew,  62  Atl.  Rep.  558  (N.  J.  1906).  915   (1905) ;   aff'd,  148  Fed.  Rep.  1020 
Where    a    New    Jersey   corporation  and  210  U.  S.  206.   A  contrary  conclu- 
has  issued  its  stock  in  exchange  for  sion    was    reached    in    regard    to   the 
stock    of    a    foreign   corporation    and  same    transaction    in    Old    Dominion, 
paid  money  in  addition  thereto,  and  etc.    Co.    v.    Bigelow,    188    Mass.    315 
an  Ohio  court  has  held  that  the  trans-  (1905). 

action  was   illegal,   the  money  to  be  The  New  York  courts  will,  at  the 

paid  cannot  be  collected  by  a  suit  in  instance  of  a  New  York  stockholder 

New  Jersey.     Strickland  v.  National  in  a  New  Jersey  corporation,  enjoin 

Salt    Co.,    64    Atl.    Rep.    982     (N.    J.  the    latter   from    issuing   stock    as   a 

1906).  bonus  with  bonds  in  violation  of  the 

Even  though  a  company  has  agreed  New    Jersey   statute   requiring  stock 

to  issue  its  full  paid  stock  for  prop-  to  be  issued  for  money  or  property, 

erty,  yet  if  the  contract  has  not  been  even  though  the  actual  value  of  the 

carried  out  and  the  directors  have  stock  and  bonds  so  issued  does  not 
not  adjudged  that  the  value  of  the  exceed  the  par  value  of  the  bonds 
property  was  equal  to  the  par  value  and  the  amount  received  by  the  cor- 
of  the  stock,  and  it  is  evident  that  it     poration    is    the    par    value    of    the 

228 


CH.   III.] 


"watered"  stock. 


[§47. 


the  judgment  of  the  directors  is  conclusive.1  And  there  are  statutes 
in  Iowa,2  Massachusetts,3  Oregon,4  and  Utah5  on  this  subject  of 
watered  stock. 


bonds.  The  fact  that  the  company 
is  in  a  failing  condition  does  not 
change  the  effect  of  the  statute. 
Kraft  v.  Griffon  Co.,  82  N.  Y.  App. 
Div.  29   (1903). 

As  to  the  common  law  in  New 
Jersey,  see  §  46,  supra. 

i  Donald  v.  American,  etc.  Co.,  62 
N.  J.  Eq.  729  (1901),  rev'g  61  N.  J. 
Eq.   458.     See   also   McCarter   v.   Pit- 


man,  etc.   Gas  Co.,   69   Atl.  Rep.  211 
(N.  J.  1908). 

2  In  Osgood  v.  King,  42  Iowa,  478 
(1876),  where  stock  was  issued  for 
land  grossly  overvalued,  the  court 
held  the  vendor  liable  for  the  par 
value  of  the  stock  less  the  actual 
value  of  the  land.  The  person  re- 
ceiving the  stock  was  a  director  at 
the  time. 


3  Under  the  statute  of  Massachu- 
setts of  1902  officers  and  stockholders 
in  a  corporation  who  have  taken  part 
in  the  company's  issue  of  stock  for 
property  at  an  unfair  valuation  are 
personally  liable  for  the  debts,  and 
this  statute  was  enforced  in  Anthony, 
etc.  Co.  v.  Metropolitan  Art  Co.,  190 
Mass.  35  (1906),  where  $100,000  of 
stock  was  issued  for  $50,000  worth 
of  property,  even  though  there  was 
no  proof  of  any  fraudulent  intent  or 
of  any  actual  knowledge  that  the 
valuation  was  unfair. 

A  statute  that  the  commissioner  of 
corporations  must  pass  upon  the 
value  of  property,  which  is  turned 
in  fcr  stock,  cannot  be  evaded  by 
the  parties  paying  cash  to  the  cor- 
poration for  the  stock  and  then  using 
that  cash  to  buy  the  property  from 
themselves.  Yet  if  they  do  so  under 
advice  of  counsel,  they  are  not  liable 
for  the  penalty  for  doing  so.  Harvey- 
Watts  Co.  v.  Worcester,  etc.  Co.,  193 
Mass.  138  (1906).  See  also  §48, 
infra. 

■i  In  Oregon  under  the  constitu- 
tional prevision  making  stockholders 
liable  for  corporate  debts  to  the 
amount  of  their  stock  subscribed  and 
unpaid,  a  creditor  may  show  that 
stock  was  issued  for  property  taken 
at  an  overvaluation  and  may  hold  the 
stockholders  liable  for  the  difference 
between  the  actual  value  of  the  prop- 
erty and  the  price  at  which  it  was 
received.     If  the  purchase  was  made 


in  good  faith  there  is  no  liability, 
but  where  parties  purchase  a  half  in- 
terest in  a  creamery  for  $5,000,  and 
on  the  following  day  all  of  the  own- 
ers transfer  their  interest  to  a  cor- 
poration formed  for  that  purpose  for 
$16,000  of  full-paid  stock,  the  trans- 
action is  clearly'  fraudulent  as  to 
creditors  and  the  stockholders  may 
be  held  liable.  Macbeth  v.  Banfield, 
45  Or.  553  (1904).  See  96  Pac.Rep.  52S 

5  There  is  a  statute  also  in  Utah. 
Where  parties  supposed  that  certain 
lands  were  public  lands  of  the 
United  States  and  open  to  patent, 
and  they  quitclaimed  the  same  to  a 
corporation  in  payment  for  stock,  and 
it  turns  out  that  the  lands  had  been 
previously  patented  by  other  parties, 
the  former  are  liable  on  the  stock 
to  corporate  creditors.  Henderson  v. 
Turngren,    9    Utah,    432    (1894). 

Where  mining  claims  which  are 
worthless  are  conveyed  to  a  company 
for  $200,000  of  paid-up  stock,  the 
stock  is  not  paid  up,  and  the  parties 
receiving  the  stock  are  liable  for  the 
par  value  thereof  to  corporate  cred- 
itors. Salt  Lake  Hardware  Co.  v. 
Tintic  Milling  Co.,  13  Utah,  423 
(189G).  Stockholders  are  not  person- 
ally liable  on  stock  issued  as  full 
paid  to  the  amount  of  $25,000  for 
mining  claims  which  were  reasonably 
estimated  to  be  worth  that  sum. 
Richardson  v.  Treasure,  etc.  Co.,  23 
Utah,  366  (1901). 


229 


§  47.] 


"watered"  stock. 


[CIT.   III. 


In  England,  in  1863,  the  Companies  Clauses  Consolidation  Act1 
prohibited  the  issue  of  new  stock  for  a  price  less  than  its  par  value. 


In  Jackson  v.  Traer,  64  Iowa,  469 
(1SS4),  overruling  s.  c,  16  N.  W.  Rep. 
120  (1884),  the  stock  was  not  issued 
to  the  construction  company  for  the 
purpose  of  constructing  the  corpo- 
rate works,  but  was  issued  after  the 
construction  was  finished,  and  a  cash 
debt  was  due  them,  which  was  paid 
by  an  issue  of  the  stock  to  pay  that 
debt  already  due. 

The  supreme  court  of  the  United 
States,  in  Clark  v.  Bever,  139  LT.  S. 
96  (1891),  refused  to  follow  the  de- 
cision in  Jackson  v.  Traer,  64  Iowa, 
469  (1884).  Both  of  these  cases 
grew  out  of  the  same  transaction. 

In  Chisholm  v.  Forny,  65  Iowa,  333 
(1884),  where  full-paid  stock  was  is- 
sued for  a  patent-right,  in  good  faith, 
but  the  patent-right  subsequently 
turned  out  to  be  worthless,  the  stock- 
holders were  held  liable  to  corporate 
creditors  as  though  no  payment  had 
been  made. 

Where  $100,000  of  stock  was  issued 
for  patents  worth  $16,000,  and  $50,- 
000  of  the  stock  was  transferred  by 
the  patentees  to  a  trustee  for  all  the 
stockholders,  a  subscriber  for  $1,500 
of  stock,  who  pays  the  company 
therefor  $500,  is  liable  to  corporate 
creditors  for  $1,000,  even  though  the 
$1,500  of  stock  was  a  part  of  the 
$50,000  of  stock  that  the  inventors 
retained  and  directed  the  company  to 
issue  to  defendant.  The  defendant 
was  not  a  bona  fide  subscriber  or 
transferee,  but  was  one  of  the  pro- 
moters and  was  president  of  the  com- 
pany. Fraud  cannot  be  alleged  in 
defense.  Boulton  Carbon  Co.  v. 
Mills,  78  Iowa,  460  (1889). 

In  the  following  case  a  very  pe- 
culiar device  was  successful.  Stock 
was  issued  conditionally  that  its  is- 
sue be  complete  and  binding  when  it 
became  worth  par,  and  that  the  price 


then  to  be  paid  for  it  to  the  company 
should  be  fifty  cents  on  the  dollar. 
The  stock  was  issued  and  partly  paid 
for,  but  never  reached  par  in  value: 
Held,  that  a  participating  stockhold- 
er, who  was  also  a  creditor,  could 
not,  nor  could  his  assignee,  enforce 
any  liauility.  Callanan  v.  Windsor, 
7S   Iowa,  193    (1889). 

Where  land  is  sold  to  a  corporation 
in  exchange  for  stock,  the  actual 
value  of  the  land  being  only  thirty- 
six  per  cent,  of  the  par  value  of  the 
stock,  the  holders  of  the  stock  are 
liable  for  the  remaining  sixty-foui' 
per  cent,  to  corporate  creditors.  Wish- 
ard  v.  Hansen  &  Co.,  99  Iowa,  307 
(1896). 

In  the  case  of  National  Park  Bank 
v.  Peavey,  64  Fed.  Rep.  912  (1894), 
the  court  refers  to  the  Iowa  decisions 
on  this  subject  of  fictitiously  paid-up 
stock  as  being  based  upon  the  Iowa 
statutes,  and  held  that  a  corporate 
creditor  might  enforce  the  liability 
in  an  action  at  law  as  allowed  by  the 
Iowa  statute. 

In  Iowa  the  court  considers  the 
value  of  the  property,  and  credits  on 
the  stock  only  the  actual  value,  and 
holds  the  stockholders  and  trans- 
ferees with  notice  liable  for  the  dif- 
ference, even  though  the  stock  was 
issued  as  full-paid.  Tuthill  Spring 
Co.  v.  Smith,  90  Iowa,  331   (1894). 

In  White  v.  Greene,  70  N.  W.  Rep. 
182  (Iowa,  1897);  aff'd,  105  Iowa, 
176  (1898),  the  court  held  the  stock- 
holder liable  on  stock  where  $120,000 
of  stock  had  been  issued  for  property 
which  had  just  been  purchased  for 
$20,000. 

Where  $55,000,  par  value,  of  stock 
is  issued  for  land  worth  $8,000,  a 
creditor  of  the  corporation  may  hold 
the  party  receiving  the  stock  liable 
for    the    remaining    $47,000,    as    the 


l  See  26  &  27  Vict.,  ch.  118,  §  21. 
230 


CH.   III.] 


"watered"  stock. 


[§47. 


An  amendment  thereto  in  1S691  struck  out  this  prohibition,  and 
gave  power  to  the  directors  to  issue  stock  on  such  terms  and  con- 
ditions as  they  saw  fit.  The  Railway  Companies  Act2  of  1867  is  to 
the  same  effect. 

In  England  the  issue  of  stock  for  property  or  services  is  largely 
regulated  by  statute.3  On  account  of  the  many  frauds  perpetrated 
upon  the  public  by  the  issue  of  stock  for  property  taken  at  a  gross 
overvaluation,  parliament,  in  1867,  passed  an  act  requiring  all  con- 
tracts whereby  stock  was  issued  for  property  or  services  to  be  pub- 
licly registered,  under  penalty  of  the  payment  being  void.4  Diffi- 
culty then  arose  as  to  what  was  the  status  and  liability  of  a  person 


owner  of  stock  unpaid  for  to  that 
amount,  and  it  is  immaterial  that  the 
articles  of  incorporation  recited  that 
that  amount  of  stock  would  be  issued 
for  the  specified  land.  Stout  v.  Hub- 
bell,  104  Iowa,  499  (1898).  The  statu- 
tory provision  in  Iowa  that  a  certifi- 
cate of  stock  shall  state  on  its  face 
to  what  extend  it  is  paid  up,  and 
whether  in  money  or  property,  does 
not  invalidate  an  issue  of  stock  with- 
out such  statement  appearing  on  the 
certificate.  French  v.  Northwestern 
Laundry,  107  N.  W.  Rep.  430  (Iowa, 
1906). 
i  See  32  &  33  Vict.,  ch.  48,  §  5. 

2  See  30  &  31  Vict.,  ch.  127,  §  27.  See 
also  Webb  v.  Shropshire  Ry.,  [1893] 
3  Ch.  307,  where  the  issue  was  at  a 
discount  of  sixty  per  cent,  under  a 
statute.  Also  Statham  v.  Brighton, 
etc.  Co.,  [1899]  1  Ch.  1S9,  where  stock 
was  issued  for  cash  at  less  than  par. 

3  In  the  case  Moseley  v.  Koffy- 
fontein  Mines,  Ltd.,  [1904]  2  Ch.  108, 
the  court  said:  "I  hope  a  day  may 
come  when  it  may  be  gravely  consid- 
ered by  the  Legislature  whether  it 
would  not  be  for  the  advantage  of 
the  community,  and  especially  of  the 
commercial  community,  that  an  Act 
should  be  passed  requiring  that  in  all 
cases  the  full  nominal  value  of  a 
share  should  be  paid  in  cash  and 
nothing  else.  I  am  satisfied  from 
my  own  judicial  experience  in  the 
administration     of     companies     that 


such  a  law  would  have  a  tendency 
to  benefit  the  companies  themselves, 
and  to  check  a  large  amount  of  un- 
wholesome speculation  on  the  Stock 
Exchange  which  is  largely  fed  and 
supported  by  operations  undertaken 
by  vendors,  promoters,  and  others  for 
the  purpose  of  unloading  fully-paid 
shares  which  they  have  been  allowed 
to  pay  for  by  giving  what  is  called 
money's   worth   instead   of   cash." 

4  30  &  31  Vict.,  ch.  131,  §25. 
"Every  share  in  any  company  shall 
be  deemed  and  taken  to  have  been 
issued  and  to  be  held  subject  to  the 
payment  of  the  whole  amount  there- 
of in  cash,  unless  the  same  shall  have 
been  otherwise  determined  by  a  con- 
tract duly  made,  in  writing,  and  filed 
with  the  registrar  of  joint-stock  com- 
panies at  or  before  the  issue  of  such 
shares."  "Where  the  stockholders  ap- 
ply long  after  incorporation  for  leave 
to  file  with  the  public  register  the 
contract  whereby  stock  is  issued  for 
property,  the  court  will  require  them 
first  to  provide  for  existing  debts.  Re 
Darlington  Forge  Co.,  L.  R.  34  Ch. 
D.  522    (1887). 

A  mere  vote  of  stock  to  a  director 
in  compensation  for  his  services  does 
not  render  him  liable  thereon  for 
failure  to  register  the  contract,  unless 
he  knows  of  the  entry  of  his  name  as 
holder  of  the  shares  or  accepts  cer- 
tificates for  the  same.  Arnot's  Case, 
L.  R.  36  Ch.  D.  702    (1887). 


231 


§  48.]  "watered"  stock.  [en.  in. 

receiving  stock  for  property,  in  case  the  contract  therefor  was  not 
publicly  registered,  as  required  by  act  of  parliament.  The  courts 
finally  decided  that,  if  the  sums  due  reciprocally  were  expressly  off- 
set, then  that  the  stock  was  to  be  deemed  paid  for,  notwithstanding 
the  statute.1  But  a  mere  general  understanding  that  the  property 
is  payment  for  the  stock  is  insufficient.  The  prohibition  in  the  stat- 
ute then  applies,  and  payment  in  cash  will  have  to  be  made  upon  a 
winding  up.2  The  point  decided  by  these  cases  seems  to  have  been 
misapprehended  in  a  few  American  cases.3 

Frequently  actions  herein  are  against  corporate  officers  who  di- 
rectly or  indirectly  receive  the  stock.  This  class  of  cases  is  consid- 
ered in  the  next  section. 

§  48.  Liability  of  the  officers  of  the  corporation. — There  is  great 
difficulty  in  defining  clearly  and  accurately  the  liability  of  the  cor- 
porate officers  herein.  This  is  because  the  officers  may  have  com- 
mitted an  ultra  vires  or  fraudulent  act;  or  may  have  participated 
in  the  profits  as  promoters;  or  may  have  received  a  gift  of  part  of 
the  stock  from  the  parties  to  whom  they  issued  it. 

There  are  few  cases  holding  a  director  liable  for  loss  to  the  cor- 
poration where  an  issue  of  its  stock  for  money  or  property  less  in 
value  than  the  par  value  of  the  stock  has  been  made.  Such  an  ac- 
tion would'  be  similar  in  its  character  to  the  numerous  cases  against 
directors  for  their  frauds  and  ultra  vires  acts.4 

i  Pell's  Case,  L.  R.  5  Ch.  App.  11  withdraw.  Re  Midland,  etc.  Co.,  60 
(1869);  Ex  parte  Clark,  L.  R.  7  Eq.  L.  T.  Rep.  666  (1889). 
Cas.  550  (1869).  See  also  §23.  In  3  See  Wetherbee  v.  Baker,  35  N. 
Spargo's  Case,  L.  R.  8  Ch.  App.  407  J.  Eq.  501  (1882). 
(1873),  the  court  said:  "If  parties  4  See  Part  IV.  Where  the  direc- 
account  with  each  other,  and  sums  tors  issue  stock  to  a  mining  expert 
are  stated  to  be  due  on  one  side,  and  at  ninety  cents  on  the  dollar  in  con- 
sums  to  an  equal  amount  due  on  the  sideration  of  an  examination  and  re- 
other  side  on  that  account,  and  those  port  by  him,  they  are  liable  to  the 
accounts  are  settled  by  both  parties,  company  for  the  remaining  ten  cents 
it  is  exactly  the  same  thing  as  if  on  the  dollar,  but  not  for  surplus 
the  sums  due  on  both  sides  had  been  value  which  the  stock  afterwards  ac- 
paid."  See  also  Maynard's  Case,  L.  quired.  Hirsche  v.  Sims,  [1894]  A. 
R.  9  Ch.  App.  60   (1873);  Re  Vulcan  C.  654. 

Iron  Works,  Law  Times,  May,  1885,        Although  none  of  the  stockholders 

p.  61.  and    creditors    of    a   company    which 

2  Dent's    Case,    L.   R.    15    Eq.    Cas.  is  in  difficulties  object  to  a  new  issue 

407    (1873) ;   Fothergill's  Case,  L.  R.  of  bonds  and  stock  for  contract  work, 

8    Ch.   App.    270    (1873);    Crickmer's  a  part  of  the  bonds  and  stock  being 

Case,  L.  R.  10  Ch.  App.  614   (1875);  then   given   to   the   stockholders   and 

Rowland's    Case,    42   L.    T.   Rep.    785  bondholders    as   a   bonus,    yet   where 

(1880).     A  person  taking  stock  at  a  the  intention  is  to  have  outside  peo- 

discount  for  property  overvalued  may  pie  invest  in  the  bonds  and  stock  of 

232 


CH.    III.] 


"watered"  stock. 


[§  48. 


In  a  suit  of  this  character,  however,  against  an  officer  of  the  cor- 
poration, he  is  liable  not  for  the  par  value  of  the  stock,  less  the 
value  of  the  property  or  labor  received  therefor,  but  at  the  most 
he  can  be  held  liable  only  for  the  market  value  of  the  stock,  less 
the  value  of  the  labor  or  property  received  by  the  corporation.1 


the  company  the  scheme  is  illegal. 
Innocent  purchasers  of  the  stock  may 
hold  the  directors  who  did  the  act 
liable  for  the  stock  and  bonds  thus 
given  as  a  bonus.  London  Trust  Co. 
v.  Mackenzie,  68  L.  T.  Rep.  380 
(1893). 

In  an  action  by  a  treasurer  for 
pay  for  his  services  it  is  no  defense 
that  the  corporation,  with  a  capital 
fixed  at  $1,000,000,  had  $50,000  paid 
in  in  cash  to  comply  with  the  statute, 
and  then  the  remaining  capital  stock, 
$950,000,  together  with  the  cash  so 
paid  in,  were  issued  for  two  patents, 
and  that  the  treasurer  checked  out 
therefor  the  said  $50,000,  being  the 
part  unexpended  at  that  time.  Sears 
v.  Kings,  etc.  Ry.,  156  Mass.  440 
(1892). 

A  statement  filed  with  the  state 
commissioner  as  required  by  statute, 
in  regard  to  the  amount  of  the  paid- 
up  stock,  is  not  such  a  representation 
as  will  sustain  an  action  for  damages 
for  fraudulent  representations  induc- 
ing a  person  to  take  the  notes  of  the 
company.  Hunnewell  v.  Duxbury,  154 
Mass.  286  (1891). 

The  fact  that  the  corporate  officers 
have  filed  a  false  statement  as  to 
the  amount  cf  paid-up  capital  stock 
will  not  sustain  an  action  for  dam- 
ages for  fraud  in  inducing  a  party  to 
take  the  notes  of  the  corporation. 
Representations  as  to  the  credit  of 
a  corporation  must  be  in  writing  in 
order  to  be  actionable  under  the  Mas- 
sachusetts statute.  Hunnewell  v. 
Duxbury,  157  Mass.  1  (1892). 

The  statute  of  limitations  runs 
against  an  action  by  taxpayers 
against  the  officers  and  promoters  of 
a  railroad  to  which  municipal  aid 
was  voted,  to  compel  them  to  account 


for  watered  stock  and  bonds  and  to 
cause  the  stock,  bonds,  and  mortgage 
to  be  canceled.  Allen  v.  Wisconsin, 
etc.  Ry.,  90  Iowa,  473  (1894).  Di- 
rectors may  be  personally  liable  for 
illegally  issuing  stock  and  afterwards 
paying  to  the  stockholders  a  portion 
of  the  price  received  by  the  corpora- 
tion for  bonds  and  stock,  the  stock 
being  contributed  by  the  stockhold- 
ers, but  they  are  not  liable  jointly 
for  money  so  paid  to  each  of  them 
separately  as  stockholders.  Great 
Western,  etc.  Co.  v.  Harris'  Estate, 
111   Fed.   Rep.   38    (1901). 

Unless  the  title  to  property  is 
vested  in  a  receiver  he  cannot  sue  in 
courts  of  a  foreign  jurisdiction,  upou 
the  order  of  the  court  appointing 
him,  to  recover  property.  Neither 
can  he  bring  suit  in  the  name  of  the 
corporation,  where,  if  he  succeeds,  the 
property  would  be  turned  over  to 
him  as  receiver.  His  right  to  sue 
in  a  foreign  jurisdiction  is  not  recog- 
nized on  the  principle  of  comity,  be- 
cause every  court  is  entitled  to  ap- 
point its  own  receiver  to  distribute 
the  property  within  the  jurisdiction. 
Great  Western,  etc.  Co.  v.  Harris,  198 
U.  S.  561   (1905). 

l  In  the  case  of  Continental  Tel. 
Co.  v.  Nelson,  49  N.  Y.  Super.  Ct. 
197  (1883),  the  president  was  sued 
by  the  corporation  itself  for  issuing 
stock  in  payment  of  labor,  the  par 
value  of  the  stock  being  worth  over 
twice  the  value  of  the  labor.  The 
court  held  that  he  was  liable  only 
for  the  actual  market  value  of  the 
stock  in  excess  of  the  value  of  the 
labor,  and  submitted  the  question  to 
the  jury.  See  also  Nott  v.  Clews,  14 
Abb.  N.  C.  (N.Y.)  437  (1883),  overrul- 
ing a  demurrer.  In  this  case,  however, 
33 


§  48.]  "watered"  stock.  [ch.  in. 

Where  the  directors  of  a  bank  upon  an  increase  of  the  capital  stock 
issue  a  part  of  the  stock  for  worthless  notes,  they  are  liable,  upon 
the  bank  becoming  insolvent,  to  the  receiver  for  the  par  value  of 
such  stock,  unless  they  can  show  the  stock  could  not  have  been  other- 
wise issued  or  sold.1 

Where,  however,  the  directors  receive  a  part  of  the  stock  them- 
selves either  by  its  issue  directly  to  themselves,  or  by  being  secret 
partners  with  those  to  whom  it  is  issued,  or  by  a  gift  to  them  from 
the  parties  to  whom  it  is  issued,  then  the  directors  may  be  com- 
pelled to  account  to  the  corporation  for  the  stock  actually  received 
by  themselves.  In  such  a  case,  however,  the  directors,  as  such,  can- 
not be  made  liable  on  the  capital  stock  issued  to  third  persons  and 
still  retained  by  them.  The  directors  are  liable  only  to  the  extent 
that  they  themselves  received  stock.  This  liability  arises  from  the 
principle  of  law  that  a  director  must  account  to  his  corporation  for 
any  secret  gift  that  may  be  made  to  him  by  persons  contracting 
with  the  corporation,  and  must  account  also  for  profits  made  by 
his  secret  participation  in  contracts  between  the  corporation  and 
third  persons.2  In  such  cases  the  director  is  liable  to  the  corpora- 
tion or  its  creditors,  not  for  the  par  value  of  the  stock  received  by 
him,  but  for  the  actual  value  of  the  stock,  or  for  the  profit  or  price 
which  he  received  therefor.3     A  director  is  disqualified  from  being 

the  directors  had  received  part  of  that  the  corporation  could  demand  of 
the  stock  as  a  gift.  See  also  Osgood  the  director  either  the  stock  or  the 
v.  King,  42  Iowa,  478  (1876);  but  see  profit  realized  by  him,  or  the 
Flagler,  etc.  Co.  v.  Flagler,  19  Fed.  profits  thereby  lost  by  the  corpora- 
Rep.  468  (1884) ;  Langdon  v.  Fogg,  tion,  but  could  not  compel  him  to  pay 
18  Fed.  Rep.  5  (1S83);  s.  c,  in  state  the  full  par  value  of  the  stock.  In 
court,  14  Abb.  N.  C.  (N.  Y.)  435  De  Ruvigne's  Case,  L.  R.  5  Ch.  D.  30G 
(1883).  A  corporation  cannot  refuse  (1877),  where  shares  of  stock  were 
to  transfer  stock  on  the  ground  that  issued  as  paid  up  to  a  person  for 
the  vendor  fraudulently  induced  the  services  palpably  overvalued,  and  he 
company  to  issue  the  stock  to  him  transferred  a  part  of  the  stock  to  a 
where  the  company  has  been  guilty  director,  De  Ruvigne,  the  court  said: 
of  laches  in  not  seeking  a  remedy  "If  the  company  attempt  to  make 
before  the  transfer.  The  vendee  in  the  appellant  [director]  a  contribu- 
this  case  was  a  director.  American,  tory,  and  they  allege  fraud  in  the 
etc.  Co.  v.  Bayless,  91  Ky.  94  (1891).  original  agreement  by  which  he  was 
i  Cockrill  v.  Abeles,  86  Fed.  Rep.  to  take  the  shares,  they  must  either 
505    (1898).  throw  over  the  agreement  altogether 

2  See  §§  649,  650,  and  cases  in  notes  or  they  must  take  it  altogether; 
thereto.  they  cannot  adopt  it  as  to  one  part 

3  In  Carling's  Case,  L.  R.  1  Ch.  D.  and  reject  it  as  to  the  rest."  The 
115  (1875),  where  the  person  receiv-  court  said  the  director  could  be  held 
ing  stock  for  property  taken  at  an  liable  for  breach  of  trust  and  be 
overvaluation  gave  part  of  it  to  a  made  to  pay  to  the  corporation  the 
corporate    director,    the    court    held  selling  value  of  the  shares;    and  since 

234 


ch.  in.] 


"watered"  stock. 


[§  48. 


interested  in  a  construction  contract  with  the  company;1  hut  if  all 
the  then  existing  stockholders  assent  thereto,  and  creditors  are  not 
injured,  such  a  transaction  is  legal.2  On  the  organization  of  a 
company  the  directors  may  issue  stock  to  themselves  for  property 
where  they  are  the  sole  stockholders.  The  presumption  is  that  the 
stock  was  issued  for  full  value.3 

There  is  still  another  class  of  cases,  in  which  a  director  acts  also 
as  a  promoter  of  the  company  and  receives  stock  for  his  services. 
He  then  is  liable  to  account  to  the  corporation  therefor,  not  only 
as  a  director,  but  also  as  a  promoter.4 

Another  class  of  cases  may  exist  where  the  directors  vote  stock 
to  themselves  in  payment  for  their  services  to  the  company.5 


some  of  the  stock  was  sold  at  par, 
he  was  chargeable  with  the  par  value 
of  the  stock  so  received  by  him. 

In  Anderson's  Case,  L.  R.  7  Ch.  D. 
75,  94  (1877),  the  court  held  that,  if 
shares  were  improperly  issued  to  a 
director  at  a  discount,  the  contract 
might  be  set  aside  and  the  considera- 
tion returned,  or  the  profits  realized 
by  him  might  be  recovered.  In  Cur- 
rie's  Case,  3  De  G.,  J.  &  S.  367  (1863), 
where  shares  were  taken  both  direcc- 
ly  and  indirectly  by  the  corporate  of- 
ficers for  property  and  services  gross- 
ly overvalued,  the  court  held  that  the 
transaction  might  be  undone  alto- 
gether for  fraud,  but  there  was  no 
liability  on  their  part  to  contribute 
anything  on  the  shares.  The  only 
remedy  is  to  set  aside  the  transaction 
and  recover  the  profits  thereof. 
Langdon  v.  Fogg,  18  Fed.  Rep.  5 
(1883);  s.c,  14  Abb.  N.  C.  (N.  Y.) 
435,  holds  that  the  directors  are  not 
liable  to  the  corporation  for  the  par 
value  of  the  stock  issued  to  their 
dummy  for  property  and  then  trans- 
ferred to  themselves.  See  also  §  650, 
infra,  and  cases  in  notes. 

In  the  case  of  Re  Ambrose  Lake, 
etc.  Co.,  L.  R.  14  Ch.  D.  390  (18S0), 
it  was  held  that  where  all  the  stock- 
holders acquiesced,  and  there  were 
no  creditors'  rights  involved,  the  cor- 
poration cannot  recover  from  its  di- 
rectors profits  realized  by  them  from 
shares  issued  to  them  as  paid  up  in 


consideration  of  property  taken  at  a 
gross  overvaluation.  The  corporation 
was  held  to  be  in  no  position  to  com- 
plain. In  Van  Cott  v.  Van  Brunt,  82 
N.  Y.  535  (1880),  where  the  facts 
were  very  much  the  same  as  in  the 
preceding  case,  the  court  said  (p. 
541) :  "If  the  defendant  [director  and 
president]  had  realized  a  sum  beyond 
the  amount  actually  expended,  there 
might  have  been,  perhaps,  some 
ground  for  claiming  that  the  arrange- 
ment should  inure  to  and  for  the 
benefit  of  the  company."  A  person 
to  whom  paid-up  shares  have  been 
issued  without  consideration  and 
who  transfers  them  to  a  bona  fide 
purchaser  is  not  liable  thereon,  but 
if  he  was  a  director  he  is  liable  for 
breach  of  trust.  Freeman's  Case,  7 
Ont.  W.  R.  (Can.)  613  (1906) 
i  See  §§  649,  662,  infra. 

2  See  §§  39,  662,  735,  and  ch.  XLIV. 

3  Turner  v.  Fidelity,  etc.,  2  Cal. 
App.  122   (1905). 

4  See  the  important  case  of  Chand- 
ler v.  Bacon,  30  Fed.  Rep.  538  (1887) ; 
also,  §  651,  infra,  and  cases  cited.  In 
Iowa,  where  "watered"  stock  is  given 
as  a  gift  by  the  patentees  to  a  pro- 
moter, who  afterwards  became  the 
first  president  of  the  company,  he  is 
liable  to  corporate  creditors  for  all 
the  "water"  there  is  in  the  stock. 
Boulton  Carbon  Co.  v.  Mills,  78  Iowa, 
460    (1889). 

5  See  §  657,  infra. 


235 


§  48.  J 


"watered"  stock. 


[CH.   III. 


Whether  the  directors  are  liable  herein  to  purchasers  of  stock  or 
to  corporate  creditors  in  an  action  for  deceit  is  an  open  question.1 

The  officers  of  the  corporation  who  participate  in  the  issue  of 
stock  as  paid  up,  when  it  has  not  been  fully  paid,  are  liable  to  per- 
sons purchasing  such  stock  for  damage  thereby  suffered.2  In  Mas- 
sachusetts, by  statute,  corporate  officers  are  made  liable  for  corpo- 
rate debts,  if  they  issue  stock  for  property  at  an  unfair  valuation 
of  the  latter.3     In  England  there  is  a  statute,  under  which  the  court 


l  See  §§  157,  158,  355,  infra. 

A  sale  of  pledge  of  stock  stamped 
"non-assessable,"  when  in  fact  it  was 
not  legally  paid  up,  renders  liable  for 
false  representations  the  president 
and  secretary  who  made  such  sale 
or  pledge,  and  who  knew  that  it  was 
not  paid-up  stock.  Windram  v. 
French,  151  Mass.  547    (1890). 

In  Bartholomew  v.  Bentley,  15  Ohio, 
659    (1846),  certain  persons   incorpo- 
rated  a  bank,   incurred  large  debts, 
then  sold  their  stock  to  the  bank  and 
left  the  creditors  nothing.    A  creditor 
brought   an   action   on   the   case   for 
fraud.     The  court  sustained  the  ac- 
tion,  and  said:     "If  the   defendants, 
with  the  design  to  defraud  the  public 
generally,   have   knowingly  combined 
together  and  held  forth  false  and  de- 
ceptive colors,  and  done  acts  which 
were    wrong,    and    have    thereby    in- 
jured  the  plaintiff,  they  must  make 
him  whole  by  responding  to  the  full 
extent  of  that  injury;    and  they  can- 
not place  between   him  and  justice, 
with  any  success,  the  charter  of  the 
German  Bank  of  Wooster,  whether  it 
be  valid  or  void,  forfeited  or  in  esse. 
Neither  a  good  nor  a  bad  thing  may 
be   falsely  used  for  purposes  of  de- 
ception   and    made    a    scapegoat   for 
responsibility.    Nor  is  it  material  that 
there  should  have  been  an  intention 
to  defraud  the  plaintiff  in  particular. 
If  there  was  a  general  design  to  de- 
fraud all  such  as  could  be  defrauded 
by   taking   their    paper   issues,    it   is 
sufficient,  and  the  plaintiff  may  main- 
tain his  suit,  provided  he  has  taken 
the  paper  and  suffers  from  the  fraud. 
The    act    incorporating   the 


president  and  directors  of  the  Ger- 
man Bank  of  Wooster,  admitting  it 
to  be  in  force,  conferred  no  authority 
upon  any  person  to  hold  out  false 
colors  to  deceive  the  public,  no  au- 
thority to  issue  bills  without  the 
means  of  redeeming  them;  and  those 
who  combined  to  use  it  for  the  pur- 
poses of  swindling  acted  for  them- 
selves rather  than  as  agents  of  the 
bank." 

Creditors  of  a  corporation  cannot 
hold  the  directors  liable  for  fraud, 
deceit,  etc.,  in  forming  a  sham  cor- 
poration, when  no  misrepresentations 
can  be  traced  to  them.  Mere  state- 
ments as  to  the  amount  of  capital 
stock  are  insufficient.  Brackett  v. 
Griswold,  112   N.  Y.  454   (1889). 

2  Cross  v.  Sackett,  2  Bosw.  617 
(1858);  Re  Gold  Co.,  L.  R.  11  Ch. 
D.  701  (1879).  In  a  suit  by  a  stock- 
holder against  the  president  for  mis- 
representations inducing  the  former 
not  to  sell  his  stock,  the  defendant 
may  be  examined  before  trial  on  the 
question  of  his  having  received  from 
the  corporation  $15,000,000  of  stock 
for  property  worth  $800,000,  that  fact 
bearing  on  the  misrepresentation 
which  was  as  to  the  dividend  earning 
capacity  of  the  company.  McDonald 
v.  Morse,  96  N.  Y.  App.  Div.  406 
(1904). 

3  Stats.  1875,  ch.  177,  §  2.  Where 
an  officer  of  a  foreign  corporation 
signs  and  delivers  to  the  commission- 
er of  corporations  a  certificate  which 
states  that  its  copyrights  and  privi- 
leges are  worth  $120,000  when  in  fact 
they  were  worth  only  $10,000,  he  is 
liable  to  the  corporate  creditors  un- 


236 


gh.  in.] 


"watered"  stock. 


[§  49. 


has  power,  on  the  application  of  creditors,  to  direct  the  official  re- 
ceiver to  prosecute  criminally  a  director  for  alleged  offenses  as  di- 
rector, such  prosecution  to  be  carried  on  at  the  expense  of  the  assets 
of  the  company.1  It  is  a  criminal  offense  in  England  for  any  di- 
rector, manager,  or  officer  of  a  corporation  to  publish  false  state- 
ments with  intent  to  induce  persons  to  purchase  stock.  Under  this 
statute  a  person  is  liable  as  a  manager  for  such  acts,  if  he  acted  as 
manager,  even  though  he  was  never  appointed.2 

§  49.  Liability  of  the  persons  purchasing  the  stock  with  notice. — 
It  seems  to  be  generally  assumed,  as  a  matter  of  course,  that  per- 
sons purchasing  stock  with  notice  that  it  had  not  been  paid  up,  al- 
though in  fact  it  had  been  issued  as  paid  up,  are  liable  on  such 
stock  to  the  same  extent  that  their  transferrers  were  liable.3     It  has 


der  the  statutes  of  Massachusetts,  and    any  prior  owner  was  bona  fide  and 
it  is  no  defense  that  the  stockholders     without  notice.    Barrow's  Case,  L.  R. 


did  not  intend  to  sell  the  stock. 
Heard  v.  Pictorial  Press,  182  Mass. 
530   (1903).     See  §47,  supra. 

Under  the  Massachusetts  statute  of 
1906  making  directors  of  street  rail- 
ways liable  for  all  debts  to  the  ex- 
tent of  the  capital  stock  until  it  is 
all  paid  in,  and  a  certificate  to  that 
effect  filed,  the  directors  continue  lia- 
ble if  the  certificate  is  untrue.  West- 
inghouse,  etc.  Co.  v.  Reed,  80  N.  E. 
Rep.  621    (Mass.  1907). 

In  New  York,  under  the  statute 
authorizing  the  attorney-general  to 
bring  suit  to  remove  directors  and 
other  corporate  officers  for  miscon- 
duct, he  may  commence  suit  to  re- 
move them  as  directors  and  also  as 
officers  for  issuing  stock  without  con- 
sideration. People  v.  Lyon,  119  N. 
Y.  App.  Div.  361    (1907). 

i  Re  London,  etc.,  Corp.  Ltd., 
[1903]    1   Ch.   728. 

2  Rex  v.  Lawson,  [1905]  1  K.  B. 
541. 

3  Upton  v.  Tribilcock,  91  U.  S.  45 
(1875).  In  Coleman  v.  Howe,  154  111. 
458  (1895),  the  court  said:  "Where  a 
person  purchasing  stock  issued  as 
paid  up  has  notice  that  it  has  not 
been  paid,  his  liability  is  the  same  as 
that  of  the  party  who  transferred  it 
to  him."     But  they  are  not  liable  if 


14  Ch.  D.  432  (1880).  A  transferee 
of  "watered"  stock  taking  with  no- 
tice is  liable  the  same  as  his  trans- 
ferrer. Boulton  Carbon  Co.  v.  Mills. 
78  Iowa,  460  (1889) ;  White  v.  Greene, 
70  N.  W.  Rep.  182  (Iowa,  1897),  aff'd, 
105  Iowa,  176  (1898) ;  Sprague  v.  Na- 
tional Bank  of  America,  172  111.  149 
(1898).  A  transferee  with  notice  Is 
liable  in  the  same  way  as  the  trans- 
ferer. Allen  v.  Grant,  122  Ga.  552 
(1905).  Purchasers  with  notice  of 
stock  that  has  been  issued  for  prop- 
erty at  a  fraudulent  overvaluation 
are  liable  thereon.  Garden  City,  etc. 
v.  American,  etc.  Co.,  205  111.  42 
(1903).  Where  an  option  which  has 
been  purchased  at  $125,000,  of  which 
amount  $30,000  has  been  paid,  is  sold 
to  an  Illinois  corporation  for  $8,000,- 
000  par  value  of  stock,  persons  tak- 
ing the  stock  with  notice  are  liable 
proportionately  to  bona  fide  corporate 
creditors  for  the  difference  between 
the  actual  value  of  the  property  and 
the  par  value  of  the  stock.  One  of 
the  promoters,  however,  cannot  en- 
force such  liability  to  repay  money 
which  he  has  loaned  to  the  company. 
Meyer  v.  Ruby,  etc.  Co.,  192  Mo.  162 
(1905).  A  purchaser  of  stock  which 
purports  to  be  fully  paid,  but  which 
he  knows  is  not  fully  paid,  is  liable 


237 


§  49.] 


"watered"  stock. 


[ch.  in. 


been  held  that  a  person  purchasing  bonds  of  a  newly  formed  corpor- 
ation at  par  with  a  bonus  of  stock,  is  not  a  bona  fide  purchaser,  even 

to  corporate  creditors  for  the  balance     did  not  pay  the  corporation  for  the 


unpaid.  Foote  v.  Illinois,  etc.  Bank, 
194  111.  600  (1902).  Where  a  person, 
to  whom  stock  is  issued  for  property 
at  a  fraudulent  overvaluation,  pur- 
chases other  stock  of  the  same  kind, 
he  is  liable  not  only  on  the  stock 
originally  issued  to  him  but  also  oh 
the  stock  so  purchased  by  him,  even 
though  the  stock  on  its  face  states 
that  it  is  "full  paid  and  non-assess- 
able." Higgins  v.  Illinois,  etc.  Bank, 
193  111.  394   (1901). 

A  purchaser  of  stock  in  a  New  York 
corporation  is  liable  on  the  statutory 
liability  of  stockholders  in  that  state 
where  stock  has  been  issued  for  prop- 
erty at  an  intentional  overvaluation. 
White,  etc.  Co.  v.  Jones,  167  N.  Y. 
158  (1901).  A  transferee  of  stock 
taking  with  knowledge  that  the  stock 
was  issued  for  property  at  a  fraud- 
ulent overvaluation  is  liable  thereon 
under  the  constitution  and  statutes 
of  Montana  and  the  liability  is  en- 
forceable to  pay  damages  for  torts 
of  the  company.  Kelly  v.  Clark,  21 
Mont  291  (1S98).  In  the  case  of 
Fouche  v.  Merchants',  etc.  Bank,  110 
Ga.  827  (1900),  where  $50,000  of  stock 
was  issued  in  payment  for  certain 
bonds  and  property  and  the  bonds 
were  never  delivered  and  the  prop- 
erty that  was  delivered  was  worth 
$2,500,  the  court  held  the  stock  was 
not  full  paid,  even  though  the  cer- 
tificate recited  that  it  was  full  paid 
and  non-assessable,  and  the  court  held 
that  the  stockholders  and  transferees 
with  notice  were  liable  on  such  stock. 
Where  the  facts  are  known  and  it  is 
a  question  of  law,  a  purchaser  cannot 
claim  to  be  a  'bona  fide  purchaser. 
Rogan  v.  Illinois,  etc.  Bank,  93  111. 
App.  39   (1900). 

In  Maine  it  is  held  that  the  trans- 
feree of  stock  issued  as  paid  up  is 
not  liable  to  a  corporate  creditor 
thereon,  even  though  the  transferrer 


stock,  and  even  though"  the  transferee 
knew  that  fact.  Morgan  v.  Howland, 
89  Me.  4S4  (1897).  Under  the  stat- 
utes of  Maine  a  transferee  of  stock  is 
not  liable,  even  though  the  stock  was 
issued  for  property  at  a  fraudulent 
overvaluation.  Dunn  v.  Howe,  96 
Fed.  Rep.  160  (1899);  rev'd  on  an- 
other point  in  107  Fed.  Rep.  849. 

Where  $100,000  of  the  stock  of  an 
Illinois  corporation  is  issued  to  par- 
ties who  agree  to  turn  in  a  patent 
therefor,  and  the  patent  is  never 
turned  in,  and  in  fact  turns  out  to 
be  of  no  value,  the  parties  receiving 
the  stock  with  notice  are  liable  there- 
on to  bona  fide  corporate  creditors, 
even  though  such  stock  recites  on  ita 
face  that  it  is  fully  paid.  Van  Cleve 
v.  Berkey,  143  Mo.  109  (1898). 

Where  the  certificate  of  stock  states 
on  its  face  that  it  is  "fully  paid  up" 
and  yet  that  it  is  subject  to  assess- 
ment for  certain  purposes,  the  holder 
is  bound  to  investigate.  Wishard  v. 
Hansen,  etc.  Co.,  99  Iowa,  307  (1896). 
In  the  case  of  Gilkie,  etc.  Co.  v. 
Dawson,  etc.  Co.,  46  Neb.  333  (1895), 
where  $240,000  par  value  of  stock  was 
issued  for  an  equity  in  land,  such 
equity  being  worth  only  $20,000,  the 
court  held  that  the  transaction  was 
fraudulent  per  se,  and  the  holders  of 
the  stock  were  liable  for  the  differ- 
ence between  its  par  value  and  the 
$20,000;  and  the  court  also  held  that 
the  transferees  taking  with  full 
knowledge  of  the  facts  were  also  lia- 
ble. In  the  case,  however,  of  Pen- 
field  v.  Dawson,  etc.  Co.,  57  Neb.  231 
(1898),  this  same  transaction  came 
again  before  the  court  and  the  court 
practically  overruled  the  latter  case 
and  held  that  the  stockholders  were 
not  liable,  the  lower  court  having  held 
that  they  had  acted  in  good  faith  and 
without  any  attempt  to  defraud  tho 
corporation. 


238 


ch.  in.] 


"watered"  stock. 


[§  50. 


though  he  made  such  purchase  not  from  the  corporation,  but  from 
a  third  person,1  but  the  supreme  court  of  the  United  States  holds 
otherwise.2  In  Illinois  the  transferrer  of  stock  is  liable  secondarily 
on  stock  issued  for  property  taken  at  a  fraudulent  over-valuation, 
the  transferee  being  primarily  liable.3  In  New  Jersey  this  rule  is 
reversed.4 

§  50.  Liability  of  bona  fide  transferees  without  notice,  — A  bona 
fide  purchaser  for  value  and  without  notice  of  stock  issued  by  a 
corporation  as  paid  up  cannot  be  held  liable  on  such  stock  in  any 
way,  either  to  the  corporation,  corporate  creditors,  or  other  per- 
sons, even  though  the  stock  was  not  actually  paid  up  as  represented. 
Such  a  purchaser  has  a  right  to  rely  on  the  representations  of  the 
corporation  that  the  stock  is  paid  up.  Difficulty  sometimes  arises, 
however,  in  determining  what  will  constitute  a  sufficient  represen- 
tation that  the  stock  is  paid  up.  A  representation  by  the  cor- 
porate agents  that  the  full  par  value  will  not  be  required  is  insuffi- 


i  See  v.  Heppenheimer,  69  N.  J. 
Eq.  36  (1905);  Colonial,  etc.  Co.  v. 
McMillan,  18S  Mo.  547   (1905). 

Dickerman    v.    Northern    T.    Co., 
17€  U.  S.  181,  202  (1900). 

s  Florsheim  v.  Illinois,  etc.  Bank, 
192  111.  382  (1901);  aff'g  93  111.  App. 
297  (1901);  Rogan  v.  Illinois,  etc. 
Bank,  93  111.  App.  39  (1900).  It  has 
been  held  by  a  lower  court  in  Illinois, 
that  even  though  stock  has  been  is- 
sued for  property  at  an  overvaluation, 
yet,  if  the  person  receiving  the  stock 
has  transferred  it  in  good  faith  and 
the  transfer  has  been  recorded  on  the 
books,  the  transferrer  is  no  longer 
liable.  Parkhurst  v.  Mexican  S.  R.  R., 
102  111.  App.  507  (1902).  A  stock- 
holder's liability  on  stock  may  be  off- 
set against  bonds  held  by  the  stock- 
holder, even  though  he  has  trans- 
ferred them  to  another,  who  had 
knowledge  of  the  facts.  Hynes  v. 
Illinois,  etc.  Bank,  80  N.  E.  Rep.  753 
(111.  1907).  A  subscriber  for  stock 
who  has  not  paid  therefor,  except  by 
turning  in  worthless  property,  and 
who  afterwards  then  transfers  his 
stock  to  another  person  after  the  com- 
pany becomes  insolvent,  is  still  liable 


on  the  stock.  McConey  v.  Belton,  etc. 
Co.,  97  Minn.  190  (1906).  A  person 
to  whom  stock  is  issued  for  property 
and  who  transfers  the  same  while  the 
corporation  is  solvent  cannot  be  held 
liable  on  such  stock,  even  though  the 
property  was  taken  at  an  overvalua- 
tion. Cole  v.  Adams,  19  Tex.  Civ.  App. 
507  (1898).  A  mere  oral  notice  by  a 
third  party  that  a  stockholder  had 
transferred  his  stock  to  a  designated 
person  does  not  relieve  the  former 
from  his  liability  on  the  subscription, 
no  formal  transfer  having  been  made, 
the  stock  having  been  issued  at  twen- 
ty cents  on  a  dollar.  Vermont,  etc. 
Co.  v.  Declez,  etc.  Co.,  135  Cal.  579 
(1902). 

4  See  v.  Heppenheimer,  6D  N.  J. 
Eq.  36  (1905).  Where  $500,000  of 
stock  is  issued  for  $2  cash  and  a 
formula  for  cereal  breakfast  food, 
and  the  stock  is  then  sold  at  less 
than  par  to  the  public,  and  the  com- 
pany fails,  the  stockholders  by  statute 
being  liable  only  to  the  extent  of  their 
unpaid  subscriptions,  the  parties  to 
whom  the  stock  was  originally  issued 
may  be  held  liable.  Wood  v.  Sloman, 
114  N.  W.  Rep.  317  (Mich.  1907). 


239 


§  50.] 


"watered"  stock. 


[ch.  ni. 


cient.1  The  word  "non-assessable,"  stamped  or  printed  or  written 
on  the  face  of  the  certificate,  is  not  a  sufficient  representation  that 
the  stock  is  paid  up,  so  as  to  protect  a  bona  fide  purchaser  thereof, 
where  the  certificate  also  shows  that  only  twenty  per  cent,  has  been 
paid  thereon.2 

Where,  however,  a  statement  is  made  on  the  face  of  the  certificate 
that  it  is  paid-up  stock,  the  bona  fide  purchaser  of  the  certificate 
need  not  inquire  further,  but  may  rely  on  that  representation,  and 
is  protected  thereby  against  liability.3 


1  Webster  v.  Upton,  91  U.  S.  65 
(1875) ;  Upton  v.  Tribilcock,  91  U.  S. 
45   (1875). 

2  Webster  v.  Upton,  91  U.  S.  65,  71 
(1875);  Sanger  v.  Upton,  91  U.  S.  56 
(1875).  A  statement  in  the  margin 
of  the  certificate  of  stock  that  the 
shares  are  $100  each  is  a  part  of  the 
certificate,  and  if  the  body  of  the  cer- 
tificate states  that  $50  have  been  paid 
on  each  share,  the  holder  has  notice 
that  the  stock  is  not  full  paid.  Fish 
v.  Gilbert,  73  Conn.  377  (1900). 

3  Young  v.  Erie  Iron  Co.,  65  Mich. 
Ill  (1887);  Re  Macdonald,  etc.  Co., 
[1S94]  1  Ch.  89;  Albitztigui  v.  Guad- 
alupe, etc.  Co.,  92  Tenn.  598  (1893). 
One  who  purchases  in  good  faith,  in 
the  open  market,  stock  of  a  corpora- 
tion which  purports,  on  the  face  of 
the  certificates,  to  be  full  paid  and 
non-assessable,  is  not  liable  for  as- 
sessments on  such  stock,  though  in 
fact  it  had  not  been  fully  paid.  Rood 
v.  Whorton,  67  Fed.  Rep.  434  (1895); 
s.  c,  74  Fed.  Rep.  118  (1896).  In 
Coleman  v.  Howe,  154  111.  458  (1895), 
the  court  said:  "A  purchaser  or  as- 
signee of  stock  which  has  not  been 
fully  paid  does  not  become  liable  to 
the  corporate  creditors  for  the  unpaid 
balance,  where  the  stock  has  been  is- 
sued as  fully  paid,  and  he  has  ac- 
quired the  same  in  good  faith,  and 
without  notice  that  it  has  not  been 
fully  paid."  In  Waterhouse  v.  Jamie- 
son,  L.  R.  2  H.  L.  (Sc.)  29  (1870), 
where  the  stock  was  purchased  in 
open  market,  the  court  said:  "Here 
the  appellant  is  a  bona  fide  holder  of 


shares  upon  which,  no  doubt,  there 
was  a  false  statement  made  by  the 
company,  of  which  he  had  no  knowl- 
edge, and  as  to  which  he  was  under 
no  obligation  to  inquire,  and  there- 
fore he  cannot  be  subjected  to  liabil- 
ity by  having  imputed  to  him  a 
knowledge  of  the  falsehood."  A  bona 
fide  purchaser  of  stock  which  upon 
its  face  purports  to  be  full-paid  stock 
is  not  liable  thereon.  Hess  v.  Trum- 
bo,  84  S.  W.  Rep.  1153  (Ky.  1905). 
In  Brant  v.  Ehlen,  59  Md.  1  (1882), 
the  court  said:  "Where  shares  are 
issued  by  the  company  to  the  sub- 
scriber as  full-paid  shares,  and  are 
sold  by  the  subscriber  as  such,  there 
is  no  ground  on  which  a  promise  can 
be  implied,  on  the  part  of  the  pur- 
chaser without  notice,  to  be  answer- 
able either  to  the  company  or  to  its 
creditors,  should  the  representations 
on  the  faith  of  which  he  purchased 
prove  to  be  false.  He  could  not  be 
held  liable  on  the  ground  of  contract, 
because  he  never  agreed  to  purchase 
any  other  shares  than  full-paid 
shares;  and  if  it  be  said  that  the 
shares  were  fraudulently  issued,  he 
could  not  be  held  liable  on  the  ground 
of  fraud,  because  he  was  in  no  sense 
a  party  to  the  fraud."  In  Stcacy  v. 
Little  Rock,  etc.  R.  R.,  5  Dill.  348 
(1879);  s.  c,  22  Fed.  Cas.  1142, 
Judge  Dillon  examined,  at  considera- 
ble length,  the  reasons  of  the  rule 
protecting  bona  fide  purchasers  of 
stock  issued  as  paid  up,  and  sustained 
the  rule  itself.  See  also  Burkinshaw 
v.    Nicolls,    L.    R.    3    App.    Cas.    1004 


240 


ch.  in.] 


"watered"  stock. 


[§  50. 


"Fully  paid-up  shares"  mean  "shares  upon  which  the  whole 
amount  that  could  be  called  had  been  called  up."1  If  the  corporation 
states  to  a  person  about  to  buy  stock  that  it  is  full  paid,  and  he 
purchases  it,  he  cannot  be  held  liable  on  an  unpaid  subscription.2 

A  purchaser  of  stock  is  entitled  to  rely  on  statements  in  the  cor- 
porate books  that  the  stock  is  paid  up.3  The  law  goes  still  further, 
and  holds  that  where  a  person  in  open  market,  in  good  faith  and 
without  notice,  purchases  certificates,  such  stock  is  to  be  deemed 
"paid-up"  in  his  hands,  and  he  is  protected  as  a  bona  fide  purchaser, 
even  though  there  is  nothing  on  the  face  of  the  certificates  stating 
that  they  are  paid  up.4     This  can  now  be  laid  down  as  the  estab- 


(1878).  One  case,  Myers  v.  Seeley, 
10  Nat.  Bankr.  Reg.  411  (1874);  s.  c, 
17  Fed.  Cas.  HIS,  lays  down  a  differ- 
ent doctrine.  The  court  says:  "The 
assignee  of  shares  can  be  in  no  better 
condition  than  the  assignor.  .  . 
The  question  is  simply  whether  the 
stock  has  been  really  paid  in  full  to 
the  corporation.  The  assignee  may 
have  paid  for  it  to  the  assignors,  and 
may  have  relied  on  the  representa- 
tions of  the  latter,  and  of  officers  of 
the  company,  that  the  shares  bought 
were  fully  paid,  yet  creditors  are  not 
bound  thereby;  and  if  the  stock  was 
not  fully  paid,  the  holder  is  liable  to 
creditors  for  the  amount  remaining 
unpaid."  This  case  must  be  consid- 
ered poor  law.  Where  the  charter 
and  the  certificates  of  stock  provide 
that  the  stock  shall  be  subject  to  as- 
sessment to  pay  a  certain  mortgage, 
it  is  -immaterial  that  the  stock  states 
on  its  face  that  it  is  paid  up.  West- 
ern Imp.  Co.  v.  Des  Moines  Nat.  Bank, 
103  Iowa,  455    (1897). 

i  Bloomenthal  v.  Ford,  [1897]  A. 
C.  156. 

2  Rochester,  etc.  Co.  v.  Roe,  7  N. 
Y.  App.  Div.  366  (1896).  A  bona  fide 
purchaser  of  stock  in  the  open  market 
who  is  informed  by  the  manager  of  a 
corporation  at  its  office  that  the  stock 
is  fully  paid  is  not  liable  on  the 
stock.  In  re  Remington,  etc.  Co.,  153 
Fed.  Rep.  345   (190 

3  Erskine  v.  Lowenstein,  11  Mo. 
App.  595  (1881);    aff'd,  S2  Mo.  301. 

(16)  2< 


4  Keystone  Bridge  Co.  v.  McCluney, 

8  Mo.  App.  496  (1880);  Foreman  v. 
Bigelow,    4    Cliff,    508    (1878);     s.    c, 

9  Fed.  Cas.  427,  as  explained  in  8 
Mo.  App.  496;  Johnson  v.  Lullman, 
15  Mo.  App.  55  (1884),  where  the 
court  says:  "If  any  presumption  of 
fact  arises  from  the  face  of  a  stock 
certificate  in  customary  form,  as  was 
the  one  in  this  case,  it  is  that  the 
stock  ...  is  fully  paid  for."  See 
also  Erskine  v.  Loewenstein,  82  Mo. 
301  (1884);  Cleveland,  etc.  Co.  v. 
Texas,  etc.  Ry.,  27  Fed.  Rep.  250 
(1SS6).  If  a  certificate  is  silent  as 
to  whether  the  stock  is  paid  up,  the 
purchaser  is  entitled  to  consider  it 
paid  up.  Re  Wakefield  Mica  Co.,  7 
Ont.  W.  R.    (Can.)    104   (1906). 

If  a  certificate  of  stock  is  silent  on 
its  face  as  to  whether  it  is  full  paid 
or  not,  a  bona  fide  purchaser  is  pro- 
tected in  considering  it  full-paid 
stock.  West  Nashville,  etc.  Co.  v. 
Nashviile  Sav.  Bank,  86  Tenn.  252 
(1888).  Cf.  Burkinshaw  v.  Nicolls, 
L.  R.  3  App.  Cas.  1004,  1017  (1878). 
In  Brant  v.  Ehlen,  59  Md.  1  (1882), 
the  court  says:  "The  purchaser  is 
not  bound  to  suspect  fraud  where 
everything  seems  fair.  .  .  .  Any 
other  doctrine  would  virtually  destroy 
the  transferable  nature  of  such  shares 
and  paralyze  the  whole  of  the  deal- 
ings in  the  stock  of  corporations." 

A  party  purchasing  a  certificate  of 
stock  which  does  not  state  whether  it 
is  paid  up  or  not  may  assume  that  it 


§  50.] 


"watered"  stock. 


[en.  in. 


lished  rule.  It  is  based  on  sound  public  policy,  favoring,  as  it  does, 
the  transfer  of  personal  property,  and  the  guasi-negotiability  of 
stock,  and  discountenancing  secret  liens  and  constructive  notice. 

A  purchaser  in  open  market  of  stock  represented  to  be  paid  up 
by  a  statement  to  that  effect  on  the  certificate  is  presumed  to  be  a 
bona  fide  purchaser.  Hence  there  has  arisen  the  well-established 
rule,  both  in  America  and  England,  that  a  bona  fide  purchaser  for 
value,  and  without  notice,  of  stock  issued  as  paid  up,  is  not  liable 
for  any  part  of  the  par  value  which  may  not  have  been  paid.1     In 


is  paid  up,  and  will  be  protected  in 
that  assumption.  Du  Pont  v.  Tilden, 
42  Fed.  Rep.  87   (1890). 

An  inquiry  by  a  purchaser  of  stock 
of  corporate  officers,  as  to  whether  it 
was  full-paid  stock,  must  be  made  to 
officers  having  authority  to  speak  for 
the  corporation.  Browning  v.  Hinkle, 
48  Minn.  544  (1892).  See  also  §257, 
infra. 

i  Sprague  v.  Nat.  Bank  of  America, 
172  111.  149   (1898).     A  bona  fide  pur- 
chaser  of   stock   issued   for   property 
at    an    overvaluation    is    not    liable 
thereon.    Meyer  v.  Ruby,  etc.  Co.,  192 
Mo.  162  (1905).    Bona  fide  transferees 
are  protected.     Easton  Nat.  Bank  v. 
American,  etc.  Co.,   69  N.  J.  Eq.  326 
(1905).     A  bona  fide  purchaser  of  a 
certificate  of  stock  is  protected  even 
though  nothing  whatsoever  was  paid 
to  the  corporation  for  the  stock,  and 
he    may    compel    the    corporation    to 
transfer    the    stock    to    him    on    the 
books.      Westminster,    etc.    Bank    v. 
New    England,    etc.,    73    N.    H.    465 
(1906).     A  suit  by  the  receiver  of  a 
corporation    to    hold    the    transferees 
of  stock  liable  for  the  par  value  of 
such  stock  on  the  ground  that  it  had 
been  fraudulently  issued  without  con- 
sideration must  allege  that  the  trans- 
ferees  purchased  the  stock  with  no- 
tice of  the  fraud  or  were  not  holders 
for  value.     The   presumption  is  that 
they  were  not  guilty  of  the  fraud  and 
were  holders  for  value.     Finletter  v. 
Appleton,    195    Pa.     St.    349     (1900). 
Even    though    stock    was    issued    for 
property   taken   at   an   overvaluation 


yet  such  stock  in  the  hands  of  a  bona 
fide  purchaser  is  valid,  notwithstand- 
ing the  constitutional  provision  in 
California  against  such  an  issue. 
Smith  v.  Martin,  135  Cal.  247  (1901). 
A  purchaser  of  stock  which  has  been 
issued  for  property  taken  at  an  over- 
valuation is  not  liable  thereon  where 
he  took  without  knowledge  of  such 
overvaluation.  Hence,  a  purchaser 
of  treasury  stock  at  fifty  cents  on  the 
dollar  is  not  liable  for  the  remaining 
fifty  cents,  even  though  it  turned  out 
that  originally  the  stock  was  issued 
for  property  taken  at  an  overvalua- 
tion, such  purchaser  having  no 
knowledge  of  such  overvaluation. 
This  is  the  rule,  even  in  Missouri, 
where  the  court  goes  to  the  extreme 
length  in  holding  parties  liable  for 
stock  issued  for  property  taken  at  an 
overvaluation.  Berry  v.  Rood,  168 
Mo.  316  (1902).  A  bona  fide  pur- 
chaser of  watered  stock  is  not  liable 
thereon.  Frazer,  etc.  Min.  Co.  v.  Gal- 
lagher, 5  British  Columbia  Rep.  82 
(1895) ;   Re  Concession  Trust,   [1896] 

2  Ch.  757;  Troup  v.  Horbach,  53  Neb. 
795  (1898);  s.  c,  57  Neb.  644  (1899). 
In  Re  British  Farmers',  etc.  Co.,  L. 
R.  7  Ch.  D.  533   (1878);    aff'd,  L.  R. 

3  App.  Cas.  1004  (1878),  sub  nom. 
Burkinshaw  v.  Nicolls,  the  court  held 
that,  if  the  bona  fide  purchaser  were 
not  protected,  "no  person  buying 
shares  in  the  market  as  paid-up 
shares  would  be  safe,  for  he  would 
get  nothing  more  than  a  certificate 
to  show  they  were  paid  up.  .  . 
Obviously  such  a  construction  would 


242 


CH.   III.] 


"watered"  stock. 


[§  50. 


a  case  where  parties  receiving  stock  and  bonds  from  the  corporation 
in  payment  for  property  sold  the  bonds  with  a  bonus  of  stock,  the 


destroy  the  transferable  nature  of 
shares  altogether."  See  also  Foreman 
v.  Bigelow,  4  Cliff.  508  (1878);    s.  c, 

9  Fed.  Cas.  427;  McCraken  v.  Mc- 
Intyre,  1  Duv.  (Can.)  479  (1877); 
Steacy  v.  Little  Rock,  etc.  R.  R.,  5 
Dill.  348  (1879);  s.  c,  22  Fed.  Cas. 
1142;  Jackson  v.  Sligo,  etc.  Co.,  1 
Lea  (Tenn.)  210  (1878);  Brant  v. 
Ehlen,  59  Md.  1  (1882);  Waterhouse 
v.  Jamieson,  L.  R.  2  H.  L.  (Sc.)  29 
(1870).      Cf.    Crickmer's   Case,   L.   R. 

10  Ch.    App.    614     (1875).      Contra, 
Myers  v.  Seeley,  10  Nat.  Bankr.  Reg. 
411   (1874);    s.  a,  17  Fed.  Cas.  1118. 
A  bona  fide  purchaser  of  stock  in  the 
open  market  is  not  liable  on  the  stock 
to  corporate  creditors,  although  it  was 
issued  for  cash  at  less  than  par,  the 
certificate  of  stock  reciting  on  its  face 
that  it  was  fully  paid  up.    The  court 
held  the  party  to  be  a  bona  fide  pur- 
chaser,   although    he   knew   that   the 
company  had   issued   stock  at  a  dis- 
count,   but    did    not    know    that    the 
stock  which  he  purchased  was  a  part 
of  such  stock   issued   at  a  discount. 
He  was  not  bound  to  inquire  of  the 
company.     Re  New   Chile   &   Co.,   68 
L.   T.   Rep.   15    (1S92).     It  is   imma- 
terial that  the  payment  in  stock  is- 
sued  as   paid   up   turns   out  to  have 
been  valueless.     The    bona  fide  pur- 
chaser -is  protected,  and  the  corpora- 
tion   must    allow    registry    by    him. 
Protection  Life  Ins.  Co.  v.  Osgood,  93 
111.    69    (1879).      In    Wintringham    v. 
Rosenthal,    25   Hun,    580    (1881),   the 
court  held  that  a  bona  fide  purchaser 
of  stock,  which  he  purchased  suppos- 
ing it  to  be  paid  up,  is  not  liable  for 
the  unpaid  par  value.    The  stock  was 
issued  by  a  bank,  evidently  on  a  cash 
subscription.      This    case    practically 
overrules  Mann  v.  Currie,  2  Barb.  294 
(1S4S).     The  general  railroad  act  of 
New  York  (Laws,  1850,  ch.  140,  §  10) 
prescribed      that     each      stockholder 
should  be  liable  "to  an  amount  equal 


to  the  amount  unpaid  on  the  stock 
held  by  him."  In  Tasker  v.  Wallace, 
6  Daly,  364,  374  (1876),  the  court 
held  that  under  this  statute,  "as  be- 
tween a  stockholder  and  a  creditor, 
it  is  wholly  immaterial  whether  he 
was  a  bona  fide  and  innocent  pur- 
chaser of  stock  which  the  vendor  as- 
sured him  had  been  paid."  This  re- 
mark was,  it  seems,  a  dictum,  and, 
being  by  an  inferior  court,  is  doubt- 
ful as  an  authority.  The  representa- 
tion, moreover,  was  not  on  the  face 
of  the  certificate,  nor  was  it  made  by 
the  corporation.  In  the  case  of  Hub- 
bell  v.  Meigs,  50  N.  Y.  480,  489  (1872), 
where  the  purchaser  of  Wisconsin 
railroad  stock  sued  his  vendor  for 
damages  for  deceit  on  the  ground, 
among  others,  that  the  stock  had  been 
issued  fictitiously  as  paid  up,  the 
court  said:  "It  is  unnecessary  to  de- 
termine whether  the  corporation  was 
authorized  by  its  charter  to  sell  its 
stock  at  less  than  par,  or  whether,  in 
so  selling,  its  officers  did  not  violate 
their  duty.  The  plaintiff  was  a  bona 
fide  purchaser,  and,  being  such,  ac- 
quired a  valid  title  to  the  stock  trans- 
ferred to  him."  Where  the  foreclos- 
ure of  a  mortgage  is  contested  on 
the  ground  that  bonds  and  stock  were 
issued  largely  in  excess  of  the  value 
of  the  property,  and  on  the  ground 
that  the  parties  who  turned  in  their 
property  for  stock  were  defrauded  by 
the  promoters,  the  court  said  in  re- 
gard to  the  bonds:  "We  are  clearly 
of  opinion  that,  so  far  as  they  were 
purchased  for  a  valuable  considera- 
tion by  innocent  holders,  they  are  not 
subject  to  the  set-off  claimed.  The 
question  whether,  so  far  as  they  are 
held  by  parties  cognizant  of  the  al- 
leged fraud,  they  are  subject  to  a 
set-off,  is  not  one  which  properly 
arises  in  this  case,  where  the  bonds 
must  be  treated  as  an  entirety,  but  is 
a  defense  applicable  to  each  individ- 


243 


§  50.] 


"watered"  stock. 


[ch.  m. 


supreme  court  of  the  United  States  held  that  the  purchasers  were 
not  necessarily  purchasers  with  notice.1 

But  even  a  bona  fide  purchaser  of  what  purported  to  he  full-paid 
stock  in  a  corporation  was  liable  on  the  double  liability  attached  to 
stock  under  the  former  New  York  statute,  where  the  stock  was 
issued  for  property  taken  at  an  overvaluation  and  no  certificate  of 
payment  had  been  filed  as  required  by  the  statute.2  The  liability 
of  the  transferrer  of  stock  issued  for  property  at  an  overvaluation 
is  considered  elsewhere.3 

Where  a  subscriber  who  has  not  yet  taken  out  his  certificate  of 
stock  instructs  the  corporation  to  issue  the  certificates  to  a  desig- 
nated transferee,  the  latter  is  not  held  to  be  the  original  allottee 
of  that  stock ;  and,  even  though  the  stock  was  irregularly  issued  as 
paid-up  stock,  he  can  claim  to  be  a  bona  fide  transferee  with- 
out notice.4 


ual  bondholder."  Dickerman  v.  North- 
ern T.  Co.,  176  U.  S.  181,  206  (1900). 
A  purchaser  of  stock  in  the  market 
is  not  liable  under  the  Maine  statute 
relative  to  the  value  of  property 
which  is  sold  to  the  corporation  in 
payment  for  stock,  and  the  original 
party  to  whom  the  stock  is  issued  is 
only  liable  to  make  payment  up  to 
par  as  to  debts  contracted  while  he 
was  owner.  Maine,  etc.  Co.  v.  South- 
ern, etc.  Co.,  92  Me.  444    (1899). 

l  Dickerman    v.    Northern    T.    Co., 
176  U.  S.  181,  202    (1900),  the  court 
saying:    "It  is  true  that  these  parties, 
in  disposing  of  the  bonds,  allowed  to 
each  purchaser  of  a  one-thousand-dol- 
lar bond,  two  hundred  dollars  of  pre- 
ferred and  four  hundred  of  common 
stock,  but  they  did  not  seem  to  have 
profited  by  this  themselves.     And   if 
it  were  necessary  to  the  negotiation 
of  the  bonds  to  give  a  bonus  in  stock, 
it  cannot  be  considered  in  the  light 
of  a  mere  donation.    Nor,  if  it  wore 
done   in   good   faith,  would   it  neces- 
sarily  afford   a  ground   of   complaint 
to    dissenting   stockholders.      Certain- 
ly,   if    this    bonus   were    received    in 
ignorance  of  the  fraud  practised  upon 
the  original  mill  owners,  and  simply 
as  an  inducement  to  take  the  bonds, 
the  dissenting  stockholders  could  not 


compel  the  bondholders  to  submit  to 
a  deduction  from  their  bonds  of  the 
par  value  of  the  stock  received  as  a 
bonus,  particularly  in  view  of  the  fact 
that  the  stock  might  turn  out  to  be 
worthless." 

2  If,  however,  after  the  issue  of 
the  stock  further  sums  of  money 
were  paid  in  by  the  stockholders 
equal  to  the  difference  between  the 
par  value  of  the  stock  and  the  value 
of  the  property,  the  liability  ceased 
as  to  subsequent  creditors.  White, 
Corbin  &  Co.  v.  Jones,  167  N.  Y.  158 
(1901).  Cf.  §  42,  supra,  as  to  who  is 
a  bona  fide  purchaser;  see  also  §  293, 
infra. 

Persons  who  purchase  stock  of  a 
company  soon  after  its  organization, 
without  paying  anything  therefor,  ex- 
cept in  some  instances  by  services, 
are  chargeable  with  notice  that  the 
stock  was  not  paid  up.  Gillett  v. 
Chicago  Title  &  T.  Co.,  82  N.  E.  Rep. 
891    (111.  1907). 

3  See  §  49,  supra 

4  Young  r.  Erie  Iron  Co.,  65  Mich. 
Ill  (1887) ;  Carling's  Case,  L.  R.  1 
Ch.  D.  115  (1875).  A  bona  fide  pur- 
chaser of  certificates  of  stock,  which 
recite  on  their  face  that  they  are  fully 
paid  up,  is  protected  even  though  the 
vendor  was  the  party  to  whom  the 

;44 


ch.  in.] 


"watered"  stock. 


[§  51. 


E.       ISSUE  OF  WATERED  STOCK  BY  A  STOCK  DIVIDEND. 

§  51.  Third  method:  Issue  by  stock  dividends. — The  third 
method  of  issuing  fictitiously  paid-up  stock  is  by  a  wrongful  use  of 
the  power  to  make  stock  dividends.  It  seems  to  be  generally  conceded 
that  if  the  capital  stock  and  the  actual  property  of  the  corporation 
are  not  increased  to  the  extent  of  the  par  value  of  the  stock  dis- 
tributed as  a  dividend,  then  that  the  issue  of  stock  by  such  dividend 
is  irregular,  and  under  certain  circumstances  fraudulent.  On  the 
other  hand,  if  an  equal  amount  of  property  is  thereby  added  to  the 
capital  of   the  corporation,   the  stock   dividend  is   legal.1      Where 


stock  was  issued  at  a  discount,  and 
even  though  he  caused  the  corpora- 
tion to  issue  the  stock  directly  from 
the  corporation  to  such  purchaser.  Re 
Building,  etc.  Co.,  [1896]  1  Ch.  100. 
Nominees  of  a  person  to  whom  full- 
paid  stock  is  to  be  issued,  same  as 
transferees,  are  not  liable,  though  the 
original  issue  was  to  them.  Re  Mac- 
donald,  etc.  Co.,  [1894]  1  Ch.  89.  See 
also  §  62,  infra.  Cf.  Rowland's  Case, 
42  L.  T.  Rep.  785  (1880);  Re  British 
Farmers',  etc.  Co.,  38  L.  T.  Rep.  757 
(1878) ;  Re  Vulcan  Iron  Works,  Law 
Times,  18S5,  p.  61. 

i  In  Williams  v.  Western  Union 
Tel.  Co.,  93  N.  Y.  162  (1883),  the 
court  (p.  189)  said  that  a  stock  divi- 
dend "could  be  declared  by  a  cor- 
poration without  violating  its  letter, 
its  spirit,  or  its  purpose.  .  .  .  There 
is  no  public  policy  which,  in  all 
cases,  condemns  such  dividends.  .  . 
No ,  harm  is  done  to  any  person, 
provided  the  dividend  is  not  a  mere 
inflation  of  the  stock  of  the  company, 
with  no  corresponding  values  to  an- 
swer to  the  stock  distributed.  .  .  . 
So  long  as  every  dollar  of  stock  is- 
sued by  a  corporation  is  represented 
by  a  dollar  of  property,  no  harm  can 
result  to  individuals  or  the  public 
from  distributing  the  stock  to  the 
stockholders."  Howell  v.  Chicago, 
etc.  Ry.,  51  Barb.  378  (1S68),  is  to 
the  same  effect.  In  Bailey  v.  Rail- 
road   Co.,    22    Wall.    604    (1874),    the 


court  (p.  635)  said  that  net  earnings, 
however  expended  or  invested,  belong 
"to  the  stockholders,  and  may  be  dis- 
tributed, as  they  may  direct,  in  divi- 
dends of  stock    .    .    .    or  by  a  sale  of 
property."   See  also  ch.  XXXII,  infra. 
A  stock  dividend  need  not  be  deliv- 
ered forthwith  to  a  stockholder  who 
paid  for  his  original  stock  by  a  note 
to    the    corporation    secured    by    the 
original  certificate  of  stock.    Alford  v. 
Laurel  Imp.  Co.,  86  Miss.  375  (1905). 
In   the   case   Chester  v.   Buffalo,   etc. 
Mfg.  Co.,  183  N.  Y.  425  (1906),  there 
was  involved  incidentally  a  five  hun- 
dred per  cent,  stock  dividend.  A  stock 
dividend  was  involved  in  Great  West- 
ern, etc.  Co.  v.  Harris,  128  Fed.  Rep. 
321  (1903);  aff'd,  198  U.  S.  561.     The 
court   in   this   last   case   said  such   a 
dividend    was    not    a    withdrawal    of 
the  assets  of  the  corporation,  and  the 
court    adopted    the    language    of   the 
brief    as    follows:     "After    the    issue 
they    (the   stockholders)    owned    the 
same  thing.   They  gained  nothing  and 
the  corporation  parted  with  nothing 
by  the  issue  of  additional  stock.     It 
merely   placed    in   the   hands   of   the 
stockholders  an  instrument  whereby 
they  could  conveniently  detract  from 
the  value  of  the  shares  of  stock  which 
they  formerly  held,  in  order  to  vest 
new  and  equal  rights  in  the  persons 
to  whom  they  might  transfer  the  new 
shares.    Whatever  of  value  passed  to 
the   purchasers   of   those   shares   was 


§  51.] 


"watered'*  stock. 


[en.  in. 


the  directors  of  a  national  Lank  place  a  fictitious  value  on  the  as- 
sets of  the  bank,  in  order  to  declare  a  stock  dividend,  such  directors 
are  liable  for  the  par  value  of  the  stock  to  the  receiver  of  the  bank 
for  the  benefit  of  its  creditors,  unless  the  directors  show  that  the 
stock  could  not  have  been  otherwise  issued  or  sold.1  A  stock  divi- 
dend may  take  the  shape  of  an  issue  of  stock  for  cash  at  less  than 
the  par  value.2 


withdrawn,  not  from  the  assets  of 
the  company,  but  from  the  anteced- 
ent equity  or  interest  which  was 
vested  in  the  stockholders  making 
the  sale.  Taking  the  stock  transac- 
tion by  itself,  it  did  not  affect  the 
company  in  any  way.  It  merely  di- 
minished the  relative  interest  in  the 
corporation  of  those  stockholders 
who  engaged  in  it."  Where  the  com- 
pany is  under  obligations  to  issue 
stock  to  represent  interest  on  sub- 
scriptions until  dividends  are  de- 
clared, a  stock  dividend  does  not  stop 
the  interest.  Hardin  County  v.  Louis- 
ville, etc.  R.  R.,  92  Ky.  412  (1891). 
In  the  case  of  Rose  v.  Barclay,  191 
Pa.  St.  594  (1899),  the  validity  of 
a  stock  dividend  whereby  a  gas  com- 
pany having  $300,000  capital  stock 
distributed  $300,000  additional  capi- 
tal stock  among  its  stockholders  as 
a  stock  dividend  to  represent  the  en- 
hanced value  of  the  property  was  not 
questioned.  A  stock  dividend  was 
sustained  in  Cole  v.  Adams,  19  Tex. 
Civ.  App.  507  (1898),  to  the  extent 
that  such  dividend  represented  prof- 
its which  had  been  used  in  the  prop- 
erty but  not  to  the  extent  that  such 
dividends  represented  a  rise  in  the 
value  of  the  property  of  the  com- 
pany. A  scheme  by  which  found- 
ers' shares  are  to  be  exchanged  for 
ordinary  stock  at  the  rate  of  one 
hundred  shares  of  the  latter  for  each 
share  of  the  former  is  ultra  vires  and 
illegal,  and  will  not  be  sanctioned 
by  the  court.  Re  Development  Co. 
etc.,  [1902]  1  Ch.  547. 
l  Cockrill  v.   Abeles,   86  Fed.  Rep. 


505  (189S).  A  stock  dividend  is  not 
in  itself  injurious  to  the  corporation 
or  its  creditors,  and  the  creditors 
cannot  complain  of  it,  and  hold  the 
stockholders  liable  thereon,  but  a  sub- 
sequent gratuitous  issue  of  stock  to 
stockholders,  a  part  of  which  they 
then  contribute  to  go  with  a  sale  of 
bonds  by  the  corporation,  a  portion 
of  the  price  therefor  to  be  paid  to 
the  stockholders,  is  illegal,  and  such 
proportion  so  paid  to  the  stockholders 
may  be  recovered  back  by  bondhold- 
ers upon  the  corporation  becoming  in- 
solvent. Great  Western,  etc.  Co.  v. 
Harris'  Estate,  111  Fed.  Rep.  38 
(1901).  Unless  the  title  to  property 
is  vested  in  a  receiver  he  cannot  sue 
in  courts  of  a  foreign  jurisdiction, 
upon  the  order  of  the  court  appoint- 
ing him,  to  recover  property.  Neither 
can  he  bring  suit  in  the  name  of  the 
corporation,  where,  if  he  succeeds, 
the  property  would  be  turned  over  to 
him  as  receiver.  His  right  to  sue  in 
a  foreign  jurisdiction  is  not  recog- 
nized on  the  principle  of  comity,  be- 
cause every  court  is  entitled  to  ap- 
point its  own  receiver  to  distribute 
the  property  within  the  jurisdiction. 
Great  Western,  etc.  Co.  v.  Harris,  198 
U.  S.  561  (1905).  Even  though  a 
stock  dividend  is  declared  without  a 
proper  basis  therefor,  yet  the  stock- 
holders receiving  the  same  are  not 
liable  thereon  to  corporate  creditors 
except  to  subsequent  creditors.  An- 
glo-American, etc.  Co.  v.  Lombard, 
132  Fed.  Rep.  721   (1904). 

2  Re  Owen,   etc.   Co.,  21  Ont.  Rep. 
(Can.)   349   (1891). 


246 


ch.  in.]  "watered"  stock.  [§  51a. 

In  some  of  the  states  stock  dividends  are  prohibited  by  constitu- 
tional or  statutory  provisions.1 

The  decided  tendency  of  the  law,  however,  is  to  sustain  and  even 
encourage  stock  dividends,  where  they  are  regularly  and  legally 
made  by  adding  to  the  property  representing  the  capital  stock  fur- 
ther property  to  represent  the  stock  dividend.  By  such  an  act  the 
responsibility  of  the  corporation  is  increased,  creditors  are  more 
secure,  inasmuch  as  there  is  more  property  to  respond  to  their  claims, 
and  the  stockholders  have  increased  their  investment  by  adding  the 
profits  to  the  capital  stock  instead  of  distributing  them  by  a  cash 
dividend. 

§  51a.  Fourth  method:  Issue  by  consolidation  of  two  or  more  com- 
panies or  by  sale  of  one  company  to  another. — A  fourth  method  of 
issuing  watered  stock  is  by  the  consolidation  of  two  or  more  cor- 
porations or  by  the  sale  of  all  the  property  and  assets  of  one  cor- 
poration to  another.  The  latter  method,  the  sale  of  one  com- 
pany's assets  to  another  company  in  consideration  of  the  full-paid 
stock  of  the  latter,  is  but  a  method  of  issuing  stock  for  property, 
a  subject  already  fully  treated.2  A  dissenting  stockholder  in  a 
solvent  corporation  may  object  to  the  sale  of  all  the  corporate  prop- 
erty to  another  corporation  in  exchange  for  the  stock  of  the 
latter.3  Where,  however,  all  the  stockholders  consent  to  such  a 
sale,  and  corporate  creditors  are  not  injured,  such  a  sale  is  legal 

i  111.  Const.,  art.  XI,  §  13.  In  "Wis-  In  Massachusetts,  by  statute,  tele- 
consin  by  statute.  R.  S.  1878,  §  1753,  graph,  telephone,  gas,  electric  light, 
amended  by  ch.  93,  Laws  1881.  In  Mas-  steam  railroad,  street  railway,  aque- 
sachusetts  railway  corporations  are  by  duct  and  water  companies  are  pro- 
statute  prohibited  from  declaring  a  hibited  from  declaring  stock  dividends 
stock  dividend  except  by  authority  or  scrip  dividends,  or  dividends  of 
of  the  general  court.  Mass.  Pub.  cash  derived  from  the  sale  of  stock 
Stat,  ch.  112,  §  61.  It  has  been  held  or  scrip.  Laws  1894,  p.  374,  ch.  350. 
not  a  violation  of  this  statute  for  a  If  the  tangible  property  of  the  cor- 
railway  company  to  distribute  among  poration  is  actually  in  excess  of  the 
its  stockholders,  without  the  assent  par  value  of  the  capital  stock,  then 
of  the  general  court,  shares  of  its  a  stock  dividend  to  the  extent  of  that 
own  stock  which  it  had  purchased  excess  would,  it  seems,  be  legal;  but 
from  the  commonwealth,  when  it  had  the  proceedings  to  declare  the  stock 
legislative  authority  for  such  pur-  dividend  must  show  these  facts,  or 
chase  and  distribution.  Common-  the  dividend  will  be  enjoined.  Fitz- 
wealth  v.  Boston,  etc.  R.  R.,  142  Mass.  patrick  v.  Dispatch  Pub.  Co.,  83  Ala. 
146  (1886).  See  §287,  infra.  In  604  (1887).  The  court  changed  the 
Massachusetts  a  stock  dividend  is  reasoning  of  its  opinion  as  reported 
practically  declared  by  a  large  cash  in  2  So.  Rep.  727. 
dividend  and  simultaneously  the  is-  2  See  §§  35-50,  supra. 
6ue  of  new  stock  for  cash  at  par.  3  See  §  670,  infra. 
Jones  v.  Brown,  171  Mass.  318  (1S98). 

247 


§  51a.]  "watered"  stock.  [ch.  hi. 

without  express  legislative  authority  therefor,  if  the  corporation  is 
a  private  corporation,  and  such  a  sale  is  legal,  even  if  the  corpora- 
tion is  a  quasi-public  corporation,  such  as  a  railroad,  if  there  is  ex- 
press legislative  authority  for  the  sale.  In  making  the  sale,  it  is 
quite  usual  for  the  buying  corporation  to  issue  to  the  selling  cor- 
poration full-paid  stock  of  the  former  to  an  amount  several  times 
larger  than  the  outstanding  capital  stock  of  the  latter.  This  stock 
is  then  distributed  among  the  stockholders  of  the  selling  corpora- 
tion. Sometimes  the  stock  is  issued  by  the  buying  corporation  di- 
rectly to  the  stockholders  of  the  selling  corporation,  in  exchange 
for  the  old  stock,  the  property  at  the  same  time  being  transferred 
to  the  buying  corporation.  Such  a  mode  of  sale  is  legal  and  has 
been  held  to  be  substantially  equivalent  to  a  consolidation.1 

A  consolidation  differs  from  a  sale  in  that  by  a  consolidation  the 
old  corporations  are  dissolved  and  a  new  corporation  comes  into 
existence,  whereas  in  a  sale  one  corporation  buys  the  property  of 
another.  A  consolidation,  from  one  point  of  view,  is  a  sale  of  the 
assets  of  two  or  more  existing  corporations  to  a  new  corporation. 
A  consolidation  is  often  resorted  to  in  the  case  of  railroads,  street 
railways,  gas  companies,  electric  light  companies,  water-works  com- 
panies and  similar  companies,  under  legislative  authority,  as  a 
means  of  watering  the  stock  of  the  corporations  which  are  consol- 
idated. Such  a  watering  of  stock  is  legal  and  is  rarely  attacked. 
There  are  instances  in  which  by  such  a  consolidation  stock  has  been 
increased  fourteen-fold,  and  yet  the  legality  of  the  consolidation  not 
questioned.2 

i  Chicago,  etc.  Ry.  v.  Ashling,  160  stock  was  not  such  a  dividend  as  en- 

111.  373    (1895).  Where  a  corporation  titled  the  state  to  levy  a  tax  thereon. 

sells  its  assets  for  stock  in  another  In  the  case  of  City  of  Allegheny  r. 

corporation,  such  stock  going  to  the  Federal  Street,  etc.  Ry.   Co.,  179  Pa. 

selling    corporation    itself,    this    is   a  St.   424    (1896),   upon   the   consolida- 

sale  and  not  a  consolidation.     Hiles  tion  of  three  street  railway  companies 

v.  Hiles  &  Co.,  120  111.  App.  Rep.  617  the  consolidated  company  issued  ten 

(1905),    distinguishing    Chicago,    etc.  shares  of  its  stock  for  each  share  in 

Ry.  v.  Ashling,  supra.  one  of  the  constituent  companies,  and 

2  See    instances    in    the    notes    to  two  shares  for  each  share  of  another 

§  892,  infra.  of  the  constituent  companies,  and  one 

In  the  case  of  City  of  Allegheny  v.  share    for    each    share    in    the   third 

Pittsburg,   etc.   Ry.   Co.,   179   Pa.   St.  constituent  company.    The  court  held 

414   (1897),  it  appears  that  upon  the  in  this  case  also  that  such  issue  of 

consolidation    of   street   railways   in-  consolidated    stock   was    not   a   divi- 

volved  in  that  case  eight  shares  of  dend   subject  to  taxation   under  the 

the  stock  of  the  consolidated  company  Pennsylvania  law. 

were  issued   for  one   share  of  stock  In  the  case  of  Trenton,  etc.  Ry.  Co. 

of   the   constituent   companies.      The  v.  Wilson,   55   N.   J.   Eq.   273    (1897), 

court   held    that    such   an    issue    of  upon   a  consolidation   of  street  rail- 

248 


CH.   III.] 


"watered"  stock. 


[§  51a. 


The  subject  of  the  sale,  lease  or  consolidation  of  railroads  is  fully 
considered  elsewhere.1 


ways  involved  in  that  case  fourteen 
shares  of  the  consolidated  stock  were 
issued  for  each  share  of  stock  in  one 
of  the  constituent  companies.  The 
court  did  not  question  the  legality  of 
the  transaction,  but  passed  merely  up- 
on the  question  whether  certain  old 
stockholders  were  entitled  to  any- 
thing more  than  the  fourteen  shares 
for  one. 

A  minority  stockholder  in  a  street 
railway  cannot  cause  to  he  set  aside 
a  sale  of  its  property  to  another  com- 
pany for  stock  of  the  latter,  where 
such  sale  is  authorized  by  statute, 
even  though  the  statute  was  passed 
subsequently  to  the  incorporation  of 
the  street  railway,  and  even  though 
the  purchasing  company  had  issued 
bonds  and  stocks  to  the  amount  of 
$90,000,000  in  payment  for  street 
railways,  the  capital  stock  and 
bonded  indebtedness  of  which  was 
only  $33,255,000,  and  even  though  in 
making  the  sale  the  majority  stock- 
holders voted  that  the  stock  was 
worth  $170  a  share,  and  that  that 
price  should  be  paid  to  minority 
stockholders,  and  the  vendee  company 
thereupon  agreed  to  pay  the  same. 
The  remedy  of  the  dissenting  stock- 
holder, if  any,  is  at  law  for  the  mar- 
ket value  of  the  stock  or  a  propor- 
tionate .share  of  the  proceeds.  Tanner 
v.  Lindell  Ry.,  180  Mo.  1   (1904). 

A  stockholder  in  one  of  the  con- 
stituent companies  may  maintain  a 
bill    to    have    the    consolidation    de- 


clared illegal,  if  he  can  show  that 
the  majority  were  interested  in  the 
other  company  and  that  his  company 
has  been  treated  unfairly,  and  that 
the  other  company  had  been  grossly 
overcapitalized.  Jones  v.  Missouri, 
etc.  Co.,  144  Fed.  Rep.  765  (1906); 
rev'g  135  Fed.  Rep.  153.  See  also 
§  662,  infra. 

A  consolidated  company  may  main- 
tain a  suit  against  a  director  of  one 
of  the  constituent  companies  for 
fraudulently,  at  the  time  of  consol- 
idation, causing  an  issue  of  a  large 
amount  of  stock  to  him  out  of  the 
treasury  stock  for  past  services, 
which  stock  was  thereupon  exchanged 
for  stock  in  the  constituent  com- 
pany, especially  where  such  director 
as  trustee  of  the  treasury  stock  of 
both  companies  controlled  them  and 
voted  such  stock  for  the  consolida- 
tion, and  also  voted  proxies  obtained 
on  a  notice  of  the  meeting,  which 
did  not  state  that  his  compensation 
was  to  be  voted  upon.  United,  etc. 
Co.  v.  Smith,  44  N.  Y.  Misc.  Rep.  567 
(1904). 

Where  the  statute  authorizing  con- 
solidation specifies  that  the  consol- 
idated capital  stock  shall  not  be  more 
than  the  "fair  aggregate  value"  of 
the  property,  a  stockholder  may  en- 
join a  consolidation  whose  capital 
stock  is  far  in  excess  of  a  fair  value 
of  the  property.  Langan  v.  Franck- 
lyn,  20  N.  Y.  Supp.  404  (1892). 
l  See  §§  892-897,  infra. 


249 


CHAPTER  IV. 

METHOD    OS    SUBSCRIBING— PARTIES    TO    SUBSCRIPTIONS— ACTION 

TO   ENFORCE  SUBSCRIPTIONS. 


A.      METHODS    OF    SUBSCRIBING. 

§  52.  Generally   no   formalities   neces- 
sary. 

53.  Informalities,  irregularities,  and 

mistakes  in  subscriptions. 

54.  Various    defenses     to    subscrip- 

tions. 

55.  Proof  of  subscription. 

56.  The  English  rule. 

57.  Subscriptions  taken  by  commis- 

sioners. 

58.  Subscriptions    in   excess   of   the 

capital  stock. 

59.  Subscriptions    and    organization 

where  there  is  a  special  char- 
ter and  no  commissioners  are 
provided  for. 

60.  Subscriptions    delivered    in    es- 

crow. 

61.  Liability  of  corporation  for  re- 

fusal to  issue  a  certificate  of 
stock. 

62.  Substitution    of   subscribers    be- 

fore the  incorporation,  change 
in  the  proposed  enterprise, 
and  alterations  in  subscription 
paper. 

63.  Right    to     recover     money     ad- 

vanced on  shares  upon  a  fail- 
ure to  organize  the  company. 

B.       WHO    IS    COMPETENT    TO    SUBSCRIBE 
FOR   STOCK. 

64.  Corporations    generally    not. 

65.  Commissioners,    directors,    part- 

ners,   etc.,    as    subscribers. 


§  66.  Married   women  as  subscribers. 

67.  Infant  as  subscriber. 

68.  Agent  as  subscriber. 

69.  Subscriptions   taken   by   an   un- 

authorized agent  of  corpora- 
tion. 

70.  Unissued    or    increased    capital 

stock  —  Right  to  subscribe 
therefor. 

C.       AN    ACTION    LIES    TO    COLLECT    SUB- 
SCRIPTIONS. 

71.  A  subscription  implies  a  prom- 

ise to  pay,  which  is  enforce- 
able without  proof  of  any  par- 
ticular consideration. 

72.  Such  is  the  rule  for  subscriptions 

before  incorporation  as  well 
as  those  after — Acceptance  of 
the  subscription — Withdrawal 
— 'Subscription  for  the  benefit 
of  contractors. 

73.  The  New  York  rule. 

74.  In    New    England    an    express 

promise  or  express  statute  is 
necessary  to  support  an  action 
to   collect  subscriptions. 

75.  Professor  Collin's  rules  on  this 

subject. 

76.  Stockholders'       agreements       to 

guarantee  company  defots  and 
stockholders'  contracts  for  the 
benefit  of  the  corporation. 


§  52.  Generally  no  formalities  necessary. — A  contract  of  sub- 
scription for  shares  of  stock  in  an  incorporated  company  may  be 
entered  into  in  various  ways.  Whenever  an  intent  to  become  a 
subscriber  is  manifested,  the  courts  incline,  without  particular  ref- 
erence to  formality,  to  hold  that  the  contract  of  subscription  sub- 
sists. It  is,  as  in  the  case  of  other  contracts,  very  much  a  question 
of  intent.     Formal  rules  are  for  the  most  part  disregarded.1     And 

i  Quoted  and  approved  in  Ventura,     Lednicky,  113  N.  W.  Rep.  245   (Neb. 
etc.  Ry.  v.  Collins,  46  Pac.  Rep.  287     1907). 
(Cal.  1896),  and  Nebraska,  etc.  Co.  v. 

250 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§   52. 


in  general  a  contract  of  subscription  may  be  made  in  any  way  in 
which  other  contracts  may  be  made.1  Any  agreement  by  which 
a  person  shows  an  intention  to  become  a  stockholder  is  sufficient  to 
bind  both  him  and  the  corporation.2  When  one  accepts  or  assumes 
the  position  and  duties  and  claims  the  right  and  privileges  and 
emoluments  of  a  stockholder,  and  the  corporation  accepts  or 
acquiesces  therein,  such  person  is  estopped  to  deny  that  he  is  a  sub- 
scriber, even  though  there  may  have  been  something  irregular  or 
defective  in  the  form  or  manner  of  his  subscription,  or  there  may 
have  been  no  formal  subscription  at  all.3 


i  Blunt  v.  Walker,  11  Wis.  334,  349 
(1860). 

2  Quoted  and  approved  in  Nebraska, 
etc.  Co.  v.  Lednicky,  113  N.  W.  Rep. 
245  (Neb.  1907);  Planters',  etc.  Co. 
v.  Webb,  144  Ala.  666  (1905),  and 
Greenbrier,  etc.  Exposition  v.  Ochel- 
tree,  44  W.  Va.  626  (189S);  Fry  v. 
Lexington,  etc.  R.  R.,  2  Mete.  (Ky.) 
314  (1859);  Wellersbiirg,  etc.  Co.  v. 
Young,  12  Md.  476  (1858);  Gill  V. 
Kentucky,  etc.  Co.,  7  Bush  (Ky.)  635 
(1870) ;  Oler  v.  Baltimore,  etc.  R.  R., 
41  Md.  583  (1874);  Schaeffer  v.  Mis- 
souri, etc.  Co.,  46  Mo.  24S  (1870).  A 
director  who  authorizes  and  consents 
to  the  entry  of  his  name  as  a  sub- 
scriber to  stock  for  a  certain  amount 
cannot  thereafter  avoid  the  liability 
on  the  ground  that  he  did  not  actual- 
ly sign  the  subscription.  Jackson, 
etc.  Co.  v.  Walle,  105  La.  89   (1900). 

An  agreement  between  one  person 
and  another  by  which  the  former  is 
to  exchange  his  stock  in  one  corpora- 
tion for  stock  in  another,  does  not 
render  him  liable  as  a  subscriber  in 
the  latter  where  the  stock  had  never 
been  finally  delivered.  Ecuadorian 
Assoc,  v.  Ecuador  Co.,  70  N.  J.  Eq. 
277   (1905). 

A  subscription  payable  to  whom- 
soever might  lease  premises,  free  of 
rent,  to  a  stock  exchange,  may  be 
enforced  by  a  corporation  thereafter 
organized  for  that  purpose,  and  the 
delivery  of  the  subscription  to  the 
person  obtaining  the  same  is  a  suffi- 
cient  delivery.     A  separate   contract 


with  the  then  owners  of  the  building 
which  was  afterwards  acquired  by 
the  corporation  does  not  affect  such 
subscription,  the  corporation  having 
no  notice  thereof.  Merchants',  etc. 
Co.  v.  Chicago,  etc.  Co.,  210  111.  26 
(1904). 

3  Sanger  v.  Upton,  91  U.  S.  56 
(1875);  Upton  v.  Tribilcock,  91  U. 
S.  45  (1875)  ;  Wheeler  v.  Millar,  90 
N.  Y.  353  (1882);  Hamilton,  etc.  Co. 
v.  Rice,  7  Barb.  157  (1849);  Dorris 
v.  French,  4  Hun,  292  (1875) ;  Boston, 
etc.  R.  R.  v.  Wellington,  113  Mass. 
79  (1873);  Ex  parte  Besley,  2  Mac. 
&  G.  176  (1850);  Clark  v.  Farring- 
ton,  11  Wis.  306  (1860);  Jewell  v. 
Rock  River  Paper  Co.,  101  111.  57 
(1881) ;  Haynes  v.  Brown,  36  N.  H. 
545  (1858)  ;  Chaffin  v.  Cummings,  37 
Me.  76  (1853) ;  Chester  Glass  Co.  v. 
Dewey,  16  Mass.  94  (1819);  Griswold 
v.  Seligman,  72  Mo.  110  (1880); 
Boggs  v.  Olcott,  40  111.  303  (1866); 
Musgrave  v.  Morrison,  54  Md.  161 
(1880);  Phcenix,  etc.  Co.  v.  Badger, 
67  N.  Y.  294  (1876);  s.  c,  6  Hun, 
293  (1875);  Palmer  v.  Lawrence,  3 
Sandf.  161  (1849);  Philadelphia, 
etc.  R.  R.  v.  Cowell,  28  Pa.  St.  329 
(1857) ;  Cheltenham,  etc.  Ry.  v.  Dan- 
iel, 2  Q.  B.  281  (1841);  West  Corn- 
wall Ry.  v.  Mowatt,  15  Q.  B.  521 
(1850).  And  see  the  dissenting  opin- 
ion of  Lord  St.  Leonards  in  Spack- 
man  v.  Evans,  L.  R.  3  H.  L.  Cas.  171, 
197  (1868)  ;  Harrison  v.  Heathorn. 
6  Man.  &  G.  81  (1843);  Ness  v.  An- 
gas,    3    Exch.    805    (1849);     Ness  v. 


251 


§    52.]                        SUBSCRIPTIONS — METHOD,    PARTIES,    ETC.  [CH.  IV. 

Merely  accepting  and  holding  a  certificate  of  stock  is  sufficient 
to  constitute  one  a  stockholder.1 

There  have  been  various  dicta  to  tho  effect  that  a  subscription 

cannot  be  entered  into  by  parol,2  but  the  later  and  better  opinion 

Armstrong,  4  Exch.  21  (1849);  Moss  Co.,  57  Ind.  135  (1877);  Kentucky, 
v.  Steam  Gondola  Co.,  17  C.  B.  180  etc.  v.  Schaefer,  120  Ky.  227  (1905). 
(1855);  Bailey  v.  Universal,  etc.  The  issue  of  a  certificate  of  stock  is 
Assoc,  1  C.  B.  (N.  S.)  557  (1857).  a  sufficient  subscription  for  it.  Cleven- 
The  mere  acts  of  interested  parties  ger  v.  Moore,  71  N.  J.  L.  148  (1904). 
by  which  certain  leases  in  lands  are  A  person  taking  stock  from  a  cor- 
turned  in  to  the  corporation,  it  being  poration  on  its  original  issue  is  liable 
understood  that  payment  for  the  without  subscription.  Shickle  v. 
property  and  services  was  to  be  a  Watts,  94  Mo.  410  (1888).  A  person 
certain  amount  of  stock,  may  consti-  who  receives  a  certificate  of  stock 
tute  stockholdership,  although  no  from  a  company  in  order  to  enable 
formal  record  is  made  of  the  transac-  it  to  organize,  and  immediately  trans- 
tion  and  agreement,  and  although  no  fers  it  back  to  the  company,  is  not 
certificates  of  stock  are  issued  to  any-  liable  on  such  stock  as  an  offset  to 
body.  Holland  v.  Duluth,  etc.  Co.,  65  claims  which  he  has  as  a  creditor  of 
Minn.  324  (1896).  Where  stock  is  the  corpoi-ation.  Parberry  v.  Wood- 
taken  and  paid  for,  it  is  immaterial  son  Sheep  Co.,  18  Mont.  317  (1896). 
that  there  was  no  formal  subscription  A  person  is  liable  on  stock  which  he 
therefor.  Anderson  v.  Scott,  70  N.  H.  accepts  from  a  corporation  in  Maine, 
534  (1901).  The  absence  of  records  even  though  he  did  not  actually  sub- 
being  sufficiently  accounted  for  to  scribe  therefor.  Dunn  v.  Howe,  96 
make  parol  evidence  admissible,  de-  Fed.  Rep.  160  (1899);  rev'd  on  an- 
fendant's  attendance  at  meetings  of  other  point  in  107  Fed.  Rep.  849. 
the  corporation  and  his  acting  as  2  Pittsburgh,  etc.  R.  R.  v.  Gazzam, 
president  were  accounted  competent  32  Pa.  St.  340  (1858).  In  this  case 
proof  of  his  being  a  stockholder,  an  attempt  was  made  to  make  de- 
Haynes  v.  Brown,  36  N.  H.  545  (1858).  fendant  liable  upon  his  signature  to 
Where  the  stockholders  formally  in-  a  paper  by  which  the  signers  agreed 
crease  the  capital  stock  and  certify  to  subscribe  for  stock  in  a  railroad 
that  it  has  been  increased  and  issue  company,  but  the  signatures  were 
mortgage  bonds  to  the  full  amount  shown  to  have  been  copies  and  not 
of  such  increased  capital  stock,  un-  originals.  Vreeland  v.  New  Jersey 
der  a  statute  which  prohibits  the  is-  Stone  Co.,  29  N.  J.  Eq.  188  (1878). 
sue  of  bonds  in  excess  of  the  capital  The  decision  was  on  the  question  of 
stock,  they  will  be  held  to  have  sub-  fraud  in  inducing  defendant  to  take 
scribed  pro  rata  to  such  increased  the  stock.  Thames  Tunnel  Co.  v. 
capital  stock.  Kreisser  v.  Ashtabula,  Sheldon,  6  B.  &  C.  341  (1827),  holding 
etc.  Co.,  Ohio  Circuits  (1903),  p.  313.  that  one  who  had  subscribed  a  pre- 
i  Quoted  and  approved  in  Walter  v.  liminary  paper  and  had  paid  the  sum 
Merced,  etc.  Assoc,  126  Cal.  582  required  in  advance,  but  who  had 
(1899);  Upton  v.  Tribilcock,  91  U.  S.  not  signed  the  contract  referred  to 
45  (1875) ;  McLaughlin  v.  Detroit,  in  an  act  of  parliament,  was  not  a 
etc  Ry.,  8  Mich.  100  (1860);  Barron  subscriber  within  the  meaning  of 
v.  Burrill,  86  Me.  66,  72  (1893).  See  that  act.  See  also  §339,  infra. 
also  McHose  v.  Wheeler,  45  Pa.  St.  32  Fanning  v.  Insurance  Co.,  37  Ohio 
(18C3);     Clark    v.    Continental    Imp.  St.    339    (1881),    was   a   suit  upon   a 

252 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§  52. 


is  that  such  a  subscription  is  valid  and  binding.1  It  bas  been  held 
that,  where  a  director  is  required  to  be  a  stockholder,  the  act  of  serv- 
ing as  a  director  is  an  implied  subscription  for  stock  to  the  amount 
required  in  order  to  be  a  director.2     But  a   contrary  rule   now 


note  secured  by  a  mortgage  claimed 
to  have  been  given  in  payment  for 
stock.  The  proof  showed  that  de- 
fendant verbally  agreed  with  a  can- 
vasser to  take  the  stock,  but  did  not 
sign  any  subscription  book  or  other 
contract,  and  never  received  certifi- 
cates of  stock.  Held,  that  there  was 
no  subscription  and  no  sufficient  con- 
sideration for  the  note. 

Galveston  Hotel  v.  Bolton,  46  Tex. 
633  (1877).  In  this  case  defendant 
had  signed  an  informal  paper  as  a 
subscription  for  stock,  and  had  of- 
fered excuses  for  not  paying  the  first 
call,  asking  for  time,  etc.  The  in- 
formal paper  was  lost,  and  defend- 
ant's name  did  not  appear  on  the 
company's  books  in  any  capacity. 
After  the  organization  of  the  com- 
pany he  acknowledged  to  its  secre- 
tary his  obligation  to  pay  the  call. 
Held,  that  he  was  not  a  stockholder 
liable   to  calls. 

The  oral  statement  of  the  stock- 
holder that  he  would  take  a  certain 
amount  of  stock  is  not  sufficient  au- 
thority to  a  corporation  to  enter  his 
name  for  that  amount.  Ingersoll,  etc. 
Co.  v.  McCarthy,  16  Q.  B.  Rep.  (Can.) 
162  .(1858). 

i  Quoted  and  approved  in  Somer- 
set, etc.  Co.'s  Receiver  v.  Adams,  72 
S.  W.  Rep.  1125  (Ky.  1903);  Per- 
kiomen,  etc.  Co.  v.  Dyer,  187  Pa.  St. 
470  (1898);  Liberty,  etc.  Bank  v.  Ot- 
ter View,  etc.  Co.,  96  Va.  352  (1898); 
Rogers  v.  Burr,  105  Ga.  432  (1898). 
An  oral  subscription  is  not  void  by 
the  statute  of  frauds.  Reed  v.  Gold, 
102  Va.  37  (1903).  The  oral  agree- 
ment of  a  creditor  to  take  increased 
stock  in  payment  of  his  debt  is  bind- 
ing on  him.  Reld  v.  Detroit,  etc.  Co., 
132  Mich.   528    (1903).     Stock  issued 


to  a  corporate  creditor  may  be  shown 
to   have   been   issued   in   payment  of 
the   debt.     Iserman  v.   International, 
etc.  Co.,  66  Atl.  Rep.  605  (N.  J.  1907). 
Where   a  person  offers   to  take   pre- 
ferred stock  and  thereupon  the  com- 
pany amends  its  charter  and  author- 
izes the  stock  and  he  is  made  a  di- 
rector, he  is  liable  on  the  stock.    Per- 
son,  etc.   Co.   v.  Lipps,   67   Atl.  Rep. 
1081    (Pa.    1907).     Where    a    person 
present    at   a   corporate   meeting   di- 
rected the  secretary  to  subscribe  cer- 
tain stock,  and  the  secretary  did  so 
on  a  loose  sheet  of  paper,  the  court 
held  the  subscriber  bound;   also  that 
the    corporate    records    reciting    the 
facts  were  competent  to  show  accept- 
ance,  though    recorded   subsequently. 
Colfax   Hotel   Co.   v.   Lyon,   69    Iowa, 
683    (1886).      A    verbal    subscription 
suffices.     The  statute  of  frauds  does 
not  apply.     Bullock  v.  Falmouth,  etc. 
Co.,  85  Ky.  184  (1887).    A  verbal  sub- 
scription   for    stock    was    upheld    in 
Tabler  v.  Anglo-American  Assoc,   32 
S.  W.  Rep.  602   (Ky.  1895);   Shellen- 
berger  v.   Patterson,    168    Pa.    St.    30 
(1895),  and  York  Park  Bldg.  Assoc. 
v.  Barnes,  39  Neb.  834  (1894).   Where 
a  person  orally  tells  a  director  that 
he  will  subscribe  a  specified  amount 
of  stock,  and  gives  a  check  in  part 
payment,  he  is  liable  as  a  stockholder. 
Cookney's    Case,    3    De   G.    &   J.    170 
(1858).     And  see  also  various  cases 
in  the  notes  herein,  involving  some- 
what similar  facts. 

2  See  Harward's  Case,  L.  R.  13  Eq. 
30  (1871);  Stephenson's  Case,  45  L. 
J.  (Ch.)  488  (1876);  Re  British  & 
A.  Tel.  Co.,  L.  R.  14  Eq.  316  (1872); 
Re  Empire  Ass.  Corp.,  L.  R.  6  Ch. 
App.   469    (1871). 

Where  one  accepts  the  office  of  di- 


253 


§  52.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[CH.  IV. 


exists.1  A  subscription  in  a  small  pocket  memorandum  book  has  been 
held  sufficient  to  bind  the  subscriber.-  So,  a  subscription  on  a 
single  sheet  of  paper  may  be  binding,3  even  though  the  charter  pro- 
vides for  the  opening  of  books.4  A  signature  to  the  certificate  re- 
quired by  statute  to  be  filed  in  order  to  obtain  the  charter  of  incor- 
poration, with  the  number  of  shares  placed  opposite  to  the  signature, 
is  a  sufficient  subscription  to  bind  both  the  corporation  and  the  sub- 
scriber.5    But  the  assignee  of  a  corporation  cannot  sue  its  incor- 


rector  without  owning  the  required 
number  of  shares  of  stock,  and  is 
in  consequence  under  obligation  to 
qualify  himself  by  taking  stock,  he  is 
not  obliged  to  take  the  stock  from 
the  company,  but  may  purchase  or 
procure  the  shares  as  he  is  able  in 
the  open  market  or  at  private  sale. 
Brown's  Case,  L.  R.  9  Ch.  App.  102 
(1873);  Karuth's  Case,  L.  R.  20  Eq. 
506    (1875). 

Where  shares  are  allotted  to  a  di- 
rector in  order  to  qualify  him,  he  is 
liable  upon  said  shares  upon  the 
winding  up,  even  though  he  did  not 
know  of  the  allotment,  and  even 
though  he  had  acquired  other  quali- 
fication shares.  Re  Portuguese,  etc. 
Mines,   [1891]   3  Ch.  28. 

i  Re  Moore  Bros.  &  Co.,  [1899]  1 
Ch.  627;  Onslow's  Case,  55  L.  T. 
Rep.  612  (1881) ;  aff'd,  58  L.  T.  Rep. 
824  (1S87),  and  cases  cited;  Ex  parte 
Cammell,  [1894]  1  Ch.  528.  And  see 
summary  in  Healey's  Company  Law 
and  Pr.  135,  139.  But  a  director  is 
liable  upon  qualification  shares  upon 
a  winding  up  of  the  company,  even 
though  he  has  never  held  any  shares, 
where  the  charter  provides  that  serv- 
ing as  a  director  shall  constitute  a 
contract  to  pay  for  qualification 
shares.  Re  Anglo-Austrian,  etc. 
Union,  [1892]  2  Ch.  158. 

The  common-law  rule  that  a  di- 
rector is  not  liable  to  the  amount 
of  qualification  shares  which  he  is  re- 
quired by  statute  to  have,  but  which 
he  does  not  have,  is  not  applicable 
to  directors  in  national  banks.  Finn 
v.  Brown,  142  U.  S.  56   (1891). 


Hamley's  Case,  L.  R.  5  Ch.  D.  705 
(1877),  holds  that  a  director  who 
was  not  qualified  did  not  by  acting 
render  himself  liable  to  creditors  to 
the  amount  of  qualification  stock. 
The  court,  in  a  dictum,  said:  "He 
never  was  a  director,  and  he  never 
will  be  a  director,  as  far  as  that 
election  is  concerned,"  although  of 
course  his  acts  as  a  director  may 
bind  the  company  as  to  third  persons. 
See  also  Ex  parte  Stock,  33  L.  J. 
(Ch.)    731    (1864). 

Resignation  releases  the  liability. 
Re  Self-Acting,  etc.  Co.,  54  L.  T.  Rep. 
676  (1886);  Marquis  of  Abercorn's 
Case,  4  De  G.,  F.  &  J.  78  (1862) ;  Re 
Wheal  Buller  Consols,  L.  R.  38  Ch. 
D.  42  (1888).  See  also  ch.  XXXVII, 
infra. 

"Can  a  director  part  with  his  quali- 
fication shares?"  See  on  this  sub- 
ject 8  Ry.  &  Corp.  L.  J.  99. 

2  Buffalo,  etc.  R.  R.  v.  Gifford,  87 
N.  Y.  294  (1882);  Brownlee  v.  Ohio, 
etc.  R.  R.,  18  Ind.  68  (1862).  Contra, 
McClelland  v.  Whiteley,  15  Fed.  Rep. 
322  (1883).  The  full  christian  name 
need  not  be  subscribed.  State  v. 
Beck,  81  Ind.  501   (1882). 

3  Iowa,  etc.  R.  R.  v.  Perkins,  28 
Iowa,  281  (1869);  Hamilton,  etc.  Co. 
v.  Rice,  7  Barb.  157  (1849).  Cf. 
Bucher  v.  Dillsburg,  etc.  R.  R.,  76  Pa. 
St.  306  (1874) ;  Hawley  v.  Upton,  102 
U.  S.  314  (1880). 

4  Mexican  Gulf  Ry.  v.  Viavant,  6 
Rob.  (La.)  305  (1843);  Ashtabula, 
etc.  R.  R.  v.  Smith,  15  Ohio  St.  328 
(1864). 

5  Phoenix,  etc.  Co.  v.  Badger,  67  N. 


254 


CH.  IV.] 


SUBSCRIPTIONS METHOD,  PARTIES,  ETC. 


[§  52. 


porators  for  ten  per  cent,  of  the  capital  stock  on  the  ground  that 
they  had  sworn  that  ten  per  cent,  had  been  paid  in  in  order  to 
obtain  the  charter,  when  in  fact  it  had  not  been  paid  in.1 

Where  an  "underwriter"  agrees  to  subscribe  for  whatever  the 
public  do  not  take,  and  authorizes  another  to  make  the  subscription 
for  him,  he  is  bound  by  the  subscription.2 

A  company  may  give  a  person  an  option  to  subscribe  for  shares  of 


Y.  294  (1876);  s.  c,  6  Hun,  293; 
Nulton  v.  Clayton,  54  Iowa,  425 
(1880);  Herries  v.  Wesley,  13  Hun, 
492  (1878).  The  certificate  of  incor- 
poration signed  by  an  individual 
with  the  words  "250  shares'*  is  a 
subscription  if  so  intended.  Dupee 
v.  Chicago,  etc.  Co.,  117  Fed.  Rep.  40 
(1902). 

Where  the  statute  provides  that 
the  persons  signing  the  articles  of 
incorporation  shall  set  opposite  their 
names  the  amount  of  their  subscrip- 
tion, a  subscriber  who  complies 
therewith,  but  does  not  acknowledge 
the  articles  as  required  by  the  stat- 
ute, is  not  bound  by  his  subscription 
so  far  at  least  as  the  articles  are  con- 
cerned. Coppage  v.  Hutton,  124  Ind. 
401  (1890).  It  is  not  necessary  that 
the  subscription  be  to  the  articles  of 
incorporation.  San  Joaquin,  etc.  Co. 
v.  Beecher,  101  Cal.  70  (1894).  A 
failure  to  acknowledge  the  articles  of 
incorporation  is  a  good  defense  to  a 
subscriber  to  them  who  is  sued  upon 
his  subscription.  Greenbrier  Ind.  Ex- 
position v.  Rodes,  37  W.  Va.  738 
(1893)".  An  incorporator  is  liable  for 
the  number  of  shares  specified  in  the 
certificate  of  incorporation  as  being 
the  number  which  he  agrees  to  take. 
Rathbone  v.  Ayer,  121  N.  Y.  App.  Div. 
355  (1907).  A  person  who  signs  the 
certificate  of  incorporation  which  re- 
cites a  subscription  for  stock  by  him 
is  liable,  even  though  he  takes  no 
further  part.  McCarter  v.  Ketcham, 
67  Atl.  Rep.  610  (N.  J.  1907). 

i  Patterson    v.    Franklin,    176    Pa. 
St.  612    (1896). 

2  Shaw   v.   Bentley,    68   L.   T.   Rep. 
812    (1893);    also  Re  Henry  Bentley 


69  L.  T.  Rep.  204  (1893).  An  under- 
writers' agreement  to  subscribe  if 
called  upon  so  to  do  does  not  render 
them  liable  on  a  winding  up  if  they 
were  not  so  called  upon.  Re  Har- 
vey's Oyster  Co.,  [1894]  2  Ch.  474. 
The  offer  of  a  party  to  take  such 
stock  as  may  not  be  taken  by  the 
public  when  offered  for  subscription 
may  be  accepted  after  the  public  sub- 
scriptions are  closed.  Especially  is 
this  the  case  where  the  underwriter 
afterwards  practically  accepted  the 
stock.  Re  Hemp,  etc.  Co.,  [1896]  2 
Ch.  121.  An  underwriter's  contract 
is  given  in  full  in  Re  Hannan's,  etc. 
Co.,  75  L.  T.  Rep.  45  (1896);  s.  c, 
[1896]  2  Ch.  643.  An  offer  to  under- 
write such  stock  as  is  not  subscribed 
for  by  the  public  must  be  accepted 
by  the  company  prior  to  the  offer 
to  the  public  in  order  to  be  binding 
upon  the  person  making  the  offer. 
Re  Consort,  etc.  Mines,  [1897]  1  Ch. 
575.  A  pledgee  of  an  underwriter's 
agreement  may  have  difficulty  in  ten- 
dering performance  to  the  under- 
writers. Litchfield,  etc.  Society  v. 
Dibble,  67  Atl.  Rep.  476  (Conn. 
1907).  The  agreement  of  individuals 
with  a  promoter  to  underwrite  shares 
of  stock  of  a  company  cannot  neces- 
sarily be  enforced  by  the  company, 
and  may  be  modified  without  the  con- 
sent of  the  company,  but  if  shares 
are  allotted  to  the  underwriters,  and 
they  do  not  object,  they  are  liable 
as  shareholders  by  English  law,  and 
if  the  corporation  was  an  English  cor- 
poration such  liability  may  be  en- 
forced in  the  United  States.  Electric, 
etc.  Co.  v.  Prince,  81  N.  E.  Rep.  306 
(Mass.   1907).     See  also   §14,  supra. 


255 


§   53.]  SUBSCRIPTIONS — METHOD,    PARTIES,    ETC.  [CH.  TV. 

stock  in  the  company.  If  the  company  sells  its  assets  before  such 
option  is  exercised,  the  party  holding  the  option  may  exercise  it  and 
sue  for  damages.  The  price  at  which  the  company  sold  its  assets 
is  the  basis  of  the  damage.1 

§  53.  Informalities,  irregularities  and  mistakes  in  subscriptions. 
— But  a  subscription  to  an  incomplete  copy  of  the  articles  of  associa- 
tion will  not  bind  the  subscriber;2  and  again,  a  subscription  paper 
in  which  the  names  of  directors  were  left  blank  has  been  held  not 
enforceable  against  a  subscriber  after  the  blank  has  been  filled  with- 
out his  consent  or  concurrence.3  Equity  will  not,  however,  in  the 
absence  of  fraud,  relieve  a  subscriber  merely  upon  the  ground  that 
he  by  mistake  subscribed  for  more  stock  than  he  intended,  in  a  case 
where  he  suffered  the  corporation  to  act  upon  the  faith  of  his  sub- 
scription.4    But  if  one  signs  an  agreement  to  subscribe,  on  a  sub- 

i  Re  South  African,  etc.  Co.,  74  L.  gansport,  etc.,  13  Ind.  404  (1859).    In 

T.  Rep.    769    (1896);    aff'd,,  77   L.   T.  this  case  the  charter  required  that  di- 

Rep.  377.     Instead  of  subscribing  for  rectors  should  be  named  in  the  arti- 

stock  a  party  may  make   a   contract  cles  of  association.     The  adoption  of 

with  a  corporation  to  take  the  stock  the   articles   at   the   time  of   electing 

with   the  right  to   return   it  and   re-  directors  was  held  to  be  a  substantial 

ceive  back  the  purchase  price  within  compliance  with  the  charter,  the  re- 

a  certain   time.     Such  a  contract   is  quirement   being  considered   as   only 

legal,  and  the  stock  may  be  returned  directory. 

and  the  money  recovered  if  corporate  But  where  an  actual  subscription  is 

creditors'    rights    do    not    intervene,  made,    with    a    view    of    influencing 

Vent   v.    Duluth,    etc.    Co.,    64    Minn,  other  subscriptions,   but  the  number 

307  (1896).     In  the  case  of  Brown  v.  of  shares  to  be  taken  is  left  blank, 

St.    Paul,    etc.    Works,    62    Minn.    90  so  that  the  subscription  itself  might 

(1895),   an   agreement   of  a  corpora-  be    subsequently    withdrawn,    it    was 

tion   with   a  subscriber   for  stock   to  held  that  the  corporate  agents  might 

take  back  the  stock  at  a  certain  time  fill   up   the  blank,   and   thereby   bind 

and    refund    the    money    if   the   sub-  the  subscriber.     Jewell  v.  Rock  River, 

scriber  so  wished  was  upheld.  etc.  Co.,  101  111.  57   (1881). 

2  Dutchess,  etc.  R.  R.  v.  Mabbett,  The  case  of  Clark  v.  Continental 
58  N.  Y.  397   (1874).  Imp.    Co.,    57    Ind.    135    (1877),    held 

3  Dutchess,  etc.  R.  R.  v.  Mabbett,  that  an  agreement  to  pay  in  install- 
58  N.  Y.  397  (1874),  the  court  say-  ments  a  certain  sum  to  a  contractor 
ing:  "A  signature  to  an  incomplete  as  the  work  progressed,  in  considera- 
paper,  wanting  in  any  substantial  tion  of  stocks  to  be  delivered  by  the 
particular,  when  no  delegation  of  corporation,  after  full  payment  has 
authority  is  conferred  to  supply  the  been  made  in  this  way,  was  not  a 
defect,  does  not  bind  the  signer  with-  subscription  to  capital  stock,  and  that 
out  further  assent  on  his  part  to  the  the  maker  of  such  an  agreement  was 
completion    of   the    instrument."     To  not  a  subscriber. 

same  effect,  Consols  Ins.  Assoc,  v.  4  Diman  v.  Providence,  etc.  R.  R., 
Newall,  3  Fost.  &  F.  130  (1862),  5  R.  I.  130  (1858).  Where,  with  a 
where  the  number  of  shares  was  left  view  to  organizing  a  corporation, 
in  blank.     See  also  Eakright  v.  Lo-    various   parties    sign   a   subscription 

256 


en.  iv.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§  53. 


scription  paper,  entirely  misunderstanding  the  nature  of  the  con- 
tract he  is  entering  into,  his  subscription  must,  on  general  principles, 
be  treated  as  null  and  void  for  want  of  mutual  consent.  Cases 
of  this  nature  may  arise  without  involving  the  question  of  fraud.1 
Questions  relative  to  the  withdrawal  of  a  subscriber,  after  sub- 
scription, are  considered  elsewhere.2 

If  the  business  of  the  incorporation  is  illegal,  the  subscription,  of 
course,  cannot  be  enforced.3 

Many  cases  are  given  in  the  notes  which  will  throw  some  light 
on  the  various  principles  of  law  as  applicable  to  the  facts  in  actions 
to  collect  subscriptions.4 


list  on  the  oral  agreement  that  they  tion    if    he    wished    after    consulting 

might   change    the    amount   of   their  with    another    person,    and    that    he 

subscriptions,  and  one  who  signed  for  actually  did  so  withdraw.     Ada,  etc. 

.$5,000    notified    the    chief    promoter  Assoc,  v.  Mears,  123  Mich.  470  (1900). 

that  he  wanted   but  $2,500,   and  the  Even  though  two  persons  signed  the 

corporation,    when    organized,    made  articles   of  incorporation  as   incorpo- 


calls  on  him  for  only  $2,500,  a  corpo- 
rate creditor  cannot  hold  him  for 
more.  White  v.  Kahn,  103  Ala.  308 
(1894). 

i  Jackson  v.  Hayner,  12  Johns.  469 
(1815) ;  Thoroughgood's  Case,  2  Coke, 


rators  and  as  subscribers  of  stock,  on 
condition  that  the  articles  would  not 
be  used  unless  a  certain  other  party 
signed,  and  even  though  the  latter 
party  did  not  sign  and  the  articles 
were  filed  and  the  stock  subsequently 


Rep.  9   (1584);   Foster  v.  Mackinnon,  tendered  to  such  signers,  which  they 

L.  R.  4  C.  P.  704   (1869);   Rockford,  refused,  yet  if  they  took  no  steps  to 

etc.   R.    R.    v.    Schunick,    65    111.    223  remove    their    names    as   subscribers 

(1872), — not  stock  cases,  but  sustain-  from    the    books    they   are   liable    as 

ing  the   general  principle.  stockholders    to    corporate    creditors 

Reed  v.  Richmond  Street  R.  R.,  50  on  a  statutory  liability.     Rehbein  v. 

Ind.    342    (1S75).      In    this    case    the  Rahr,  109  Wis.  136  (1901). 

statute  authorizing  the   organization  3  See  ch.  XIII. 

of  street  railway  companies  required  Notes  given  in  the  purchase  of 
that  the  articles  of  association  stock  in  a  corporation  whose  sole 
should,  among  other  things,  state  the  business  is  to  carry  on  an  infringing 
number  of  directors  and  their  names,  telephone  business  are  without  con- 
Neither    of    these    requirements    was  sideration    and    void.      Clemshire    v. 


observed;  and  in  an  action  to  recover 
a  subscription  the  court  held  the  sub- 
scription void,  saying:  "If  one  of 
these  requirements  can  be  dispensed 
with,  or  held  to  be  directory  merely, 
we  do  not  see  where  we  are  to  stop. 


Boone    County    Bank,    53    Ark.    512 
(1890). 

4  Boggs  v.  Olcott,  40  111.  303 
(1866),  holding  that  the  payment  of 
calls  by  one  whose  name  appears  to 
a  subscription  to  the  stock  of  a  cor- 


The  case  of  Eakright  v.  Logansport,  poration    is    an    admission    that    his 

etc.  R.  R.,  13   Ind.  404   (1859),  went  signature      and      subscription     were 

as   far   in   this    direction   as   we   are  authorized  and  binding  upon  him.   To 

willing  to  go."  same  effect  is  Musgrave  v.  Morrison, 

2  See    §169,    infra.      A    subscriber  54  Md.   161    (1880);    Rhey  v.  Ebens- 

may  show  that  he  was  assured  that  burg,  etc.  Co.,  27  Pa.  St.  261   (1856). 

he  might  withdraw  from  the  subscrip-  in  which  a  promise  to  subscribe  for 
(17)                                               257 


§  54.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[CII.  IV. 


§  54.  Various  defenses  to  subscriptions.  — There  are  various  de- 
fenses to  the  validity  and  enforceability  of  a  subscription  which 
have  been  treated  of  elsewhere.  Thus,  a  subscriber  to  the  cap- 
ital  stock   of   an   incorporated   company    is,    in   general,    bound    to 


a  certain  amount  of  stock  for  the 
purpose  of  inducing  the  company  to 
adopt  a  certain  route  was  held  en- 
forceable, though  no  formal  subscrip- 
tion ever  was  made;  Hawley  v.  Up- 
ton, 102  U.  S.  314  (1SS0),  where, 
the  paper  issued  being  a  bond  in 
consideration  of  shares  received,  but 
which  were  in  fact  never  issued,  the 
signer  was  held  to  be  a  stockholder. 
In  Cayuga  Lake  R.  R.  v.  Kyle,  64 
N.  Y.  1S5  (1876),  where  the  articles 
of  association  were  defective  in  not 
distinctly  stating  the  termini  of  the 
road  nor  the  counties  through  which 
it  passed,  it  was  held  that  such  de- 
fect could  not  avail  the  defendant  in 
an  action  for  a  balance  of  an  unpaid 
subscription.  Gorrissen's  Case,  L.  R. 
8  Ch.  App.  507  (1873),  in  which  the 
person  agreeing  to  place  stock  was 
held  not  liable  as  a  stockholder.  Bos- 
ton, etc.  R.  R.  v.  Wellington,  113 
Mass.  79  (1873),  in  which  the  rail- 
road was  not  divided  into  sections 
as  contemplated  by  the  subscription 
paper,  the  change,  however,  being  a 
merely  formal  irregularity.  In  an 
old  case  in  Massachusetts  it  was  held 
that  a  statement,  made  at  a  public 
meeting  of  the  corporation,  by  one 
of  the  stockholders,  that  he  would 
spend  half  his  estate,  or  enough  of 
it  to  make  the  enterprise  undertaken 
by  the  corporation  a  success,  did  not 
render  him  liable  for  a  failure  to 
do  so.  Andover,  etc.  Corp.  v.  Hay, 
7   Mass.   102    (1810). 

A  subscription  by  various  parties  to 
a  cheese  factory  to  be  incorporated, 
the  number  of  shares  being  placed  op- 
posite the  names,  binds  the  subscrib- 
ers only  to  the  extent  of  the  shares 
so  placed  opposite  their  names.  Da- 
vis, etc.  Co.  v.  Jones,  G6  Fed.  Rep. 
124    (1895).     A  subscription  contract 


prior  to  incorporation  may  be  such 
that  the  subscribers  are  liable  sev- 
erally to  the  amount  of  their  sub- 
scriptions. Davis  v.  Ravenna  Cream- 
ery Co.,  48  Neb.  471  (1896).  A  sub- 
scription prior  to  incorporation  will 
not  be  construed  as  rendering  each 
subscriber  liable  for  the  whole,  even 
though  the  subscription  speaks  of  a 
joint  liability,  it  being  clear  that 
such  was  not  the  intent  of  the  sub- 
scribers. Chicago,  etc.  Co.  v.  Graham, 
78  Fed.  Rep.  83  (1896).  A  subscriber 
who  places  opposite  his  signature  the 
figures  $1,000  is  bound,  although  he 
does  not  write  the  number  of  shares 
taken.  Columbus  Land  Co.  v.  Mc- 
Nally,  172  Pa.  St.  158  (1895).  An 
agreement  to  buy  stock  was  held  to 
be  a  subscription  to  stock  in  Lincoln, 
etc.  Co.  v.  Sheldon,  44  Neb.  279 
(1895).  An  indefinite  agreement  to 
subscribe,  running  to  trustees,  is  not 
enforceable,  no  corporate  name,  cap- 
ital stock,  or  incorporators  being 
named.  Loutsenhizer  v.  Farmers', 
etc.   Co.,  5  Colo.  App.  479    (1895). 

The  validity  of  a  subscription  de- 
pends upon  the  law  of  the  state  cre- 
ating the  corporation,  unless  payment 
is  to  be  made  elsewhere.  Penobscot, 
etc.  Co.  v.  Bartlett,  78  Mass.  244 
(1858). 

Burlington,  etc.  Ry.  v.  Palmer,  42 
Iowa,  222  (1875),  was  an  action  upon 
a  subscription  note  to  a  railroad, 
which,  by  agreement,  was  not  to  be 
delivered  until  a  right  of  way  had 
been  secured,  when  a  contract  should 
be  executed  by  the  railroad  to  con- 
struct an  extension  upon  certain  con- 
ditions. Held,  that  the  fact  that  the 
contract  last  referred  to  did  not  con- 
tain one  of  the  conditions  which  had, 
however,  been  complied  with,  did  net 
constitute  a  defense  to  the  action. 


258 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§    54. 


know  the  legal  effect  of  his  subscription;  and  false  and  even  fraud- 
ulent representations  made  to  him  at  the  time  of  taking  his  sub- 


In  Lane  v.  Brainerd,  30  Conn.  565 
(1862),  one  who  had  subscribed  in 
an  irregular  way,  but  had  acted  as  a 
stockholder  and  accepted  the  office 
of  director,  was  held  to  have  waived 
all  objection  to  the  form  of  his  sub- 
scription. To  same  effect,  Danbury, 
etc.  R.  R.  v.  Wilson,  22  Conn.  435 
(1853). 

The  fact  that  a  subscription  paper 
does  not  correctly  designate  the  ter- 
mini of  a  railroad  already  built  is  no 
defense  to  a  subscriber.  Cayuga  Lake 
R.  R.  v.  Kyle,  64  N.  Y.  185  (1876). 
The  legislature  cannot  make  a  person 
a  subscriber  in  opposition  to  his  will. 
Richmond,  etc.  Assoc,  v.  Clarke,  61 
Me.  351   (1873). 

One  who  never  subscribes  in  writ- 
ing for  stock,  nor  assumes  the  posi- 
tion or  rights  of  a  stockholder,  but 
gives  a  bond  to  repay  the  subscrip- 
tion price,  which  is  loaned  to  him,  is 
not  liable  on  the  bond.  Butler  Uni- 
versity v.  Scoonover,  114  Ind.  381 
(1888). 

It  is  a  question  of  fact  and  of  con- 
tract whether  a  party  loaned  money 
to  the  company  or  was  a  subscriber 
to  the  stock.  McComb  v.  Barcelona, 
etc.  Assoc,  134  N.  Y.  598  (1892), 
aff'g  10  N.  Y.  Supp.  546. 

Where  the  corporation  contracts 
with  the  subscriber  to  give  him  in- 
definite time  in  which  to  pay  for  his 
stock  the  subscription  is  void.  Mc- 
Comb v.  Credit  Mobilier,  etc.  Co.,  13 
Phila.  468  (1878);  Van  Allen  v.  Illi- 
nois Cent.  R.  R.s  7  Bosw.  515  (1861). 
It  is  otherwise  when  only  a  reason- 
able credit  is  given.  Mitchell  v. 
Beckman,  64  Cal.  117   (1883). 

The  fact  that  the  subscriptions  to 
various  subscription  lists  of  the  same 
character  are  cut  off  from  the  head- 
ings and  pasted  under  one  heading 
does  not  release  the  subscribers.  It 
is  not  a  mutilation.  Sodus  Bay,  etc. 
R.  R.  v.  Hamlin,  24  Hun,  390  (1881). 


Subscriptions  need  not  be  on  one 
paper,  but  may  be  on  various  papers. 
Anderson  v.  Scott,  70  N.  H.  534 
(1901). 

Charlotte,  etc.  v.  Blakely,  3  Strobh. 
(S.  C.)  245  (184S).  In  this  case  one 
who  subscribed  a  paper  agreeing  to 
take  certain  railroad  stock  "provided 
the  road  comes  to  Columbia,"  but  did 
not  sign  the  subscription  books  when 
opened,  was  held  not  to  be  a  stock- 
holder. 

Erie,  etc.  R.  R.  v.  Owen,  32  Barb. 
616  (1860).  In  this  case  it  is  said 
that  there  are  two  modes  in  which  a 
person,  under  the  general  railroad 
act  of  the  state  of  New  York,  may 
become  a  stockholder  in  a  railroad 
corporation,  viz.:  by  subscribing  the 
articles  of  association,  and  becoming 
a  member  of  the  corporation  as  the 
act  provides  (§§1  and  2),  or  by  sub- 
scribing to  the  capital  stock,  in  the 
book  opened  by  the  directors,  after 
the  corporation  is  in  existence;  and 
that  no  one  who  has  only  signed  the 
articles  of  association,  before  the  cor- 
poration came  into  being,  is  a  corpo- 
rator or  member  of  the  corporation, 
unless  the  articles  so  signed  by  him 
have  been  duly  filed  in  the  office  of 
the  secretary  of  state,  as  required 
by  the  statute.  It  is  doubtful 
whether  this  can  be  considered  good 

law.     This   case   is    distinguished   in 
Buffalo,   etc.  R.  R.  v.  Clark,  22  Hun, 

359,  362    (1880);    aff'd,   87  N.  Y.  294, 

and   Sodus,   etc  R.  R.  v,  Hamlin,   24 

Hun,  390,  394  (1881). 

Although  the   statute  provides   for 

subscription  books,  yet  a  subscription 

on  a  subscription  paper  will  be  valid. 

Ashtabula,    etc.    R.    R.    v.    Smith,    15 

Ohio    St.    328     (1864);    Brownlee    v. 

Ohio,  etc.  R.  R„  18   Ind.   68    (1862); 

Buffalo,  etc.  R.  R.  v.  Gilford,  87  N.  Y. 

294     (1882);     Hamilton,    etc.    Co.    v. 

Rice,   7   Barb.   157    (1849);    People  v. 

Stockton,    etc.    R.    R.,    45    Cal.    306 


259 


§  54.] 


SUBSCRIPTIONS — METHOD,   PARTIES,   ETC. 


[CH.  IV. 


scription  as  to  the  legal  effect  of  his  contract  of  subscription  are 
not  sufficient  to  release  him.1  Parol  conditions  or  agreements  in 
reference  to  subscriptions  which  are  absolute  on  their  face  are  gen- 
erally not  sustained.2  Where  the  certificate  of  incorporation  varies 
materially  from  the  preliminary  subscription  agreement,  the  sub- 
scriber is  released.3     The  right  of  a  stockholder  to  withdraw  from 

(1873);    Stuart   v.   Valley   R.   R.,   32  "was  not  a  party  to  the  petition,  and 

Gratt.  146   (1879).     Especially  where  he  is  not  by  the  terms  of  the   [gen- 

a  loose  sheet  is  subsequently  put  into  eral]   statute  a  member  of  the  com- 

a  volume  and  made  part  of  the  rec-  pany,  and  he  has  done  nothing  since 

ords    of    the    corporation.      Woodruff  the  patent,  by  attending  meetings  or 

v.  McDonald,  33  Ark.  97    (1878).  otherwise,  which  can  have  relation  to 

Ex  parte  Besley,   2  Mac.  &  G.  176  his   agreement  to   take  stock."     The 

(1850),  in  which  the  defendant  was  court  with   regret  held   that  he  was 

held  to  be  a  subscriber  and  liable  to  not  a  stockholder, 

creditors   of  a   railway,   although   he  i  See  §  196,  infra. 

had  not  signed  any  subscription  pa-  2  See  ch.    IX,  infra.     A  defendant, 

per  or  book,  but  had  attended  meet-  it  is  said,  however,  who  is  sued  on  a 

ings  of  the  provisional  committee  as  subscription  absolute,  may  show  that 

a  member  thereof,  and  had  paid  small  he  agreed  orally  to   subscribe  condi- 

assessments   ordered   by   it.  tionally,    and    placed    his    name    on 

Carlisle  v.  Saginaw,  etc.  R.  R.,  27  blank  paper,  and  that  the  secretary 
Mich.  315  (1873).  Where  the  law  re-  of  the  corporation  subsequently, 
quired  subscriptions  to  be  made  "in  without  his  knowledge,  subscribed 
the  manner  to  be  provided  by  its  the  name  unconditionally  to  a  sub- 
by-laws,"  a  subscription  made  be-  scription  paper.  See  §  137,  infra. 
fore  such  by-laws  were  adopted  was  And  it  is  held  that  when  a  corpora- 
declared  to  be  void.  tion  invites  and  accepts  subscriptions 

New   Brunswick,   etc.   Co.   v.   Mug-  as  a  loan,  to  be  repaid  in  full  and 

geridge,    4    Hurl.    &    N.    160    (1859).  the  subscription   canceled,   it  cannot 

Defendant  had   agreed  in  writing  to  repudiate  such   a  contract  and  treat 

accept  shares  he  desired  to  subscribe  the  subscription  so  induced  as  abso- 

for,  and  had  paid  the  sum  required  lute.     See   §  247,   n.,  infra.     A  party 

in  advance,  but  he  did  not  sign  the  sued   upon    a   subscription   for    stock 

articles    of    association    subsequently  may  show  that  a  letter  accompanied 

sent  to  him  for  his  signature.    In  an  the  subscription  to  the  effect  that  he 

action   for  calls  he  was  held   not  to  would    pay    a   certain    part    in    cash, 

be  a  shareholder,  although  his  name  which   had   been   done,    and   pay  the 

had    been    placed   as   such   upon   the  balance  out  of  his  monthly  accounts 

company's     register.       The     decision  with  the  corporation.     Elliott  v.  New 

rested   upon    a   clause   in   the    Joint-  York,   etc.   Co.,   73  Hun,  519    (1893); 

Stock  Companies  Act,  1856,  to  the  ef-  aff'd,  148  N.  Y.  752. 

feet  that  no  person  shall  be  deemed  3  Greenbrier,     etc.       Exposition     v. 

to    have   accepted    any    share   unless  Rodes,    37    W.    Va.    738     (1893).      A 

his  acceptance  be  in  writing.  subscription   to   a   corporation   to   be 

Tilsonburg,  etc.  Co.  v.  Goodrich,  8  organized   for   dealing  in   a  specified 

Ont.    565    (1885),   which   was    an   ac-  article  cannot  be  enforced  by  a  cor- 

tion   for   calls   on   shares.     "The   de-  poration   subsequently    organized    for 

fendant"    (although   one  of   the   pro-  manufacturing   and    dealing    in    that 

jectors     and     original     subscribers)  article.     Woods,    etc.    Co.    v.    Brady, 

260 


en.  iv.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§  55. 


his  subscription  is  discussed  elsewhere  in  this  volume.1  And  many 
other  defenses  which  have  been  raised  to  defeat  actions  for  the  col- 
lection of  subscriptions  are  considered  elsewhere.2 

§55.  Proof  of  subscription. — It  is  presumptive  evidence  that 
one  is  a  subscriber  or  stockholder  when  his  name  appears  on  the 
books  of  the  company  in  either  of  these  capacities.3     And  so  also 


181  N.  Y.,  145  (1905).  A  change  in 
the  plan  of  organization  so  as  to  have 
a  larger  capital  stock  than  was  orig- 
inally intended  releases  a  subscriber. 
Norwich,  etc.  Co.  v.  Hockaday,  89  Va. 
557  (1893).  See  also  §§62' and  194, 
infra. 

i  See  §§  167-170,  infra. 

2  See  ch.  X. 

3  Quoted  and  approved  in  Torras 
v.  Raeburn,  108  Ga.  345  (1899).  The 
appearance  of  a  person's  name  as  a 
stockholder  on  the  corporate  books 
is  prima  facie  evidence  that  he  owns 
the  stock.  Sherwood  v.  Illinois,  etc. 
Bank,  195  111.  112  (1902).  An  entry 
in  the  stock  book  of  a  national  bank 
is  evidence  of  stockholdership  in  an 
action  to  enforce  the  statutory  lia- 
bility. Brown  v.  Ellis,  103  Fed.  Rep. 
834  (1900).  The  corporate  stock 
book,  containing  a  list  of  the  stock- 
holders, the  number  of  shares  owned 
by  each,  the  amounts  paid  and  due, 
and  containing  defendant's  name 
among  others,  is  sufficient  evidence 
of  a  balance  due  on  unpaid  subscrip- 
tion. Glenn  v.  Orr,  96  N.  C.  413 
(1887);  Turnbull  v.  Payson,  95  U.  S. 
418  (1877);  Hoagland  v.  Bell,  36 
Barb.  57  (1861);  Hamilton,  etc.  Co. 
v.  Rice,  7  Barb.  157  (1849);  Pitts- 
burgh, etc.  R.  R.  v.  Applegate,  21  W. 
Va.  172  (1882)  ;  Taylor  v.  Hughes,  2 
Jones  &  Lat.  (Ir.  Ch.)  24,  55  (1844); 
McHose  v.  Wheeler,  45  Pa.  St.  32 
(1863).  Cf.  Coffin  v.  Collins,  17  Me. 
440  (1840);  Whitman  v.  Granite 
Church,  24  Me.  236  (1844)  ;  Rockville, 
etc.  Turnp.  v.  Van  Ness,  2  Cranch,  C. 
C.  449  (1824);  s.  c,  20  Fed.  Cas. 
1080;  Mudgett  v.  Horrell,  33  Cal.  25 
(1867).  Or  when  a  certificate  has 
been    issued   to    him,   which   he   pro- 


duces. Boardman  v.  Lake  Shore,  etc. 
R.  R.,  84  N.  Y.  157  (1881)  ;  Agricul- 
tural Bank  v.  Burr,  24  Me.  256 
(1844);  Vanderwerken  v.  Glenn,  85 
Va.  9  (188S) ;  Lewis  v.  Glenn,  84 
Va.  947  (1888).  The  appearance  of 
a  person's  name  on  the  stock  book  of 
a  corporation  raises  a  presumption 
that  he  subscribed.  South  Branch 
Ry.  v.  Long's  Adm'r,  43  W.  Va.  131 
(1897). 

The  stock  book  and  a  subscription 
list  are  sufficient  to  prove  stockhold- 
ership in  the  absence  of  rebuttal  tes- 
timony. Glenn  v.  Liggett,  47  Fed. 
Rep.  472  (1891).  But  entries  in  the 
cash  book  are  not  admissible,  nor  the 
report  of  the  treasurer  of  the  corpo- 
ration. Glenn  v.  Liggett,  47  Fed.  Rep. 
472    (1891). 

Where  the  name  of  an  individual 
appears  upon  the  stock  book  of  a 
corporation  as  a  stockholder,  the  pre- 
sumption is  that  he  is  regularly  and 
lawfully  the  holder  and  owner  of  the 
stock,  and,  in  the  absence  of  evidence 
that  the  stock  has  come  to  him  by 
transfer,  that  he  was  regularly  a  sub- 
scriber. Turnbull  v.  Payson,  95  U. 
S.   418    (1877). 

If  a  person  appears  upon  the  books 
as  a  stockholder,  the  presumption  is 
raised  that  he  is  a  stockholder,  and 
entries  in  the  stock  book  are  admis- 
sible to  raise  such  presumption.  Hol- 
land v.  Duluth,  etc.  Co.,  65  Minn. 
324    (1896). 

The  stock  books  are  sufficient  to 
prove  stockholdership  if  the  name 
contained  therein  is  the  same  as  de- 
fendant's and  was  entered  as  his 
name.  Liggett  v.  Glenn,  51  Fed.  Rep. 
381  (1892).  Cf.  Howard  v.  Glenn,  85 
Ga.  238    (1890). 


261 


§  55.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[CH.  IV. 


it  is  said  that  the  commissioners'  books  are  prima  facie  evidence  of 
the  subscriptions  found  in  them,1  and  likewise  as  to  the  original 
subscription  paper.2  And  again,  entries  in  the  proper  books  by 
commissioners  duly  appointed  to  take  subscriptions  are  evidence 
against  the  subscribers.3  So  corporate  books  to  which  a  subscrip- 
tion has  been  transferred  by  authority  of  the  subscriber  are  evi- 
dence of  the  subscription,4  and  also  the  books  that  contain  the 
original  subscriptions.5     Entries  on  the  stock  ledger  and  corporate 


The  books  of  the  corporation  are 
prima  facie  evidence  of  stockholder- 
ship.  Lehman  v.  Glenn,  87  Ala.  618 
(1889). 

A  mistake  in  entering  the  name  of 
the  subscriber  on  the  corporate  books 
may  be  fatal  to  proving  stockholder- 
ship  by  the  books.  Where  the  sub- 
scription is  denied,  the  best  evidence 
is  the  subscription  itself;  and  until 
it  is  accounted  for,  the  stock  ledger 
is  inadmissible  in  evidence.  If  the 
action  is  on  the  written  subscription, 
recovery  can  be  on  that  alone.  Taussig 
v.  Glenn,  51  Fed.  Rep.  409   (1892). 

Where  there  is  no  law  authorizing 
a  paper  containing  the  subscriptions 
to  the  capital  stock  of  a  corporation 
to  be  filed  in  the  office  of  the  secre- 
tary of  state,  a  copy  thereof,  certi- 
fied under  the  seal  of  the  secretary 
of  state,  is  not  admissible  as  evidence 
in  a  suit  by  the  corporation  to  charge 
the  defendant  as  stockholder.  Troy, 
etc.  R.  R.  v.  Kerr,  17  Barb.  581,  GOO 
(1854) ;  Tilsonburg,  etc.  Co.  v.  Good- 
rich, 8  Ont.  565  (1885).  Cf.  Bou- 
chaud  v.  Bias,  3  Benio,  238  (1846); 
Bick  v.  Balch,  8  Peters,  30   (1834). 

Stockholdership  is  proved  by  the 
stockholders'  book  which  by  statute 
is  made  presumptive  evidence  of  the 
facts  therein  stated,  and  by  the  tes- 
timony of  a  corporate  officer  that  the 
persons  therein  named  are  stockhold- 
ers and  that  they  took  part  in  stock- 
holders' meetings.  Zang  v.  Wyant, 
25  Colo.  551  (1898).  Where  it  is 
proved  that  the  defendant  is  a  stock- 
holder, the  books  of  the  company  may 
be  used  to  prove  the  amount  of  stock 


he  held,  but  such  books  are  not  suf- 
ficient to  prove  that  he  was  a  stock- 
holder. The  law  of  the  forum  gov- 
erns as  to  this.  National  Express, 
etc.  Co.  v.  Morris,  15  App.  Cas.  Bist. 
of  Col.  262    (1899). 

The  stock  ledger  supported  by  the 
evidence  of  the  bank  officials1  may 
prove  who  were  the  stockholders. 
Adams  v.  Clark,  36  Col.  65  (1906). 
The  corporate  books  are  sufficient  to 
prove  that  the  whole  capital  stock  of 
the  corporation  has  been  subscribed, 
as  required  by  statute,  before  con- 
demnation proceedings  of  land  ia 
taken,  even  though  some  of  the  stock 
is  subscribed  by  one  as  trustee.  State 
v.  Superior  Court,  etc.,  87  Pac.  Rep. 
40  (Wash.  1906).  The  stock  book  is 
admissible  but  is  not  conclusive. 
Willoughby  v.  Kelly,  91  Pac.  Rep.  874 
(Okl.  1907). 

1  Rockville,  etc.  Co.  v.  Van  Ness,  2 
Cranch,  C.  C.  449  (1824);  s.  c,  20 
Fed.  Cas.  1080;  Wood  v.  Coosa,  etc. 
R.  R.,  32  Ga.  273  (1861). 

2  Partridge  v.  Badger,  25  Barb.  146 
(1857). 

3  Wood  v.  Coosa,  etc.  R.  R.,  32  Ga. 
273    (1861). 

4  Iowa,  etc.  R.  R.  v.  Perkins,  28 
Iowa,  281  (1869);  Hawley  v.  Upton, 
102  U.  S.  314  (1880),  a  case  where 
the  party  had  no  knowledge  of  the 
transfer,  but  was  held  liable.  Cf. 
Whitman  v.  Granite  Church,  24  Me. 
236    (1844). 

5  Marlborough  Branch  R.  R.  v.  Ar- 
nold, 75  Mass.  159  (1858).  Cf.  Mud- 
gett  v.  Horrell,   33  Cal.  25    (1867). 

The   subscription   books  are  prima 


262 


ch.  rv.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§  55. 


books  are  competent  evidence  of  an  issue  of  stock  to  a  person.1 
There  arc  recent  decisions,  however,  to  the  contrary,  and  it  has 
been  held  that  the  fact  that  the  name  of  a  person  appears  as  a  stock- 
holder on  the  stock  book  of  a  corporation  is  not  sufficient  to  raise 
a  presumption  that  he  is  a  stockholder,  in  a  suit  against  him  by  a 
judgment  creditor  of  the  corporation  to  enforce  a  statutory  liabil- 
ity.2 It  has  also  been  held  that  entries  in  the  books  of  a  corpora- 
tion showing  the  transfer  of  stock  to  a  certain  person,  and  pay- 
ments by  him  thereon,  are  not  prima  facie  evidence  that  he  is  a 
stockholder  in  a  suit  to  charge  him  as  a  stockholder  of  the  corpo^ 
ration.3  The  presumption  that  one  is  a  stockholder,  arising  from 
the  fact  of  his  name  being  found  in  the  stock  and  transfer  book,  may 
be  met  by  proof  to  the  contrary.4  Creditors  of  a  corporation  are 
presumed  to  have  relied  upon  the  books  as  to  who  are  stockholders.5 
In  order  to  let  in  secondary  evidence  of  a  subscription,  there  must 


facie  evidence  of  stockholdership. 
Semple  v.  Glenn,  91  Ala.  245  (1891). 

In  enforcing  a  subscription,  stock- 
holdership may  be  proven  by  show- 
ing the  name  on  the  subscription  list 
and  proving  payment  of  several  as- 
sessments. Glenn  v.  McAllister,  46 
Fed.  Rep.  883  (1891). 

Stockholdership  may  be  proved  by 
admissions  of  the  stockholder  and 
the  testimony  of  the  treasurer,  and 
by  the  record  book  purporting  to 
contain  copies  of  the  original  minutes, 
where  the  stock  book  could  not  be 
found.  Congdon  v.  Winsor,  17  R.  I. 
236    (1891). 

i  Chapman  v.  Porter,  69  N.  Y.  276 
(1877). 

2  Foote  v.  Anderson,  123  Fed.  Rep. 
659  (1903).  Third  parties  are  not 
bound  by  entries  in  the  books  of  a 
corporation,  and  hence  stockholder- 
ship  cannot  be  proved  by  such  books, 
unless  such  stockholders  knew  there- 
of and  assented  thereto.  Harrison  v. 
Remington,  etc.  Co.,  140  Fed.  Rep. 
385  (1905).  The  mere  fact  that  a 
man's  name  is  entered  in  the  books 
as  a  stockholder  does  not  prove  that 
fact.  Proof  must  be  given  that  he 
authorized,  assented,  or  knew  of  and 
acquiesced      in      the      subscription. 


Girard,    etc.   Co.   v.   Loving,   71   Kan. 
558    (1905). 

3  Carey  v.  Williams,  79  Fed.  Rep. 
906  (1897),  the  court  reviewing  the 
authorities.  The  fact  that  a  per- 
son's name  appears  on  the  books  of 
a  corporation  as  a  stockholder  is  not 
sufficient  evidence  upon  which  to 
charge  him  as  a  stockholder,  and  he 
may  show  that  the  stock  was  trans- 
ferred to  him  before  it  should  have 
been  transferred  under  his  contract 
of  purchase.  Sigua,  etc.  Co.  v.  Greene, 
104  Fed.  Rep.  854  (1900).  Stock- 
holdership cannot  be  proved  by  books 
of  the  corporation  other  than  the 
stock  subscription  book  signed  by  the 
subscriber.  Hinsdale  Sav.  Bank  v. 
New  Hampshire  Bkg.  Co.,  59  Kan. 
716    (1898). 

4  Mudgett  v.  Horrell,  33  Cal.  25 
(1867).  Cf.  Brewers',  etc.  Ins.  Co. 
v.  Burger,  10  Hun,  56  (1877).  The 
mere  fact  that  a  party  is  registered 
on  corporate  books  as  a  subscriber 
for  stock  is  insufficient  where  it  is 
shown  that  the  party  did  not  sub- 
scribe and  never  authorized  any  sub- 
scription. Chapman  v.  Virginia,  etc. 
Co.,  96  Va.  177  (1898). 

5  United  States,  etc.  Co.  v.  Davies, 
2   Kan.   App.   611    (1895).     Cf.   Mud- 


263 


56.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[CII.  IV. 


be  proof  of  an  original  subscription  and  of  the  loss  of  the  book  or 
paper,  or  the  absence  of  the  original  paper  satisfactorily  accounted 
for.1  Where  a  person  is  shown  to  be  a  stockholder,  the  books  of  the 
company  are  admissible  to  prove  how  much  has  been  paid  on  his 
stock.2 

The  books  of  the  corporation  are  evidence  in  a  suit  against  a  stock- 
holder on  a  call,  even  though  the  entries  are  not  proved  to  be  cor- 
rect by  the  person  actually  making  them.3 

As  against  the  officers  of  the  company  .it  may  be  proved  by  the 
books  of  the  company  that  they  had  converted  to  their  own  use  the 
funds  of  the  company  illegally.4 

§  56.  The  English  rule. — In  England  the  contract  of  a  subscrip- 
tion for  shares  is  entered  into  in  a  somewhat  more  technical  or  for- 
mal manner.  An  application,  in  the  first  instance,  is  made  in  writ- 
ing for  a  specified  number  of  shares,  which  application  is  held  to 
be  a  mere  offer,  open  for  acceptance  by  the  corporation  for  only  a 
limited  time.5     If  the  application  be  accepted,  the  corporation  for- 


gett   v.    Horrell,    33    Cal.    25    (1867), 
and  §  260,  infra. 

i  Pittsburgh,  etc.  R.  R.  v.  Gazzam, 
32  Pa.  St.  340  (1858);  Graff  v.  Pitts- 
burgh, etc.  R.  R.,  31  Pa.  St.  489 
(1858).  See  also  Hays  v.  Pittsburgh, 
etc.  R.  R.,  38  Pa.  St.  81  (1860).  A 
contract  between  the  defendant,  who 
is  sued  as  a  stockholder,  and  his  at- 
torney, relative  to  defending  the  ac- 
tion, is  inadmissible  to  prove  stock- 
holdership.  Liggett  v.  Glenn,  51  Fed. 
Rep.  381  (1892);  Dorsheimer  v. 
Glenn,  51  Fed.  Rep.  404  (1892).  A 
corporation  may,  by  suit,  compel  its 
agents  to  deliver  up  subscription 
lists,  or  in  lieu  thereof  be  liable 
themselves  on  the  subscriptions.  Peo- 
ple's Brewing  Co.  v.  Bcebinger,  40  La. 
Ann.  277    (1888). 

2  Fish  v.  Smith,  73  Conn.  377 
(1900). 

3  Sigua,  etc.  Co.  v.  Brown,  171  N. 
Y.  488  (1902).  In  a  suit  by  a  receiver 
of  a  national  bank  to  recover  back 
dividends  illegally  paid,  the  books  of 
the  bank  are  competent  evidence  to 
prove  the  acts  of  the  corporation  and 
its  financial  condition,  except  as  to 
dealings  between  the  corporation  and 


the  defendant.     Hayden  v.  Williams, 
96   Fed.  Rep.   279    (1899). 

4  Saranac,  etc.  R.  R.  v.  Arnold,  167 
N.  Y.  368  (1901).  A  director  may 
be  proved  to  be  such  by  the  minute 
book  of  the  corporation,  but  general 
entries  upon  the  ledger  of  the  cor- 
poration do  not  charge  a  director 
with  notice  thereof,  unless  it  is 
proved  that  he  had  access  to  the 
ledger  or  control  over  it.  Leonard  v. 
Faber,  52  N.  Y.  App.  Div.  495  (1900), 
the  court  stating  that  corporate 
books,  such  as  the  stock  book  and 
minute  books  containing  records,  in 
which  third  parties  are  not  interested, 
are  evidence  of  the  facts  set  forth 
in  them  both  in  favor  and  against 
the  corporation,  but  that  account 
books  showing  transactions  between 
the  corporation  and  third  persons  are 
similar  to  account  books  of  other  par- 
ties and  are  admissible  only  as  ad- 
missions by  the  corporation.  See 
also  §  727,  infra. 

5  Ramsgate,  etc.  Co.  v.  Montefiore, 
L.  R.  1  Exch.  109  (1886) ;  Re  Bowron, 
L.  R.  5  Eq.  428  (1868),  and  the  cases 
generally  cited,  infra,  in  this  sec- 
tion. 


264 


ch.  rv.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§  56. 


mally  allots  to  the  applicant  the  desired  number  of  shares,  and 
gives  him  a  notice  of  the  allotment.  The  notice  is  of  the  essence 
of  the  contract  An  allotment  without  notice  is  not  sufficient  to 
bind  the  applicant  as  a  contributory  or  a  stockholder.1  If  the  notice 
of  allotment  is  sent  by  mail,  the  allottee  becomes  bound  from  the 
time  of  posting  the  letter,  whether  he  received  it  or  not.2  And  if 
the  allottee  knew  of  the  fact  of  the  allotment,  and  especially  if  he 
acted  or  suffered  others  to  act  upon  the  assumption  that  he  was  a 
shareholder,  a  formal  notification  may  be  unnecessary  to  bind  him.3 
The  application  being  in  the  nature  of  an  offer  or  a  proposition  may 
be  withdrawn  at  any  time  before  it  has  been  regularly  accepted,  and 
it  must  be  accepted  within  a  reasonable  time,  or  the  party  making 
it  cannot  be  held  bound  ;4    and  although  the  application  should  be  in 


A  subscriber  may  withdraw  before  not  having  been  given  of  a  directors' 

allotment  by  a  legally  convened  meet-  meeting,   yet  the   allotment  may  be 

Ing  of  the  directors.    Re  Portuguese,  confirmed    by    a    subsequent    legally 

etc.    Mines,    L.    R.    42    Ch.    D.    160  called  meeting.     Re  Portuguese,  etc. 

(1889).    But  not  where  the  allotment  Mines,  L.  R.  45  Ch.  D.  16  (1890). 

is  made  irregularly  before,  but  regu-  2  Harris's   Case,  L.  R.  7   Ch.  App. 

larly  confirmed  after,  the  withdrawal.  587    (1872);    Household,   etc.    Co.   v. 

Re  Portuguese,  etc.  Mines,  L.  R.  45  Grant,  L.  R.  4  Exch.  D.  216   (1879); 

Ch.  D.  16    (1890).  Townsend's   Case,   L.   R.   13   Eq.   148 

"lHebbs's    Case,*   L.    R.    4    Eq.    9  (1871).    But  see  Hebbs's  Case,  L.  R. 

(1867);    Gunn's   Case,   L.   R.   3    Ch.  4  Eq.  9  (1867).    Contra,  British,  etc. 

App.   40    (1867);    Re  Peruvian  Rys.  Tel.  Co.  v.  Colson,  L.  R.  6  Exch.  108 

Co     L    R    4   Ch.  App.   322    (1869);  (1871);   Re  Constantinople,  etc.  Co., 

Pellatt's  Case,  L.  R.  2  Ch.  App.  527  L.  R.  11  Eq.  86   (1870).    Where  the 

(1867) ;    Ward's   Case,  L.  R.   10  Eq.  party  to  whom  the  stock  is  allotted 

659    (1870);    Harris's   Case,   L.   R.   7  does  not  reply  to  the  letter  informing 

Ch.  App.  587  (1872) ;  Household,  etc.  him  of  the  allotment,  he  is  not  bound. 

Co.  v.  Grant,  L.  R.  4  Exch.  D.  216  Re  Staffordshire  Gas,  etc.  Co.,  66  L. 

(1879).    The  mere  act  of  signing  the  T.   Rep.   48    (1891). 

memorandum  of  association  does  not  3  Levita's   Case,  L.  R.  3    Ch.  App. 

make  one  a  stockholder.     Mackley'3  36   (1867);  Re  Peruvian  Rys.  Co.,  L. 

Case,  L.  R.  1  Ch.  D.  247   (1875).     A  R.  4  Ch.  App.  322    (1869);  Richards 

mere  allotment  without  an  entry  of  v.  Home,  etc.  Assoc,  L.  R.  6  C.  P. 

the  name  on  the  stock  register  does  591   (1871). 

not   render   the   person   liable   as   a  4  Ward's   Case,   L.   R.   10    Eq.    659 

stockholder.     Nicol's  Case,  L.  R.  29  (1870);  Best's  Case,  2  De  G.,  J.  &  S. 

Ch.   D.   421    (1885).     Nor   is   one   a  650    (1865);    Ramsgate,    etc.    Co.    p. 

stockholder  unless  he  signs  the  deed  Montefiore,  L.  R.  1  Exch.  109  (1866) ; 

of  settlement.    Irish  Peat  Co.  v.  Phil-  Chapman's    Case,    L.    R.    2    Eq.    567 

lips    1   Best  &    S.   598  (1861).    Nor  (1866);  Ritso's  Case,  L.  R.  4  Ch.  D. 

will'  a  certificate  be  issued  till  then.  774   (1877);  Wilson's  Case,  20  L.  T. 

Wilkinson   v.   Anglo-Californian,   etc.  (N.   S.)    962    (1869);    Pellatt's   Case, 

Co.    18  Q.  B.  728   (1852).  L.  R.  2  Ch.  App.  527   (1867).     A  no- 

Although    an    allotment    of    stock  tice  of  withdrawal  of  an  application 

may  be   illegal  by  reason  of  notice  for  stock  is  effective  when  received 

265 


57.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[CII.  IV. 


writing,  the  withdrawal  of  it  may  he  oral.1  It  seems  to  he  well 
settled  in  England,  that,  in  order  to  make  the  contract  to  take  up 
shares  completely  binding,  there  must  ho  the  application  in  writing, 
the  allotment  of  the  shares  to  the  applicant,  and  a  communication 
to  him  of  notice  of  the  allotment.2 

§  57.  Subscriptions  taken  by  commissioners.  — Although  the  stat- 
ute provides  for  subscription  either  by  an  original  subscription  to 
the  articles  of  association,  or,  after  the  incorporation,  by  a  subscrip- 
tion in  books  to  be  opened  by  commissioners,  nevertheless  it  has 
been  held  that  a  subscription  in  some  other  way  is  binding.3     The 

by    the    secretary    at    the    company's  tra,   Troy,   etc.   R.   R.   v.   Tibbits,   18 

office.     Re   London,   etc.   Bank,   Ltd.,  Barb.   297    (1854);    Parker  v.  North- 

[1900]    1   Ch.   220.  ern,   etc.  R.  R.,  33  Mich.  23    (1875); 

i  Wilson's  Case,  20  L.  T.  (N.  S.)  Unity  Ins.  Co.  v.  Cram,  43  N.  H. 
9G2  (1869).  An  application  for  C36  (1862) ;  Shurtz  v.  Schoolcraft,  etc. 
shares  in  a  company  may  be  ver-  R.  R.,  9  Mich.  269  (1861).  But  when 
bally  withdrawn  before  allotment.  Re  the  statutes  provide  for  commission- 
Brewery  Assets  Corp.,  [1894]  3  Ch.  ers,  it  is  said  they  must  all  be  pres- 
272.  ent  in  order  to  do  legally  the  judicial 

2  Adams's   Case,   L.  R.    13   Eq.   474  duties  assigned  to  them.     Crocker  v. 

(1872);   Hebbs's  Case,  L.  R.  4  Eq.  9  Crane,   21   Wend.   211    (1839).     It   is 

(1867);    Pellatt's   Case,   L.   R.   2   Ch.  said  that  in  the  taking  of  subscrip- 

App.  527  (1867);  Roger's  Case,  L.  R.  tions    the    commissioners    act    minis- 

3  Ch.  App.  633,  637   (1868);  Tucker's  terially,  but  in  the  distribution  or  al- 

Case,   41   L.   J.   Ch.   157    (1871).     Cf.  lotment  of  shares  they  act  judicially; 

Bloxam's  Case,  33  Beav.  529    (1864),  and  that  a  distribution  of  shares  by 

distinguished  in  Pellatt's  Case,  supra,  commissioners  not  sufficient  in  num- 

But  under  the  Companies  Act  of  1862,  ber    to    constitute    a    legal    board    is 

§  23,  the   decisions   are  uniform  that  void.    Crocker  v.  Crane,  21  Wend.  211 

whenever  one  signs  the  memorandum  (1S39). 

of    association    he   becomes   a   stock-         It  has  been  held  that  the  commis- 

holder,  and  must  be  put  on  the  list  sioners  may  limit  the  amount  of  stock 

of  contributories,  although  no  shares  which  any  one  subscriber  may  take, 

may  have  been  allotted  to  him.     Re  and   will,   in   a   proper  case,   be  sus- 

London,  etc.  Co.,  L.  R.  5  Ch.  D.  525  tained  therein   on  grounds  of  public 

(1877);  Evans's  Case,  L.  R.  2  Ch.  App.  policy,  although  the  power  so  to  act 

427    (1867);    Sidney's  Case,  L.   R.  13  is    not    specifically    conferred    upon 

Eq.    228     (1871);    Levick's    Case,    40  them  by  statute.     Brower  v.  Passen- 

L.  J.    (Ch.)   180   (1870);   Hall's  Case,  ger  Ry.,   3   Phila.    161    (1858).     And 

L.    R.    5    Ch.    App.    707    (1870),    dis-  accordingly      fictitious     subscriptions 

tinguishing  Snell's  Case,  L.  R.  5  Ch.  for   the   purpose   of   evading   such   a 

App.   22    (1869).     An  allotment  to  a  limitation  of  the  amount  of  stock  to 

person  who  has  not  applied  for  shares  be  taken  by  a  single  subscriber  are 

is  not  binding.    Re  Northern,  etc.  Co.,  illegal  and  void.     Perkins  v.  Savage, 

63  L.  T.  Rep.  369  (1890).  15   Wend.    412    (1836).      Commission- 

3  Buffalo,   etc.   R.   R.  v.   Gifford,   87  ers  to  take  subscriptions  may  refuse 

N.  Y.  294   (1S82);  Stuart  v.  Valley  R.  to  allow  one  parson  to  subscribe  for 

R.,  32  Gratt.  (Va.)   146  (1879).     Con-  half   of   the    stock,    and    may   refuse 

266 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§    58. 


commissioners  may  themselves  be  subscribers  to  the  stock/  but  they 
can  have  no  priority  of  right  to  subscribe  over  others,  and  no  sub- 
scriptions can  lawfully  be  taken  with  closed  doors.  The  books  must 
be  open,  and  the  public  must  have  an  opportunity  to  subscribe.2 
The  commissioners  have  only  such  general  powers  as  are  necessary 
to  validate  the  subscriptions  to  the  stock.  Their  authority  and  func- 
tions cease  upon  the  organization  of  the  corporation.3 

§  58.  Subscriptions  in  excess  of  the  capital  stock. — In  general, 
after  the  full  amount  of  stock  provided  for  in  the  act  of  incorpo- 
ration has  been  subscribed,  any  further  subscriptions  are  void.4 
Where,  by  statute,  the  commissioners  do  not  properly  apportion 
stock,  in  cases  involving  an  excess  of  subscriptions,  an  aggrieved 
subscriber  may  apply  to  a  court  of  equity  for  relief.5 


to  accept  a  subscription  from  a  per-    Bank     v.     McDonough, 


La.      63 


son  as  trustee.  Thomas  v.  Citizens', 
etc.  Ry.,  1  Am.  St.  Ry.  Dec.  299  (Pa. 
1S58). 

i  Walker  r.  Devereaux,  4  Paige, 
229    (1833). 

2  Brower  v.  Passenger  Ry.,  3 
Phila.  161  (1858).  When  the  amount 
of    the    subscription    is    not    limited, 


(1833). 

4  Lathrop  v.  Kneeland,  46  Barb. 
432  (1S66);  Mackley's  Case,  L.  R.  1 
Ch.   D.   247    (1S75). 

Where  a  few  persons  subscribe  for 
all  the  stock  for  the  benefit  of  such 
other  persons  as  may  care  to  take 
the  same,  and  another  person  takes  a 


the  commissioners,  in  the  absence  of     portion  thereof  by  a  new  direct  sub- 
other  express  provision,  may  usually     scription,  he  cannot  avoid  payment  on 


decide  when   enough   stock  has  been 
subscribed,  and  their  decision  is  prac- 


the  ground  that  there  was  an  over- 
issue.     Somerset,   etc.   Co.'s  Receiver 


tically   conclusive   as   an   exercise  of     v.  Adams,  72   S.  W.  Rep.   1125    (Ky. 

1903). 
•r>  Walker    v.    Devereaux,    4    Paige, 


discretion.     Saugatuck  Bridge  Co.  v. 
Westport,   39   Conn.   337,   34S    (1872). 


Their    failure    to    take    the    statutory  229    (1S33);   Meads  v.  Walker,  Hopk. 

oath  will  not  invalidate  the  subscrip-  Ch.   587    (1S25).     Cf.   Haight  v.  Day, 

tions    taken    by    them,    if    they    are  1  Johns.  Ch.  IS    (1814). 
in    other    essential    respects    regular.         Where  an  apportionment  is  provid- 

Hollman  v.  Williamsport,   etc.   Co.,  9  ed  for  in  the  event  of  an  excess  of 


G.  &"J.   (Md.)    462    (1S3S). 

3  James  v.  Cincinnati,  etc.  R.  R.,  2 
Disney  (Cin.  Super.  Ct),  261  (1858); 
Peninsular  Ry.   v.   Duncan,   2S   Mich. 


subscriptions,  it  is  said  that  the  con- 
tract of  subscription  is  not  complete 
until  the  apportionment  is  made; 
that  there  can  be  neither  stockhold- 


130  (1873)  ;  Hardenburgh  v.  Farmers',  ers  nor  corporation  prior  to  the  ap- 

etc.    Bank,    3    N.    J.    Eq.    68    (1S34)  ;  portionment.    Walker  v.  Devereaux,  4 

Walker   v.   Devereaux,    4    Paige,    229  Paige,  229   (1S33) ;  Crocker  v.  Crane, 

(1833);   Crocker  v.  Crane,  21  Wend.  21    Wend.    211     (1839);    Burrows    v. 


211  (1839);  Wellersburg,  etc.  Co.  v. 
Hoffman,  9  Md.  559  (1S56) ;  Smith  v. 
Bangs,  15  111.  399  (1854);  State  v. 
Lehre,  7  Rich.  L.  (S.  C.)  234  (1854). 
The  corporation  may  by  suit  set 
aside  illegal  subscriptions — the  sub- 
scribers  not   being  qualified.     Union 


Smith,  10  N.  Y.  550  (1853).  Cf. 
Buffalo,  etc.  R.  R.  v.  Dudley,  14  N. 
Y.    336,    346    (1S56). 

Where  a  resolution  was  passed  by  a 
board  of  directors,  entitling  a  promo- 
ter to  have  a  certain  number  of  shares 
allotted    to    him,    and    the   available 


267 


58.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[CH.  IV. 


But,  after  the  organization  of  the  corporation,  the  duty  to  appor- 
tion the  stock,  if  there  has  been  an  oversubscription,  belongs  to  the 
corporation  and  not  to  the  commissioners.1  And,  in  the  absence  of 
statutory  authority,  the  commissioners,  even  before  organization, 
have  no  general  power,  if  they  receive  excessive  subscriptions,  to 
reduce  proportionally  all  the  subscriptions  and  apportion  the  stock. 
It  is  their  only  duty  to  take  subscriptions  up  to  the  full  amount  of 
the  prescribed  capital,  and  to  refuse  anything  beyond  that.2  Xeither 
can  the  corporation,  if  it  has  issued  the  full  amount  of  the  stock, 
recover  on  subscriptions  in  excess.  The  subscriber  acquires  no  title 
by  such  a  subscription,  and  corporate  creditors  can  enforce  no  lia- 
bility thereon.3     Where  a  corporation  takes  subscriptions  for  more 


shares  had  been  disposed  of  before 
his  bill  for  specific  performance  was 
filed,  held,  he  had  no  ground  for 
coming  into  equity.  Ferguson  v.  Wil- 
son, L.  R.  2  Ch.  App.   77,  87    (1S6G). 

Even  though  promoters  send  to  a 
person  a  printed  form  of  application 
for  stock,  and  he  signs  and  returns 
the  same,  this  does  not  obligate  them 
to  allot  to  him  such  stock  or  any 
part  thereof.  Feitel  v.  Dreyfous,  117 
La.  756   (1906). 

i  State  v.  Lehre,  7  Rich.  L.  (S. 
C.)  234  (1854),  where  an  application 
for  mandamus  to  compel  commission- 
ers to  reapportion  stock  agreeably  to 
the  charter  of  a  company,  and  for 
quo  warranto  against  officers  claimed 
to  have  been  illegally  elected,  was  re- 
fused, the  appellate  court  holding 
that  the  commissioners  had  no 
power  to  reapportion  stock  after  the 
subscribers  had  become  a  body  cor- 
porate. In  Smith  v.  Bangs,  15  111. 
399  (1854),  after  the  commissioners 
had  closed  the  subscription  books  and 
called  a  meeting,  at  which  directors 
were  chosen,  they  reopened  the  books 
to  receive  further  subscriptions.  On 
the  application  of  one  of  the  direct- 
ors they  were  restrained  by  injunc- 
tion, the  court  holding  that  their 
powers  were  at  an  end. 

2  Van  Dyke  v.  Stout,  8  N.  J.  Eq. 
333    (1850). 

3  Burrows  v.  Smith,  10  N.  Y.  550 
(1853);  Oler  v.  Baltimore,  etc.  R.  R., 
41  Md.   583    (1874).     See  also  §192, 


infra.  When  the  corporation  has  ac- 
cepted the  subscriptions  in  excess  of 
the  capital  stock,  corporate  officers 
cannot  buy  in  shares  of  the  stock  at 
a  disccunt  and  then  reissue  them  to 
provide  for  the  oversubscription, 
charging  the  corporation  par  for  the 
stock  bought  in,  and  thereby  realiz- 
ing a  profit  to  themselves  individ- 
ually on  the  transaction.  East  New 
York,  etc.  R.  R.  v.  Elmore,  5  Hun, 
214  (1875).  A  subscriber  for  stock 
who  has  given  his  note  in  payment 
may  file  a  bill  in  equity  to  compel 
the  corporation  to  recognize  him  as 
a  stockholder,  where  the  corporation 
denies  that  he  is  a  stockholder  and 
has  issued  all  its  stock  to  other  par- 
ties who  took  with  notice.  It  is  un- 
necessary to  bring  into  the  suit  the 
other  parties  who  actually  have  the 
stock,  the  stock  having  been  held  by 
the  company  as  collateral  security. 
Morey  r.  Fish,  etc.  Co.,  108  Wis.  520 
(1901) .  Where,  after  a  subscription  for 
stock  is  made,  the  company  contracts 
to  issue  all  its  stock  to  a  contractor 
in  payment  for  work,  and  thereupon 
the  subscriber  gives  up  his  stock  to 
the  company  and  it  is  issued  to  the 
contractor,  the  subscriber  is  not  lia- 
ble on  such  stock,  even  though  the 
contractor  does  not  fulfill,  and  even 
though  the  subscriber  caused  the  con- 
tract with  the  contractor  to  be  made. 
Riverton  Water  Co.  v.  Hummel,  175 
Pa.  St.  575  (1896).  See  also  §§168, 
169,  766c,  infra.. 


268 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§§  59,60. 


stock  than  it  can  issue,  it  cannot  make  calls  on  the  stock  until  after 
the  stock  has  been  apportioned.1  A  subscriber  for  stock  cannot  be 
compelled  to  accept  shares  previously  and  lawfully  issued  to  another 
subscriber.2  Where  a  person  has  subscribed  for  stock,  but  the  cor- 
poration finds  it  has  issued  all  of  its  stock,  it  cannot  compel  such 
subscriber  to  take  preferred  stock  instead.3  If  a  corporation  has 
already  issued  its  entire  stock  to  other  parties,  it  cannot  collect  on 
a  subscription  made  before  such  issue  of  the  entire  stock  to  other 
parties.4  It  is  no  defense  that  the  stock  of  a  proposed  corporation 
was  oversubscribed.5 

§  59.  Subscriptions  and  organization  where  there  is  a  special 
charter and  no  commissioners  are  provided  for.— -This  subject  is  con- 
sidered elsewhere.6 

§  60.  Subscriptions  delivered  in  escrow.  — Subscriptions  for 
shares  may  be  made  and  delivered  in  escrow  to  an  agent  of  the  cor- 
poration who  is  engaged  in  taking  subscriptions,7  or  to  a  director 
of  the  corporation,8  or  to  a  commissioner.9  The  depositary  can 
deliver  it  up  only  on  performance  of  the  condition.10  So,  also,  a 
subscriber  may  show  by  parol  an  agreement  with  an  agent  of  the  cor- 
poration that  his  subscription  to  blank  paper  should  not  be  a  sub- 


i  Bristol,  etc.  Co.  v.  Tilton,  70  N. 
H.  239    (1900). 

2  Knoxville,  etc.  R.  R.  v.  Mayor, 
98  Term.  1  (1S96).  A  subscriber  for 
stock  is  not  released  by  tbe  fact  tbat 
in  organizing,  in  order  to  make  up 
the  full  capital  stock,  one  of  the  sub- 
scribers subscribed  for  the  balance 
which  he  supposed  was  not  taken,  but 
which  it  turned  out  had  been  taken. 
Tulare,  etc.  Bank  v.  Talbot,  131  Cal. 
45    (1900). 

3  Knoxville,  etc.  R.  R.  v.  Mayor,  98 
Tenn.   1    (1S96). 

4  Level  Land  Co.  v.  Hayward,  95 
Wis.  109    (1S96). 

5  Shick  v.  Citizens'  Enterprise  Co., 
15  Ind.  App.  329    (1S96). 

6  See  ch.  XXXVI,   infra. 

7  Cass  v.  Pittsburg,  etc.  Ry.,  80 
Pa.  St.  31  (1S75).  It  is  a  good  de- 
fense, even  as  against  a  receiver,  that 
the  subscriber  delivered  the  subscrip- 
tion to  the  canvasser  to  hold  until 
the  former  investigated,  and  that  he 
at  once  investigated  and  forbade  the 
delivery  of  the  subscription.     Great 


Western   T.   Co.   v.   Loewenthal,    154 
111.  261   (1S94). 

s  Ottawa,  etc.  R.  R.  v.  Hall,  1  111. 
App.    612    (1S7S). 

9  Cass  v.  Pittsburg,  etc.  Ry.,  80 
Pa.  St.  31  (1S75);  Ottawa,  etc.  R.  R. 
v.  Hall,  1  Bradw.  (111.)  612  (1878). 
Cf.  Price  v.  Pittsburg,  etc.  R.  R.,  34 
111.  13,  36  (1864).  Contra,  Wight  v. 
Shelby  R.  R.,  16  B.  Mon.  (Ky.)  4 
(1855). 

io  Ottawa,  etc.  R.  R.  v.  Hall,  1 
Bradw.  (111.)  612  (1S78).  It  is  com- 
petent to  show  by  parol  that  a  sub- 
scription was  delivered  in  escrow. 
Ottawa,  etc.  R.  R.  r.  Hall,  1  Bradw. 
(111.)  612  (1878).  Cf.  Tonica,  etc.  R. 
R.  v.  Stein,  21  111.  96  (1859).  A  sub- 
scription for  stock  may  be  delivered 
in  escrow,  and  is  not  enforceable  un- 
less the  conditions  of  such  delivery 
are  complied  with.  Gilman  v.  Gross, 
97  Wis.  224  (1S97).  A  subscription 
to  be  delivered  to  the  company  in 
case  the  subscriber  became  a  director 
is  not  enforceable  if  he  was  not  made 
a  director.    Turner's  Case,  7  Ont.  Rep. 


!69 


§  61.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[CH.  IV. 


scription  until  lie  had  seen  and  approved  the  heading  of  the  subscrip- 
tion paper.1 

§  61.  Liability  of  the  corporation  for  refusal  to  issue  a  certificate 
of  stock. — The  corporation  is  bound,  upon  demand,  to  deliver  to  a 
stockholder  a  certificate  of  stock  representing  his  interests  in  the 
corporation.2     If  it  refuses  to  issue  the  certificate  the  stockholder 


(Can.)  448  (1884).  An  oral  condi- 
tion that  the  subscription  list  was 
not  to  be  delivered  except  by  the 
defendant's  consent  was  upheld  in 
Davis  v.  Kneale,  97  Mich.  72    (1893). 

i  Bucher  v.  Dillsburg,  etc.  R.  R., 
76  Pa.  St.  306  (1874).  A  subscriber 
cannot  defend  against  a  note  to  pay 
the  subscription  on  the  ground  that 
he  delivered  it  to  an  agent  of  the 
corporation  with  instructions  not  to 
deliver  it  to  the  corporation  until 
other  stockholders  gave  similar  notes. 
Hardin  v.  Sweeney,  14  Wash.  129 
(1896). 

2  The  subscriber  may  compel  the 
corporation  to  issue  a  certificate  to 
him.  Buffalo,  etc.  R.  R.  v.  Dudley, 
14  N.  Y.  336,  347  (1856)  ;  Mitchell  v. 
Beckman,  64  Cal.  117  (1883);  Na- 
tional Bank  v.  Watsontown  Bank,  105 
U.  S.  217  (1881);  Fletcher  v.  McGill, 
110  Ind.  395  (1887);  Rio  Grande  Cat- 
tle Co.  v.  Burns,  82  Tex.  50    (1891). 

A  valid  certificate  may  be  issued 
out  of  the  state  in  which  the  cor- 
poration exists.  Courtright  v.  Deeds, 
37  Iowa,  503   (1873). 

The  failure  of  the  corporation  to 
issue  a  certificate  is  no  defense  to  an 
action  to  collect  the  subscription.  See 
§  192,    infra. 

As  to  whether  a  company  is  obliged 
at  common  law  to  issue  certificates 
of  stock,  see  an  article  in  6  Juridical 
Review    (Eng.),  58. 

It  has  been  held  in  Maryland  that 
a  subscriber  to  the  increased  capital 
stock  of  the  company  is  not  entitled 
to  a  certificate  until  he  has  paid  for 
the  stock  in  full,  and  such  subscriber 
is  not  entitled  to  the  rights  of  a  stock- 
holder until  he  has  paid  in  full.    The 


court  stated  that  such  stockholders 
are  not  entitled  to  dividends  equally 
with  other  stockholders.  The  basis 
of  the  decision  was  the  difference  be- 
tween original  stock  and  increased 
stock.  The  court  refused  to  compel 
the  corporation  to  issue  a  certificate. 
Baltimore,  etc.  Ry.  v.  Hambleton,  77 
Md.  341  (1893).  A  statute  authoriz- 
ing the  issue  of  certificates  of  stock 
when  it  is  fully  paid  up  does  not 
prevent  the  issue  of  such  certifi- 
cates before  it  is  fully  paid  up. 
Green  v.  Abietine  Med.  Co.,  96  Cal. 
322  (1892).  It  has  been  held  in 
Tennessee  that  where  stock  is  only 
partly  paid,  and  the  corporation  is- 
sues a  certificate  reciting  on  its  face 
how  much  is  still  due,  and  the  holder 
pledges  it,  and  no  transfer  to  the 
pledgee  is  made  on  the  corporate 
books,  the  corporation  can  have  a 
sale  of  the  stock  for  non-payment  of 
the  balance  remaining  due,  but  such 
proportion  of  the  proceeds  will  be 
paid  to  the  pledgee  as  the  amount  al- 
ready paid  on  the  stock  bears  to  the 
par  value  of  the  stock.  Ingles,  etc. 
Co.  v.  Knoxville,  etc.  Co.,  53  S.  W. 
Rep.   1111    (Tenn.  1899). 

"Where  a  prospective  corporate  of- 
ficer issues  certificates  of  stock  in  the 
prospective  corporation,  a  person  who 
loans  money  on  such  stock  as  col- 
lateral security  may  hold  such  officer 
liable  for  issuing  the  stock  before 
the  corporation  was  organized.  Mer- 
chants' Nat.  Bank  v.  Robison,  8  Utah, 
256    (1892). 

A  corporation  in  selling  its  stock 
may  do  so  on  condition  that  the  cer- 
tificates therefor  are  not  to  be  issued 
for  five  years,  the  purpose  being  to 


270 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§  61. 


may  bring  suit  in  equity  to  compel  its  issuance,1  or  he  may  recover 
of  the  corporation  in  assumpsit  the  value  of  the  stock  at  the  time 
of  the  demand.2  Where  a  corporation  refuses  to  issue  the  stock  to 
a  subscriber,  he  may  file  a  bill  in  the  alternative  to  compel  the  issue 


pool  the  stock  for  that  length  of 
time.  Williams  v.  Ashurst  Oil,  etc. 
Co.,  144  Cal.  619   (1904). 

i  Quoted  and  approved  in  Lacaff 
v.  Dutch,  etc.  Co.,  31  Wash.  566 
(1903);  Rowley's  Appeal,  115  Pa.  St. 
150  (1S87).  Specific  performance 
will  be  granted  to  compel  a  corpora- 
tion to  issue  common  stock  in  pay- 
ment for  property  in  accordance  with 
a  contract  of  the  corporation,  where 
the  stock  has  no  market  value,  and  it 
appears  that  there  have  never  been 
any  sales  of  such  stock.  Selover  v. 
Isle,  etc.  Co.,  91  Minn.  451  (1904). 
Where  underwriters  have  agreed  to 
purchase  the  bonds  of  the  corpora- 
tion at  a  certain  price  with  a  bonus 
of  seventy-five  per  cent,  in  stock,  the 
corporation  may  pledge  the  bonds 
and  assign  the  underwriting  agree- 
ment to  the  pledgee,  and  the  pledgee 
in  order  to  enforce  the  underwriting 
agreement  may  compel  the  corpora- 
tion to  furnish  the  seventy-five  per 
cent,  in  stock  for  that  purpose.  Kirk- 
patrick  v.  Eastern,  etc.  Co.,  135  Fed. 
Rep.  146  (1904) ;  aff'd,  137  Fed.  Rep. 
387.  A  South  Carolina  corporation 
may  be  sued  in  New  Hampshire  by 
a  purchaser  of  a  certificate  of  stock 
to  compel  a  transfer  thereof  on  the 
books  of  the  company.  Westminster 
Nat.  Bank  v.  New  England,  etc.,  73 
N.  H.  465  (1906).  Mandamus  will 
not  issue  to  compel  a  corporation  to 
issue  to  a  purchaser  treasury  stock 
which  he  has  purchased,  even  though 
he  has  paid  for  the  same,  unless  the 
stock  has  some  peculiar  and  special 
value  different  from  other  similar 
stock  in  that  company,  or  unless  the 
control  of  the  corporation  is  at  issue. 
The  legal  right  to  the  stock  must 
also  be  clear.  State  v.  Jumbo,  etc. 
Miu.  Co.,  94  Pac.  Rep.  74  (Neb.  1908). 


See  also  §§  337,  338,  391,  infra.  Cf. 
Thorp  v.  Woodhull,  1  Sandf.  Ch.  411 
(1844).  A  stockholder  in  a  natural- 
gas  company  whose  stockholdership 
is  denied,  and  who  is  excluded  from 
the  benefit  of  free  gas  as  given  to 
other  stockholders,  may  maintain  a 
suit  in  equity  to  establish  her  rights 
as  a  stockholder,  and  if  she  sub- 
scribed for  the  stock  and  was  recog- 
nized by  the  corporation  as  a  stock- 
holder, her  rights  cannot  be  denied, 
although  no  certificate  was  ever  is- 
sued to  her  and  she  never  paid  for 
the  stock.  Gowdy,  etc.  Co.  v.  Patti- 
son,  29  Ind.  App.  261   (1902). 

If  in  organizing  and  issuing  the 
stock  the  amount  to  be  issued  for  the 
property  is  not  what  the  contract 
calls  for,  the  vendor  may  compel  a 
specific  performance.  Bailey  v.  Cham- 
plain,  etc.  Co.,  77  Wis.  453  (1890). 
A  suit  in  equity  lies  against  a  cor- 
poration to  compel  it  to  issue  a  cer- 
tificate of  stock  to  a  subscriber  upon 
tender  of  the  sum  subscribed.  Ar- 
buckle  v.  Spice  Co.,  11  Ohio  Circuits, 
726   (1901).     See  also  §24,  supra. 

2  "A  subscriber  for  shares  of  stock, 
in  case  the  contract  of  subscription 
was  regularly  entered  into,  may,  if 
the  corporation  refuse  to  issue  him 
a  certificate,  have  his  action  in  equity 
for  specific  performance,  or  he  may 
recover  of  the  corporation,  in  assump- 
sit, the  value  of  the  shares  at  the 
time  of  the  demand."  Birmingham 
Nat.  Bank  v.  Roden,  97  Ala.  404 
(1892),  quoting  the  text. 

Wyman  v.  American  Powder  Co.,  62 
Mass.  168  (1851);  Chester  Glass  Co. 
v.  Dewey,  16  Mass.  94  (1819).  But 
to  entitle  one  to  recover  back  money 
advanced  to  a  corporation  for  shares, 
upon  the  ground  of  a  failure  to  issue 
the  certificate,   the   subscriber   must, 


271 


§C1.] 


SUBSCRIPTIONS — METHOD,    PARTIES,   ETC. 


[ch.  rv. 


of  the  stock  or  the  payment  of  its  value  with  damages.1  A  sub- 
scriber to  the  increased  capital  stock  who  has  actually  paid  part 
of  the  price  cannot  recover  back  the  money,  upon  corporate  in- 
solvency, on  the  ground  that  no  certificate  was  issued." 

The  fact  that  the  corporation  has  not  issued  a  certificate  to  a 
stockholder  for  thirty  years,  and  that  he  has  not  insisted  on  his 
right  as  such,  is  no  bar  to  his  suit  to  establish  his  stockholdership.3 

In  case  the  full  capital  stock  has  been  issued,  then,  of  course, 
specific  performance  of  an  agreement  to  issue  more  stock  cannot 
be  had.4     A  person  to  whom  a  corporation  issues  full-paid  stock  in 


before  suit,  rescind  the  contract  and 
demand  the  money.  Swazey  v.  Choate 
Mfg.  Co.,  48  N.  H.  200  (1868).  See 
also  Pacific  Nat.  Bank  v.  Eaton,  141 
U.  S.  227   (1891). 

i  And  if,  during  the  pendency  of 
the  suit,  the  company  becomes  in- 
solvent, the  court  can  give  him  dam- 
ages payable  pro  rata  out  of  the  as- 
sets of  the  corporation.  Re  Reading 
Iron  Works,  149  Pa.  St.  1S2    (1892). 

In  an  action  by  a  subscriber  for 
stock  to  compel  the  corporation  to 
deliver  stock,  the  directors  are  proper 
but  not  necessary  parties.  Wells  v. 
Green  Bay,  etc.  Co.,  90  Wis.  442 
(1895). 

In  England  it  seems  that  directors 
are  not  individually  liable  to  sub- 
scribers for  the  breach  by  the  corpo- 
ration of  its  agreement  to  issue 
stock.  Ferguson  v.  Wilson,  L.  R.  2 
Ch.  App.  77  (1866).  But  see  also 
Swift  v.  Jewsbury,  L.  R.  9  Q.  B.  301 
(1874);  Betts  v.  De  Vitre,  L.  R.  3 
Ch.  429,  441  (186S);  Henderson  v. 
Lacon,  L.  R.  5  Eq.  249  (1867); 
Eaglesfield  v.  Londonderry,  L.  R.  4 
Ch.  D.  693  (1S76);  affd  (H.  L.),  26 
W.  R.  540. 

2  Pacific  Nat.  Bank  v.  Eaton,  141 
U.  S.  227  (1891);  Thayer  v.  Butler, 
141  U.  S.  234  (1891) ;  Butler  v.  Eaton, 
141  U.  S.  240  (1891).  A  subscriber 
cannot  rescind  his  subscription  on 
the  ground  that  the  certificates  had 
never  been  issued  to  him.  Cotter  v. 
Butte,  etc.  Co.,  31  Mont.  129   (1904). 

3  Bedford  County  v.  Nashville,  etc. 


Ry.,  14  Lea  (Tenn.),  525  (1884); 
Kobogum  v.  Jackson  Iron  Co.,  76 
Mich.  498    (1889). 

An  incorporator,  who  subscribes 
for  eleven  shares  of  stock,  but  does 
not  pay  for  them  nor  claim  them 
for  ten  years,  and  in  the  meantime 
they  have  been  issued  to  the  real  par- 
ties in  interest,  cannot  then  claim 
them.  Taylor  v.  Johnson,  99  S.  W. 
Rep.  320  (Ky.  1907). 

Where  for  fifty  years  a  claimant 
of  stock  takes  no  proceedings  to  ob- 
tain it,  and  during  that  time  other 
persons  claim  the  stock  and  have  pos- 
session of  it  and  have  received  divi- 
dends upon  it,  laches  is  a  bar  to  a 
suit  by  the  former  to  recover  the 
stock.  Livingston  v.  Proprietors', 
etc.,  15  Fed.  Cas.  691  (1879);  s.  c, 
16  Blatch.  549. 

■i  Finley,  etc.  Co.  v.  Kurtz,  34 
Mich.  89  (1876);  Ferguson  v.  Wilson, 
L.  R.  2  Ch.  App.  77  (1866).  Where 
a  person  sells  property  to  a  corpora- 
tion to  be  paid  for  in  stock  and  the 
corporation  issues  all  its  stock  to 
other  parties,  he  may  hold  the  cor- 
poration liable  in  damages.  Pendery 
v.  Carleton,  87  Fed.  Rep.  41  (1898). 
Where  a  bank  contracted  to  give  a 
person  a  certain  amount  of  stock  if 
he  would  do  business  with  it,  and  he 
did  so,  the  bank  is  liable  in  damages 
for  refusal  to  deliver  the  stock.  Rich 
v.  State  Nat.  Bank,  7  Neb.  201  (187S). 
In  a  suit  against  a  corporation  to 
compel  it  to  issue  stock  to  the  plain- 
tiff  or   else    pay   the   value   thereof, 


272 


CH.  IV.  J 


SUBSCRIPTIONS — LiETHOD,  PARTIES,  ETC. 


[§    62. 


settlement  of  a  claim  is  not  bound  by  any  prior  contracts  of  the 
corporation  in  regard  to  that  stock  where  he  took  the  stock  without 
notice  of  the  contracts.1  The  liability  of  a  corporation  to  issue  stock 
to  the  subscribers  thereof  does  not  necessarily  devolve  upon  another 
corporation  which  succeeds  to  its  debts,  liabilities  and  franchises.2 

§  62.  Substitution  of  stockholders  before  the  incorporation — 
Change  in  the  proposed  enterprise— Alteration  of  the  subscription 
paper. — There  has  been  some  controversy  as  to  the  legality  of  one 
person  being  substituted  for  another  as  a  subscriber  before  the  in- 
corporation and  issue  of  the  stock.  If  the  facts  are  such  that  a 
cancellation  of  the  subscription  is  legal,  then  doubtless  the  sub- 
stitution is  legal.3     But  where  such  is  not  the  case,  then  it  would 


the  proper  form  in  judgment  is  an 
order  to  issue  the  stock.  A  money 
judgment  should  be  entered  only 
after  proof  of  the  corporation's  fail- 
ure to  comply  with  the  main  order. 
Consolidated,  etc.  Co.  v.  Huff,  62 
Kan.  405  (1901).  For  the  refusal 
of  the  corporation  to  issue  original 
stock  to  a  subscriber,  the  measure 
of  damages  is  the  difference  between 
the  price  contracted  for  and  the  mar- 
ket value  on  the  day  when  the  issue 
ought  to  have  been  made.  Van  Al- 
len v.  Illinois  Cent.  R.  R.,  7  Bosw.  515 
(18G1).  For  another  rule  as  to  the 
measure  of  damages,  and  one  more  in 
favor  of  the  plaintiff,  see  Baltimore, 
etc.  Ry.  v.  Sewell,  35  Md.  238  (1872)  ; 
and  also  ch.  XXXV,  infra.  In  Lou- 
isiana, the  universal  legatee  may 
pay  for,  and  demand,  the  certificate 
of  stock  subscribed  for  by  his  an- 
cestor. The  executor  has  no  power 
to  cancel  the  subscription,  and  the 
stock  cannot  be  appropriated  by  a 
subsequent  subscriber,  who  sub- 
scribed for  it  by  consent  of  the  execu- 
tor. State  v.  Crescent  City,  etc.  Co., 
24  La.  Ann.  318  (1872).  Cf.  Wallace 
v.  Townsend,  43  Ohio  St.  537  (1885). 
If  a  mistake  has  been  made  by  which 
the  certicates  and  stock  have  been 
issued  to  the  wrong  person,  a  court 
of  equity  will  remedy  it.  O'Meara  v. 
North  American  Min.  Co.,  2  Nev.  112 
(1866).  A  subscriber  for  stock  who 
has  given  his  note  in  payment  may 


file  a  bill  in  equity  to  compel  the 
corporation  to  recognize  him  as  a 
stockholder,  where  the  corporation  de- 
nies that  he  is  a  stockholder  and  has 
issued  all  its  stock  to  other  parties 
who  took  with  notice,  and  it  is  un- 
necessary to  bring  into  the  suit  other 
parties  who  actually  have  the  stock, 
the  stock  having  been  held  by  the 
company  as  collateral  security.  Morey 
v.  Fish,  etc.  Co.,  108  Wis.  520  (1901). 

1  Angle  v.  Chicago,  etc.  Ry.,  94 
Fed.  Rep.  717  (1899).  See  also  §  766c, 
infra. 

2  Conant  v.  National  Ice  Co.,  40  N. 
Y.  Sup.  Ct.  83  (1S75).  A  subscriber 
for  stock  who  has  paid  ten  per  cent, 
cannot  sue  a  consolidated  company, 
into  which  his  company  has  been 
merged,  for  a  certificate,  even  though 
the  articles  of  consolidation  provide 
for  the  issue  of  one  share  of  the  lat- 
ter company  for  every  two  shares  of 
the  old  company,  unless  he  has  first 
demanded  the  certificate  and  has  of- 
fered to  pay  the  remaining  ninety 
per  cent,  or  asks  for  a  certificate  of 
stock  not  paid  up.  Babcock  r.  Schuyl- 
kill, etc.  R.  R.,  133  N.  Y.  420  (1892). 
Cf.   §  671,   infra. 

3  See  §§  167-170,  infra,  on  cancella- 
tion. See  also  Burke  v.  Smith,  16 
Wall.  390  (1872),  and  dictum  in 
Ryder  v.  Alton,  etc.  R.  R.,  13  111.  516, 
521  (1851).  Cf.  Selma,  etc.  R.  R.  v. 
Tipton,  5  Ala.  787  (1843),  to  the  ef- 
fect  that  a   subscriber   cannot   with- 


(18) 


273 


§  62.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[CH.  IV. 


seem  that  the  substitution  is  merely  a  transfer  of  the  stock,  and 
the  transferrer,  in  that  case,  should  be  liable,  but  only  to  the  same 
extent  as  in  other  cases  of  transfer  of  stock.1  Where  the  subscriber 
causes  the  stock  to  be  issued  to  another  person,  and  the  latter  pays 
the  corporation  therefor,  the  former's  liability  is  discharged.2 

In  California  it  is  held  that  no  substitution  of  stockholders  is 
legal ;  but  the  weight  of  authority  clearly  sustains  a  contrary  rule.3 
If  the  corporation  is  duly  formed,  the  vendor  may  compel  the  vendee 
to  pay  for  the  subscription  transferred,  and  may  collect  a  note 
given  in  payment.4 

A  material  change  in  the  character  of  the  enterprise,  the  capital 


draw.  Subscribers  to  stock  may 
make  a  contract  by  which  they  di- 
vide their  subscriptions  with  others 
and  agree  that  no  person  should  hold 
more  than  a  certain  amount  of  stock. 
Hladovec  v.  Paul,  222  111.  254  (1906). 

A  corporation  which  for  a  long 
time  was  abandoned  and  which  is 
unable  to  tell  who  its  stockholders 
are  may  file  a  bill  in  equity  to  ascer- 
tain who  its  stockholders  are  and 
to  cancel  illegal  certificates  and  de- 
termine the  rights  of  conflicting 
claims  to  the  stock.  Geneva,  etc.  Co. 
v.  Steele,  111  N.  Y.  App.  Div.  706 
(1906). 

i  See  ch.  XV. 

2  Re  Glory  Paper  Mills,  [1894]  3 
Ch.  473.     See  also  §  50,  supra. 

3  Valentine  v.  Berrien,  etc.  Co.,  128 
Mich.  280  (1901) ;  Baltimore,  etc.  Ry. 
v.   Sewell,   35  Md.   238    (1872);   Tem- 
pest v.  Kilner,   3   C.   B.  249    (1846); 
Hunt  v.  Gunn,  13   C.  B.    (N.   S.)    226 
(18G2);  Merrimac  Minn.  Co.  v.  Levy, 
54  Pa.  St.  227   (1867).     Contra,  Haw- 
kins  v.   Mansfield,    etc.    Co.,    52    Cal. 
513    (1877);   Morrison  v.  Gold  Moun- 
tain,   etc.    Co.,    52    Cal.    306    (1877); 
Coleman  v.  Spencer,    5  Blackf.  (Ind.) 
197    (1839).     See  also  Chater  v.  San 
Francisco,     etc.     Co.,     19     Cal.     219 
(1861).     A  sale  of  stock   in   a  com- 
pany to  be   organized   is  legal.     Van 
Dam  r.   Tapscott,  40  N.  Y.  App.  Div. 
36    (1899). 

A  substitution  of  stockholders  after 


organization  by  canceling  some  sub- 
scriptions and  filling  in  others  is  ille- 
gal. There  should  be  a  transfer. 
Cartwright  v.  Dickinson,  88  Tenn.  476 
(1890). 

Even  though  a  party  subscribes  for 
stock,  but  with  his  consent  the  cor- 
poration issues  it  directly  to  others 
on  their  original  subscriptions,  this 
is  not  a  transfer  from  the  original 
subscriber,  and  hence  the  stock  can- 
not be  attached  as  his  stock.  Scott 
v.  Houpt,  73  Ark.  78   (1904). 

A  suit  lies  to  compel  a  corporation 
to  issue  stock  in  accordance  with  a 
contract  for  construction  work.  Citi- 
zens', etc.  Assoc,  v.  Belleville,  etc.  R. 
R.,  117  Fed.  Rep.  109  (1902).  See 
also  on  this  subject,  §  169  and  §  50. 

4  Mahan  v.  Wood,  44  Cal.  462 
(1872).  Where  an  insolvent  corpo- 
ration which  has  never  issued  any 
certificates  of  stock  resolves  by  a  vote 
of  its  stockholders  to  apply  its  assets 
to  the  extent  of  their  value  to  the 
payment  of  the  debts  and  that  new 
stock  be  issued  to  the  stockholders 
upon  their  paying  therefor  in  full, 
and  one  stockholder  sells  his  interest 
in  the  original  stock  and  the  pur- 
chaser for  seven  years  does  not  com- 
plain, he  cannot,  after  the  corpora- 
tion has  become  prosperous,  claim 
that  he  is  entitled  to  the  old  stock 
or  any  interest  in  the  corporation. 
Stoddard  v.  Decatur,  etc.  Co.,  184  111. 
53    (1900). 


274 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§    63. 


stock,  or  purpose  of  the  proposed  company  releases  those  who  do 
not  assent  thereto.1 

Where  articles  are  materially  altered  without  the  consent  of  all 
the  subscribers,  after  their  subscription  and  before  the  complete 
organization  of  the  company,  such  articles  are  not  binding  upon 
the  non-consenting  subscribers.2  But  it  is  no  defense  that  the  sub- 
scriptions of  other  parties  were  erased  and  that  such  parties  were 
released  by  the  board  of  directors.3  A  subscription  to  be  paid  for 
when  the  directors  find  other  parties  who  will  agree  to  purchase 
the  stock  from  the  subscriber  is  illegal  as  an  attempt  to  release  a 
subscriber.4  The  mere  erasure  of  a  subscription  will  not  of  itself 
prevent  a  recovery  upon  it.5 

§  63.  Right  to  recover  back  money  advanced  on  shares  upon  a 
failure  to  organize  the  company.  — Where  one  has  advanced  money 


1  See  §  54,  supra,  and  §§  194,  502, 
infra. 

2  Burrows  v.  Smith,  10  N.  Y.  550 
(1853);  Norwich  Lock  Mfg.  Co.  v. 
Hockaday,  89  Va.  557  (1893);  Green- 
brier Ind.  Exposition  v.  Rodes,  37 
W.  Va.  738  (1893).  An  alteration  in 
the  subscription  articles  is  no  de- 
fense unless  fraudulently  made  or  to 
the  injury  of  defendant.  Armstrong 
v.  Danahy,  75  Hun,  405  (1894).  See 
also   §  197,  infra. 

An  alteration  of  a  subscription  list 
by  a  subscription  being  changed  and 
another  name  substituted  releases 
other  subscribers  who  signed  before 
the  alteration.  Texas  Printing,  etc. 
Co.  v.  Smith,  14  S.  W.  Rep.  1074 
(Tex.. 1889). 

A  change  in  the  subscription  by 
several  of  the  subscribers,  but  not 
increasing  the  liability  of  the  others, 
does  not  release  the  others.  An  in- 
crease in  the  capital  upon  incorpora- 
tion does  not  release.  Gibbons  v. 
Grinsel,  79  Wis.  365  (1891). 

3  Bristol,  etc.  Co.  v.  Selliez,  175 
Pa.  St.  IS  (1896).  See  also  §191, 
infra. 

4  McNulta  v.  Corn,  etc.  Bank,  164 
111.   427    (1897). 

5  Johnson  v.  "Wabash,  etc.  Co.,  16 
Ind.  389  (1861).  And  where  one  took 
a    book    for    subscriptions    from    an 


agent  of  the  corporation,  and  sub- 
scribed himself  and  persuaded  others 
to  subscribe,  and  kept  the  book  some 
months,  but  finally,  because  of  a  dif- 
ference with  the  agent  about  the  pay- 
ment for  his  services,  cut  his  name 
out  of  the  book  and  returned  it  to 
the  company,  it  was  held,  in  an  ac- 
tion by  the  company  for  the  amount 
of  his  subscription,  that  he  was 
bound  thereon  just  as  though  he  had 
left  his  name  on  the  list  of  subscrib- 
ers. Greer  v.  Chartiers  Ry.,  96  Pa. 
St.  391  (1SS0);  Railroad  Co.  v. 
White,  10  S.  C.  155   (1878). 

It  has  been  held,  however,  in  New 
York,  that  where  the  statutory  cer- 
tificate required  by  law  to  be  filed 
in  order  to  obtain  incorporation  re- 
mains in  the  hands  of  a  subscriber, 
a  subscriber  may  erase  or  modify 
his  subscription  as  he  sees  fit,  even 
though  he  had  previously  induced 
others  to  subscribe.  Burt  v.  Farrar, 
24  Barb.   518    (1S57). 

A  stockholder  who  erases  his  sig- 
nature from  a  subscription  list  with- 
out authority  cannot,  as  a  corporate 
creditor,  enforce  such  subscription 
list  against  other  stockholders,  he 
having  illegally  altered  the  agree- 
ment. Jackson  v.  Cherokee  Medicine 
Co.,   47   S.   C.   215    (1896). 


275 


§  63.] 


SUBSCRIPTIONS — METHOD,   PARTIES,    ETC. 


[CH.  IV. 


in  good  faith  to  the  promoters  of  a  company,  as  a  deposit  or  assess- 
ment upon  stock  subscribed  for  to  be  subsequently  issued,  and  the 
enterprise  contemplated  by  the  proposed  incorporation  is  abandoned, 
or  the  company  for  any  reason  fails  to  be  incorporated,  such  sub- 
scriber may  recover  back  the  money  so  advanced.1  A  note  given 
for  stock  in  a  company  to  be  formed,  but  which  never  is  formed, 
cannot  be  collected,  except  by  a  bona  fide  purchaser.2  Where  sev- 
eral owners  of  riparian  rights  and  lands  agree  to  organize  a  com- 
pany and  transfer  their  property  to  it  for  stock,  and  a  few  of  them 
make  such  transfer  and  the  others  refuse  to  do  so,  the  former  may 
have  the  transfers  made  by  them  canceled.3  Where  a  corporation 
receives  money  in  payment  for  increased  capital  stock  to  be  issued 
and  never  increases  its  stock,  and  the  money  has  been  used  in  the 
business  and  the  corporation  becomes  insolvent,   the  subscriber   is 


i  Nockels  v.  Crosby,  3  Barn.  &  C. 
814  (1825);  Ward  v.  Londesborough, 
12  C.  B.  252  (1852);  Ashpitel  v.  Ser- 
combe,  5  Exch.  147  (1850) ;  Williams 
v.  Salmond,  2  Kay  &  J.  463  (1856); 
Chaplin  v.  Clarke,  4  Exch.  403  (1849). 
Cf.  Vollans  v.  Fletcher,  1  Exch.  20 
(1847) ;  Grand  Trunk,  etc.  Ry.  v.  Bro- 
die,  9  Hare,  823  (1852);  Kemson  v. 
Saunders,  4  Bing.  5  (1826),  where  a 
vendee  recovered  from  his  vendor 
money  paid  for  stock  in  a  company 
which  was  never  organized.  And  see 
also  Williams  v.  Page,  24  Beav.  654 
(1857).  "A  bill  in  equity  lies  to  re- 
cover back  money  paid  on  a  'bub- 
ble.' "  Colt  v.  Woollaston,  2  P.  Wms. 
154  (1723);  Green  v.  Barrett,  1  Sim. 
45  (1826).  See  also  the  "Bubble 
Act,"  6  Geo.  I.,  ch.  18;  also  §705, 
etc.,  infra,  and  95  Pac.  Rep.  67. 

Where  a  subscriber  for  stock  pays 
for  the  stock  before  the  company  is 
organized,  he  may  recover  back  the 
money  if  the  company  is  not  organ- 
ized. Bradford  v.  Harris,  77  Md.  153 
(1893). 

Where  promoters  agree  to  sell 
stock  in  a  proposed  corporation  upon 
a  tender  of  the  price  by  a  certain 
day,  such  tender  need  not  be  made 
if  the  company  is  not  organized.  The 
proposed  purchaser  may  recover  back 
the  consideration.    Manistee  Lumber 


Co.  v.  Union  Nat.  Bank,  143  111.  490 
(1892). 

A  person  who  loans  money  to  a  cor- 
poration organized  to  bring  about  a 
consolidation  of  other  corporations 
cannot  complain  that  the  stock  issued 
in  exchange  for  stock  of  other  cor- 
porations was  returned  upon  the  fail- 
ure of  the  plan,  and  he  cannot  hold 
the  directors  liable  under  a  statute 
making  them  liable  for  distributing 
the  capital  stock,  where  it  appears 
that  he  was  partially  responsible  for 
the  failure.  Audenreid  v.  East,  etc. 
Co.,   68  N.  J.  Eq.  450    (1904). 

Where  subscribers  to  the  stock  of 
a  proposed  telephone  corporation 
authorize  a  committee  of  nine  to  pur- 
chase material  and  incorporate,  and 
five  of  the  committee  in  opposition 
to  four  do  purchase  and  incorporate 
the  minority  are  not  bound  by  their 
action.  Mt.  Carmel,  etc.  Co.  v.  Mt. 
Carmel,  etc.  Co.,  119  Ky.  461  (1905). 

2  Howe  v.  Raymond,  74  Conn.  63 
(1901).  A  note  given  to  pay  for 
stock  in  a  corporation  to  be  organ- 
ized cannot  be  enforced  by  the  payee 
where  the  corporation  has  not  been 
formed.  Northwestern,  etc.  Co.  v. 
Lanning,  83  Minn.  19   (1901). 

3  Mack  v.  Consolidated,  etc.  Co., 
101  Fed.  Rep.  869    (1900). 


276 


CH.  IV.]  SUBSCRIPTIONS — METHOD,  PARTIES,  ETC.  [§   64. 

not  entitled  to  repayment  in  preference  to  other  creditors.1  There 
is  a  difference  of  opinion  as  to  whether  a  subscriber  is  obliged  to 
submit  to  the  deduction  of  any  part  of  the  amount  paid  in  by  him 
for  the  payment  of  the  expenses  incurred  by  the  promoters  in  at- 
tempting the  incorporation.  In  Pennsylvania  it  is  held  that  a  person 
who  advances  money  for  stock  in  a  corporation  to  be  organized  by 
the  defendants  may  recover  it  back  if  the  corporation  is  not  organ- 
ized within  a  reasonable  time,  and  it  is  no  defense  that  the  defend- 
ants  used  the  money  in  developing  patents  and  endeavoring  to  form- 
the  corporation.2  In  California,  on  the  other  hand,  it  is  held  that  a 
party  to  a  plan  to  form  a  corporation,  who  pays  in  money  before 
incorporation,  with  full  knowledge  of  the  fact  that  it  is  to  be  spent, 
cannot  recover  it  back  on  the  ground  that  the  company  was  finally 
not  incorporated,3  and  the  other  cases  seem  to  be  to  the  same  effect.4 
Questions  relative  to  the  liability  of  promoters  for  debts  incurred 
prior  to  incorporation,5  and  the  validity  of  contracts  with  irregu- 
larly or  incompletely  incorporated  or  organized  companies,6  are 
considered  elsewhere. 

B.       WHO  IS  COMPETENT  TO  SUBSCRIBE  FOR  STOCK. 

§  64.  Corporations  generally  not. — Upon  general  common-law 
principles,  any  one  who  is  competent  to  enter  into  ordinary  con- 
tracts may  make  a  valid  subscription  for  stock  in  an  incorporated 
company.  A  subscription  for  stock  is  a  contract;  and,  in  general, 
any  one  who  may  contract  may  subscribe.  The  corporation  itself, 
however,  cannot  be  a  subscriber  to  its  own  stock.7    Where  such  a  sub- 

i  Bircher  v.  Walther,   163  Mo.   461  shares,  of  the  par  value  of  $100  each, 

(1901).  and  six   different  persons  subscribed 

2  Hudson  v.  West,  189  Pa.  St.  491  for  one  share  each,  and  one  person 
(1899).  then   subscribed   for  the   corporation 

3  Meyer  v.  Bishop,  129  Cal.  204  as  follows:  "Oregon  Central  Rail- 
(1900).  road  Company,  by  G.  L.  Woods,  Chair- 

4  Williams  v.  Salmond,  2  Kay  &  man,  seventy  thousand  shares,  seven 
J.  463  (1856);  Ashpitel  v.  Sercombe,  million  dollars,"  it  was  held  that  this 
5  Exch.  147  (1850).  The  subscriber  subscription  was  void,  and  that  the 
is  liable  for  his  proportion  of  the  nee-  corporation  could  not  be  created  by 
essary  expenses,  preliminary  to  the  such  subscriptions.  Holladay  v.  El- 
incorporation  and  organization  of  the  liott,  8  Oreg.  84  (1S79).  See  also 
company.  Salem  Mill-dam  Corp.  v.  §  251,  infra.  And  again  it  has  been 
Ropes,  23  Mass.  23  (1827).  Contra,  held  that  where  the  directors  of  a 
Nockels  v.  Crosby,  3  Barn.  &  C.  814  company,  in  order  to  make  up  the  re- 
(1825).  quired  amount  of  capital  stock,  sub- 

5  See  §§705-707,  infra.  scribed   as   trustees   for  the  corpora- 

6  See  §  637,  infra.  tion   itself,   they  are  liable  for  calls 

7  Thus,  where  a  number  of  individ-  on  the  amount  so  subscribed.  In  the 
uals  attempted  to  organize  a  corpora-  same  case  a  bill  by  a  member  of  the 
tion   with   a  capital   stock  of  72,500  corporation  on  behalf  of  himself  and 

277 


§  04.] 


SUBSCRIPTIONS — METHOD,    PARTIES,   ETC. 


[CH.  IV. 


scription  is  made  in  the  name  of  a  trustee  for  the  corporation, 
the  trustee  is  personally  liable  thereon  to  corporate  creditors.1  Mu- 
nicipal corporations  may  lawfully  subscribe  for  the  stock  of  private 
corporations  when  authorized  by  statute  so  to  do.2  Where  a  mu- 
nicipality has  subscribed  for  stock  illegally,  any  other  stockholder 
may  bring  suit  to  have  the  subscription  canceled.3 

It  is  not  equally  clear  that  one  private  corporation  may  subscribe 
for  the  stock  in  another  such  corporation.  On  the  contrary,  such  sub- 
scriptions are  ultra  vires  and  void  unless  clearly  within  the  ordinary 
objects  and  business  of  the  subscribing  corporation.  A  bank  cannot 
lawfully  subscribe  for  stock  in  a  railroad  corporation.4     A  railroad 


all  the  other  members  except  the  de- 
fendants, praying  that  this  transac- 
tion, although  it  had  been  sanctioned 
unanimously  at  a  meeting  of  the  com- 
pany, might  be  declared  fraudulent 
and  void,  was  sustained,  although 
some  of  the  members,  on  behalf  of 
whom  the  bill  was  filed,  had  been 
present  and  voted  at  that  meeting. 
Preston  v.  Grand  Collier  Dock  Co., 
11  Sim.  327    (1840). 

Where  the  unissued  stock  of  a  com- 
pany (upon  its  reorganization  on  the 
expiration  of  its  charter)  is  issued  to 
the  president  as  trustees  to  sell  from 
time  to  time  and  to  turn  over  the 
proceeds  of  the  sales  to  the  company, 
the  fact  that  he  gives  the  company  a 
note  for  the  same  signed  by  him  as 
"Trustee  for  Bank"  does  not  render 
him  liable  on  such  note  upon  the 
bank  becoming  insolvent.  Neptune 
v.   Paxton,   15   Ind.   App.    284    (189G). 

Stockholders  cannot  defeat  their 
liability  on  stock  by  setting  up  that 
they  subscribed  on  behalf  of  the  cor- 
poration itself,  and  on  the  secret 
agreement  that  they  should  not  be 
held  liable.  Barto  v.  Nix,  15  Wash. 
563  (1896);  Denny  Hotel  Co.  v. 
Schram,   6  Wash.   134    (1893). 

In  Allibone  v.  Hager,  46  Pa.  St.  48 
(1863),  the  court  held  it  no  defense 
to  an  action  by  a  creditor  of  a  cor- 
poration that  defendants  had  sub- 
scribed for  stock  in  their  own  names, 
but  really  as  agents  for  the  corpora- 
tion itself. 


i  Johnston  v.  Allia,  71  Conn.  207 
(1898). 

2  Sharpless  v.  Mayor,  etc.,  21  Pa. 
St.  147  (1S53),  and  the  long  train  of 
decisions  following.  The  matter  of 
municipal  subscriptions  is  fully  con- 
sidered in  chapter  VI. 

3  Stebbins  v.  Perry  County,  167  111. 
567    (1897). 

4  Nassau  Bank  v.  Jones,  95  N.  Y. 
115  (1884),  holding  that  the  bank 
could  not  recover  the  profits  on  such 
subscription  which  was  made  in  the 
name  of  its  agent;  nor  for  stock  in 
any  other  corporation,  the  business 
of  which  is  wholly  other  than  bank- 
ing. Franklin  Co.  v.  Lewiston  Sav. 
Inst.,  68  Me.  43  (1877);  Mechanics', 
etc.  Bank  v.  Meriden  Agency  Co., 
24  Conn.  159  (1855);  Talmage  v.  Pell, 
7  N.  Y.  328  (1852).  Cf.  First  Nat. 
Bank  v.  National  Exch.  Bank,  92  U. 
S.  122  (1875);  and  see  Royal  Bank 
of  India's  Case,  L.  R.  4  Ch.  App. 
252  (1869) ;  Joint-stock  Dist.  Co.  v. 
Brown,  L.  R.  8  Eq.  381  (1869) ;  Berry 
v.  Yates,  24  Barb.  199  (1857),  holding 
that  one  insurance  company  cannot 
subscribe  to  another.  For  a  failure 
of  proof  to  show  that  a  corporation 
was  a  subscriber  for  stock,  see  Mc- 
Millan v.  Carson  Hill,  etc.  Co.,  12 
Phila.  404  (1878).  An  owner  of  land 
cannot  defeat  its  condemnation  by 
showing  that  a  corporation  subscribed 
to  part  of  the  capital  of  the  corpora- 
tion seeking  to  obtain  the  land.  Re 
Rochester,   etc.  R.  R.,  110  N.  Y.  119 


278 


CH.  IV.]  SUBSCRIPTIONS — METHOD,  PARTIES,  ETC.  [§    64. 

corporation  cannot  subscribe  for  shares  of  stock  in  another  rail- 
road company,1  or  land  company,2  nor  can  a  dry-dock  company  be 
held  liable  upon  a  subscription  for  stock  in  a  steamship  company;3 
nor  can  a  manufacturing  company  legally  subscribe  to  the  stock  of  a 
bank  for  the  purpose  of  carrying  on  the  banking  business.4  A  fire 
insurance  company  has  no  power  to  subscribe  for  stock  in  a  projected 
bank,  not  yet  organized,  even  though  the  statute  gives  it  power  to  in- 
vest in  stocks.5  A  furniture  manufacturing  company  is  not  liable 
on  a  statutory  liability  on  stock  which  it  has  subscribed  and  paid  for 
in  a  hotel  company.0  A  land  improvement  company  has  no  power 
to  subscribe  for  stock  in  other  companies  and  such  a  subscription 
cannot  be  enforced.7  An  improvement  company  owning  lands  may 
subscribe  to  the  stock  of  a  railroad  company  in  order  to  bring  about 
the  construction  of  the  railroad  running  through  such  lands.8 
Where  a  corporation  owning  land  becomes  a  stockholder  in  a  building 
association  and  gives  a  mortgage  in  connection  therewith,  the  mort- 
gage is  valid,  even  though  the  corporation  was  not  authorized  to 
subscribe  for  stock.9  All  such  contracts  are,  in  general,  ultra  vires 
and  not  enforceable.10  A  construction  company,  however,  is  pre- 
sumed to  have  power  to  subscribe  for  the  stock  of  a  railroad  which 
it  is  building.11     A  railroad  company  has  no  power  to  donate  its 

(1888) ;  Union  Hotel  Co.  v.  Hersee,  79  v.    Fountain,    etc.    R.    R.,    Ill    Tenn. 

N.   Y.   454    (1880).     See   also    §§314-  55    (1903). 

317,  infra.  3  New  Orleans,   etc.   Steamship  Co. 

i  Maunsell   v.  Midland,   etc.   Ry.,   1  v.  Ocean  Dry  Dock  Co.,  28  La.  Ann. 

Hem.  &  M.  130  (1863).     One  railroad  173   (1876).     Subscription  by  one  cor- 

company    has    no    implied    power    to  poration  to  the  stock  of  another.    Mul- 

subscribe   to   the  capital   of  another,  queeney  v.   Shaw,   50   La.   Ann.   1060 

and  cannot  do  so  indirectly  by  having  (1898). 

individuals  subscribe  and  then  indem-  4  Sumner  v.  Marcy,  3  Woodb.  &  M. 

nifying    the    individuals.      Logan    v.  105  (1847);  s.  c,  23  Fed.  Cas.  384. 

Courtown,   13   Beav.   22    (1850);    and  5  Commercial   F.   Ins.  Co.  v.  Board 

see  ch.  XIX.  of  Revenue,  99  Ala.  1   (189.2). 

2  A  railroad  company  has  no  legal  6  Knowles   v.   Sandercock,   107   Cal. 

power  to   subscribe  for  the  stock  of  629  (1895).    See  ch.  XIV  on  this  sub- 

a   land  company   nor  become  accom-  ject. 

modation  endorser  of  the  latter's  note,  7  McAlester   Mfg.    Co.    v.    Florence, 

even  though  all  the  stockholders  as-  etc.  Co.    128  Ala.  240   (1901). 

sent  thereto,   but  a  stockholder  can-  8  Watt's    Appeal,    78    Pa.    St.    370 

not    complain    where    the    owner    of  (1875). 

his  stock  at  the  time  of  the  act  con-  9  Meares    v.    Monroe,    etc.    Co.,    126 

sented  thereto,  excepting  that  a  mere  N.  C.  662;  s.  c,  127  N.  C.  580. 

authorization    prior   to   his    purchase  io  See  Part  IV,  on  ultra  vires  con- 

of    his    stock    will    not    sustain    acts  tracts   in   general, 

done   after   suit  commenced   by   him  n  Re  Rochester,  etc.  Ry.,  45  Hun, 

objecting  to  the  same.     McCampbell  126    (1S87) ;   aff'd  110  N.  Y.  119.     In 

279 


§  65.] 


SUBSCRIPTIONS — METHOD,   PARTIES,   ETC. 


[CII.  IV. 


funds  to  a  fair.1  A  hotel  company  may  subscribe  to  a  military  en- 
campment enterprise.2  It  is  no  defense  to  an  action  on  a  subscrip- 
tion that  a  part  of  the  subscriptions  were  made  by  corporations  and 
were  not  enforceable.  Only  the  state  can  raise  that  objection.3 
Where  one  corporation  subscribes  for  stock  in  another  corporation 
and  pays  for  such  stock,  and  dividends  are  declared  by  the  latter,  it 
cannot  refuse  to  pay  the  dividends  to  the  former  on  the  ground  that 
the  former  had  no  power  to  subscribe  for  the  stock.4 

§  65.  Commissioners,  directors,  partners,  etc.,  as  subscribers. — 
Commissioners  may  be  subscribers  to  the  capital  stock.5  So,  also, 
may  directors  and  corporate  officers  subscribe;  and  it  has  been  held 
that  a  director,  in  the  absence  of  fraud  or  fraudulent  intent,  may 
subscribe  for  the  whole  of  the  unsubscribed  stock  in  his  own  name 
and  for  his  own  benefit,6  But  a  stockholder  who  was  not  present 
at  a  stockholders'  meeting  is  not  bound  by  the  ratification  by  such 
meeting  of  the  issue  of  a  large  amount  of  the  original  capital  stock  to 
the  directors  themselves,  who  were  illegally  elected,  but  who  thereby 
acquire  control  of  the  company.7     A  partner,  if  the  act  be  within 


a  suit  by  the  receiver  of  an  insolvent 
street  railway  company  to  hold  a 
construction  company  liable  on  stock 
which,  together  with  bonds,  was  is- 
sued for  the  construction  of  a  street 
railway,  the  claim  being  that  there 
was  no  consideration  received  for  the 
stock,  the  bill  in  equity  must  allege 
that  the  construction  company  had 
power  to  acquire  such  stock.  Doak 
v.  Stahlman,  58  S.  W.  Rep.  741  (Tenn. 
1899). 

i  See  §§  681,  775,  909,  infra.  A 
railroad  company  has  no  power  to 
subscribe  to  the  stock  of  a  military 
association.  Military,  etc.  v.  Savan- 
nah, etc.  Ry.,  105  Ga.  420   (1898). 

2  Richelieu  Hotel  Co.  v.  Interna- 
tional, etc.  Co.,  140  111.  248  (1892). 
A  subscription  of  a  manufacturing 
corporation  to  the  stock  of  an  ex- 
position corporation  is  not  collecti- 
ble. Nebraska,  etc.  Co.  v.  Horton,  93 
N.  W.  Rep.  225   (Neb.  1903). 

3  TJ.  S.  Vinegar  Co.  v.  Foehrenbach, 
148  N.  Y.  58  (1895).  The  fact  that 
corporations  subscribed  for  stock  of 
an  exposition  company  without  char- 
ter authority  so  to  do  is  no  defense 

280 


to  another  stockholder  who  stood  by 
without  objecting  and  who  does  not 
prove  that  such  subscriptions  were 
not  paid.  McCoy  v.  World's,  etc.  Ex- 
position, 186  111.  356  (1900). 

■i  Bigbee,  etc.  Co.  v.  Moore,  121  Ala. 
379    (1899). 

5  Walker  v.  Devereaux,  4  Paige, 
229  (1833). 

6  Sims  v.  Street  R.  R.,  37  Ohio 
St.  566  (18S2).  But  see  §§70,  286, 
614.  But  neither  the  commissioners 
(Brower  v.  Passenger  Ry.,  3  Phila.  161 
— 1858),  nor  any  original  stockholder 
(Curry  v.  Scott,  54  Pa.  St.  270— 
1867),  have  any  priority  of  right  over 
the  other  subscribers,  or  the  public 
generally,  in  the  matter  of  subscrip- 
tion for  stock. 

7  Morris  v.  Stevens,  178  Pa.  St. 
563  (1S97).  Where  the  stockholders 
are  present  and  only  one  objects  to 
the  issue  of  unissued  stock  to  a  di- 
rector, whereby  he  acquires  control, 
such  issue  is  legal.  Christopher  v. 
Noxon,  4  Ont.  Rep.  (Can.)  672  (1883). 
In  Re  London,  etc.  Ltd.,  77  L.  T. 
Rep.  146  (1897),  there  were  one  hun- 
dred and  twenty  founders'  shares  of 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§    65. 


the  scope  of  the  partnership  business,  may  hind  his  firm  by  a  sub- 
scription in  the  firm  name.1  But  if  it  is  not  within  the  scope  of  the 
partnership  business,  the  person  so  signing  is  liable  personally ;  and 
whether  or  not  the  subscription  was  within  the  scope  of  the  partner- 
ship business  may  be  a  question  for  the  jury.2  Even  though  stock 
is  issued  in  the  name  of  two  persons  who  are  partners,  yet  if  it  had 
nothing  to  do  with  the  partnership,  each  is  liable  for  one-half  of  the 
subscription,  that  being  their  proportionate  interest.3  Trustees  of 
an  estate,  and  having  express  power  to  sell  the  same,  may  transfer  the 
property  to  a  corporation  in  exchange  for  the  stock  of  the  latter.4 
A  person  who  subscribes  for  stock  as  trustee  is  personally  liable  if  he 
was  not  trustee.5  A  corporation  which  takes  a  subscription  from 
the  trustee  as  trustee  is  chargeable  with  notice  of  the  fact  that  trust 
funds  are  being  used.6  An  executor  may  take  part  in  and  person- 
ally subscribe  for  stock  in  a  corporation  formed  to  take  over  an  em- 
barrassed and  unprofitable  partnership  in  which  the  estate  is  inter- 
ested.7 


£10  each  and  twelve  thousand  ordi- 
nary shares  of  £10  each.  The  found- 
ers' shares  were  entitled  to  half  of 
any  dividend  which  might  remain 
after  paying  ten  per  cent,  on  the 
ordinary  shares.  The  directors  al- 
lotted to  themselves  eighty  of  these 
founders'  shares,  and  the  court  upheld 
the  allotment.  The  prospectus  stated 
that  each  person  taking  fifty  ordi- 
nary shares  would  be  entitled  to  take 
one  of  the  founders'  shares.  The 
directors  caused  the  fifty  ordinary 
shares  for  each  of  the  eighty  founders' 
shares  to  be  taken  by  others. 

i  Maltby  v.  Northwestern,  etc.  R. 
R.,  16JMd.  422  (1860);  Ogdensburgh, 
etc.  R.  R.  v.  Frost,  21  Barb.  541 
(1856);  Union  Hotel  Co.  v.  Hersee, 
79  N.  Y.  545  (1880).  Otherwise  if  it 
is  not  within  the  partnership  busi- 
ness. Livingston  v.  Pittsburgh,  etc. 
R.  R.,  2  Grant's  Cas.  (Pa.)  219  (185S). 
Where  partners  are  stockholders,  and 
all  stockholders  join  as  sureties  to 
notes  to  aid  the  corporation,  one  part- 
ner may  bind  the  firm  by  signing  its 
name  also  as  surety.  Morse  v.  Hage- 
nah,  68  Wis.  603  (1887).  A  member 
of  a  mercantile  firm  cannot  bind  the 


firm  by  a  subscription  to  the  capital 
stock  of  a  milling  corporation.  Patty 
v.  Hillsboro,  etc.  Co.,  4  Tex.  Civ.  App. 
224   (1893). 

2  Morse  v.  Hagenah,  68  Wis.  603 
(1887).  Even  though  persons  sub- 
scribe for  stock  on  the  understanding 
that  it  is  for  a  firm  in  which  they 
are  members,  yet  if  the  firm  is  not 
bound  they  are  personally  bound. 
Rehbein  v.  Rahr,  109  Wis.  136  (1901). 

3  Morse  v.  Pacific  Ry.(  191  111.  356 
(1901);  aff'd,  191  111.  371.  Where  a 
firm  or  partnership  becomes  a  sub- 
scriber in  the  copartnership  name, 
corporate  creditors  may  have  execu- 
tion against  any  one  of  the  partners. 
The  partnership  subscription  is  not 
a  defense  of  which  any  single  partner 
can  avail  himself  to  escape  liability. 
Bray  v.  Seligman,  75  Mo.  31  (1881). 

4  In  re  Sprague,  22  R.  I.  413 
(1901).  See  N.  Y.  Real  Prop.  Law,  §  94. 

5  Boatmen's  Bank  v.  Gillespie,  108 
S.  W.  Rep.  74  (Mo.  1908). 

6  Harrison  v.  Fleischman,  70  N. 
J.  Eq.  301  (1905);  see  also  §  322, 
infra. 

7  Houghtelmg  v.  Stockbridge,  138 
Mich.  544  (1904). 


281 


66.] 


SUBSCRIPTIONS — METIIOD,   PARTIES,    ETC. 


[CH.  IV. 


§  66.  Married  women  as  subscribers. — At  common  law  a  mar- 
ried woman  could  not  subscribe  for  stock,  and  any  person  subscrib- 
ing in  her  name  was  himself  personally  liable  on  the  subscription.1 
But  now,  in  England,  and  generally  in  the  United  States  by  stat- 
ute, a  married  woman  may  bind  her  separate  estate  by  such  sub- 
scription;2 and  when  it  appears  that  the  contract  was  with  the 
wife,  having  been  made  directly  and  solely  with  her,  the  husband 
is  not  bound.3  The  recourse  of  the  corporation  or  the  corporate 
creditors  is,  in  such  a  case,  to  her  separate  estate  only.4  At  com- 
mon law  a  married  woman,  even  though  she  owned  a  majority  of 
the  stock  of  a  corporation,  could  not  bind  herself  to  pay  its  debts, 
and  even  under  the  New  Jersey  statute  she  does  not  obtain  anything 
for  the  use  of  her  separate  estate,  sufficient  to  sustain  such  a  prom- 
ise.5 A  married  woman  is  bound  under  the  statutes  of  Kentucky 
on  a  note  which  she  signs,  even  though  the  money  goes  to  a  corpo- 
ration in  which  she  is  a  stockholder.0 

In  England  a  husband  has  been  held  liable  on  his  wife's  subscrip- 
tion to  the  capital  stock  of  an  incorporated  company,  the  subscription 
having  been  made  before  marriage.7 


i  Pugh  &  Sharman's  Case,  L.  R. 
13  Eq.  566   (1872). 

2  Witters  v.  Sowles,  32  Fed.  Rep. 
767  (1887);  Matthewman's  Case,  L. 
R.  3  Eq.  781  (1866);  Luard's  Case, 
1  De  G.,  F.  &  J.  533  (1860);  Butler 
v.  Cumpston,  L.  R.  7  Eq.  16  (1868); 
Re  Reciprocity  Bank,  22  N.  Y.  9 
(1860).  See  §§  250,  319,  infra.  A 
married  woman  may  be  an  incorpora- 
tor. Good  Land  Co.  v.  Cole,  110  N. 
W.  Rep.  895   (Wis.  1907). 

3  Angas's  Case,  1  De  G.  &  Sm.  560 
(1849) ;  Dalton  v.  Midland,  etc.  Ry., 
13  C.  B.  474  (1853);  Ness  v.  Angas, 
3  Exch.  805  (1849).  See  also  Luard's 
Case,  1  De  G.,  F.  &  J.  533   (1860). 

4  Biggart  v.  City  of  Glasgow  Bank, 
6  Scotch  Ct.  of  Sess.  Cas.  (4th  ser.) 
470  (1879)  ;  Matthewman's  Case,  L. 
R.  3  Eq.   781    (1866). 

5  Allen  v.  Beebe,  63  N.  J.  L.  477 
(1899). 

o  Williams  v.  Farmers'  &  Drovers' 
Bank,  49  S.  W.  Rep.  183   (Ky.  1899). 

7  Burlinson's  Case,  3  De  G.  &  Sm. 
18  (1849),  where  the  husband  was 
held  liable,  although  he  had  not  ful- 


filled the  conditions  of  the  deed  of 
settlement  entitling  him  to  become  a 
member,  but  had  only  received  divi- 
dends on  the  wife's  shares. 

Luard's  Case,  1  De  G.,  F.  &  J.  533 
(I860),  holding  that  where  a  woman, 
being  a  registered  owner  of  stocks 
before  marriage,  attempted  to  deed 
them  in  trust  so  as  to  exclude  the 
husband,  but  the  trustees  did  not  ac- 
cept, and  they  continued  in  her  name 
until  the  liquidation  of  the  company, 
the  husband  should  be  placed  with 
the  wife  on  the  list  of  contributories. 

White's  Case,  3  De  G.  &  Sm.  157 
(1850),  was  decided  on  special  facts 
under  the  terms  of  a  deed  of  settle- 
ment which  regulated  the  rights  of 
the  husband  and  wife  to  shares  in 
her  name.  In  this  case  a  restricted 
liability  for  a  limited  time  was  im- 
posed upon  the  husband,  he  having 
done  some  acts  in  relation  to  the 
shares,  but  not  sufficient  to  constitute 
an  entire  acceptance. 

Sadler's  Case,  3  De  G.  &  Sm.  36 
(1849),  holding  the  husband  liable 
when   the  shares   came   to  the  wife 

ttOmi 


ch.  rv.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§  67. 


§  67.  Infant  as  subscriber.  — A  subscription  for  stock  by  an  in- 
fant is  a  contract  to  be  governed  by  the  general  rules  of  law  that 
apply  to  the  contracts  of  infants  generally.  In  general,  the  sub- 
scription of  an  infant  is  voidable  rather  than  void.  He  may  re- 
pudiate it  at  majority,  and  thereby  entirely  escape  liability;  or  he 
may  ratify  it,  and  thereby  become  as  fully  bound  as  though  the 
subscription  had  been  made  after  majority.1     Accordingly  it  is  a 


by  legacy  before  marriage,  although 
neither  she  nor  the  husband  paid  the 
covenanted  calls,  received  any  divi- 
dends, or  otherwise  acted  as  mem- 
bers. 

Kluht's  Case,  3  De  G.  &  Sm.  210 
(1850),  where  the  husband  was  held 
liable  for  losses  during,  but  not  for 
losses  before  and  after,  the  coverture. 
He  had  not  complied  with  necessary 
preliminaries  for  becoming  a  member, 
although  he  had  done  some  acts  in 
relation  to  the  shares  of  the  wife. 

A  husband  is  liable  upon  a  legacy 
of  stock  to  the  wife  during  coverture, 
where  it  appeared  that  the  stock  had 
been  transferred  to  her,  and  the  trans- 
fer duly  accepted  by  her  and  her  hus- 
band, and  that  she  only  had  signed 
the  dividend  warrants  and  drawn  the 
dividends,  the  proceeds  being  applied 
to  ordinary  household  expenses. 
Thomas  v.  City  of  Glasgow  Bank,  6 
Scotch  Ct.  of  Sess.  Cas.  (4th  ser.) 
607    (1879). 

l  Lumsden's  Case,  L.  R.  4  Ch.  App. 
31  (1868),  where  an  infant  trans- 
ferred shares  after  coming  of  age, 
and  -did  not  attempt  to  repudiate  his 
remaining  shares  until  four  months 
after  the  winding-up  order,  being 
nine  months  after  his  majority.  He 
was  held  to  have  affirmed  his  hold- 
ing. 

Ebbett's  Case,  L.  R.  5  Ch.  App.  302 
(1870),  where  a  holding  for  fourteen 
months  after  majority  without  repu- 
diating the  shares  was  held  to  be  an 
acquiescence,  though  the  shareholder 
had  never  acted  as  such. 

Baker's  Case,  L.  R.  7  Ch.  App.  115 
(1871),  where  a  company  was  in  proc- 


ess of  being  wound  up,  when  an  in- 
fant, holding  shares  as  trustee,  at- 
tained his  majority,  and  he  promptly 
repudiated  the  shares  when  the  notice 
of  a  call  was  sent  him  four  months 
afterwards.  Subsequently  he,  by  let- 
ter, authorized  the  official  liquidator 
to  use  his  name  in  proceedings 
against  the  cestui  que  trust.  Held, 
that  by  the  letter  he  had  not  re- 
tracted his  repudiation  of  the  shares. 

In  Mitchell's  Case,  L.  R.  9  Eq.  363 
(1870),  an  infant  holding  shares  as 
trustee,  who  took  no  steps  to  repu- 
diate them  for  two  years  after  coming 
of  age,  was  held  to  be  a  contributory. 

In  Wilson's  Case,  L.  R.  8  Eq.  240 
(1869),  an  infant  holding  shares  in  a 
bank,  who  came  of  age  after  the  wind- 
ing-up order  was  made,  was  held  not 
to'  be  a  contributory,  though  he  had 
made  no  formal  repudiation,  but  had 
not  done  any  act  of  acquiescence,  ex- 
cept that  his  solicitors,  acting  for 
him  and  others,  had  opposed  an  order 
for  a  call. 

In  Hart's  Case,  L.  R.  6  Eq.  512 
(1868),  where  notice  of  intention  to 
put  the  name  of  a  female  infant  upon 
the  list  of  contributories  of  a  cor- 
poration in  process  of  being  wound  up 
was  served  during  infancy,  and  more 
than  two  years  after  her  majority 
a  summons  for  a  call  was  made, 
when  she  applied  to  have  her  name  re- 
moved from  the  list,  it  was  held  she 
was  not  precluded  by  the  delay. 

In  Pirn's  Case,  3  De  G.  &  Sm.  11 
(1849),  where  a  son,  who,  after  the 
death  of  his  father,  discovered  that 
shares  had  been  taken  in  his  own 
name,  was  held  not  to  be  a  contribu- 


283 


§  68.] 


SUBSCRIPTIONS — METHOD,    PARTIES,   ETC. 


[cn.  rv. 


settled  rule  that,  where  one  subscribes  for  shares  in  the  name  of  an 
infant,  he  is  liable  personally  to  the  corporation  or  the  corporate 
creditors  on  the  subscription.1  An  infant's  subscription  must  be 
repudiated  within  a  reasonable  time  after  coining  of  age  or  he  will 
be  held  to  have  ratified  it.2  A  minor  who  has  subscribed  and  paid 
for  stock  in  a  corporation,  which  corporation  was  afterwards  merged 
in  another  corporation  for  stock  of  the  latter,  cannot  recover  back 
his  money  from  the  second  corporation.3  Even  though  by  the  terms 
of  a  subscription  agreement  it  is  to  be  binding  only  upon  so  much 
money  being  subscribed  and  some  of  the  money  subscribed  is  by 
minors,  this  is  no  defense  to  the  adult  subscribers,  since  the  minors 
subscribing  are  bound  after  their  majority,  unless  they  plead  infancy 
as  a  defense.4 

§  68.    Subscription    by    agent. — A    valid    subscription    may,    of 

Where  a  person  subscribes  for 


course,  be  made  through  an  agent.5 


tory,  although,  at  the  request  of  an 
officer  of  the  company,  he  had  sur- 
rendered the  shares  for  exchange  for 
others.  A  minor  who  subscribes  and 
pays  for  stock  may  disaffirm  the  same 
upon  becoming  of  age.  Seeley  v. 
Seeley,  etc.  Co.,  128  Iowa  294  (1905). 
See  §§   250,   318,  infra. 

1  "Weston's  Case,  L.  R.  5  Ch.  App. 
614  (1870);  Richardson's  Case,  L. 
R.  19  Eq.  588  (1875);  Reaveley's 
Case,  1  De  G.  &  Sm.  550  (1848); 
Reid's  Case,  24  Beav.  318  (1857);  Ex 
parte  Reavely,  1  Hall  &  Tw.  118 
(1849).  So  also  a  person  is  liable 
who  transfers  stock  to  an  infant. 
Capper's  Case,  L.  R.  3  Ch.  App.  458 
(1868);  Castello's  Case,  L.  R.  8  Eq. 
504  (1869) ;  Symons's  Case,  L.  R.  5 
Ch.  App.  298  (1870);  Curtis's  Case, 
L.  R.  6  Eq.  455   (1868). 

2  Dublin,  etc.  Ry.  v.  Black,  7  Railw. 
&  Can.  Cas.  434  (1852) ;  s.  c,  8  Exch. 
181.  Infancy  is  a  personal  defense. 
Beardsley  v.  Hotchkiss,  96  N.  Y.  201 
(1884).  Where  an  infant  allows  his 
name  to  remain  on  the  register  after 
he  becomes  of  age,  he  thereby  ratifies 
his  subscription.  Cork,  etc.  Ry.  v. 
Cazenove,  10  Q.  B.  935  (1847).  A 
court  will  not  presume  that  an  infant 
subscriber  has  avoided  his  contract; 
and  hence  a  defense  of  infancy,   in 


an  action  on  a  subscription,  without 
allegation  of  avoidance,  is  ineffectual, 
and  the  plaintiff  may  have  judgment. 
Leeds,  etc.  Ry.  v.  Fearnley,  4   Exch. 

26  (1849).  But  it  has  been  held 
that  repudiation  before  coming  of 
age  avoids  the  contract  of  subscrip- 
tion ao  initio;  and  hence  a  plea  of 
infancy  and  of  repudiation  while  an 
infant,  and  of  notice  to  the  company 
that  the  stock  was  at  their  disposal, 
is  a  good  defense  to  an  action  on  a 
subscription.  Newry,  etc.  Ry.  v. 
Coombe,  3  Exch.  565  (1849).  See 
also  Parsons's  Case,  L.  R.  8  Eq.  656 
(1869). 

3  White  v.  Mount  Pleasant  Mills 
Corp.,  172  Mass.  462   (1899). 

4  Chicago,  etc.  Co.  v.  Higgin- 
botham,  29  S.  Rep.  79  (Miss.  1901). 

5  Musgrave  v.  Morrison,  54  Md.  161 
(1880) ;  Burr  v.  Wilcox,  22  N.  Y.  561 
(1860);  Rhey  v.  Ebensburg,  etc.  Co., 

27  Pa.  St.  261  (1856);  Re  New  York, 
etc.  Ry.,  99  N.  Y.  12  (1885),  aff'g  35 
Hun,  220;  Re  Whitley  Partners,  L.  R. 
32  Ch.  D.  337  (1886).  Where  bonds 
are  purchased  by  one  for  several,  they 
are  liable  to  contribute  therefor.  Mus- 
grave v.  Buckley,  114  N.  Y.  506 
(1889). 

If  both  the  principal  and  agent  are 
incorporators,    and    the    agent    sub- 


284 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§    68. 


stock  in  the  name  of  another  as  trustee,  he  may  maintain  an  action 
to  compel  the  trustee  to  account  for  the  subscription  and  to  turn  it 


scribes,  in  his  own  name,  the  prin- 
cipal cannot  claim  the  stock,  inas- 
much as  he  has  sworn  in  the  articles 
of  incorporation  that  all  the  incor- 
porators were  bona  fide  subscribers. 
Rowley's  Appeal,  115  Pa.  St.  150 
(18S7). 

A  subscription  by  one  of  several 
heirs  in  the  name  of  the  "estate"  is 
not  binding  on  any  of  the  heirs  where 
a  statute  requires  such  subscription 
to  be  several.  Troy,  etc.  R.  R.  v. 
Warren,  18  Barb.  310  (1854). 

Davidson  v.  Grange,  4  Grant's  Ch. 
(U.  Can.)  377  (1854).  In  this  case  a 
subscription  by  an  agent  in  his  own 
name  was  held  to  constitute  him  a 
trustee  for  his   principals. 

State  v.  Lehre,  7  Rich.  L.  (S.  C.) 
234  (1854),  holding  that  a  statute  for- 
bidding any  person  from  subscribing 
for  shares  in  the  name  of  another 
person  did  not  exclude  a  subscription 
by  an  agent  for  his  principal. 

Cox's  Case,  4  De  G.,  J.  &  S.  53 
(18G3),  s.  a,  33  L.  J.  (ch.)  145,  was 
decided  under  the  Companies  Act,  but 
the  court  was  inclined  to  think  the 
result  would  have  been  the  same  in- 
dependent of  that  statute.  It  was 
there  held  that  where  a  subscriber,  in 
addition  to  his  own  shares,  had 
caused  a  large  number  to  be  regis- 
tered in  the  names  of  mere  nominees 
for  him,  in  order  to  delude  the  public 
as  to  the  number  of  members,  he  was 
rightly  placed  on  the  list  of  contribu- 
tories  for  all  the  shares  when  the 
company  was  wound  up.  This  case 
was  distinguished  in  King's  Case,  L. 
R.  6  Ch.  App.  196  (1871).  In  a  con- 
demnation proceeding  where  it  is  de- 
nied that  the  capital  stock  had  been 
properly  subscribed,  a  subscription  by 
a  person  as  trustee  for  an  undisclosed 
principal  is  to  be  counted.  State  v. 
Superior  Court,  88  Pac.  Rep.  332 
(Wash.   1907). 

On  this  question  of  "dummies,"  see 


ch.  XIV.     See  also  brief  in  15  Ohio 
St.  332. 

If  such  subscriptions  are  prohibited 
by  the  corporate  charter,  the  principal 
cannot  recover  back  money  which  he 
has  given  to  the  agent  to  subscribe. 
Perkins  v.  Savage,  15  Wend.  412 
(1836). 

Mere  authority  to  an  agent  to  sub- 
scribe is  not  a  subscription  in  itself. 
Grangers'  Market  Co.  v.  Vinson,  6 
Oreg.  172  (1876).  Also,  New  Bruns- 
wick, etc.  Co.  v.  Muggeridge,  4  Hurl. 
&   N.    160    (1859). 

In  New  York  it  is  a  penal  offense 
for  a  person  to  subscribe  for  another 
who  does  not  intend  to  pay,  or  to  sub- 
scribe in  the  name  of  a  fictitious  per- 
son.    N.  Y.   Penal   Code,   §   590. 

Where  one  subscribes  for  stock  in 
his    own    name,    in    pursuance    of    a 
verbal     agreement    between    himself 
and  another  that  the  stock  should  be- 
long  to   them    jointly,    and    that   he 
should  hold  it  on  joint  account,  and, 
the   company   subsequently   becoming 
insolvent,  the  stockholders  are  called 
on  to  contribute  an  amount  equal  to 
their  stock,  it  was  held,  in  New  York, 
that  the  nominal  owner  of  the  stock 
might    have    contribution    from    the 
joint  owner.     Stover  v.  Flack,  30  N. 
Y.  64   (1864).     In  Orr  v.  Bigelow,  14 
N.    Y.    556    (1856),    the   parties   had 
covenanted  that  plaintiffs  should  sub- 
scribe  for   stock,    pay   ten   per   cent, 
thereon,  and  then  assign  it  to  defend- 
ant, who  engaged  to  indemnify  them 
from  further  liability.    Defendant  re- 
fused to  take  the  shares,  and  the  cor- 
poration recovered  judgment  against 
plaintiffs  for  the  balance  of  the  sub- 
scription.     In    this    action    plaintiffs 
had  judgment  against  defendant  upon 
the    covenant,    the   measure    of    dam- 
ages   being    held    to    be    the    balance 
paid  by  them,  and  not  that  sum  less 
the    market   value    of    the   stock.     A 
state  subscribing  through  its  officers 


285 


68.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[CII.  IV. 


over  upon  payment  being  made.1  A  claim  that  a  person  who  took 
stock  did  so  as  trustee  or  agent  for  the  benefit  of  another  person 
is  a  claim  which  can  be  proved  by  oral  testimony,  but  must  be  clearly 
proved  and  must  be  founded  on  a  sufficient  consideration.  "Loose, 
vague,  and  indefinite  expressions  are  insufficient  to  create  such  a 
trust.  The  intention  must  be  evinced  with  clearness  and  certainty."2 
The  subscriptions  of  the  original  incorporators  may  be  made  by  an 
agent.3  But  no  person  can  be  made  a  subscriber  to  the  capital  stock 
of  a  corporation,  and  be  subjected  to  the  liabilities  of  a  subscriber, 
by  a  subscription  in  his  name,  made  by  another  without  authority, 
but  assuming  to  act  as  his  agent.  Such  a  subscription  is  not  binding 
on  the  principal.4  Such  an  unauthorized  subscription,  however, 
may  be  adopted  and  ratified  by  the  person  in  whose  name  it  was 
made  without  warrant  of  authority,  in  such  a  way  as  to  make  it  valid 
and  binding.5     A  person  subscribing  for  stock  as  agent  for  another, 


is  bound  by  their  acts  as  directors. 
State  v.  Jefferson  Turnp.  Co.,  3 
Humph.  (Tenn.)  305  (1842). 

lMcComb  v.  Frink,  149  U.  S.  629 
(1893).  In  Colt  v.  Clapp,  127  Mass. 
476  (1879),  where  one  who  had  ver- 
bally agreed  to  purchase  stock  for  the 
joint  benefit  of  himself  and  others  re- 
fused to  divide  the  stock,  he  was  held 
accountable  to  the  others  for  their  re- 
spective shares  of  dividends  paid 
thereon  in  actions  for  money  had  and 
received.     See  also  §  321,  infra. 

2  Levi  v.  Evans,  57  Fed.  Rep.  677 
(1893). 

SRe  New  York,  etc.  Ry.,  99  N.  Y. 
12    (1885). 

4  Ticonic,  etc.  Co.  v.  Lang,  63  Me. 
480  (1874);  Pirn's  Case,  3  De  G.  & 
Sm.  11  (1849) ;  Henessey's  Case,  3  De 
G.  &  Sm.  191  (1850);  Ex  parte  Hall, 
1  Macn.  &  G.  307  (1849). 

Drover  v.  Evans,  59  Ind.  454  (1877), 
holding  that  where  an  agent  to  make 
a  subscription  exceeds  his  authority 
the  principal  is  not  bound  by  it. 

Cf.  Chapman  &  Barker's  Case,  L.  R. 
3  Eq.  361  (1867).  And  this  is  equally 
the  rule  when  it  is  sought  to  charge 
one  by  such  a  subscription,  not  in  his 
individual  capacity,  but  only  in  the 
capacity  of  trustee  for  another.  Ex 
parte  Hall,  1  Macn.  &  G.  307  (1849). 


5  Musgrave  v.  Morrison,  54  Md.  161 
(1880);  Mississippi,  etc.  R.  R.  v.  Har- 
ris, 36  Miss.  17  (1858),  where  the  de- 
fendant promised  to  pay;  Jones  v. 
Milton,  etc.  Co.,  S  Ind.  547  (1856), 
where  the  principal  subscribed  over 
again;  Philadelphia,  etc.  R.  R.  v. 
Cowell,  28  Pa.  St.  329  (1857),  where 
the  defendant  acquiesced  for  seven 
years;  Putnam  v.  New  Albany,  4  Biss. 
365  (1869);  s.  c,  20  Fed.  Cas.  79, 
where  the  city  ratified. 

What  acts  or  omissions,  short  of 
express  ratification,  will  in  law  suffice 
to  bind  one  upon  such  a  subscription, 
is,  in  general,  a  question  for  the  jury. 
Philadelphia,  etc.  R.  R.  v.  Cowell,  28 
Pa.  St.  329  (1857).  Cf.  Fox  v.  Clif- 
ton, 6  Bing.  776  (1830).  A  new  trial 
was  granted  in  9  Bing.  115.  It  is 
held  that  silence  or  failure  to  object 
to  the  subscription  for  a  considerable 
time  after  knowledge  of  it  is  brought 
to  the  subscriber  is  evidence  of  a 
ratification.  McHose  v.  Wheeler,  45 
Pa.  St.  32  (1863);  Thompson  v.  Reno 
Sav.  Bank,  19  Nev.  103,  171,  242,  291, 
293  (1885) ;  Sanger  v.  Upton,  91  U.  S. 
56  (1875).  Contra  Hume  v.  Com- 
mercial Bank,  9  Lea  (Tenn.),  728 
(1882).  And  giving  a  proxy  to  vote 
the  stock  may  be  sufficient  to  ratify 
such  a  subscription.    McCully  v.  Pitts- 


286 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§   68. 


and  in  that  other's  name,  but  without  authority,  thereby  becomes 
himself  a  subscriber  in  place  of  the  person  whose  name  he  signs,  or 
his  unauthorized  subscription  may  subject  him  to  an  action  for  dam- 
ages.1 A  person  who  subscribes  for  stock  as  trustee  is  personally 
liable  if  he  was  not  trustee.2  But  where  one  corporation  has  no 
power  to  subscribe  for  stock  in  another,  an  agent  making  the  sub- 
scription is  not  personally  liable,  the  facts  being  known  to  all  the 
parties.3  A  person  who  subscribes  for  stock  through  another  as 
agent  may  be  held  liable  as  an  original  subscriber,  the  subscription 
having  been  made  in  his  name.4  The  real  subscriber  for  stock  is 
liable  on  a  note  given  by  his  agent  in  payment  therefor.5  A  person, 
who  by  writing  has  subscribed  for  stock,  cannot  set  up  that  he  agreed 
with  the  president  that  he  was  acting  merely  as  agent  for  others.6 
Where  a  bank  desires  to  subscribe  to  the  stock  of  a  trust  company, 


burgh,  etc.  R.  R.,  32  Pa.  St.  25  (1858). 
Contra,  McClelland  v.  Whiteley,  11 
Biss.  444  (1883).  But  a  mere  declara- 
tion to  strangers,  by  the  person  in 
whose  name  the  subscription  had  been 
made,  that  he  had  taken  that  amount 
of  stock,  is  not  a  ratification  of  the 
subscription.  Rutland,  etc.  R.  R.  v. 
Lincoln,  29  Vt.  206  (1857).  And  even 
the  fact  that  one  whose  name  had 
been  in  this  way  put  down  as  a  sub- 
scriber was  a  director  in  the  corpora- 
tion was  held  not  to  imply  knowl- 
edge that  his  name  was  on  the  books 
as  a  subscriber.  Hallmark's  Case,  L. 
R.  9  Ch.  D.  329  (1878).  Cf.  Fox  v. 
Clifton,  6  Bing.  776  (1830).  A  new 
trial  was  granted  in  9  Bing.  115.  But 
as  a  rule  it  is  believed  that  accepting 
the  office  of  a  director  would,  in  this 
country,  be  held  a  sufficient  ratifica- 
tion of  such  a  subscription,  in  the 
absence  of  any  other.  This  is  ex- 
pressly declared  to  be  the  rule  in 
Tennessee  and  elsewhere.  Moses  v. 
Ocoee  Bank,  1  Lea  (Tenn.),  398 
(1878) ;  Danbury,  etc.  R.  R.  v.  Wilson, 
22  Conn.  435  (1853).  Cf.  Fry  r. 
Lexington,  etc.  R.  R.,  2  Mete.  (Ky.) 
314  (1859).  Contra,  Hume  v.  Com- 
mercial Bank,  9  Lea  (Tenn.),  728 
(1882). 

But  where  an  agent  takes  stock  as 
agent,  on  condition  that  it  is  to  be 


submitted  to  the  principal,  and,  "if 
approved,  to  be  taken  out  in  the  pur- 
chase of  thread,"  the  principal  is  not 
bound  where  he  declines  to  accept, 
even  though  he  did  not  notify  the 
corporation  of  his  refusal.  Merrick 
Thread  Co.  v.  Philadelphia,  etc.  Co., 
115  Pa.  St.  314   (1887). 

i  Salem  Mill-dam  Corp.  v.  Ropes, 
26  Mass.  187  (1829).  In  some  juris- 
dictions it  is  held  that  by  such  a 
subscription  the  subscriber  makes 
himself  personally  liable  as  a  sub- 
scriber. Union  Hotel  Co.  v.  Hersee, 
79  N.  Y.  454  (1880);  State  v.  Smith, 
48  Vt.  266  (1876).  See  also  Troy,  etc. 
R.  R.  v.  Warren,  18  Barb.  310  (1854) ; 
Pugh  &  Sharman's  Case,  L.  R.  13  Eq. 
566  (1872);  McHose  v.  Wheeler,  45 
Pa.  St.  32;  Thompson  v.  Reno,  etc. 
Bank,  19  Nev.  103,  171,  242,  291,  293 
(1885);  §  249,  infra. 

2  Boatmen's  Bank  v.  Gillespie,  108 
S.  W.  Rep.  74  (Mo.  1908). 

3  Merchants',  etc.  Co.  v.  Streuby, 
44  S.  Rep.  791  (Miss.  1907). 

■i  Evans  v.  Texas,  etc.  Co.,  4  Tex. 
Civ.  App.  326  (1893),  71  Pac.  Rep. 
1101. 

5  Wheeler  v.  Mineral,  etc.  Co.,  31 
Colo.   110    (1903). 

6  American,  etc.  Co.  v.  Bean,  125 
Fed.  Rep.  823  (1903);  rev'd  on  an- 
other point  in  134  Fed.  Rep.  57. 


287 


§§    69,  70.]  SUBSCRIPTIONS — METHOD,   PARTIES,   ETC.  [CH.  IV. 

but  cannot  legally  do  so,  and  its  directors  give  their  note  in  payment, 
they  are  liable  on  the  note  to  the  receiver  of  the  trust  company.1 
An  unauthorized  signature  of  a  name  to  a  subscription  list  may  be 
forgery.2 

§  69.  Subscriptions  taken  by  an  unauthorized  agent  of  the  cor- 
poration. — A  subscription  taken  by  a  person  who  has  no  authority 
from  the  corporation  to  take  subscriptions  is  not  in  general  enforce- 
able.3 But  it  has  been  held  that  such  a  subscription  may,  by  ac- 
ceptance and  ratification  on  the  part  of  the  corporation,  be  validated, 
and  the  subscriber  made  liable  as  though  the  subscription  had  been 
regularly  taken.4 

§  70.  Unissued  or  increased  capital  stock — Right  to  subscribe 
therefor. — Where  the  whole  capital  stock  or  a  part  of  the  author- 
ized capital  stock  is  offered  for  subscription,  and  a  part  only  of  the 
amount  so  offered  is  subscribed  for,  the  remainder  of  the  stock  so 
offered  may  be  offered  by  the  directors  to  any  person,  at  a  fair  price 
not  less  than  par,  even  though  that  person  is  a  director  in  the  com- 
pany. But  where  only  a  part  of  the  authorized  capital  stock  has 
been  offered  and  issued,  and  subsequently  it  is  resolved  to  issue  more 
of  the  authorized  capital,  or  where  the  capital  stock  is  increased  under 
the  statutes,  and  the  increase  is  about  to  be  issued,  then  a  different 
rule  prevails.  Every  existing  stockholder  then  has  the  right  to  sub- 
scribe at  par  for  such  a  proportion  of  the  stock  to  be  issued  as  his 
old  holdings  bear  to  the  amount  of  stock  then  outstanding.5  Any 
other  rule  would  enable  the  parties  in  control  to  seize  the  new  stock, 
in  some  cases  for  gain  because  the  stock  is  worth  more  than  par,  and 
in  other  cases  so  as  to  acquire  increased  votes  at  a  coming  election. 
In  either  case  this  would  work  a  fraud  on  the  other  stockholders.6 

1  Adams  v.  Kennedy,  34  Atl.  Rep.  c  See  §  286,  infra,  and  §  65,  supra. 
659  (Pa.  1896).  Where  de  facto  directors,  immediately 

2  State  v.  Hazzard,  80  N.  E.  Rep.  after  the  election,  order  an  issue  of  a 
149  (Ind.  1907).  large  amount  of  the  original  unissued 

3  Essex  Turp.  Corp.  v.  Collins,  S  capital  stock  of  the  company,  and 
Mass.  292  (1S11) ;  Shurtz  v.  School-  most  of  it  is  taken  by  one  of  their 
craft,  etc.  R.  R.,  9  Mich.  269  (1861);  number,  who  thereby  acquires  a  ma- 
Carlisle  v.  Saginaw,  etc.  R.  R.,  27  jority  of  the  stock  of  the  company, 
Mich.  315  (1873).  Contra,  North-  and  subsequently  the  election  is  de- 
eastern  R.  R.  v.  Rodrigues,  10  Rich,  clared  illegal,  such  directors  may  be 
L.    (S.  C.)    278    (1857).  enjoined    from    voting    the    stock    so 

4  Walker  v.  Mobile,  etc.  R.  R.,  34  issued,  and,  if  they  have  sold  it, 
Miss.  245  (1S57) ;  Mobile,  etc.  R.  R.  may  be  enjoined  from  voting  other 
v.  Yandal,  5  Sneed  (Tenn.),  294  stock  equal  in  amount  to  the  stock 
(1858);  Judah  v.  American,  etc.  Co.,  so  sold  by  them.  The  existing  stock- 
4  Ind.  333   (1853).  holders  are  entitled  to  subscribe  for 

5  See  §§  286,  614,  653,  infra.  their  proportion  of  the  unissued  origi- 

288 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§  71. 


It  is  legal  for  a  company  in  taking  a  subscription  to  stock  to  give 
the  subscriber  an  option  to  take  other  shares  within  a  certain  time  at 
par.1  Sometimes  a  portion  of  the  new  stock  is  sold  at  the  same 
price  to  parties  who  agree  to  take  such  stock  as  the  stockholders  do 
not  take,  but  this  is  often  only  an  ingenious  device  to  deprive  the 
stockholders  of  their  right  to  subscribe  for  their  full  proportion  of 
the  new  stock  and  is  illegal.2  Where  directors  have  issued  stock  to 
themselves  at  a  price  less  than  the  market  price  they  may  be  held 
liable,  at  the  instance  of  a  stockholder  suing  for  the  benefit  of  the 
corporation,  for  the  difference  between  the  price  they  paid  and  the 
price  of  the  stock  when  it  was  issued  to  them.3  Where  the  directors 
cause  treasury  stock  to  be  sold  to  themselves  at  less  than  its  real 
value  and  for  the  purpose  of  carrying  an  election,  the  court  will  set 
the  transfer  aside  as  fraudulent.4 


C.      AX   ACTION   LIES   TO    COLLECT   SUBSCRIPTIONS. 

§  71.  A  subscription  for  shares  implies  a  promise  to  pay  for  them, 
and  this  promise  sustains  an  action  to  collect,  without  proof  of  any 
particular  consideration.5 — This  rule  of  law   is  sustained  by   the 


nal  capital  stock.  Morris  v.  Stevens, 
178   Pa.   St.  563    (1S97). 

Where,  long  after  the  company  has 
commenced  to  do  business,  it  has  dis- 
posed of  its  property  and  is  ready  to 
declare  a  five  hundred  per  cent,  divi- 
dend, the  directors  issue  to  them- 
selves at  par  that  part  of  the  original 
capital  stock  which  never  had  been 
issued,  it  is  a  fraud  on  the  remain- 
ing stockholders.  Arkansas,  etc.  Soc. 
v.  Eichholtz,  45  Kan.  164   (1891). 

l  Hilder  v.  Dexter,  [1902]  A.  C.  474. 

-  See  §  2S6,  infra.  Where  unissued 
shares  of  the  par  value  of  11.  each  are 
worth  about  4.1,  each,  and  a  portion 
thereof  are  offered  to  the  stockholders 
at  21.  10s.  each,  and  an  option  on  the 
balance  is  given  to  underwriters  at 
the  same  price  in  consideration  of 
the  underwriters  agreeing  to  take 
such  of  the  stock  as  is  offered  to  the 
stockholders  and  is  not  taken  by  the 
latter,  a  minority  stockholder  may  en- 
join the  carrying  out  of  such  option 


to  the  underwriters,  it  being  in  vio- 
lation of  the  English  statute  prohibit- 
ing the  payment  of  a  commission  for 
underwriting  subscriptions.  Burrows 
v.  Matabele,  etc.  Co.,  [1901]  2  Ch.  23. 

3  The  highest  market  price  since 
that  day  for  small  amounts  of  stock 
is  no  basis  for  the  measure  of  dam- 
ages. Shaw  v.  Holland,  [1900]  2  Ch. 
305. 

4  Hilles  v.  Parrish,  14  N.  J.  Eq.  380 
(1862). 

5  Quoted  and  approved  in  Ventura, 
etc.  Ry.  v.  Collins,  46  Pac.  Rep.  287 
(Cal.  1896);  San  Joaquin,  etc.  Co.  v. 
Beecher,  101  Cal.  70  (1894);  Succes- 
sion of  Thomson,  46  La.  Ann.  1074 
(1894),  and  Puget  Sound,  etc.  R.  R. 
v.  Ouellette,  7  Wash.  265  (1893).  See 
also  §  203,  infra;  Pittsburg,  etc. 
Assoc,  v.  Swan,  51  Pac.  Rep.  583  (Kan. 
1897).  An  express  promise  to  pay  is 
not  necessary  in  an  English  corpora- 
tion, the  statutes  providing  that  the 
subscription  shall  be  a  debt  due  from 


(19) 


289 


§  71.] 


SUBSCRIPTIONS — METHOD,    PARTIES,   ETC. 


[CII.  IV. 


great  weight  of  authority.     The  signing  of  the  subscription  paper 
is  an  implied  promise  to  pay  the  subscription.1 


the  subscriber.  Nashua  Sav.  Bank  v. 
Anglo-American,  etc.  Co.,  189  U.  S. 
221   (1903),  citing  §71. 

i  Quoted  and  approved  in  Planters', 
etc.  Co.  v.  Webb,  144  Ala.  666 
(1905);  Upton  v.  Tribilcock,  91  U. 
S.  45  (1875);  Hawley  r.  Upton,  102 
U.  S.  314  (18S0);  Webster  v.  Upton, 
91  U.  S.  65  (1875);  American  Alkali 
Co.  v.  Campbell,  113  Fed.  Rep.  39S 
(1902);  Carnahan  v.  Campbell,  153 
Ind.  226  (1902);  Waukon,  etc.  R.  R. 
r.  Dwyer,  49  Iowa,  121  (1878);  Nul- 
ton  v.  Clayton,  54  Iowa,  425  (1880); 
Miller  v.  Wild  Cat,  etc.  Co.,  52  Ind. 
51  (1S75);  Mitchell  v.  Beckman,  64 
Cal.  117  (1883)  ;  Merrimac  Min.  Co.  v. 
Levy,  54  Pa.  St.  227  (1S67) ;  Beene 
v.  Cahawba,  etc.  R.  R.,  3  Ala.  660 
(1842);  Fry  v.  Lexington,  etc.  R.  R., 
2  Mete.  (Ky.)  314  (1S59);  Gill  v. 
Kentucky,  etc.  Co.,  7  Bush.  (Ky.), 
635  (1S70);  Mount  Sterling,  etc.  Co. 
v.  Little,  14  Bush  (Ky.),  429  (1879); 
Chase  v.  East  Tenn.  R.  R.,  5  Lea 
(Tenn.),  415  (1SS0).  Even  though 
the  corporation  has  the  power  to  for- 
feit the  shares  for  non-payment. 
Hughes  v.  Antietam  Mfg.  Co.,  34  Md. 
316  (1870);  Dexter,  etc.  Co.  v.  Mil- 
lerd,  3  Mich.  91  (1854).  Where  a 
subscriber  agrees  in  writing  to  pay, 
suit  may  be  brought  without  first 
selling  his  stock  to  pay  the  assess- 
ment. Shattuck  v.  Robbins,  68  N. 
H.  565  (1896).  It  is  sufficient  to 
allege  that  the  defendant  holds  stock 
which  has  never  been  paid  up.  The 
defense  that  the  defendant  did  not 
subscribe  for  the  stock  or  did  not 
agree  to  pay  for  it  or  that  he  is  not 
liable  must  be  set  up  in  the  answer. 
Atlantic  T.  Co.  v.  Osgood,  116  Fed. 
Rep.   1019    (1902). 

As  to  enforceability  of  subscrip- 
tions, not  for  stock,  but  as  a  gift  to 
enterprises,  see  Rogers  v.  Galloway 
F.  College,  64  Ark.  627  (1898) ;  Smith 
v.   Burton,    59   Vt.    408    (1887);     Me- 


Cabe  v.  O'Connor,  69  Iowa,  134 
(1886);  Broadbent  v.  Johnson,  2 
Idaho,  300  (1887),  where  subscrip- 
tion was  to  a  railroad;  Gans  v.  Rei- 
mensnyder,  2  Atl.  Rep.  (Pa.)  425, 
note;  Grand  Lodge  v.  Farnham,  70 
Cal.  158  (1886) ;  Roberts  v.  Cobb, 
103  N.  Y.  600  (1886);  Utica,  etc. 
R.  R.  v.  Brinckerhoff,  21  Wend.  139 
(1S3D);  Watkins  v.  Eames,  63  Mass. 
537  (1S52).  See  also  Davis  v.  Smith 
Am.  Organ  Co.,  117  Mass.  456  (1875) ; 
Presbyterian  Church  v.  Cooper,  112 
N.  Y.  517  (1889);  Cottage,  etc. 
Church  v.  Kendall,  121  Mass.  529 
(1877);  Livingston  v.  Rogers,  1 
Caines'  T.  R.  583  (1804);  Hamilton 
College  v.  Stewart,  1  N.  Y.  5S1 
(ISIS);  Van  Rensselaer  v.  Aiken,  44 
N.  Y.  126  (1S70);  Presbyterian  Soc. 
v.  Beach,  74  N.  Y.  72  (1878) ;  Hutch- 
ins  v.  Smith,  46  Barb.  235  (1865)  ; 
Amherst  Academy  v.  Cowls,  23  Mass. 
427    (1828). 

Although  a  note  given  as  a  con- 
tribution for  the  founding  of  a  col- 
lege is  not  enforceable  merely  on  the 
ground  that  others  had  contributed, 
yet  it  is  enforceable  if  certain  acts  or 
services  are  to  be  performed  and  they 
are  performed.  Keuka  College  v. 
Ray,  167  N.  Y.  96  (1901).  Subscrip- 
tion to  a  church.  Waters  v.  Union 
T.  Co.,  129  Mich.  640  (1902).  A  prom- 
ise to  contribute  towards  the  purchase 
of  a  site  for  a  church  is  binding  and 
may  be  enforced.  First,  etc.  Church 
v.  Pungs,  126  Mich.  670  (1901).  A 
subscription  to  build  a  church  cannot 
be  withdrawn  after  it  is  delivered, 
but  any  conditions  in  such  subscrip- 
tion must  be  complied  with.  Roth- 
enberger  v.  Glick,  22  Ind.  App.  288 
(1899).  A  church  subscription  pay- 
able to  a  committee  may  be  enforced 
by  a  part  of  the  subscribers  suing 
for  the  benefit  of  all,  under  the  Wis- 
consin statute.  Hodges  v.  Nalty,  104 
Wis.  464   (1899).     A  subscriber  to  a 


290 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§    71. 


There  have  been  various  opinions  of  the  courts  as  to  the  consider- 
ation supporting  this  implied  promise  which  sustains  an  action  to 
collect  the  subscription.  It  has  been  held  that  the  right  to  mem- 
bership in  the  proposed  corporation,   and  the  probable  advantages 


gratuitous  fund  may  withdraw  at  any 
time  before  it  is  accepted  or  any  ex- 
pense incurred.  American,  etc.  Co. 
v.  Melcher,  132  Iowa,  324  (1906).  A 
voluntary  subscription  may  be  with- 
drawn prior  to  acceptance.  Doherty 
v.  Arkansas,  etc.  R.  R.,  142  Fed.  Rep. 
104  (1905).  Donations  on  condition, 
but  collected  before  the  condition  was 
performed,  still  belong  to  the  subscrib- 
ers. Larrimer  v.  Murphy,  72  Ark. 
552  (1904).  A  corporation  organized 
for  the  purpose  of  furnishing  facilities 
to  public  exchanges  and  owning  a 
building  for  that  purpose  may  accept 
a  subscription  as  a  bonus  payable  to 
it,  on  condition  that  a  stock  exchange 
locates  in  such  building.  Merchants', 
etc.  Co.  v.  Chicago,  etc.  Co.,  210  111. 
26  (1904). 

A  subscriber  or  donator  of  money 
to  a  factory  cannot  prevent  its  mov- 
ing away  if  it  is  a  losing  enterprise. 
Ayres  v.  Dutton,  87  Mich.  528  (1891). 

A  subscription  to  a  church  may  be 
enforced  by  the  bishop  in  whose  name 
the  title  is  taken,  he  being  one  of 
those  to  whom  it  is  payable.  Egan  v. 
Bonacum,  38  Neb.  577  (1894).  A  sub- 
scription for  stock  may  be  changed 
to  a  donation.  Lake  Manawa  Ry.  v. 
Squire,  89  Iowa,  576   (1894). 

Difficulty  was  experienced  in  the 
form  of  contract  for  subscriptions  for 
a  proposed  World's  Fair  corporation 
in  1889.  The  form  adopted  was  as 
follows: 

"The  undersigned,  in  consideration  of 
the  advantages  which  will  result  to  us 
respectively  from  concert  of  action,  and 
of  other  good  causes  and  considerations, 
and  the  efforts  to  be  made  by  Samuel  D. 
Babcock  [giving  names],  to  procure  the 
subscriptions  hereinafter  provided  for,  and 
the  organization  of  a  corporation  to  con- 
trol and  manage  such  exposition,  do  agree, 
each  for  himself,  to  pay  to  the  said  Sam- 
uel  D.   Babcock   and   his   associates   herein- 


above named,  or  at  their  request,  to  said 
corporation,  the  respective  amounts  set  op- 
posite our  names  upon  the  following  terms 
and  conditions,  to  wit : 

"Such  subscription  shall  not  be  binding 
until    such   corporation   shall   be   organized. 

"No  subscription  shall  be  binding  until 
the  said  Samuel  D.  Babcock  and  his  asso- 
ciates above  named  shall  have  succeeded 
in  obtaining  subscriptions  hereto  to  the 
amount  of  at  least  $5,000,000. 

"Such  subscription  shall  be  a  prelimi- 
nary or  guarantee  fund  to  be  paid  in  instal- 
ments of  not  more  than  one-fourth  of  their 
respective  amounts  at  any  one  time,  upon 
calls  for  the  same,  made  at  intervals  of 
not  less  than  three  months  by  the  said 
Samuel  D.  Babcock  and  his  associates,  or, 
If  they  shall  so  determine,  by  the  said 
corporation ;  and  when  such  subscriptions 
shall  be  fully  paid,  certificates  shall  be 
issued  entitling  each  subscriber  to  share 
ratably  with  all  other  subscribers  to  the 
capital  stock  of  such  corporation  in  all 
assets  and  funds  that  remain  after  the 
conclusion  of  the  exposition,  the  closing 
of  all  its  accounts,  the  payment  of  all  its 
liabilities  of  every  nature,  and  the  liqui- 
dation of  all  its  expenses. 

"In  no  event  shall  the  subscribers  to 
this  fund  be  liable  for  any  debts  or  obli- 
gations growing  out  of  this  subscription 
or  of  said  exposition,  except  to  the  extent 
of  their  several  subscriptions,  and  the  cer- 
tificates to  be  issued  shall  be  in  such  form 
as  to  avoid  any  claim  for  personal  liability. 

"The  money  paid  by  said  subscribers 
shall  be  expended  by  said  corporation  only 
for  the  purposes   of  said   exposition. 

"Calls  for  payment  of  subscriptions  shall 
be  on  not  less  than  ten  days'  notice  to  be 
sent  by  mail  to  the  address  given  opposite 
the  name  of  each  subscriber,  any  other 
notice  being  hereby   expressly  waived. 

"Samuel  D.  Babcock  and  his  associates 
hereinabove  named  having  been  thus  con- 
tracted with  by  the  subscribers  because  of 
their  having  been  selected  as  a  finance 
committee  aforesaid  in  aid  of  the  aforesaid 
exposition,  it  is  hereby  further  agreed  that 
all  stipulations  in  the  agreement  made  de- 
pendent upon  the  action  of  said  Babcock 
and  his  associates  shall  be  considered  as 
fully  met  by  the  action  of  the  majority  of 
them;  and  in  case  of  vacancy  by  death, 
resignation,  or  otherwise,  such  vacancy 
may  be   filled   by   their  survivors." 


291 


§71.] 


SUBSCRIPTIONS — METHOD,    PARTIES,   ETC. 


[CH.  IV. 


to  be  derived  from  membership  in  the  company,  constitute  the  con- 
sideration.1 

It  has  been  held,  also,  that  the  stock  to  be  received  and  the  prob- 
able dividends  thereon  constitute  the  consideration.2 

And,  again,  it  has  been  held  that  a  consideration  is  conclusively 
implied  from  the  fact  of  subscription  itself;  that  it  is  implied  by 
law;  and  that  the  law  thereby  creates  a  duty  and  liability  to  pay 
for  the  stock.3 

The  particular  motive  of  a  subscriber  inducing  him  to  subscribe 
is  immaterial.  The  consideration  which  exists  in  law  cannot  be 
allowed  to  be  governed  by  the  ideas  of  the  subscriber.4  The  as- 
signee of  a  subscription  may  enforce  it.5  The  remedy  of  a  corpo- 
ration to  collect  subscriptions  is  not  in  equity,  even  though  the 
defense  will  be  that  the  board  of  directors  released  the  subscription 


i  Lake  Ontario,  etc.  R.  R.  v.  Mason,  designed  by  the  charter  is  a  sufficient 
16  N.  Y.  451  (1S57);  Osborn  v.  Cros-  consideration.  Kennebec,  etc.  R.  R. 
by,  63  N.  H.  583  (1885);  Bullock  v.  v.  Palmer,  34  Me.  366  (1852);  Am- 
Falmouth,  etc.  Co.,  85  Ky.  184  (1887).  herst  Academy  v.  Cowls,  23  Mass.  427 
In  another  case  it  is  said  that  "the  (1828);  Ohio,  etc.  College  v.  Higgins, 
advantages  to  be  derived  from  being  16  Ohio  St.  20  (1864).  Cf.  McCully 
a  member  of  such  a  company,  and  of  v.  Pittsburgh,  etc.  R.  R.,  32  Pa.  St. 
the  consequent  right  to  participate  25  (1858).  In  Minnesota  the  implied 
in  the  pecuniary  dividends,  is  a  posi-  promise  to  issue  the  stock  is  declared 
tive  benefit;  and  where  the  agree-  to  be  the  consideration  for  the  prom- 
inent secures  that  advantage  to  the  ise  to  pay  for  it.  St.  Paul,  etc.  R.  R. 
subscriber,  on  the  organization  of  the  v.  Robbins,  23  Minn.  439  (1877). 
company,  the  objection  of  a  want  of  And  in  Kentucky  it  is  held  that  the 
consideration  cannot  be  made  with  promise  by  each  of  the  subscribers  is 
success."  Hamilton,  etc.  Co.  v.  Rice,  a  sufficient  consideration  for  the 
7  Barb.  157  (1S49),  adopted  by  promises  of  the  others.  Twin  Creek, 
Brown,  J.,  in  Lake  Ontario,  etc.  R.  R.  etc.  Co.  v.  Lancaster,  79  Ky.  552 
v.  Mason,  16  N.  Y.  451,  463  (1857).  (1881). 


2  Schenectady,  etc.  Co.  v.  Thatcher, 
11  N.  Y.  102,  107  (1854);  Bish  v. 
Bradford,  17  Ind.  490  (1861);  New 
Albany,  etc.  R.  R.  v.  Fields,  10  Ind. 


3  East  Tennessee,  etc.  R.  R.  v.  Gam- 
mon, 5  Sneed  (Tenn.),  567  (1858). 

4  Illinois   River    R.    R.    v.    Zimmer, 
20    111.    654    (1858);     Miller   v.   Wild 


187    (1S5S);     Fry  v.   Lexington,    etc.     Cat,   etc.  Co.,  52  Ind.  51,  64    (1875); 
R.    R.,    2    Mete.    (Ky.)    314    (1859);     Andover,  etc.  Corp.  v.  Gould,  6  Mass. 


Selma,   etc.   R.   R.  v.  Tipton,   5   Ala. 
787    (1843);    Danbury,   etc.   R.   R.   v.. 
Wilson,   22   Conn.  435    (1853);    East 


40,    44    (1809);     Parker  v.   Northern 

Central,  etc.  R.  R.,  33  Mich.  23  (1875). 

5  See  §  111,  infra.     In  Pennsylvania 


Tennessee,  etc.  R.  R.  v.  Gammon,  5  a    statute    which    authorized    a    cor- 

Sneed     (Tenn.),     567     (1858).      And  poration    to    transfer    a   subscription 

again,  that  the  prior  proceedings  and  from   one   enterprise   to   another   has 

acts  of  the  parties  are  a  legal  basis  been     held     unconstitutional.      Pitts- 

for   the   promise    to    pay;     also   that  burgh,  etc.  R.  R.  v.   Gazzam,   32   Pa. 

the  partial  execution  of  the  purpose  St.  340   (1858). 

292 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§  72. 


and  the  company  claims  that  such  release  was  fraudulent.1  In  a 
suit  by  an  alien  corporation  to  collect  unpaid  calls,  the  statutes 
under  which  the  corporation  is  formed  may  be  proved  by  the  testi- 
mony of  an  English  solicitor  who  produces  copies  of  such  statutes.2 
§  72.  Such  is  the  rule  for  subscriptions  before  incorporation  as 
well  as  those  after— Acceptance  of  the  subscription— Withdrawal- 
Subscriptions  for  the  benefit  of  contractors.  —That  a  subscription 
for  stock  implies  a  promise  to  pay  for  it,  even  though  the  subscrip- 
tion was  before  incorporation,  is  the  rule  sustained  by  the  great 
weight  of  authority.3     It  has  been  held,  also,  that  the  corporation 

i  Sigua  Iron   Co.  v.  Clark,   77  Fed.  Carey,  116  Mass.  471  (1875)  ;    Ashue- 
Rep.   496    (1896).  lot,    etc.    Co.   v.    Hoit,    56    N.    H.    548 
2  Nashua,     etc.     Bank     v.     Anglo-  (1876);     Cross  v.  Pinckneyville  Mill 
American,    etc.    Co.,    189    U.    S.    221  Co.,    17    111.    54    (1855);     Griswold   v. 
(1903)        As    to    the    various    facts  Peoria  University,  26  111.  41    (1861); 
which  should  be  proved  in  a  suit  to  Stone  v.   Great  Western   Oil   Co.,   41 
collect   an    unpaid   call,   see   Nashua,  111.  85   (1866);    City  Hotel  v.  Dickin- 
etc.    Bank    v.    Anglo-American,    etc.  son,  72  Mass.  586  (1856) ;    Heaston  v. 
Co      108    Fed.   Rep.    764    (1901),    and  Cincinnati,    etc.    R.    R.,    16    Ind.    275 
especially     the     dissenting     opinion.  (1861);    Miller  v.  Wild  Cat,  etc.  Ca, 
See  also  §120,  infra.     In  suing  on  a  52  Ind.  51   (1875);    Peninsular  R.  R. 
subscription  to  a  foreign  corporation,  v.  Duncan,  28  Mich.  130   (1873);    Ba- 
the  statutes   governing   such   foreign  sex   Bridge  Co.  v.  Tuttle,    2  Vt.   393 
corporation  may  be  proved  by  a  copy  (1830) ;    Kirksey  v.  Florida,  etc.  Co., 
testified  to  by  a  witness  who  has  ex-  7  Fla.  23   (1857);    Beene  v.  Cahawba, 
amined  and  compared  the  copy  with  etc.  R.  R..  3  Ala.  660  (1842);    Selma, 
the    original.      Anglo-American,    etc.  etc.  R.  R.  v.  Tipton,  5  Ala.  787  (184:,    ; 
Co    v     Dyer,   181   Mass.    593    (1902).  Hartford,   etc.   R.  R.  v.  Kennedy,   12 
See    also   §753,   infra.  Conn.    499    (1838);     Thigpen    v.   Mis- 
3  Quoted    and    approved    in    Plant-  sissippi    Cent.    R.    R.,    32    Miss.    AM 
ers'     etc.   Co.   v.   Webb,    144   Ala.    666  (1S56);     Gill    v.    Kentucky,    etc.    Co., 
(1905),  and  Nebraska,  etc.  Co.  v.  Led-  7  Bush  (Ky.),  635  (1870);    Instone  v. 
nicky  113  N  W  Rep.  245  (Neb.  1907).  Frankfort  Bridge  Co.,  2  Bibb    (Ky.), 
Richelieu  Hotel   Co.  v.  International,  576    (1812);     Cucullu    v.   Union    Ins. 
etc    *Co      140    111.    248     (1892);     San  Co.,    2   Rob.    (La.)    571,    573    (1842); 
Joaquin'  etc.  Co.  v.  Beecher,  101  Cal.  Nulton    v.     Clayton,     54     Iowa,     425 
70    (1894);    Branch  r.  Augusta   Glass  (1880);      Worcester     Turnp.     Co.     v. 
Works    95  Ga.  573  (1895);  Nickum  v.  Willard,    5    Mass.    80    (1809);     Twin 
Burckhardt,  30  Oreg.  464  (1897);  Sue-  Creek,   etc.   Co.  v.  Lancaster,   79   Ky. 
cession  of  Thomson,  46  La.  Ann.  1074  552    (1881);    Minneapolis,  etc.  Co.  v. 
(1894);    West  v.  Crawford,  80  Cal.  19  Davis,     40    Minn.     110     (18S9).       Gf. 
(1889)-    Marysville,   etc.  Co.  v.  John-  Thompson     v.     Page,     42     Mass.     565 
son   93  Cal.  538  (1892);    San  Joaquin,  (1840);     Ives    v.    Sterling,    47    Mass. 
etc' Co    v.  West,  94  Cal.  399    (1892);  310     (1843);    Robinson    v.    Edinboro 
McCormick    r.    Great    Bend,    etc.    Co.,  Academy,    3    Grant's   Cas.    (Pa.)    107 
48    Kan     614     (1892);      Minneapolis,  (1861);     Edinboro'   Academy  v.  Rob- 
etc     Co     v.    Crevier,    39    Minn.    417  inson,    37    Pa.    St.    210    (1860);     Peo- 
(1888);    Penobscot  R.  R.  v.  Dummer,     pie's    Ferry    Co.    v.    Balch,    74    Mass. 
40  Me    172   (1855);    Athol,  etc.  Co.  v.     303   (1857);   Chater  v.  San  Francisco, 

293 


§  72.] 


SUBSCRIPTIONS — METHOD,   PARTIES,   ETC. 


I(||.  IV. 


may  bring  an  action,  at  law  for  damages  against  a  subscriber  to  a 
preliminary  subscription  list  who  refuses  to  take  and  pay  for  the 
stock;1  and  that  the  measure  of  damages  for  such  a  breach  of  con- 
tract to  subscribe  for  stock  is  the  difference  between  the  par  and 
market  value  of  the  stock  involved.2  It  has  been  held  that  a  cor- 
poration may  defeat  a  subscriber's  action  for  stock  by  proving  that 
it  never  accepted  his  subscription.3  But  no  formal  acceptance  by 
tho  corporation  is  necessary   in  order  to  enforce   a   subscription.4 

etc.    Co.,    19    Cal.    219     (1S61) ;    Tar  to  an  agent  specified  upon  the  incor- 

River  Nav.  Co.  v.  Neal,  3  Hawks  (N.  poration   of  the  company   is  collecti- 

C),  520   (1825);    Klein  v.  Alton,  etc.  ble   by    him.     West   v.   Crawford,    80 

R.   R.,   13   111.  514    (1851);     Banet  v.  Cal.   19    (1889).     A  corporation   may 

Alton,  etc.  R.  R.,  13  111.  504   (1851);  sue    on    a    subscription    made    before 

Sanger  v.  Upton,  91  U.  S.  56   (1875);  incorporation;      and     where     parties 

Kidwelly  Canal  Co.  v.  Raby,  2  Price,  "agreed    to   subscribe"    certain   stock 

93    (1816);     Weiss   v.   Manch    Chunk  and  pay  for  the  same,  this  is  a  suf- 

Iron   Co.,  58   Pa.   St.  295    (1868).     A  ficient    subscription.       Jeanette,     etc. 

corporation    upon    accepting    a    sub-  Works   v.   Schall,    13   Penn.    Sup.   Ct. 

scription   made   before   its   incorpora-  96    (1900).     The   agreement  of   iudi- 

tion    may    collect    such    subscription,  viduals    with    a    promoter    to    under- 

McNaught    v.    Fisher,    96    Fed.    Rep.  write  shares   of  stock  of  a  company 

168   (1899).     A  subscription  to  a  cor-  cannot    necessarily    be    enforced    by 

poration  to  be  organized   is  enforce-  the   company,   and    may   be   modified 

able    by    the    corporation.      Auburn,  without  the  consent  of  the  company, 

etc.     Assoc,    v.     Hill,     113     Cal.     382  but  if  shares  are  allotted  to  the  un- 

(1S96),  aff'g  32   Pac.  Rep.  587    (Cal.  derwriters,   and   they    do   not   object, 

1893).     The   corporation  may  collect  they    are    liable    as    shareholders    by 

a  subscription   to   its   stock  obtained  English   law,  and   if  the   corporation 

prior   to   the   incorporation,   the   sub-  was  an  English  corporation  such  lia- 

scriber     having     attended     meetings  bility  may  be  enforced  in  the  United 

and  acquiesced  in  expenditures.     In-  States.     Electric,    etc.   Co.   v.   Prince, 

ternational  Fair  Assoc,  v.  Walker,  83  81  N.  E.  Rep.  306  (Mass.  1907). 

Mich.    386     (1890).      A    subscription  l  Quick     v.     Lemon,     105     111.     578 

before    incorporation    is    enforceable,  (1S83)  ;    Thrasher  v.  Pike  County  R. 

where  defendant  paid  for  one  or  more  R.,  25  111.  393  (1861) ;    Rhey  v.  Ebens- 

shares     after     incorporation.      Bell's  burg,  etc.  Co.,  27  Pa.  St.  261   (1856); 

Appeal,    115    Pa.    St.    88     (1887).      A  Mt.    Sterling,    etc.    Co.    v.    Little,    14 

secret    agreement    that   a    subscriber  Bush    (Ky.)    429    (1879). 

for  stock  prior  to  incorporation  shall  2  Thrasher   r.   Pike  Co.  etc.  R.   R., 

not    be    required    to    take    the    stock  25   111.   393    (1861). 

is  no  defense  as  against  the  corpora-  3  A   subscriber   for   stock   is   not   a 

tion.     Greater,  etc.   Co.  v.  Riley,  210  stockholder  until  the  company  accepts 

Pa.    St.    283    (1904).     Where    a   sub-  the  subscription.     Badger  Paper  Co. 

scriber    before    incorporation    is    of-  v.  Rose,  95  Wis.  145  (1897);    Starrett 

fered  the  stock  by  the  corporation  on  r.  Rockland  F.  &  M.  Ins.  Co.,  65  Me. 

certain   conditions  which  he  refuses,  374    (1876). 

he    is    not    liable    as    a    stockholder.  4  Strasburg   R.    R.    v.   Echternacht, 

Medler    v.    Albuquerque,    etc.    Co.,    6  21  Pa.  St.  220  (1853)  ;    Miller  v.  Wild 

New   Mex.   331    (1892).     A   subscrip-  Cat,    etc.    Co.,    52    Ind.    51     (1875); 

tion  with  an  express  promise  to  pay  Thrasher  v.  Pike  County  R.  R.,  25  111. 

294 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§  72. 


The  right  of  a  subscriber  to  withdraw  from  his  subscription  is  con- 
sidered elsewhere.1  A  subscription  by  various  parties  to  a  cheese 
factory  to  be  incorporated,  the  number  of  shares  being  placed  op- 
posite the  names,  binds  the  subscribers  only  to  the  extent  of  the 
stares  so  placed  opposite  their  names.2  A  subscription  before  in- 
corporation, such  subscription  being  for  the  benefit  of  a  contractor 
who  was  building  the  plant,  may  be  enforced  by  the  latter.3 


393  (1S61);  Mount  Sterling,  etc.  Co. 
v.  Little,  14  Bush  (Ky.),  429  (1879); 
California,  etc.  Co.  v.  Schafer,  57  Cal. 
396  (1881);  Charlotte,  etc.  R.  R.  v. 
Blakely,  3  Strobh.  L.  (S.  C.)  245 
(184S);  Pittsburgh,  etc.  R.  R.  v. 
Gazzam,  32  Pa.  St.  340  (1858);  Wal- 
lingford  Mfg.  Co.  v.  Fox,  12  Vt.  304 
(1840);  Stowe  v.  Flagg,  72  111.  397 
(1874);  Goff  v.  Winchester  College, 
6  Bush  (Ky.),  443  (18G9);  Perkins 
v.  Union,  etc.  Co.,  94  Mass.  273  (1SGG) ; 
Dayton,  etc.  Co.  r.  Coy,  13  Ohio  St.  84 
(1861).  See  also  various  cases  in  the 
first  part  of  this  chapter,  and  Brown- 
lee  v.  Ohio,  etc.  R.  R.,  18  Ind.  68 
(1862);  Kelner  v.  Baxter,  L.  R.  2 
C.  P.  174  (1S66).  A  person  is  not  a 
stockholder  where  he  offers  to  sell 
land  for  stock,  and  the  corporation 
accepts  the  offer,  but  does  not  notify 
him.  Cozart  v.  Herndon,  114  N.  C. 
252  (1S94).  Delivery  of  the  subscrip- 
tion is  necessary  in  Texas.  "White 
v.  Crosby,  51  S.  W.  Rep.  350  (Tex. 
1S99).  As  to  the  defense  that  the 
enterprise  was  abandoned,  see  §  189, 
infra. 

i  See  §  169,  infra. 

2  Davis,  etc.  Co.  r.  Jones,  66  Fed. 
Rep.  124  (1S95).  A  subscription  con- 
tract prior  to  incorporation  may  be 
such  that  the  subscribers  are  liable 
severally  to  the  amount  of  their  sub- 
scriptions. Davis  v.  Ravenna  Cream- 
ery Co.,  48  Neb.  471  (1S96).  A  sub- 
scription prior  to  incorporation  will 
not  be  construed  as  rendering  each 
subscriber  liable  for  the  whole,  even 
though  the  subscription  speaks  of  a 
joint  liability,  it  being  clear  that  such 
was  not  the  intent  of  the  subscribers. 
Chicago,  etc.  Co.  v.  Graham,  78  Fed. 


Rep.  83  (1896).  Where  a  subscrip- 
tion list  states  that  each  subscriber 
shall  be  liable  only  for  the  amount 
subscribed  by  him,  the  contract  is 
several  and  not  joint.  Waddy,  etc. 
Co.  v.  Davis,  etc.  Co.,  103  Ky.  579 
(1S98).  A  subscription  agreement 
signed  by  various  parties  to  pay  the 
amount  set  opposite  their  respective 
names  towards  a  creamery  is  several 
and  not  joint.  Cornish  v.  West,  82 
Minn.  107    (1901). 

3  Davis,  etc.  Co.  v.  Dickson,  53  S. 
W.  Rep.  237  (Tenn.  1899).  And  no 
tender  of  the  stock  need  be  made 
before  suit.  Davis,  etc.  Co.  v.  Caigle, 
53  S.  W.  Rep.  240  (Tenn.  1899).  A 
preliminary  subscription  may  be  pay- 
able to  individuals,  who  are  to  do 
certain  work,  until  incorporation, 
when  payment  for  the  work  is  to  be 
made  by  the  corporation.  Norcross, 
etc.  Co.  v.  Summerour,  114  Ga.  156 
(1901).  A  subscription  agreement 
prior  to  incorporation,  in  which  the 
parties  state  the  number  of  shares 
taken,  and  in  which  they  agree  to 
pay  the  contractors,  who  are  parties 
to  the  contract,  a  specified  sum,  is  a 
joint  undertaking  on  the  subscribers' 
part.  The  contractors  may  hold  them 
liable  as  partners,  the  agreement  not 
limiting  their  liability  to  the  number 
of  shares  taken  by  each.  An  imma- 
terial alteration  after  a  part  have 
signed  does  not  release  any  one.  The 
agreement  of  the  contractors  to  hold 
each  subscriber  liable  only  on  his 
subscription  if  he  would  pay  that  is 
without  consideration  and  void.  Any 
subscriber  could  expressly  limit  his 
liability  to  his  subscription.  Davis 
v.   Shafer,   50   Fed.  Rep.   764    (1892). 


295 


§73.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[cn.  IV. 


§  73.  The  New  York  rule. — New  York  presents  decisions  on 
various  sides  of  this  subject.  In  thai  state  the  rule  is  rigidly  ap- 
plied that  liability  is  enforced  only  when  a  contract  to  pay  is  prov<  d. 
This  contract  may  be  express  or  implied.  New  Fork,  however,  is 
not  inclined  to  imply  the  contract  Thus,  a  purchaser  of  bonds  from 
the  company  who  takes  a  bonus  of  stock  withoul  paying  for  it  is  not 
under  any  implied  contract  to  pay  for  it.1  A  person  who  receives 
stock  from  the  corporation  at  less  than  par,  without  any  written 
agreement  whatsoever  in  regard  thereto,  is  not  liable  at  common 
law  for  any  further  sums.  ''The  liability  is  everywhere  made  to  de- 
pend upon  contract."2  A  person  to  whom  stock  is  transferred  with- 
out his  knowledge  is  not  liable  thereon.3  An  agreement  of  various 
persons  with  each  other  to  subscribe  for  stock  cannol  be  enforced  by 
the  corporation.4     And  where  the  statute  prescribes  the  method  of 


i  Even  though  a  corporation  in 
selling  its  mortgage  bonds  makes  a 
gift,  to  the  purchaser  of  a  bonus  of 
stock  which  has  not  been  paid  up,  yet 
neither  the  corporation  nor  a  judg- 
ment creditor  of  the  corporation  can 
claim  subsequently  that  a  person  re- 
ceiving such  stock  is  liable  thereon. 
There  is  no  contract  imposing  any 
such  liability.  Christensen  v.  Eno, 
106  N.  Y.  97  (1887).  Compare  §42, 
supra. 

2  Seymour  v.  Sturgess,  2G  N.  Y. 
134    (1862). 

3  A  stockholder's  liability  on 
stock  rests  solely  upon  a  promise  to 
pay,  express  or  implied.  If  no  ex- 
press promise  is  claimed,  and  it  ap- 
pears that  the  party  never  accepted 
the  position  of  stockholder,  but  that 
it  was  put  upon  him  without  author- 
ity and  against  his  will,  and  that 
upon  learning  of  it  he  repudiated  it, 
he  cannot  be  held  liable.  So  held 
where  stock  was  transferred  to  a 
party.  Glenn  v.  Garth,  133  N.  Y.  18 
(1892).  A  promise,  express  or  im- 
plied, must  be  proved  in  order  to 
enforce  a  subscription.  Rochester, 
etc.  Co.  v.  Roe,  7  N.  Y.  App.  Div. 
366   (1896). 

4  A  person  signed  the  following 
agreement:  "We,  the  undersigned, 
citizens   of   Unionville   and   vicinity, 


pledge  ourselves  to  subscribe  for  and 
take  stock  in  and  for  the  construction 
of  the  Lake  Ontario  Shore  Railroad  to 
the  amount  set  opposite  our  names  re- 
spectively, on  condition  said  road  be 
located  and  built  through  or  north 
of  the  village  of  Unionville  in  Par- 
ma." It  seems  that  the  railroad  com- 
pany was  in  existence  at  the  time  of 
the  subscription.  The  company  be- 
came insolvent  and  its  property  was 
sold  and  the  purchaser  built  the  road. 
The  court  held  that  the  insolvent 
company  could  not  enforce  the  above 
subscription,  inasmuch  as  it  was  not 
a  party  to  it,  and  that  as  to  the  com- 
pany the  contract  was  without  con- 
sideration and  there  was  no  proof 
that  the  contract  was  for  its  benefit. 
Lake  Ontario  Shore  R.  R.  v.  Curtiss, 
80  N.  Y.  219  (1880).  Where  a  sub- 
scription prior  to  incorporation  does 
not  specify  the  par  value  of  the  shares 
and  there  is  no  agreement  to  form 
the  corporation  and  take  stock  there- 
in and  pay  therefor  a  certain  sum 
and  no  means  of  ascertaining  the 
exact  amount  which  the  subscriber 
agreed  to  pay,  even  though  he  speci- 
fies the  number  of  shares  he  sub- 
scribes for,  his  subscription  cannot 
be  enforced.  Woods,  etc.  Co.  v.  Brady, 
181  N.  Y.  145   (1905). 


296 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§   73. 


subscription,    a  subscription  made   in  another  way   cannot  be  en- 
forced.1 

On  the  other  hand,  a  direct  subscription  to  "take"  stock  may  be 
enforced  by  the  corporation,  even  though  such  subscription  was  made 
prior   to  the   incorporation.2     An   agreement  reading,    "the  under- 


i  Where  the  statute  prescribes  that 
the  subscribers  for  stock  shall  sub- 
scribe the  articles  of  incorporation,  a 
person  who,  prior  to  incorporation, 
subscribes  for  stock  and  agrees  to 
pay  for  it,  but  does  not  sign  the  arti- 
cles of  incorporation,  cannot  be  held 
liable  by  the  corporation  on  his  sub- 
scription. Poughkeepsie,  etc.  Co.  v. 
Griffin,  24  N.  Y.  150  (1861);  Troy, 
etc.  R.  R.  v.  Tibbits,  18  Barb.  297 
(1854).  A  note  given  in  payment 
for  the  subscription  price  of  stock 
is  illegal  under  the  New  York  statute 
which  requires  ten  per  cent,  to  be 
paid  in  cash  where  the  subscription 
is  a  cash  subscription,  and  hence  in 
such  a  case  the  entire  subscription  is 
void,  even  though  it  provided  for  the 
employment  of  the  subscriber  and 
for  giving  him  a  bonus  of  stock. 
Hapgoods  v.  Lusch,  123  N.  Y.  App. 
Div.   23    (1907). 

A  person  who  signs  the  certificate 
of  organization,  acts  as  director,  in- 
dorses other  certificates  of  stock,  and 
declares  himself  to  be  a  stockholder, 
may  or  may  not  be  liable  as  a  stock- 
holder. Where,  in  addition  thereto, 
he  signed  an  agreement  with  other 
corporators  to  take  and  pay  for  cer- 
tain stock,  he  is  liable  as  a  stock- 
holder, even  though  a  subscription  by 
itself  would  not  constitute  a  contract 
with  the  company.  Powers  v.  Knapp, 
71  Hun,  371    (1893). 

2  Quoted  and  approved  in  Plant- 
ers', etc.  Co.  v.  Webb,  144  Ala.  666 
(1905).  A  subscription  before  incor- 
poration, the  subscription  containing 
an  agreement  to  pay,  was  enforced 
by  the  corporation  when  formed  in 
Avon,  etc.  Co.  r.  Weed,  125  N.  Y.  App. 
Div.  51  (1908),  the  corporation  al- 
leging that  the  subscriber  had,  after 


incorporation,  accepted  the  scrip  and 
given  his  check  therefor.  See  S.  C. 
119  App.  Div.  560;  rev'd  1S9  N. 
Y.  557.  Where  a  person,  with 
others,  prior  to  incorporation,  signs 
his  name  in  a  memorandum  book 
containing  an  agreement  that,  "in 
consideration  of  and  for  the  purpose 
of  becoming  stockholders  in"  the  B. 
&  J.  R.  R.  Co.,  they  "do  hereby  sub- 
scribe and  take  the  number  of  shares 
.  of  the  capital  stock  of  said 
company  set  opposite  [their]  respec- 
tive names,"  and  they  agree  to  pay 
therefor  "as  required  by  said  com- 
pany," and  where  such  person  after 
incorporation  pays  two  calls  on  the 
stock,  he  is  liable  for  the  remainder. 
Buffalo,  etc.  R.  R.  v.  Gifford,  87  N.  Y. 
294   (1882). 

Where  a  person  prior  to  the  incor- 
poration of  a  company  signs  a  paper 
as  follows:  "We,  the  subscribers, 
agree  to  take  the  number  of  shares 
by  us  subscribed,"  etc.,  and  after  his 
name  writes  the  words  "twenty 
shares,"  the  corporation,  after  or- 
ganization, may  enforce  the  subscrip- 
tion. Buffalo,  etc.  R.  R.  v.  Dudley, 
14  N.  Y.  336   (1856). 

Where  there  is  subscribed  to  the 
articles  of  incorporation  a  subscrip- 
tion contract  by  which  subscribers 
agree  to  take  the  number  of  shares 
set  opposite  their  respective  names, 
and  the  corporation  is  subsequently 
organized  and  becomes  insolvent,  a 
subscriber  to  such  subscription  con- 
tract is  liable  on  such  subscription 
for  the  number  of  shares  specified. 
Sagory  v.  Dubois,  3  Sandf.  Ch.  466 
(1846). 

Where  a  statute  requires  that  sub- 
scribers to  the  articles  of  incorpora- 
tion   shall    sign    for   the   number   of 


297 


.74.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[CII.  IV. 


signed  hereby  subscribe  for  the  number  of  shares  set  opposite  our 
names,"  may  be  enforced  by  the  corporation  when  it  is  formed.1  A 
subscription  made  to  the  corporation  itself  after  incorporation  is  of 
course  enforceable  by  it.2 

§  74.  In  New  England  a  subscription  for  stock  cannot  be  enforced 
unless  the  subscriber  expressly  promised  to  pay,  or  the  charter  ex- 
pressly obligated  him  to  do  so.  — Such  is  the  rule  in  Xew  England. 
It  grew  out  of  the  peculiar  charters  of  the  early  turnpike  companies, 


shares  they  take  in  the  company,  a; 
person  who  so  signs  cannot,  prior  to 
the  filing  of  the  articles,  withdraw. 
The  corporation  after  it  is  organized 
may  enforce  his  subscription.  Lake 
Ontario,  etc.  R.  R.  v.  Mason,  16  N.  Y. 
451    (1857). 

A  person  who,  prior  to  incorpora- 
tion, signs  at  the  foot  of  the  articles 
of  incorporation  a  writing  by  which 
he  agrees  to  pay  to  the  directors  the 
sums  which  he  might  from  time  to 
time  be  required  to  pay  on  his  sub- 
scription is  liable  to  the  corporation 
after  it  is  organized.  Stanton  v.  Wil- 
son, 2  Hill,  153    (1841). 

"It  has  been  repeatedly  decided 
that  a  subscription  made  before  a 
corporation  was  in  esse,  with  a  view 
to  a  future  incorporation,  was  bind- 
ing, and  that  corporation,  subsequent- 
ly organized,  could  sustain  an  action 
upon  it."  Reformed,  etc.  Church  v. 
Brown,  17  How.  Pr.  287   (1859). 

Where  a  person  signed  an  instru- 
ment stating  that,  for  value  received, 
he  promised  to  pay  two  individuals 
named  a  specified  sum,  for  the  pur- 
pose of  building  a  plank  road  between 
two  points  named,  and  authorized 
them  to  transfer  such  subscription 
to  a  corporation  thereafter  to  be 
formed  for  that  purpose;  and  a  cor- 
poration was  afterwards  organized  to 
construct  the  road  and  the  subscrip- 
tion transferred  to  it,  in  an  action 
by  the  corporation  to  recover  the 
amount,  held,  that  the  defendant  was 
liable.  Eastern  Plank  Road  Co.  v. 
Vaughan,  14  N.  Y.  546   (1856). 

Where  a  person,  prior  to  incor- 
poration,   signs    a    subscription    con- 


tract which  should  have  been  attached 
to  the  incorporation  papers  but  was 
not,  but  afterwards,  the  corporation 
having  been  organized  in  good  faith 
but  not  in  compliance  with  the  stat- 
ute, he  transfers  a  mortgage  in  pay- 
ment of  his  subscription,  and  still 
later  the  incorporation  is  made  legal 
by  new  papers,  and  he  does  not  sign, 
yet  if  he  paid  the  interest  on  the 
mortgage  after  all  this  he  is  liable 
on  the  subscription.  Valk  v.  Crandall, 
1  Sandf.  Ch.  179   (1S43). 

The  written  agreement  of  a  sub- 
scriber "to  take  the  shares  by  him 
subscribed"  is  sufficient  to  sustain 
an  action  against  him  by  the  judg- 
ment creditor  of  the  corporation. 
Spear  v.  Crawford,  14  Wend.  20 
(1835);  Cole  v.  Ryan,  52  Barb.  168 
(1868). 

A  person  subscribing  to  the  capital 
stock  of  a  bank  incorporated  in  New 
Jersey  must  pay  the  subscription  to 
the  bank,  even  though  the  subscrip- 
tion did  not  contain  an  express  prom- 
ise to  pay.  Dayton  v.  Borst,  31  N.  Y. 
435    (1S65). 

i  Yonkers,  etc.  Co.  v.  Taylor,  30  N. 
Y.  App.  Div.   334    (1898). 

2  A  person  who,  after  the  incor- 
poration of  the  company,  subscribes 
for  its  stock  in  writing,  and  in  such 
writing  agrees  to  pay  for  the  same, 
may  be  held  liable  thereon  by  the 
corporation.  Dutchess  Cotton  Mfy.  v. 
Davis,  14  Johns.  238  (1817);  High- 
land Turnpike  v.  M'Kean,  11  Johns. 
9S  (1814) ;  Goshen,  etc.  Road  v.  Hur- 
tin,  9  Johns.  218  (1812);  Northern 
R.  R.  v.  Miller,  10  Barb.  260  (1851). 


298 


CH.  IV.  J 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§74. 


which  had  shares  of  stock  not  limited  in  amount,  but  indefinite,  so 
that,  as  a  result,  if  a  subscriber  were  liable  at  all,  he  was  liable  for 
the  whole  capital  stock,  except  so  far  as  it  had  already  been  paid  in 
by  himself  and  others.  Consequently,  inasmuch  as  these  charters 
gave  to  the  corporation  the  right  to  forfeit  stock  for  non-payment 
of  subscriptions,  the  courts  held  that  an  action  to  collect  did  not  lie, 
and  that  the  remedy  by  forfeiture  was  the  only  remedy  of  the  cor- 
poration.1 This  rule  has  become  firmly  established  in  the  New  Eng- 
land states,  and  still  prevails  in  its  application  to  all  classes  of  cor- 
porations.2 A  subscriber  who  merely  agrees  to  "take"  a  certain 
amount  of  stock  is  not  liable  on  his  subscription,  at  least  not  until  a 
sale  of  the  stock  has  been  had  under  the  statutory  power  to  sell.3 
But  suit  lies  if  there  is  an  express  promise  to  pay.4 

The  supreme  court  of  Vermont,  however,  has  refused  to  follow  the 
rule  laid  down  in  Massachusetts,  Maine  and  New  Hampshire,  and 
holds  that  where  a  party  subscribes  for  stock  he  may  be  sued  on  the 
subscription,  even  though  he  did  not  expressly  promise  to  pay.5 
Where  a  stockholder  applies  for  stock  and  authorizes  the  insertion  of 


i  Worcester,  etc.  Turnp.  Co.  v. 
Willard,  5  Mass.  80  (1809) ;  Andover, 
etc.  Turnp.  Corp.  v.  Gould,  6  Mass. 
40  (1S09);  New  Bedford,  etc.  Turnp. 
Corp.  v.  Adams,  8  Mass.  13S  (1811); 
Essex  Turnp.  Corp.  v.  Collins,  8  Mass. 
292  (1811);  Franklin  Glass  Co.  v. 
White,  14  Mass.  286    (1817). 


tama  Land  Co.  v.  Holley,  129  Mass. 
540  (1880);  Mechanics',  etc.  Co.  v. 
Hall,  121  Mass.  272  (1876).  In  Maine 
an  agreement  to  "take  and  fill"  a 
number  of  shares  has  been  held  equiv- 
alent to  an  express  promise  to  pay 
for  them.  Buckfield,  etc.  R.  R.  v. 
Irish,   39  Me.   44    (1854);     Penobscot, 


2  Kennebec,   etc.   R.   R.  v.  Kendall,  etc.   R.   R.  v.   Bartlett,   78  Mass.   244 

31  Me.  470   (1850);    Belfast,  etc.  Ry.  (1858);  Pittsburgh,  etc.  R.  R.  v.  Gaz- 

v.  Moore,   60   Me.   561    (1S71) ;     New  zam,  32  Pa.  St.  340    (1858). 

Hampshire  Cent.  R.  R.  v.  Johnson,  30  3  Rockingham,    etc.    Co.    v.    Burlin- 

N.  H.  390    (1S55);    White  Mountains  game,  67  N.   H.   301    (1892). 

R.    R.    v.    Eastman,    34    N.    H.    124  4  Northwood,    etc.   Co.   v.    Pray,   67 

(1856);     Essex,   etc.  Co.  v.  Tuttle,  2  N.  H.  435    (1893).     An  agreement  to 


Vt.  39-3    (1830);    Connecticut,  etc.  R. 
R.     v.    Bailey,    24    Vt.    465     (1852); 


take   and  pay   for  stock  in  a  Maine 
corporation    may    be    enforced    in    a 


Atlantic    Cotton   Mills   v.    Abbott,    63     suit  at  law.     Hastings  Lumber  Co.  v. 


Mass.  423  (1852) ;    Katama,  etc.  Co.  v. 
Jernegan,  126  Mass.  155  (1S79) ;    Bos- 


Edwards,    188  Mass.   587    (1905). 
5  Windsor  Elec.   Light  Co.  v.  Tan- 


ton,    etc.    R.    R.    v.    Wellington,    113     dy,  66  Vt.  248    (1894). 


Mass.  79  (1873);  Buckfield,  etc.  R. 
R.  v.  Irish,  39  Me.  44  (1854) ;  Russell 
r.  Bristol,  49  Conn.  251  (18S1).  Cf. 
Odd  Fellows  Hall  Co.  v.  Glazier,  5 
Harr.  (Del.)  172  (1849);  Stokes  v. 
Lebanon,  etc.  Co.,  6  Humph.   (Tenn.) 


When  "neither  the  general  laws 
nor  the  act  by  which  the  plaintiffs 
were  incorporated,  nor  any  by-laws 
of  the  company,  created  any  forfeit- 
ure of  the  shares  for  the  non-pay- 
ment of  the  assessment,     .     .     .     the 


241  (1845);  City  Hotel  v.  Dickinson,  legal  effect  of  his  (defendant's)  sub- 
72  Mass.  586  (1856);  Belfast,  etc.  R.  scribing  for  the  stock  is  to  render 
R  v   Cottrell,  66  Me.  185  (1876) ;   Ka-    him  liable  in  assumpsit,  even  where 

299 


§  75.]  SUBSCRIPTIONS — METHOD,   PARTIES,   ETC.  [CH.  IV. 

his  name  in  the  charter  of  a  foreign  corporation,  the  charter  contain- 
ing the  provision  that  the  subscriptions  may  be  collected  by  suit, 
such  a  suit  will  lie.1 

§  75.  Professor  Collin's  rules  on  this  subject  —  Professor  Collin, 
of  the  Cornell  Law  School,  states  the  law  on  this  subject  as  follows: 

"The  following  propositions  are  given  as  the  substantially  har- 
monious net  result  of  much  confusion  in  cases  and  text-books.  Ram- 
bling remarks  may  be  found  contrary  to  each  proposition,  but  very 
few  reported  cases  have  been  decided  contrary  to  any  one  of  these 
propositions  upon  the  facts  coming  within  it,  and  I  believe  every 
proposition  can  be  sustained  in  any  state  or  federal  court: 

"(a)  A  preliminary  agreement  to  form  a  corporation  and  take 
stock  therein  is  not  a  contract  by  the  subscribers  with  each  other, 
and  cannot  be  enforced  by  one  or  more  against  any  other,  but  only 
by  the  corporation. 

"(b)  Such  an  agreement,  not  made  as  a  step  authorized  by  statute 
in  the  process  of  forming  the  corporation,  is  a  mere  offer  to  the  corpo- 
ration not  yet  in  existence,  and  is  revocable  by  any  subscriber  until 
the  birth  of  the  corporation,  which  operates  as  an  acceptance  of  the 
offer,  and  thereafter  the  subscription,  if  not  previously  revoked,  is 
irrevocable  and  may  be  enforced  by  the  corporation. 

"(c)  Such  an  agre<  ment,  made  as  a  step  authorized  by  statute 
in  the  process  of  forming  a  corporation,  is  made  valid  by  the  statute, 
and  is  binding  upon  each  subscriber  from  the  time  of  signing,  and 
is  irrevocable  thereafter,  but  can  be  enforced  only  by  the  corporation. 

"(d)  An  agreement  to  pay  money  to  trustees,  to  be  by  them  paid 
to  a  corporation  thereafter  to  be  created,  the  trustees  to  return  to  the 
subscribers  stock  in  the  corporation  accordingly,  is  a  valid  contract 
between  the  subscribers  and  the  trustees. 

"(e)  The  distinction  made  between  a  present  subscription  and  an 
agreement  to  subscribe  to  the  stock  of  a  corporation  thereafter  to 
be  created  is  unsound  in  principle,  and  disappears  as  mere  dicta 
upon  a  thorough  sifting  of  the  cases.2 

"(f)  The  damages  recoverable  by  the  corporation  upon  a  sub- 
scription is  the  amount  of  the  subscription ;  and  all  discussion  of  any 
other  measure  of  damages,  such  as  difference  between  par  and 
market  value  of  stock  subscribed,  arises  from  a  misconception  of  the 
situation,  and  disappears  from  the  net  result  of  the  authorities." 

there  is  no  express  promise  to  pay."  2  Quoted   and    approved   in   Woods, 

Essex    etc.   Co.  v.   Tuttle,   2  Vt.  393  etc.  Co.  v.  Brady,  39  N.  Y.  Misc.  79 

(1830).  (1902). 

1  Anglo-American,  etc.  Co.  v.  Dyer, 

181  Mass.  593  (1902). 

300 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§  76. 


§  70.  Stockholders'  agreements  to  guarantee  company  debts  and 
stockholders'  contracts  for  the  benefit  of  the  corporation.— An  agree- 
ment of  stockholders  to  be  responsible  for  future  debts  of  the  cor- 
poration can  be  enforced,  but  the  corporation  and  all  the  parties  are 
to  be  made  parties  defendant.1 

Where  the  stockholders  enter  into  a  contract  by  which  they  give 
a  certain  amount  of  their  stock  to  a  person  who  agrees  to  do  cer- 
tain work  for  the  corporation  in  consideration  of  the  stock  the  rem- 
edy for  a  breach  of  contract  on  his  part  is  an  action  for  damages, 
unless  by  the  contract  the  stock  was  to  be  returned  in  case  of  non- 
performance.2   Advances  made  by  one  of  the  promoters  to  the  com- 


i  Farmers'  Nat.  Bank  v.  Hannon,  14 
Fed.  Rep.  593  (1883),  If  the  plaintiff 
is  one  of  the  parties  to  the  agreement 
his  remedy  is  in  equity.  Farmers' 
Nat.  Bank  v.  Hannan,  4  Fed.  Rep. 
612  (1880).  See  also  69  Atl.  Rep.  788. 
An  agreement  of  stockholders  to 
indemnify,  protect,  and  save  harm- 
less in  proportion  to  their  stock  other 
stockholders  who  sign  corporate 
notes,  construed,  and  the  remedy  ex- 
plained. Taylor  v.  Coon,  79  Wis.  76 
(1891);  Taylor  v.  North,  79  Wis.  86 
(1891). 

Stockholders  who  sign  corporate 
notes  are  co-sureties  and  not  guaran- 
tors. Southerland  v.  Fremont,  107  N. 
C.  565   (1890). 

An  agreement  of  stockholders  that 
if  a  creditor  of  the  corporation  will 
release  certain  security  they  will  give 
other  security  or  that  the  debt  will 
be  paid  is  a  contract  of  guaranty  and 
not  an  original  undertaking.  Home 
Nat.  Bank  v.  Waterman,  134  111.  461 
(1890).  An  agreement  whereby  one 
corporation  borrows  money  from  the 
stockholders  of  another  corporation, 
and  agrees  to  repay  the  same,  is  en- 
forcible  by  such  stockholders  in  an 
action  at  law  and  the  remedy  is  not 
in  equity.  Thomas  v.  Council  Bluffs, 
etc.  Co.,  92  Fed.  Rep.  422  (1899). 
Where  a  vendor  of  machinery  to  a 
corporation  takes  its  bonds  in  pay- 
ment therefor  on  the  promise  of  the 
officers  that  they  will  purchase  the 
bonds  at  par  at  any  time  within  six 


months,  he  may  tender  the  bonds  and 
sue  for  the  purchase  price.  Erie, 
etc.  Works  v.  Thomas,  139  Fed.  Rep. 
995   (1905). 

2  Gillett  v.  Bowen,  23  Fed.  Rep.  625 
(1885).    See  also  §  662,  infra.    If  the 
action   is  to  recover  back  the  stock, 
the  corporation  is  a  proper  party  in 
order  to  obtain  a  transfer.     Johnson 
v.  Kirby,  65  Cal.  482  (1884).   See  also, 
in    general,    Cates    v.    Sparkman,    73 
Tex.   619    (1889).     For  the   construc- 
tion of  a  contract  by  which  the  own- 
ers of  all  the  stock  of  a  mining  com- 
pany turned  it  over  in  pledge  to  par- 
ties  who    would    furnish   the   money 
to  carry  on  the  mine,  see  Newton  v. 
Van  Dusen,  47  Minn.  437  (1891).  For 
the    construction     of    an    agreement 
whereby  a  stock  and  bond  holder  de- 
posits   all    his    stock    and    bonds    as 
security   to   another   person  who   ad- 
vances money  to  carry  on  the  busi- 
ness, see  Huston's  Appeal,  127  Pa.  St. 
620     (1889).      Where    a    stockholder, 
owning  a  majority  of  the  stock,  trans- 
fers it  to  a  person  under  a  contract 
by  the  latter  to  do  certain  work  for 
the  corporation,  and  make  a  loan  to 
the  former,  and  retain  the  former  as 
president,  but  the  stockholder  endeav- 
ors to  sell  out  to  another  party,  his 
bill  in  equity  to  set  aside  the  trans- 
fer  as   obtained    by   fraud    will   fail. 
Healey    v.     Loveridge,     72    Md.     220 
(1890).     Where,   for  the  purpose   of 
forwarding    a    corporate     enterprise, 
one  of  its  chief  promoters  contracts 


301 


76.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[CH.  IV. 


pany  may  be  shown  to  be  in  performance  of  his  contract  with  his 
associates  and  substantially  as  payments  for  his  stock,  and  that  the 
company  is  not  liable  to  repay  the  same.1 

A  stockholder  may  hold  liable  in  damages  a  person  who  lias  broken 
his  agreement  to  loan  money  to  the  corporation,  the  consideration  of 
such  agTecment  having  been  furnished  by  the  stockholder.     But  if 


to  give  and  sell  to  a  third  person 
certain  bonds,  etc.,  if  the  latter  will 
do  certain  acts,  the  former  cannot, 
after  part  performance  by  the  latter, 
rescind  and  recover  back  the  bonds, 
etc,  unless  he  recompenses  the  lattev 
for  his  part  performance;  nor  can 
he  rescind  at  all  unless  he  can  recom- 
pense the  latter.  His  remedy  is  for 
damages.  Such  is  the  rule  even  though 
defendant  is  charged  with  fraud  in  re- 
fusing complete  performance.  Snow  v. 
Alley,  144  Mass.  546  (1887).  Where 
the  stockholders  transfer  a  portion  of 
their  stock  to  one  of  their  number 
to  be  disposed  of  by  him  for  the  in- 
terests of  the  company  and  to  raise 
money  to  carry  on  business,  he  may 
use  a  portion  of  the  same  to  reim- 
burse one  of  the  stockholders  for 
stock  which  the  latter  used  in  the 
interest  of  the  company.  Playa,  etc. 
Co.  v.  Gage,  60  N.  Y.  App.  Div.  1 
(1901);  aff'd,  172  N.  Y.  630.  Aeon- 
tract  whereby  a  stockholder  delivers 
certain  stock  for  money  to  be  paid 
to  the  corporation,  the  money  to  be 
repaid  out  of  dividends  and  in  other 
ways,  and  the  stock  then  to  be  re- 
turned, is  a  conditional  sale  and  not 
a  loan  to  the  corporation.  Crimp  v. 
McCormick  Const.  Co.,  71  Fed.  Rep. 
356  (1896).  Where  a  director  loans 
money  to  the  company  and  takes  se- 
curity, and  afterwards  uses  such  se- 
curity to  secure  another  loan  to  the 
company  from  another  party,  the 
latter  party  cannot  by  agreement 
with  the  corporation  dispose  of  such 
security  without  the  knowledge  of 
the  director,  and  if  he  does  so  the 
director  is  released  from  liability  and 


may  reclaim  the  property.  Wright, 
etc.  v.  McAdam,  113  N.  Y.  App.  Div. 
872  (1906).  In  the  case  Dudley  v. 
Armenia  Ins.  Co.,  115  N.  Y.  App.  Div. 
380  (1906),  it  was  held  that  a  stock 
holder  who  with  other  stockholders 
pledged  his  stock  to  secure  a  debt 
from  the  corporation,  and  whose 
stock  was  sold  out  for  the  non-pay- 
ment of  the  debt,  cannot  hold  the 
pledgee  liable  in  damages,  even 
though  he  charges  that  the  latter 
wrecked  the  corporation  and  thereby 
rendered  the  stock  valueless,  the  de- 
cision being  based  on  the  theory  that 
the  depreciation  in  the  value  of  the 
stock  was  due  to  a  wrong  perpetrated 
upon  the  corporation,  for  which  the 
remedy  in  the  first  instance  was  with 
the  corporation.  A  contract  by  which 
the  president  agrees  to  give  fifty 
shares  of  stock  to  an  employee  who 
lives  up  to  his  contract  with  the  cor- 
poration, has  no  consideration  and 
cannot  be  enforced,  although  it  might 
be  otherwise  if  the  employee  could 
prove  that  he  entered  into  the  con- 
tract with  the  corporation  by  reason 
of  such  promise.  Petze  v.  Leary,  117 
N.  Y.  App.  Div.  829  (1907).  Where 
stockholders  contribute  a  part  of 
their  stock  to  one  of  their  number 
to  use  in  robbing  a  railroad  and  brib- 
ing a  judge,  and  he  uses  only  a  part 
of  it  for  that  purpose,  he  cannot  be 
compelled  by  the  others  to  distribute 
among  them  the  balance.  The  court 
will  leave  the  parties  where  it  finds 
them.  Tobey  v.  Robinson,  99  N.  Y. 
222    (1881).     Compare  §39,  supra. 

i  Hollins  v.   American,   etc.  Co.,   66 
N.  J.  Eq.  457   (1905). 


302 


CH.  IV.] 


SUBSCRIPTIONS METHOD,  PARTIES,  ETC. 


[§76. 


the  agreement  did- not  provide  for  any  particular  duration  of  tlie 
loan,  only  nominal  damages  can  be  recovered.1 

It  lias  been  held  that  a  stockholder's  agreement  to  pay  a  "corporate 
debt  is  not  void  under  the  statute  of  frauds,  even  though  it  is  oral  f 
but  in  England  it  is  held  that  a  director's  verbal  agreement  to  in- 
dorse paper  of  the  corporation  is  void  by  the  statute  of  frauds.3 

Where  the  solvent  stockholders  agree  that  they  will  severally  con- 
tribute to  raise  a  fund  to  pay  the  corporate  liabilities,  the  agreement 
is  valid  and  enforceable,  and  each  must  contribute  in  the  proportion 
that  the  number  of  shares  held  by  him  bears  to  the  number  of  shares 
held  by  all  those  who  entered  into  such  agreement,4     A  bond  given 


1  Kelly  v.  Fahrney,  97  Fed.  Rep. 
176    (1899). 

2  Emerson  v.  Slater,  22  How.  28 
(1S59).  The  oral  guarantee  of  di- 
rectors that  money  loaned  by  a  bank 
to  their  corporation  will  be  made 
good  by  them  is  within  the  statute  of 
frauds  and  not  enforceable.  Mechan- 
ics' etc.  Bank  v.  Stettheimer,  116  X. 
Y.  App.  Div.  19S  (1906). 

3  Harbourg,  etc.  Co.  v.  Martin,  86 
L.  T.  Rep.  505  (1902).  Contra,  An- 
dover  Free  Schools  v.  Flint,  54  Mass. 
539    (1847). 

4  Sterling  Wrench  Co.  v.  Amstutz, 
50  Ohio  St.  4S4  (1893).  A  contract 
by  which  several  stockholders  each 
agreed  to  pay  loans  made  by  certain 
persons  to  the  corporation  is  a  sev- 
eral contract  and  may  be  enforced 
against  each  without  joining  the  oth- 
ers. Dornan  v.  Swift,  1  Pennewill 
(Del. >,  457  (1S98).  Where  the  stock- 
holders authorize  the  receiver  of  an 
insolvent  bank  to  borrow  money  to 
pay  debts  of  the  company,  each  of 
said  stockholders  to  be  liable  there- 
for in  proportion  to  his  holdings  of 
stock,  a  person  so  loaning  the  money 
to  the  receiver  on  the  faith  of  such 
agreement  may  bring  suit  against 
them  and  all  may  be  joined  without 
joining  the  bank  or  the  receiver. 
Hanover,  etc.  Bank  v.  Cocke,  127  N. 
C.  467  (1900).  Where  six  stockhold- 
ers, in  order  to  enable  the  corpora- 
tion to  borrow  money,  agree  that  one 
of  them  shall  indorse  the  company's 


note  for  the  full  amount,  and  that 
the  other  five  shall  each  give  their 
note  for  one-sixth  of  the  amount  to 
the  corporation  and  that  the  corpora- 
tion shall  indorse  the  five  notes  to 
the  one  who  indorsed  the  company's 
note  for  the  full  amount,  which  was 
sold  to  an  outsider,  the  obligors  in 
such  notes  for  one-sixth  each  are 
guarantors  or  sureties  to  the  one  who 
indorsed  the  note  for  the  full  amount, 
and  hence  his  renewal  of  the  princi- 
pal note  does  not  release  them.  Koeh- 
ler  v.  Hussey,  57  S.  W.  Rep.  241  (Ky. 
1900).  Where  one  stockholder  agrees 
with  the  others  that  he  will  advance 
money  to  pay  the  debts  of  the  cor- 
poration and  that  all  the  stockhold- 
ers shall  contribute  pro  rata,  he  may 
maintain  an  action  against  them  for 
such  contribution.  Davidson  v.  Gret- 
na, etc.  Bank,  59  Neb.  63  (1899). 
The  agreement  of  a  stockholder  of  an 
insolvent  corporation  to  pay  pro  rata 
its  debt  to  a  bank  after  the  assets 
of  the  company  have  been  exhausted, 
is  not  binding,  there  being  no  consid- 
eration. In  re  Lehnhoff's  estate,  109 
X.  W.  Rep.  164  (Neb.  1906).  A  stock- 
holder may  defend  against  a  guar- 
anty of  the  company's  debts  on  the 
ground  that  it  was  not  to  be  deliv- 
ered until  other  stockholders  signed 
it.  Blair  v.  Security  Bank,  103  Va. 
762  (1905).  Where  by  a  subscriber's 
contract,  the  loss,  if  any,  is  to  be 
divided  among  them  pro  rata,  the  pro- 
portion  of  one   is   not  increased  by 


303 


§  76.] 


SUBSCRIPTIONS — METHOD,    PARTIES,   ETC. 


[ch.  rv. 


by  stockholders  for  the  payment  of  notes  to  a  specified  amounl  to 
be  issued  by  1  ho  corporation  within  a  specified  lime  is  enforcible 
even  though  one  of  the  bondsmen  dies  during  that  time  and  notes  are 


the  insolvency  of  another.  Kentucky, 
etc.  Assoc,  v.  Miller,  119  Ky.  393 
(1905).  A  holder  of  notes  of  the 
corporation,  who  endorses  and  deliv- 
ers them  up  to  the  corporation,  on 
an  agreement  that  the  latter  should 
deliver  them  to  a  stockholder,  who 
would  advance  the  money  to  take 
them  up,  is  not  liable  as  an  endorser 
of  the  notes.  Bradley  v.  Bush,  1  Cal. 
App.  516  (1905).  Where  stockholders 
each  agree  on  default  of  the  corpora- 
tion in  paying  a  note  to  purchase  a 
proportionate  part  of  the  collateral, 
and  the  corporation  borrows  but  a 
part  of  the  sum,  the  liability  of 
stockholders  signing  the  agreement 
is  in  proportion  to  the  amount  ac- 
tually borrowed.  Buffalo  Loan,  etc. 
Co.  v.  Carstcnsen,  107  N.  Y.  App.  Div. 
128  (1905);  aff'd,  1SG  N.  Y.  60S. 
Where  several  stockholders  assign  as 
security  to  a  corporate  note  their  un- 
paid subscriptions  and  the  holder  of 
the  note  enforces  the  same  against 
a  part  of  them  they  may  have  con- 
tribution from  the  others.  Hart  v. 
Sickles,  45  Misc.  Rep.  174  (1904). 
A  contract  between  officers  on  distri- 
bution of  assets  of  an  insolvent  cor- 
poration whereby  three  of  them 
agree  to  pay  a  note  held  by  a  cred- 
itor is  legal  and  may  be  established 
in  a  court  of  law.  Mills  v.  Hender- 
shot,  70  N.  J.  Eq.  258  (1905).  Where 
a  few  of  the  directors  and  stockhold- 
ers of  a  bank  borrow  money  for  their 
note  to  pay  a  bad  debt  due  their  bank, 
and  their  bank  afterwards  purchases 
such  note,  they  are  liable  to  their 
bank  on  the  note.  Traders',  etc. 
Bank  v.  Black,  60  S.  E.  Rep.  743 
(Va.  1908). 

The  agreement  of  the  stockholders 
to  secure  the  directors  for  becoming 
sureties  for  corporate  loans  is  a  sev- 
eral and  not  a  joint  obligation,  if 
the  obligation  is  so  drawn,  and  the 


obligation  is  original  and  not  a  col- 
lateral obligation  of  suretyship. 
Spencer  v.  McLean,  20  Ind.  App.  626 
(1898). 

A  contract  by  which  stockholders 
agreed  to  turn  in  proportionately  the 
notes  of  the  company  as  a  contribu- 
tion  to  the  company  was  construed  in 
Traders'  Nat.  Bank  v.  Smith,  22  S. 
W.  Rep.  1056    (Tex.  1893). 

A  corporation  may  enforce  an 
agreement  of  the  stockholders  to  con- 
tribute to  the  payment  of  the  debts. 
Lillard  v.  Decatur,  etc.  Co.,  36  S.  W. 
Rep.  792   (Tex.  1S96). 

Where  the  solvency  of  a  bank  is 
questioned,  and  the  directors  give 
their  accommodation  notes  to  the 
bank  to  give  it  credit,  such  notes  are 
enforceable.  Dykman  v.  Keeney,  10 
N.  Y.  App.  Div.  610    (1896). 

In  Wisconsin,  etc.  Bank  v.  Wilkin, 
95  Wis.  Ill  (1896),  the  court  held 
that  a  guaranty  by  the  stockholders 
of  the  debts,  each  of  the  guarantors 
agreeing  to  pay  the  proportion  which 
his  stock  held  to  the  whole  capital 
stock,  rendered  each  stockholder  lia- 
ble for  all  the  debts,  it  appearing 
that  some  of  the  signers  did  not  hold 
any  of  the  stock. 

A  bank  may  accept  a  deed  of  real 
estate  from  a  stockholder  and  di- 
rector to  make  good  an  impairment 
of  the  capital  stock,  it  being  agreed 
that  compensation  therefor  should  be 
paid  from  future  profits.  Brown  v. 
Bradford,  103  Iowa,  378   (1S97). 

Where  certain  stockholders  agree  to 
pay  a  proportion  of  the  corporate 
debts  if  the  other  solvent  stockhold- 
ers sign,  a  partial  payment  by  the 
former  does  not  prevent  their  defend- 
ing against  the  agreement  on  the 
ground  that  other  solvent  stockhold- 
ers have  not  signed.  Brady  v.  Eliot, 
181  Pa.  St.  259    (1897). 

A  subscription  to  pay  pro  rata  the 


304 


CH.  IV.] 


SUBSCRIPTIONS METHOD,  PARTIES,  ETC. 


[§  76. 


issued  thereafter.1  "Where  directors  are  joint  indorsers  of  corporate 
notes,  and  one  of  them  buys  the  property  at  public  sale  in  good  faith 
and  pays  the  notes,  he  may  sue  the  others  for  contribution  and  need 
not  account  for  profits  he  made  in  such  purchase.2  A  stockholder 
who  voluntarily  pays  more  than  par  for  his  stock  cannot  compel  the 
company  to  repay  to  him  the  excess,  even  though  other  stockholders 
paid  only  par,  it  being  shoivn  that  the  parties  originally  agreed  on 

losses  of  a  specific  public  enterprise  power  to  mortgage  such  land,  and  the 
was  construed  in  Laramee  v.  Tanner,  mortgagee   is  protected   even  though 
69  Minn.  156    (1897).  the  proceeds  are  misapplied.    Steinke 
As    to    accommodation   notes   given  v.  Yetzer,  108  Iowa,  512    (1899).     An 
by   the   stockholders   to   the   corpora-  insolvent  individual  who  owes  a  bank 
tion  and  the  withdrawal  of  one,  see  may  convey  land  to  the  bank  for  the 
Patterson  v.  Bank  of  B.  Columbia,  26  benefit    of    depositors,    and    the    doc- 
Oreg.    509    (1S95).      The    fact   that   a  trine  that  individual  assets  must  be 
stockholder   guaranteed   the  payment  applied  to  individual  debts  before  be- 
of   a   corporate   note   does   not  make  ing  applied  to  partnership  debts  does 
him  liable   to  the  corporation   itself,  not  apply,  even  though  he  owns  one- 
Wright  v.  Knoxville,  etc.  Co.,  59  S.  W.  half  of  the  stock  of  the  bank.   Steinke 
Rep.   677    (Tenn.   1900).     As   against  v.  Yetzer,  108  Iowa,  512    (1S99). 
a  receiver  notes  given  as  a  contribu-         i  Home,    etc.    Bank    v.    Hosie,    119 
tion  to  the  corporation  may  be  shown  Mich.  116    (1S98). 
to  have  been  given  upon  conditions.        2  Weeks  v.  Parsons,   176  Mass.  570 
Catt    v.   Olivier,    98   Va.    5S0    (1900).  (1900).     Corporate  property  held  by 
At  common   law   a   married   woman,  a  trustee  for  stockholders  who  made 
even  though  she  owns  a  majority  of  loans  to  the  corporation  does  not  pass 
the    stock    of    a    corporation,    cannot  to  his  trustee  in  bankruptcy.     In  re 
bind    herself    to    pay    its    debts,    and  Coffin,    152    Fed.    Rep.    381     (1907). 
even   under   the   New   Jersey   statute  Where  stockholders  purchase  at  fore- 
she  does  not  obtain  anything  for  the  closure  sale  and  convey  the  title  to 
use  of  her  separable  estate  sufficient  one  of  their  number  and  subsequent- 
to    sustain    such    promise.      Allen    v.  ly  consent  to  a  decree  vesting  com- 
Beebe,  C3  X.  J.  L.  377  (1899).  plete   title   in   him,   and   he  becomes 
An   agreement   of   one    stockholder  bankrupt,    his   creditors   are   entitled 
to  pav  interest  on  the  money  invest-  to    the   property,    even   though   from 
ed    by    the    others    is    binding.      The  time    to     time    he    had    distributed 


contract  may  be  equivalent  to  a  pur- 
chase-money mortgage  and  may  en- 
title the  holders  to  a  foreclosure. 
Near  v.  Donnelly,  80  Mich.  130  (1890). 


among  the  stockholders  the  proceeds 
of  sales  of  parcels  of  the  property 
sold  by  him.  In  re  Coffin,  146  Fed. 
Rep.    181    (1906).      Where    the    pur- 


In  the  case  of  Wisconsin,  etc.  Bank  chaser  at  foreclosure  sale  purchases 

v.  Mann,  100  Wis.  596  (1898),  a  guar-  for   the   benefit  of   stockholders   who 

antee   by   stockholders    was    declared  advance  the  money  for  that  purpose, 

not    enforceable   because    it    did    not  a  subsequent  sale  of  his  stock  by  one 

correctly    state    the    oral    agreement  of    the    stockholders    who    advanced 

leading  up  to   it.     Where  the   presi-  the  money  carries  his  interest  in  the 

dent  of  a  bank    in  order  to  aid   its  property   so   purchased.     Riordan   v. 

credit,  deeds  land  to  the  bank  to  se-  Schlicher,   146   Ala.    615    (1906). 
cure    the    depositors,    the    bank    has 

(20)  305 


§76.] 


SUBSCRIPTIONS — METHOD,    PARTIES,    ETC. 


[CH.  IV. 


the  payments  as  made.1  Where  notes  arc  given  by  the  directors 
instead  of  the  corporation,  they  are  practically  sureties,  the  lender 
having  insisted  that  the  transaction  be  that  way,  but  all  the  parties 
knowing  that  it  was  for  the  benefit  of  the  corporation.2  A  cor- 
porate creditor  cannot  enforce  a  person's  agreement  to  pay  the  cor- 
porate debts  and  take  stock  in  payment.3  In  JSTew  York,  however, 
where  the  director  and  treasurer  of  an  insolvent  corporation  promises 
its  creditors  that  he  will  pay  its  debts  if  he  is  allowed  to  acquire  the 
property  at  a  judicial  sale  for  less  than  its  real  value,  they  may 
enforce  such  promise.4  A  subscription  agreement  signed  by  various 
parties  to  pay  the  amount  set  opposite  their  respective  names,  towards 
a  creamery,  is  several  and  not  joint.5 

An  agreement  of  stockholders  that  if  a  creditor  of  the  corpora- 
tion will  release  certain  security  they  will  give  other  security,  or 
that  the  debt  will  be  paid,  is  a  contract  of  guaranty  and  not  an 
original  undertaking.6 

Where  the  stockholders  loan  money  to  the  company  to  be  repaid 
out  of  the  first  net  earnings,  no  repayment  will  be  ordered  whore 


i  Esgen  v.  Smith,  113  Iowa,  25 
(1901). 

2  Hughes  v.  Ladd,  42  Oreg.  123 
(1902). 

3  Washburn  v.  Interstate  Inv.  Co., 
26  Oreg.  436  (1894).  But  where  the 
corporation  assigns  claims  to  its 
president  upon  his  guaranty  that  he 
will  pay  therefrom  certain  corporate 
debts,  such  guaranty  may  be  enforced 
by  such  creditors.  Telford  v.  Oslin, 
99  Ga.   507    (1896). 

4  Lilienthal  v.  Betz,  185  N.  Y.  153 
(1906). 

5  Cornish  v.  West,  82  Minn.  107 
(1901).  See  also  §  72,  supra.  A  sub- 
scription agreement  prior  to  incor- 
poration, in  which  the  parties  state 
the  number  of  shares  taken,  and  in 
which  they  agree  to  pay  the  con- 
tractors, who  are  parties  to  the  con- 
tract, a  specified  sum,  is  a  joint  un- 
dertaking on  the  subscribers'  part. 
The  contractors  may  hold  them  liable 
as  partners,  the  agreement  not  limit- 
ing their  liability  to  the  number  of 
shares  taken  by  each.  An  immaterial 
alteration  after  a  part  have  signed 
does  not  release  any  one.  The  agree- 
ment of  the  contractors  to  hold  each 


subscriber  liable  only  on  his  sub- 
scription if  he  would  pay  that  is 
without  consideration  and  void.  Any 
subscriber  could  expressly  limit  his 
liability  to  his  subscription.  Davis 
v.  Shafer,  50  Fed.  Rep.  764  (1892). 
See  Doud  v.  National  Park  Bank,  54 
Fed.  Rep.  846  (1893).  Cf.  Davis,  etc. 
Co.  v.  Barber,  51  Fed.  Rep.  148 
(1892);  Conrad  v.  La  Rue,  52  Mich. 
83  (1883). 

c  Home  Nat.  Bank  v.  Waterman, 
134  111.  461  (1890).  Stockholders  who 
sign  corporate  notes  are  co-sureties 
and  not  guarantors.  Southerland  v. 
Fremont,   107   N.   C.   565    (1890). 

Where  the  stockholders  guarantee 
the  debts  of  the  company,  no  notice 
of  the  acceptance  of  the  guaranty, 
when  acted  on,  need  be  given.  Doud 
v.  National  Park  Bank,  54  Fed.  Rep. 
846   (1893). 

Where  the  vendors  of  stock  guar- 
antee that  the  stock  shall  be  non- 
assessable until  they  have  advanced 
$30,000,  a  stockholder  who  is  held 
liable  on  a  statutory  liability  may 
hold  the  guarantors  liable  if  they 
have  not  paid  the  $30,000.  Omo  v. 
Bernart,  10S  Mich.  43   (1895). 


306 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§76. 


the  company  becomes  insolvent  and  the  court  distributes  the  assets.1 
Where  a  stockholder  agrees  with  corporate  creditors  that  he  will 
buy  the  property  at  foreclosure  sale  and  pay  a  price  sufficient  to  pay 
their  debts,  they  may  hold  him  liable  if  he  does  not  do  so,  even 
though  it  is  not  in  writing.2  Directors  are  liable  on  a  note  given  by 
them  to  a  bank  to  make  up  losses  of  the  bank.3  Where  the  president 
of  a  bank  agrees  that  a  subscriber  for  stock  giving  in  payment  the 
notes  of  another  party  will  not  be  held  liable  as  an  endorser  thereon, 
the  president  is  liable  to  him  if  he  is  afterwards  held  liable  as  en- 
dorser.4 An  embarrassed  corporation  may,  in  order  to  obtain  work- 
ing capital,  borrow  money  on  its  notes  endorsed  by  its  stockholders 
and  directors  and  may  give  a  mortgage  to  secure  them.5 

"Where  stockholders  voluntarily  assess  themselves,  to  relieve  the 
corporation  from  pecuniary  embarrassment,  or  for  the  betterment 
of  their  stock,  whatever  may  be  the  occasion  of  the  assessment,  the 
advances  thus  made  are  not  debts  against,  but  assets  of,  the  corpora- 
tion."6 

i  Lyman  v.  Northern,  etc.  Co.,  G2  A  loan  from  stockholders  to  be  re- 
Fed.  Rep.  891  (1894).  Where  a  pur-  paid  from  the  first  profits  is  payable 
chaser  of  stock  agrees  to  and  does  absolutely  within  a  reasonable  time 
advance  money  to  the  corporation  to  if  no  profits  are  made.  Busby  v. 
make  it  financially  strong,  the  amount  Century,  etc.  Co.,  27  Utah,  231  (1904). 
to  be  repaid  when  the  company  is  in  Notes  given  by  the  directors  of  a 
condition  to  repay  it,  he  cannot  there-  bank  to  replace  impaired  capital  may 
after,  when  the  corporation  becomes  be  enforced  by  its  receiver,  even 
insolvent,  undo  the  transaction  and  though  it  was  agreed  that  they  were 
obtain  a  preference  for  such  advances,  to  be  paid  out  of  profits.  State  Bank, 
Hart  v.  Globe  Ins.  Co.,  113  Fed.  Rep.  etc.  v.  Kirk,  216  Pa.  St.  452  (1907). 
307  (1882).  Where  the  directors  of  2  Satterfield  v.  Kindley,  57  S.  B. 
a  corporation,  in  order  to  restore  the  Rep.  145  (N.  C.  1907). 
capital  stock  which  has  been  im-  3  Skordal  v.  Stanton,  89  Minn.  511 
paired,  agree  that  one  of  them  shall  (1903).  See  also  69  Atl.  Rep.  490. 
give  his  note  to  the  corporation  and  4  Patrick  v.  Barker,  112  N.  W.  Rep. 
that  the  others   shall   be  responsible  358   (Neb.  1907). 

for    their    proportionate    part    of    the  5  Webster    v.     Ypsilanti,     etc.     Co., 

note,   the   note  to  be   retired   out  of  113  N.  W.  Rep.  7   (Mich.  1907). 

the  earnings  of  the  company,  and  the  6  Brodrick  v.   Brown,   69  Fed.  Rep. 


maker  of  the  note  pays  it,  he  may 
recover  from  the  others  their  part 
of  the  same.  Crane  v.  Bayley,  126 
Mich.    323    (1901).      Where    a    stock- 


497  (1895).  Where  a  person  owns 
the  entire  capital  stock  of  a  corpora- 
tion and  contributes  money  to  it  by 
reason  of  its  capital  stock  being  im- 


holder  advances    money   to    the    cor-  paired,  and   then  sells  all  the  stock, 

poration   and   agrees   not  to   demand  he  cannot  claim  that  the  corporation 

repayment  so  long  as  the  business  is  owes  him  the  money  so  contributed, 

continued,    he    may    demand    repay-  such  money  having  been  charged  by 

ment  within  a  reasonable  time  after  him  on  the  books  to  profit  and  loss, 

the  business  is  discontinued.     Burke  Times,    etc.    Co.    v.    Given,    106    Fed. 

v.  Sidra  Bay  Co.,  116  Wis.  137  (1902).  Rep.  253    (1900). 

307 


76.] 


SUBSCRIPTIONS — METHOD,   PARTIES,   ETC. 


[CH.  rv. 


Where  the  vendor  agrees  by  contract  with  the  vendee,  and  ac- 
cepted by  the  company,  that  he,  the  vendor,  will  for  five  years  give 
his  personal  supervision  to  the  business  of  the  company,  he,  the 
vendor,  cannot  recover  compensation  from  the  company  for  such 
services.1  The  agreement  of  the  purchaser  of  the  majority  of  the 
stock  that  he  will  indemnify  and  save  harmless  the  vendors  from  the 
liabilities  of  the  company  does  not  render  the  vendee  liable  to  the 
creditors   of  the  company,2   nor  to  the   corporation.3      The    agree- 


A  fund  raised  by  the  stockholders 
for  the  benefit  of  the  creditors  and 
deposited  in  the  bank  may  be  used  by 
the  company  to  pay  a  debt  due  to 
the  bank,  the  bank  having  no  notice 
of  the  trust  character  of  the  fund. 
Wyman  v.  National  Bank,  51  Neb.  636 
(1897). 

Where  the  owner  of  oil  lands  agrees 
to  convey  them  to  a  corporation  for 
stock,  and  to  give  one-half  of  the 
stock  to  another  party,  who  pays  the 
vendor  five  thousand  dollars  and  pays 
to  the  corporation  twenty-five  thou- 
sand dollars,  the  twenty-five  thou- 
sand dollars  is  not  to  be  credited 
as  a  payment  by  the  vendor  on  an 
assessment  on  his  stock.  Hardee  v. 
Sunset  Oil  Co.,  56  Fed.  Rep.  51 
(1893).  A  stockholder  who  voluntar- 
ily guarantees  or  assumes  a  debt  of 
the  corporation  cannot,  in  case  he  is 
compelled  to  pay,  claim  contribution 
from  the  other  stockholders.  Gorder 
v.   Connor,   56  Neb.   781    (1898). 

Where  subscribers  for  stock  loaned 
money  to  the  company  on  condition 
that  it  be  repaid  to  them  through  a 
trustee,  and  repayment  is  made  to 
the  trustee,  a  corporate  creditor  can 
attack  the  transaction  only  by  a  bill 
in  equity.  Baltimore,  etc.  R.  R.  v. 
Kensington  Land  Co.,  175  Pa.  St.  95 
(1896).  Where  the  chief  stockhold- 
er has  paid  a  corporate  debt  by  giv- 
ing his  own  notes  therefor,  and  sub- 
sequently the  corporation  again  as- 
sumes the  debt,  the  transaction  is 
legal  as  against  subsequent  creditors 
of  the  corporation.  Fernald  v.  High- 
land Hall  Co.,  59  Kan.  534  (1898). 
Even   though   a   stockholder   pledges 


his  stock  to  secure  a  debt  of  the 
corporation,  and  such  stock  is  sold 
out,  yet  he  is  not  entitled  to  an  equal 
amount  of  stock  from  the  corpora- 
tion, but  is  merely  a  creditor  of  it. 
Dempster  v.  Rosehill,  etc.  Co.,  206 
111.  261  (1903).  Where  minority 
stockholders  agree  to  finance  the  com- 
pany if  they  are  given  control  of 
its  business  and  under  such  agree- 
ment do  finance  the  company  and  the 
majority  stockholders  then  take  con- 
trol, the  minority  stockholders  may 
have  a  receiver  appointed,  if  the  com- 
pany is  not  able  to  repay  money  ad- 
vanced on  their  credit.  Wood,  etc. 
Co.  v.  American,  etc.  Co.,  62  Atl.  Rep. 
768    (N.   J.   1906). 

1  Wetmore  v.  C.  A.  Wetmore  Co., 
113  Cal.  321  (1896).  The  fact  that  a 
vendor  of  personalty  said  he  would 
not  sell  to  the  corporation,  but  would 
to  the  directors,  does  not  make  them 
liable  if  the  sale  was  to  the  corpora- 
tion. Woodbury  Granite  Co.  v.  Mulli- 
ken,   66    Vt.    465    (1894). 

Where  certain  stockholders  agree 
with  a  subscriber  for  stock  that  he 
shall  receive  certain  dividends  and 
that  they  will  take  his  stock  if  he 
desires  after  three  years,  he  has  a 
reasonable  time  after  the  three  years 
to  exercise  his  right  to  sell  to  them. 
Rogers  v.  Burr,  97  Ga.  10  (1895) ;  s.  c, 
105  Ga.  432. 

2  Traders',  etc.  Bank  r.  Washing- 
ton, etc.  Co.,  22  Wash.  4G7  (1900). 
Cf.  §  673,  infra. 

3  A  corporation  cannot  enforce  a 
promise  made  by  a  stockholder  to  a 
purchaser  of  his  stock  that  he,  the 
vendor,     would     pay    the     corporate 


308 


CH.  IV.] 


SUBSCRIPTIONS — METHOD,  PARTIES,  ETC. 


[§  76. 


merit  of  vendors  of  stock  to  protect  the  vendee  against  the  payment 
of  existing  claims  of  a  corporation  is  not  enforcible  until  payment 
is  actually  made.1  Where  the  stockholders  personally  guarantee 
the  debts  of  the  corporation  they  are  liable  on  the  guaranty  and  also 
on  any  statutory  liability  attached  to  their  stock.2  A  corporation 
cannot  enforce  a  contract  by  which  the  seller  of  its  stock  agrees  with 
the  purchaser  that  the  corporate  accounts  will  be  collected  and  that 
the  debts  do  not  exceed  a  certain  amount.3  The  agreement  of  the 
stockholders  upon  a  sale  of  the  corporate  property  not  to  engage  in1 
that  line  of  business  in  a  certain  county,  is  binding  upon  them.4 

Where  the  statute  provides  for  raising  funds  for  a  mutual  insur- 
ance company  by  assessments,  the  bond  of  the  directors  to  advance 
a  certain  sum  to  the  company  as  needed  is  ultra  vires  and  unenforce- 
able.5 

An  alteration  of  a  corporate  note  after  stockholders  have  signed  as 
sureties  releases  the  stockholders.6 


debts.  German  St.  Bank  v.  North- 
western, etc.  Co.,  104  Iowa,  717 
(1898).  A  corporation  cannot  en- 
force a  contract  by  which  the  seller 
of  its  stock  agrees  with  the  purchas- 
er that  the  corporate  accounts  will 
be  collected  and  that  the  debts  do 
not  exceed  a  certain  amount.  Roch- 
ester, etc.  Co.  v.  Fahy,  111  N.  Y. 
App.  Div.  748  (1906);  aff'd,  18S  N. 
Y.  629. 

i  Cochran  v.   Selling,   36  Oreg.  333 
(1899). 

2  London,  etc.  Bank  v.  Parrott,  125 
Cal.  472  (1899).  As  to  contribution 
where  stockholders  who  are  sureties 
on  a  note  are  also  liable  as  stock- 
holders for  the  same  debt,  see  Myers 
v.  Sierra  Val.  etc.  Assoc,  122  Cal. 
669  (1898).  Where  a  stockholder  has 
guaranteed  the  bonds  of  a  corpora- 
tion and  allowed  the  mortgage  to  cov- 
er some  of  his  own  property  and  the 
corporation  becomes  insolvent,  other 
stockholders  when  sued  on  their  stat- 
utory liability  cannot  set  up  that  this 
guaranty  and  mortgage  should  first 
be  exhausted  before  they  are  held 
liable.  Winthrop,  etc.  Bank  v.  Min- 
neapolis, etc.  Co.,  77  Minn.  329 
(1899). 

3  Rochester,   etc.    Co.   v.   Fahy,    111 


N.    Y.    App.    Div.    748    (1906);     aff'd, 
188  N.  Y.  629. 

4  Union  Mills  v.  Harder,  116  N.  Y. 
App.  Div.  22    (1906). 

5  Goss  v.  Peters,  98  Mich.  112 
(1893).  Where  the  condition  to  a 
particular  subscription  is  that  $50,- 
000  be  subscribed,  the  verbal  guar- 
anty of  an  individual  that  the  $50,000 
would  be  subscribed  is  not  a  com- 
pliance with  the  condition.  Branch 
v.  Augusta  Glass  Works,  95  Ga.  573 
(1895). 

6  Pelton  v.  San  Jacinto  Lumber 
Co.,  113  Cal.  21  (1896).  A  modifica- 
tion of  the  contract  between  the  sub- 
scribers and  a  contractor  does  not 
release  the  former  where  they  accept 
the  work  upon  the  completion  of  the 
contract.  Gibbons  v.  Ellis,  83  Wis. 
434  (1S92).  An  agreement  of  stock- 
holders that  certain  corporate  notes 
will  be  paid  is  released  by  taking 
new  notes  from  the  corporation  ex- 
tending the  debt.  Home  Nat.  Bank 
v.  Waterman,  134  111.  461  (1891).  A 
note  made  by  the  stockholders  for 
the  benefit  of  the  corporation  may  be 
barred  by  the  statute  of  limitations, 
even  though  the  corporation  has  made 
partial  payments.  Patterson  v.  Col- 
lier,  113  Mich.   12    (1897). 


SoJ 


§  76.]  SUBSCRIPTIONS — METHOD,    PARTIES,    ETC.  [CH.  IV. 

Stockholders'  contracts  relative  to  treasury  stock1  and  for  the 
sale  of  stock2  are  considered  elsewhere.  The  subject  of  the  char- 
acter, rights  and  liabilities  of  an  underwriter  is  also  considered 
elsewhere.3 

Stockholders  who  endorse  a  bond  of  a  corporation  may  set  up 
the  five  years'  statute  of  limitation  although  the  bond  was  a  sealed 
instrument.  Facts  connected  with  the  stockholders  endorsing  the 
bond  may  be  explained  by  parol.4 

i  See    §  46,    supra.      A    corporation  is  a  guarantor,  and  if  the  agreement 

cannot  enforce  the  agreement  of   its  which    he    underwrites    is    modified 

promoters   that  a  certain  amount  of  without  his  consent  he  is  thereby  re- 

the   bonds   and   stock   should    be   do-  leased.     Guardian  T.  Co.  v.  Peabody, 

nated  to  the  company.     Flanagan  v. •  122  N.  Y.  App.  Div.  648   (1907). 
Lyon,  54  N.  Y.  Misc.  Rep.  372  (1907).         4  Somers    v.    Florida,    etc.    Co.,    50 

2  See  §  334,  infra.  Fla.  275    (1905). 

3  See  §  14,  supra.     An  underwriter 


310 


CHAPTER  V. 


CONDITIONAL  SUBSCRIPTIONS. 


§  77.  Definition. 

78.  Conditions  precedent  and  condi- 

tions subsequent. 

79.  Conditional  subscriptions  in  New 

York  and  Pennsylvania  before 
incorporation. 

80.  In  New  York  such  subscription 

is  void;    in   Pennsylvania  the 
condition  is  void. 

81.  Oral  conditions  are  void. 


§82.  Conditional    subscriptions    after 
incorporation. 

83.  What  may  be  the  condition. 

84.  Acceptance    by    the   corporation 

is  necessary — Withdrawal. 
8-5.  Construction  of  the  condition. 
SG,  87.   Performance  of  the  condition. 

88.  Waiver. 

89.  Notice  and  calls  on  conditional 

subscriptions. 


§  77.  Definition  of  conditional  subscription. — A  conditional  sub- 
scription is  one  on  which  payment  can  be  enforced  by  the  corpo- 
ration only  after  the  occurrence  or  after  the  performance  by  the 
corporation  of  certain  things  specified  in  the  subscription  itself.1 
Oral  agreements  made  with  the  subscriber  to  the  effect  that  pay- 
ment will  not  be  required  except  on  certain  events  or  contingencies 
are  sometimes  spoken  of  as  conditions  to  the  subscription,  but  more 
properly  are  mere  variations  of  a  written  contract,  and  are  treated 
elsewhere.2 

§  78.  Conditions  precedent  and  conditions  subsequent.  — A  condi- 
tional subscription  is  also  to  be  distinguished  from  a  subscription 
on  a  condition  subsequent.  A  subscription  on  a  condition  subse- 
quent contains  a  contract  between  the  corporation  and  the  sub- 
scriber, whereby  the  corporation  agrees  to  do  some  act.  It  thereby 
combines  two  contracts:  one  the  contract  of  subscription,  the  other 
an  ordinary  contract  of  the  corporation  to  perform  the  specified 
acts.3-     The  subscription  is  valid  and  enforceable  whether  the  con- 

i  A     conditional     subscription    has  subscription    conditional.      Smith    v. 

often    been   spoken   of   as   "a   contin-  First,  etc.  Bank,  95  S.  W.  Rep.  1111 

uing  offer  which  is  final  and  absolute  (Tex.  1906). 

when  accepted."     Taggart  v.  Western  3  Thus,  adding  to  a  subscription  the 

Md.  R.  R.,   24  Md.   5G3,   595    (18G6) ;  words,  "to  be  expended  between  Cou- 

Ashtabula,'  etc.    R.   R.    v.    Smith,    15  necticut   river   and   the  east   line   of 

Ohio  St.  328    (1864);   Lowe  v.  Edge-  the  state,"  has  been  held  to  form  a 

field,  etc.  R.  R.,  1  Head  (Tenn.),  659  contract   to    that   effect,    but   not   to 

(1858) .  make    the    subscription    conditional. 

2  See  ch.  IX;  also  §  81,  infra.     The  Lane     v.     Brainerd,     30     Conn.     565 

fact  that  a  subscriber  understood  that  (1S62) ;  Henderson,  etc.  R.  R.  v.  Leav- 

certain    persons    controlled    the    pro-  ell,    16    B.    Mon.    (Ky.)    358     (1855). 

posed  corporation  does  not  make  the  So,  also,  of  words  requiring  a  certain 

311 


'8.] 


CONDITIONAL  SUBSCRIPTIONS. 


[CIT.   V. 


ditions  are  performed  or  not.1  The  condition  subsequent  is  the 
same  as  a  separate  collateral  contract  between  the  corporation  and 
the  subscriber,  for  breach  of  which  an  action  for  damages  is  the 
remedy.2     The  distinction  between  such  a  contract  and  the  ordi- 


location  or  route  to  be  adopted.    Hen- 
derson,  etc.  R.   R.   v.   Leavell,   16   B. 
Mon.    (Ky.)    358    (1855);    the    court 
saying,  however,  that  if  the  route  is 
laid   out   otherwise,   before   payment, 
probably  the  subscriber  would  be  dis- 
charged;   if   changed   after   payment, 
it    could    be    enjoined.      Laches    will 
bar  the  right  to  such  an  injunction. 
Chapman  v.  Mad  River,  etc.  R.  R.,  6 
Ohio    St.    119    (1856).     A   more   fre- 
quent requirement  is  a  certain  loca- 
tion of  the  route,  and  also  the  con- 
struction of  a  part  or  the  whole  of 
the   road.     The   first   requirement   is 
construed    to    be    a    condition    prece- 
dent,  the    second   a   condition   subse- 
quent, since  the  payment  of  the  sub- 
scription itself  is  necessary  to  carry 
out    the    requirement.      Chamberlain 
v.  Painesville,  etc.  R.  R.,  15  Ohio  St. 
225  (1864) ;  Belfast,  etc.  Ry.  v.  Moore, 
60  Me.  561,  576   (1871);   North  Mis- 
souri  R.  R.  v.  Winkler,   29  Mo.   318 
(1860) ;  Bucksport,  etc.  R.  R.  v.  Brew- 
er,   67  Me.   295    (1877);    McMillan  v. 
Maysville,  etc.  R.  R.,  15  B.  Mon.  (Ky.) 
21S     (1854);    Swartout   v.    Michigan, 
etc.  R.  R.,  24  Mich.  389  (1872),  where 
Judge  Cooley  says:     "It  is  only  rea- 
sonable to  infer  that  they  would  have 
expressed    that    intent   more    clearly, 
and  would  have  indicated  with  defi- 
niteness  what  stage  the  work  should 
reach,  before  their  liability  should  be- 
come   fixed."      So    also    in    Miller   v. 
Pittsburgh,  etc.  R.  R.,  40  Pa.  St.  237 
(1861),  where  the  court  says:     "It  is 
a  most  extraordinary  defense,  for  it 
presupposes   that  the  company  were 
to  build   their  road   without   money, 
and  to  deliver  it,  a  finished  work,  to 
the  stock  subscribers,  who  were  then 
to  pay  their  subscriptions."    In  Pitts- 
burgh,  etc.   R.  R.   v.   Biggar,   34   Pa. 
St.  455   (1859),  a  condition  "provided 
the  road  goes  within  half  a  mile  of 


Florence,"  was  held  to  be  a  condition 
subsequent.  A  condition  that  altera 
tions  shall  be  ordered  only  by  a  vote 
of  the  directors  is  a  condition  subse- 
quent. Bucksport  &  B.  R.  R.  v.  Buck, 
68  Me.  81  (1878).  So  also  of  a  con- 
dition that  commissioners  should  be 
appointed  to  see  that  other  condi- 
tions are  complied  with.  Shaffner  v. 
Jeffries,  18  Mo.  512  (1853).  And  a 
condition  that  the  money  subscribed 
shall  be  expended  on  a  certain  part 
of  the  road.  Lane  v.  Brainerd,  30 
Conn.  565  (1862).  A  condition  that 
a  depot  shall  be  established  at  a  cer- 
tain place  is  a  condition  subsequent. 
Paducah,  etc.  R.  R.  v.  Parks,  86  Tenn. 
554  (1888).  A  condition  that  bonds 
will  be  issued  as  a  "bonus"  to  a  stock- 
holder is  void.  It  is  a  condition  sub- 
sequent. The  subscription  is  enforce- 
able. Morrow  v.  Nashville,  etc.  Co., 
87  Tenn.  262  (1889).  Condition  con- 
strued to  be  subsequent.  Johnson  v. 
Georgia,  etc.  R.  R.,  81  Ga.  725  (1888). 
For  the  English  cases  on  conditions 
precedent  and  subsequent  to  subscrip- 
tions for  stock,  see  ch.  II,  supra. 

i  A  condition  subsequent  "will  not 
defeat  an  action  for  the  recovery  of 
the  money,  notwithstanding  it  had  not 
been  performed  when  the  action  was 
commenced."  Belfast,  etc.  Ry.  v. 
Moore,  60  Me.  561  (1872).  "A  failure 
to  perform  an  independent  stipula- 
tion, not  amounting  to  a  condition 
precedent,  though  it  subject  the  party 
failing  to  damages,  does  not  excuse 
the  party  on  the  other  side  from 
the  performance  of  all  stipulations 
on  his  part."  Mill  Dam  Foundry  v. 
Hovey,  38  Mass.  417,   437    (1839). 

2  The  subscriber  is  left  to  the  ordi- 
nary remedies  for  breaches  of  con- 
tracts. In  a  contract  of  subscription 
covenants  of  the  company  to  do  cer- 
tain things   with  the  money  are  in- 


312 


CH.  V.] 


CONDITIONxVL  SUBSCRIPTIONS. 


[§  79. 


nary  conditional  snbcriptions — that  is,  subscriptions  on  conditions 
precedent — is  sometimes  difficult  to  determine.  The  supreme  court 
of  Maine  has  said  that  the  question  whether  a  condition  in  a  sub- 
scription "be  precedent  or  subsequent  is  a  question  purely  of  intent, 
and  the  intention  must  be  determined  by  considering  not  only  the 
words  of  the  particular  clause,  but  also  the  language  of  the  whole 
contract,  as  well  as  the  nature  of  the  act  required  and  the  subject- 
matter  to  which  it  relates."1  The  courts,  in  accordance  with  well- 
established  rules,  favor  conditions  subsequent.2 

§  79.  In  Neiv  York  and  Pennsylvania  conditional  subscriptions 
are  not  allowed  in  subscriptions  to  obtain  incorporation.  — In  New 
York  and  Pennsylvania  it  is  held  that  subscriptions  taken  for  the 
purpose  of  complying  with  a  statute  which  grants  a  charter  only 
upon  a  certain  amount  of  stock  being  subscribed  cannot  be  condi- 
tional, but  must  be  absolute.3 

dependent  and  a  breach  thereof  is  no  breach,    and    may    recover    back    the 

defense  to   the   subscription.     Pacific  amount  paid.    Batsell  v.  St.  Louis,  etc. 

Mill  Co.   v.  Inman,  etc.   Co.,   46  Ore.  Ry.,  4  Tex.  Civ.  App.  580   (1893). 

352    (1905).  See  also  §  97,  infra. 

A  subscriber  cannot  avoid  payment  i  Bucksport,  etc.  R.  R.  v.  Brewer, 
as  against  a  corporate  creditor  al-  67  Me.  295  (1877).  "The  situation 
though  the  subscription  was  on  condi-  and  relation  of  the  parties  to  each 
tion  that,  if  the  subscription  exceeded  other,  the  object  sought  to  be  at- 
one-half the  cost  of  a  certain  build-  tained,  and  the  subject-matter  to 
ing,  only  so  much  of  the  subscription  which  the  agreement  relates,  are  ma- 
should  be  called  for  as  would  equal  terial  .  .  .  and  indispensable 
that  half.  The  subscriber  cannot  for-  aids"  in  deciding  whether  the  condi- 
feit  what  he  has  paid  and  refuse  to  tion  be  precedent  or  subsequent, 
pay  the  remainder.  Mathis  v.  Prid-  Chamberlain  v.  Painesville,  etc.  R.  R., 
ham,   1    Tex.   Civ.   App.   58    (1892).  15  Ohio   St.   225    (1864). 

A  condition  that  the  subscriptions  2  Chamberlain  r.  Painesville,  etc.  R. 

when  collected  shall  be  used  to  build  R.,  15  Ohio  St.  225  (1864);  Swartout 

factories  which  should  be  leased  was  v.  Michigan,  etc.  R.  R.,  24  Mich.  389 

enforced    in   Porter   v.   Carpenter,   65  (1872). 

N.  H.  650  (1874).  3  "A  subscription  to  the  stock  of  a 

A  consolidated  company  is  not  lia-  public  corporation,  made  before  let- 
ble  to  a  subscriber  to  stock  of  the  ters  patent  are  issued  and  an  organ- 
original  company  for  removing  the  ization  effected,  must  be  considered 
shops  of  the  company  from  a  certain  absolute  and  unqualified,  and  any  con- 
place,  although  the  subscription  was  dition  attached  thereto  void.  Com- 
missioners have  no  authority  to  re- 
ceive conditional  subscriptions."  Boyd 
v.  Peach  Bottom  Ry.,  90  Pa.  St.  169 
(1879).     "Any  other  rule  would  lead 


conditional  upon  the  shops  being  lo 
cated  there.  Elizabethtown  v.  Chesa- 
peake, etc.  R.  R.,  94  Ky.  377  (1893). 
Where  several  persons  subscribed 
on  condition  that  the  payee  do  certain  to  the  procurement  from  the  common- 
things,  and  the  payee  commits  a  wealth  of  valuable  charters  without 
breach  of  contract,  each  of  the  sub-  any  absolute  capital  for  their  support, 
scribers   may   sue   separately   on   the     and    thus   give   rise   to   a   system   of 

313 


§§  80,81.] 


CONDITIONAL  SUBSCRIPTIONS. 


[CH.  V. 


§  80.  In  New  York  the  subscription  is  void;  in  Pennsylvania 
the  condition  is  void. — The  New  York  and  Pennsylvania  cases  differ, 
however,  in  regard  to  the  effect  of  a  conditional  subscription  to 
stock  before  and  for  the  purpose  of  incorporation.  In  New  York 
the  whole  subscription  is  void  absolutely.  It  is  as  though  not 
made,  and  cannot  be  enforced  cither  by  the  corporation  or  by  the 
would-be  subscriber.1  In  Pennsylvania  a  different  rule  prevails. 
The  condition  is  void,  but  the  subscription  itself  is  treated  as  an 
absolute  unconditional  subscription,  and  may  be  enforced  by  the 
corporation.2 

§  81.  Oral  conditions  are  void. — Under  the  general  rule  of  evi- 
dence that  a  written  agr<  ement  cannot  be  varied  or  added  to  by 
parol  evidence,  it  is  not  competent  for  a  subscril>er  to  stock  to  al- 
lege that  he  is  but  a  conditional  subscriber.3  The  condition  must 
be  inserted  in  the  writing  in  order  to  bo  effectual.     Where,  how- 


speculation  and  fraud  which  would  be 
intolerable."  Caley  v.  Philadelphia, 
etc.  R.  R.,  SO  Pa.  St.  363  (1876). 
See  also  Erie,  etc.  Co.  v.  Brown,  25 
Pa.  St.  156  (1855);  Nippenose  Mfg. 
Co.  v.  Stadon,  68  Pa.  St.  256  (1871); 
Pittsburgh,  etc.  R.  R.  v.  Stewart,  41 
Pa.  St.  54  (1861);  Troy,  etc.  R.  R.  v. 
Tibbits,  18  Barb.  297  (1854).  That 
conditional  subscriptions  are  not  to 
be  counted  in  ascertaining  whether 
the  whole  capital  stock  has  been  sub- 
scribed, which  must  be  shown  before 
another  absolute  subscriber  can  be 
made  liable,  see  §  ISO,  infra. 

Conditional  subscriptions  made 
previous  to  and  for  the  purpose  of 
incorporation  were  upheld  in  Cham- 
berlain v.  Painesville,  etc.  R.  R.,  15 
Ohio   St.   225    (1864). 

i  Troy,  etc.  R.  R.  v.  Tibbits,  18 
Barb.  297  (1854);  Re  Rochester,  etc. 
R.  R.,  50  Hun,  29  (1888),  where  the 
subscription  was  to  be  paid  in  land. 

Under  the  New  York  statute  a  con- 
ditional subscription,  payable  one-half 
when  the  rails  had  been  laid  and  one- 
half  when  the  road  goes  into  opera- 
tion, is  void  and  cannot  be  collected. 
General  Elec.  Co.  v.  Wightman,  3  N. 
Y.  App.  Div.  118  (1S96).  See  also  p. 
114,  note  4,  supra. 

2  "Where    one    subscribes    to    the 


stock  of  a  public  corporation  prior  to 
the  procurement  of  its  charter,  such 
subscription  is  to  be  regarded  as 
absolute  and  unqualified,  and  any  con- 
dition attached  thereto  is  void."  Caley 
v.  Philadelphia,  etc.  R.  R.,  80  Pa.  St. 
363  (1876).  "The  subscription  is 
valid  and  binding,  and  the  condition 
null  and  void."  Boyd  v.  Peach  Bot- 
tom Ry.,  90  Pa.  St.  169  (1879).  To 
the  same  effect  see  Bedford  R.  R.  v. 
Bowser,  48  Pa.  St.  29  (1864) ;  Baving- 
ton  v.  Pittsburgh,  etc.  R.  R.,  34  Pa.  St. 
358  (1859);  Pittsburgh,  etc.  R.  R.  v. 
Biggar,  34  Pa.  St.  455  (1859);  Pitts- 
burgh, etc.  R.  R.  v.  Woodrow,  3 
Phila.  271  (185S).  The  subscription 
itself,  however,  is  not  binding  if  it- 
is  not  reported  by  the  commissioners 
and  used  to  obtain  the  charter. 
Ligonier  R.  R.  v.  Williams,  35  Leg. 
Int.  40  (1878).  In  the  federal  courts, 
Burke  v.  Smith,  16  Wall.  390,  396 
(1872),  favors  the  Pennsylvania  rule, 
while  Putnam  v.  New  Albany,  4  Biss. 
365,  385  (1869) ;  s.  c,  20  Fed.  Cas.  79, 
86,  favors  the  New  York  rule.  In 
both  cases  the  opinions  are  dicta. 
See  also  Ellison  v.  Mobile,  etc.  R.  R., 
36  Miss.  572  (1858).  See  also  p.  114, 
note  4,  supra. 

3  See  §§  137,  138,  infra. 


314 


en.  v.] 


CONDITIONAL  SUBSCRIPTIONS. 


[§§  82, 83. 


ever,  the  parol  agreement  or  condition  is  made  subsequently  to  the 
making  of  the  contract,  and  upon  a  sufficient  consideration,  it  has 
been  upheld.1 

§  82.  Conditional  subscriptions  after  incorporation  are  valid.— 
A  conditional  subscription  to  stock,  taken  and  accepted  by  a  corpo- 
ration after  its  incorporation,  is  legal  and  valid  by  the  common 
law  of  all  the  states.  In  Pennsylvania  the  legality  of  such  condi- 
tional subscriptions  is  clearly  declared  and  sustained.2  In  New 
York,  also,  conditional  subscriptions  have  been  upheld,3  but  not 
where  the  condition  is  one  that  affects  the  route  of  a  turnpike  or 
railroad  company.  In  other  states  the  legality  of  such  subscrip- 
tions is  rarely  questioned,  but  is  generally  assumed  to  be  admitted.4 

§  83.  What  condition  may  be  attached  to  a  subscription.  — Any 
condition  which  can  be  legally  performed  or  complied  with  by  the 

i  See  §§  137,  138,  intra.  Payne,  15  N.  Y.  583  (1857) ;  Macedon, 
2  "It  is  no  longer  to  be  doubted  etc.  Co.  v.  Snediker,  18  Barb.  317 
that  an  incorporated  company,  after  (1854);  dictum  in  Dix  v.  Shaver,  14 
it  has  obtained  its  letters  patent  and  Hun,  392  (1878).  However,  in  Lake 
effected  its  organization,  may  receive  Ontario,  etc.  R.  R.  v.  Curtiss,  80  N. 
conditional  subscriptions  to  its  stock."  Y.  219  (1880),  a  condition  of  this 
Pittsburgh,  etc.  R.  R.  v.  Stewart,  41  kind  was  involved,  and  no  objec- 
Pa.  St.  54  (1861);  Caley  r.  Philadel-  tion  was  made  to  its  validity.  Sub- 
phia,  etc.  R.  R.,  80  Pa.  St.  363  (1876)  ;  scriptions  conditional,  in  that  pay- 
Philadelphia,  etc.  R.  R.  v.  Hickman,  ment  is  to  be  permitted  in  property, 
28  Pa.  St.  318  (1857).  After  incor-  labor,  or  contract  for  construction, 
poration  conditional  subscriptions  have  been  repeatedly  passed  upon  in 
may  be  received,  although  the  letters  New  York  and  upheld.  See  ch.  II, 
patent  have  not  been  issued  and  can-  supra. 

not  be  until  ten  per  cent,  of  the  capi-        4  "Except     in     New     York,     condi- 

tal   stock   is   subscribed.     The   condi-  tional  subscriptions,  in  the  absence  of 

tional   subscription   cannot,   however,  a   special   prohibition,    so   far   as   we 

form    any   part   of   such    percentage,  have      observed,      have      been      sus- 


Hanover,  etc.  R.  R.  v.  Haldeman,  82 
Pa.  St.  36   (1876). 

3  Ordinary  conditional  subscrip- 
tions were  treated  as  valid  in  Union 
Hotel  Co.  v.  Hersee,  79  N.  Y.  454 
(1880);  Burrows  v.  Smith,  10  N.  Y. 
550  (1853);  Morris  Canal,  etc.  Co.  v. 
Nathan,  2  Hall    (N.  Y.),  239    (1829) 


tained  as  authorized  and  not  in  con- 
flict with  public  policy."  Ashtabula, 
etc.  R.  R.  v.  Smith,  15  Ohio  St.  328 
(1864).  See  also  §97,  infra;  New 
Albany,  etc.  R.  R.  v.  McCormick,  10 
Ind.  499  (1858);  Shick  v.  Citizens' 
Enterprise  Co.,  15  Ind.  App.  329 
(1896);    McMillan   v.    Maysville,    etc. 


But  the  condition  that  a  particular  R.  R.,  15  B.  Mon.  (Ky.)  218  (1S54); 
location  of  the  proposed  road  should  Dayton,  etc.  R.  R.  v.  Hatch,  1  Disney 
be  adopted  has  been  held  to  be  con-  (Ohio),  84  (1S55).  A  conditional 
trary  to  public  policy,  since  improper  subscription  to  the  stock  of  a  rail- 
means  would  thereby  influence  the  road  company  is  legal.  Baltimore, 
question  of  location.  Butternuts,  etc.  etc.  R.  R.  v.  Pumphrey,  74  Md.  86 
Turnp.  Co.  v.  North,  1  Hill,  518  (1891).  Conditional  subscriptions  may 
(1841);     Fort    Edward,    etc.    Co.    v.  be  received.    Armstrong  r.  Karshner, 

315 


§  S3.] 


CONDITIONAL  SUBSCRIPTIONS. 


[CH.  V. 


corporation  may  be  the  condition  to  a  subscription  for  stock.1  The 
condition  may  be  that  payment  shall  be  in  labor  or  materials;2  it 
may  require  the  expenditure  of  the  subscription  on  a  particular  part 
of  the  enterprise;3  it  may  stipulate  that  a  certain  amount  or  the 
whole  of  the  capital  stock  shall  be  subscribed  before  calls  are  made 
on  the  subscriptions;4  or  it  may  limit  the  time  within  which  cer- 
tain things  specified  therein  must  be  done.5  Instead  of  subscrib- 
ing for  stock  a  party  may  make  a  contract  with  a  corporation  to 
take  the  stock  with  the  right  to  return  it  and  receive  back  the  pur- 
chase price  within  a  certain  time.  Such  a  contract  is  legal,  and 
the  stock  may  be  returned  and  the  money  recovered  if  corporate 
creditors'  rights  do  not  intervene.0  In  most  states  the  condition  to 
a  subscription  may  require  the  route  of  a  railroad  to  be  located  on 
a  particular  line.7      In  New  York  such  a  conditional  subscription 


47  Ohio  St.  276  (1S90).  If  the  condi- 
tion is  ultra  vires  of  the  corporation, 
the  subscription  is  not  enforceable, 
there  having  been  no  performance. 
Pellatt's  Case,  L.  R.  2  Ch.  App.  527 
(1867). 

i  The  subscriber  "may  agree  to 
take  and  pay  for  the  stock  absolutely 
or  upon  such  conditions  as  he  may 
choose  to  incorporate  into  his  sub- 
scription." Penobscot,  etc.  R.  R.  v. 
Dunn,  39  Me.  587  (1855);  Mathis  v. 
Pridham,  1  Tex.  Civ.  App.  58  (1S92). 

2  See  ch.  II,  supra. 

3  Milwaukee,  etc.  R.  R.  v.  Field,  12 
Wis.  340  (1860);  Hanover  Junction, 
etc.  R.  R.  v.  Haldeman,  82  Pa.  St.  36 
(1876). 

4  Philadelphia,  etc.  R.  R.  v.  Hick- 
man, 28  Pa.  St.  318  (1857);  Penob- 
scot, etc.  R.  R.  v.  Dunn,  39  Me.  587 
(1855) ;  Hanover  Junction,  etc.  R.  R. 
v.  Haldeman,  82  Pa.  St.  36  (1876); 
Union  Hotel  Co.  v.  Hersee,  79  N.  Y. 
454  (1880).  Even  though  the  charter 
allowed  the  commencement  of  busi- 
ness upon  the  subscription  of  a  less 
sum.  Ridgefield,  etc.  R.  R.  v.  Brush, 
43  Conn.  86  (1875). 

5  Ticonic  Water  Power,  etc.  Co.  v. 
Lang,  63  Me.  480  (1874),  holding 
also  that  time  herein  is  of  the  essence 
of  the  contract.  See  also  Morris 
Canal,    etc.    Co.    v.    Nathan,    2    Hall 


(N.  Y.),  239  (1829).  A  condition  that 
the  road  should  be  finished  within  a 
certain  time,  and  that  notice  thereof 
should  be  given  in  a  certain  way,  was 
involved  in  Garner  v.  Hall,  114  Ala. 
167  (1896);  s.  c,  122  Ala.  221.  See 
also  §  87,  infra. 

c  Vent  v.  Duluth,  etc.  Co.,  64  Minn. 
307    (1896).     Cf.   §170,   infra. 

?  Fisher   v.   Evansville,   etc.   R.   R., 
7   Ind.  407    (1856);    Connecticut,  etc. 
R.   R.    v.  Baxter,   32  Vt.   805    (1860); 
Cumberland  Valley  R.  R.  v.  Baab,  9 
Watts   (Pa.),  458   (1840);  Evansville, 
etc.    R.    R.    v.    Shearer,    10    Ind.    244 
(1858) ;  Jewett  v.  Lawrenceburgh,  etc. 
R.  R.,   10  Ind.  539    (1858);   Missouri 
Pac.     Ry.     v.     Tygard,     84     Mo.     264 
(1884);  Wear  v.  Jacksonville,  etc.  R. 
R.,    24    111.    593    (1860);    Taggart    v. 
Western  Md.  R.  R.,  24  Md.  563  (1866) ; 
Racine  County  Bank  v.  Ayers,  12  Wis. 
512   (1860).     See  also  Caley  v.  Phila- 
delphia,   etc.   R.    R.,    80    Pa.    St.    363 
(1876).    Location  may  be  required  to 
be  subject  to  the  approval  of  the  sub 
scriber.  Roberts's  Case,  3  De  G.  &  Sm 
205    (1850);   aff'd,  2  Macm.  &  G.  192 
See    also    Mansfield,    etc.    R.    R.    v 
Brown,  26  Ohio  St.  223  (1875) ;  Mans 
field,  etc.  R.  R.  v.  Stout,  26  Ohio  St 
241    (1875);    Chamberlain   v.   Paines 
ville,    etc.    R.    R.,    15    Ohio    St.    225 
(1864);     North    Missouri    R.    R.    v. 


316 


CH.  V.] 


CONDITIONAL  SUBSCRIPTIONS. 


[§   84. 


has  been  held  to  be  void,  on  the  ground  of  public  policy,  inasmuch 
as  the  discretion  of  the  directors,  in  laying  out  the  route,  would 
thereby  be  influenced  by  considerations  other  than  those  of  a  purely 
public  nature.1 

In  general,  however,  subscriptions  to  the  capital  stock  of  a  cor- 
poration may  be  conditional  as  to  the  time,  manner,  or  means  of 
payment,  or  in  any  other  way  not  prohibited  by  statute,  or  the 
rules  of  public  policy,  and  not  beyond  the  powers  of  the  corpora- 
tion to  comply  with.2 

§  84.  Acceptance  by  the  corporation  is  necessary.  — The  accept- 
ance by  the  corporation  of  a  conditional  subscription  is  necessary 
to  the  formation  of  a  contract.3     Until  such  acceptance  the  condi- 


Winkler,  29  Mo.  318  (1S60)  ;  Spartan- 
burg, etc.  R.  R.  v.  De  Graffenreid,  12 
Rich.  L.  (S.  C.)  675  (1860);  Des 
Moines  Valley  R.  R.  v.  Graff,  27  Iowa, 
99  (1869).  A  subscription  or  note, 
not  for  stock,  but  absolutely  as  a  gift 
to  the  corporation,  in  consideration 
of  a  particular  route  being  adopted, 
has  been  upheld.  Stowell  v.  Stowell, 
45  Mich.  364  (1881);  First  Nat.  Bank 
v.  Hendrie,  49  Iowa,  402  (1S7S).  A 
subscription  or  donation  to  a  rail- 
road, conditional  on  the  location  of  a 
depot,  is  enforceable  by  the  company. 
Berryman  v.  Cincinnati  Southern  Ry., 
14  Bush  (Ky.)  755  (1879).  See  §  650, 
infra.  A  construction  company,  un- 
der contract  to  construct  a  road  by 
the  shortest  route,  cannot  collect  a 
sum  promised  by  a  third  person  for 
a  deflection  of  the  route.  Woodstock 
Iron  Co.  v.  Richmond,  etc.  Co.,  129 
U.  S.  643  (18S9). 

i  See  §  82,  n.,  supra. 

2  Conditions  inconsistent  with  the 
charter  are  void.  Thigpen  v.  Missis- 
sippi Cent.  R.  R.,  32  Miss.  347  (1856). 
The  conditions  which  may  be  legally 
made  to  a  subscription  are  practi- 
cally limited  only  by  the  power  of 
the  corporation  to  contract.  A  few 
of  the  conditions  which  have  been 
passed  upon  by  the  courts  have  been 
given.  Many  minor  ones  are  involved 
in  the  cases  and  present  a  great  va- 
riety of  conditions,  corresponding,  as 
they  do,  to  the  wishes  and  motives  of 


individuals  subscribing  to  the  stock 
of  the  different  kinds  of  joint-stock 
corporations.  The  condition  of  a  sub- 
scription may  be  that  the  subscriber 
be  made  district  manager.  Mogridge's 
Case,  58  L.  T.  Rep.  801   (1888). 

A  subscription  payable  to  whomso- 
ever might  lease  premises  free  of 
rent  to  a  stock  exchange,  may  be  en- 
forced by  a  corporation  thereafter  or- 
ganized for  that  purpose,  and  the  de- 
livery of  the  subscription  to  the  per- 
son obtaining  the  same  is  a  sufficient 
delivery.  A  separate  contract  with 
the  then  owners  of  the  building  which 
was  afterwards  acquired  by  the  cor- 
poration does  not  affect  such  sub- 
scription, the  corporation  having  no 
notice  thereof.  Merchants',  etc.  Co.  v. 
Chicago,  etc.  Co.,  210  111.  26    (1904). 

3  Junction  R.  R.  v.  Reeve,  15  Ind. 
236  (1860),  where  the  subscription 
was  payable  in  land.  See  also  Gait 
v.  Swain,  9  Graft.  (Va.)  633  (1853). 
"When  the  offer  was  accepted  the 
minds  of  the  parties  met  and  the  con- 
tract was  complete.  .  .  .  The  ac- 
ceptance by  the  plaintiff  constituted  a 
sufficient  legal  consideration  for  the 
engagement  on  the  part  of  the  de- 
fendants." Taggart  v.  Western  Md. 
R.  R.,  24  Md.  563  (1866).  By  the 
entry  of  the  subscription  on  the  cor- 
porate record  an  acceptance  is  im- 
plied. New  Albany,  etc.  R.  R.  v.  Mc- 
Cormick,  10  Ind.  499  (1858).  Ac- 
ceptance by  the  president  of  the  cor- 


317 


§  85.] 


CONDITIONAL  SUBSCRIPTIONS. 


[CH.   V. 


tional  subscription  is  but  a  continuing  offer.  After  acceptance  the 
subscriber  is  bound,  until  performance  of  the  condition  by  the  cor- 
poration, to  await  such  performance;  he  cannot  withdraw  the  con- 
ditional subscription  after  it  has  been  accepted.  A  conditional 
subscription  cannot  be  revoked  after  the  condition  has  been  ful- 
filled.1 It  seems,  however,  that  if  the  performance  of  the  condition 
is  delayed  unreasonably  by  the  corporation,  the  conditional  sub- 
scriber will  be  thereby  released  from  his  obligation.2 

§85.  Construction  of  conditional  subscription. — Conditional 
subscriptions,  like  other  contracts,  are  to  be  construed  reasonably  and 
according  to  the  intent  of  the  parties,  as  indicated  by  the  language 
used  in  the  contract.3  The  circumstances  under  which  the  subscrip- 
tion  was  made  are  also  to  be  taken  into  consideration.4  If  two  in- 
terpretations are  possible,  that  which  facilitates  the  enterprise,   is 


poratiou,  and  a  subsequent  ratifica- 
tion by  the  directors  of  all  his  acts, 
are  sufficient.  Pittsburgh,  etc.  R.  R. 
v.  Stewart,  41  Pa.  St.  54  (1861).  The 
delivery  and  acceptance  may  be 
proved  by  parol.  Mansfield,  etc.  R.  R. 
v.  Brown,  26  Ohio  St.  223  (1875). 
Where  it  is  delivered  in  escrow  to 
the  agent  of  the  corporation,  there 
can  be  no  acceptance  of  it  by  the  cor- 
poration, so  long  as  such  delivery 
continues.  Cass  v.  Pittsburgh,  etc.  Ry., 
80  Pa.  St.  31  (1S75).  It  may  be  re- 
voked while  still  in  the  hands  of  a 
person  acting  as  corporate  agent  with- 
out authority.  Lowe  v.  Edgefield,  etc. 
R.  R.,  1  Head  (Tenn.),  659  (1858). 
See  also  §§72,  167.  The  subscribers 
cannot  withdraw  unless  there  is  un- 
reasonable delay.  Armstrong  v. 
Karshner,  47  Ohio  St.  276  (1890). 

i  Philadelphia,  etc.  R.  R.  v.  Con- 
way, 177   Pa.   St.  364    (1896). 

2  Where,  the  condition  not  being 
performed,  the  subscriber  notifies  the 
secretary  of  his  withdrawal  from  the 
subscription,  he  is  released.  Wood's 
Case,  L.  R.  15  Eq.  236  (1873).  "The 
objection  to  a  continuing  offer,  that  it 
suspends  indefinitely  the  liability  of 
the  conditional  subscribers,  is  suffi- 
ciently answered  by  the  consideration 
that  all  such  offers  are  subject  to  re- 
traction, and  may  be  recalled  if  their 


acceptance  is  unreasonably  deferred." 
Taggart  v.  Western  Md.  R.  R.,  24  Md. 
563  (1866);  Mansfield,  etc.  R.  R.  v. 
Stout,  26  Ohio  St.  241  (1875),  which 
hold::  that  the  question  of  acceptance 
is  immaterial  where  performance  of 
the  condition  has  been  completed  by 
the  corporation. 

3  The  whole  contract  is  "to  be 
taken  together,  and  to  have  a  reason- 
able construction  according  to  the  in- 
tent of  the  parties."  People's  Ferry 
Co.  v.  Balch,  74  Mass.  303,  312  (18.57). 
"The  language  was  chosen  by  them  to 
express  their  mutual  intent,  and  such 
construction  must  be  given  thereto  as 
will  carry  into  effect  that  mutual  un- 
derstanding. .  .  .  We  are  to  ascer- 
tain what  the  parties  understood  and 
intended  by  this  language,  and  may 
not  deviate  therefrom,  whether  that 
contract,  as  so  interpreted,  be  wise 
or  unwise  for  either  party."  Mem- 
phis, etc.  Ry.  v.  Thompson,  24  Kan. 
170    (1880). 

4  "The  contract  must  be  inter- 
preted by  the  light  of  the  circum- 
stances which  existed  at  the  time  it 
was  made,  and  not  of  those  which 
arose  afterwards."  Monadnock  R.  R. 
v.  Felt,  52  N.  H.  379  (1872);  Detroit, 
etc.  R.  R.  v.  Starnes,  38  Mich.  698 
(1878). 


518 


CH.  V.] 


CONDITIONAL  SUBSCRIPTIONS. 


[§  86. 


preferred  to  that  which  retards  it.1     If  the  meaning  is  ambiguous, 
it  is  for  the  jury  to  say  what  the  interpretation  is  to  be.2 

§  86.  Performance  of  the  condition. — A  condition  to  a  subscrip- 
tion for  stock  must  be  performed  or  complied  with  before  the  sub- 
scriber can  be  compelled  to  pay  such  subscription.3  A  substantial 
performance  of  the  condition  is  sufficient,4  A  failure  to  perform  is 
not  excused  by  reason  of  unforeseen  difficulties  arising  from  floods 


i  Quoted  and  approved  in  Sweeney 
v.  Tennessee,  etc.  R.  R.,  100  S.  W. 
Rep.  732  (Tenn.  1907) ;  Ashtabula, 
etc.  R.  R.  v.  Smith,  15  Ohio  St.  328 
(1864). 

2  Connecticut  R.  R.  v.  Baxter,  32 
Vt.  805    (1860). 

3  Porter  v.  Raymond,  53  N.  H.  519 
(1873);  Monadnock  R.  R.  v.  Felt,  52 
N.  H.  379  (1872);  Montpelier,  etc. 
R.  R.  v.  Langdon,  46  Vt.  284  (1873); 
Ashtabula,  etc.  R.  R.  v.  Smith,  15 
Ohio  St.  328  (1864);  Philadelphia, 
etc.  R.  R.  v.  Hickman,  28  Pa.  St.  318 
(1857);  Burrows  v.  Smith,  10  N.  Y. 
550  (1853);  McFarland  v.  Lyon,  4 
Tex.  Civ.  App.  5S6  (1893).  "Upon 
the  performance  of  the  condition  by 
the  promisee  the  contract  is  clothed 
with  a  valid  consideration,  which  re- 
lates back,  and  the  promise  at  once 
becomes  obligatory."  Des  Moines 
Valley  R.  R.  v.  Graff,  27  Iowa,  99 
(1869).  Upon  fulfillment  of  the  con- 
dition that  a  certain  amount  be  sub- 
scribed, the  subscription  may  be  col- 
lected. Security  State  Bank  v.  Raine, 
31  Neb.  517  (1891).  A  contract  of 
subscription  to  a  railroad  company 
when  certain  things  are  done  by  it  is 
collectible  when  these  things  have 
been  done.  Lesher  v.  Karshner,  47 
Ohio  St.  302  (1890).  A  conditional 
subscription  may  be  enforced  after 
the  condition  has  been  performed. 
Webb  v.  Baltimore,  etc.  R.  R.,  77  Md. 
92    (1893). 

4  Hall  v.  Sims,  106  Ala.  561  (1895) ; 
O'Neal  v.  King,  3  Jones,  L.  (N.  C.) 
517  (1856).  See  also  Virginia,  etc. 
R.  R.  v.  Lyon  County,  6  Nev.  68 
(1870);  Springfield  Street  Ry.  v. 
Sleeper,  121  Mass.  29   (1876);   People 


v.    Holden,    82    111.    93    (1876).     Per- 
formance must  be  within  a  reasonable 
time.      Stevens   v.    Corbitt,    33   Mich. 
458  (1876).    A  donation  to  a  railroad 
on     condition     that     the   road     run 
through  the  town,  etc.,  is  enforceable 
only  when  the  condition  is  substan- 
tially complied  with.     St.  Louis,  etc. 
R.    R.    v.    Houck,    120    Mo.    App.    634 
(1906).      A    subscription    conditional 
on  the  railroad  being  completed  and 
trains  run  within  a  certain  date,  may 
be   satisfied   by   substantial    perform- 
ance and  the  running  of  trains  with- 
in the  time  limited,  even  though  fur- 
ther  work   is    done    on   the    roadbed 
thereafter.    Doherty  v.  Arkansas,  etc. 
R.  R.,  5  Ind.  Ter.  537  (1904).    Where 
the  condition  is  that  a  certain  amount 
should  be  subscribed,  there  cannot  be 
counted   a  subscription  which  is  not 
genuine,  nor  a  subscription  which  by 
secret  agreement  is  to  be  only  partly 
paid   for.      State   Bank  v.   Cook,   125 
Iowa,  111   (1904).    Donations  on  con- 
dition, but  collected  before  the  condi- 
tion  was   performed,   still   belong  to 
the  subscribers.    Larrimer  v.  Murphy, 
72  Ark.  552   (1904).     Subscription  on 
express    condition    that    it    shall    be 
payable     only     in     case     the     whole 
amount  is  subscribed  cannot  be  col- 
lected, where  the  whole  amount  was 
made   up  by  including  the  subscrip- 
tions of  married  women  who  had  not 
paid.    Hahn's  Appeal,  7  Atl.  Rep.  482 
(Pa.  1886).     Condition  that  subscrip- 
tion  shall   be   payable   only   when  a 
sum  deemed  sufficient  by  the  directors 
has   been   subscribed   is   not  fulfilled 
when  the  directors  fixed  a  sum  and 
then   later   reduced   the   sum   to   the 
amount    subscribed.      Only    uncondi' 


319 


§  86.] 


CONDITIONAL  SUBSCRIPTIONS. 


[CH.   V. 


and  natural  causes.1  A  conditional  subscriber  is  not  a  stockholder 
or  member  of  the  corporation  until  after  the  condition  is  performed.2 
Whether  or  not  the  condition  has  been  performed  is  a  question  of 
fact.3  Performance  may  be  proved  by  parol  or  by  the  records  of 
the  corporation.4 


tional  subscriptions  are  to  be  counted. 
If  performance  turns  on  a  writing, 
the  question  is  for  the  court.  Brand 
v.  Lawrenceville  Branch  R.  R.,  77  Ga. 
506  (1887).  Reasonable  performance 
is  all  that  is  required.  Thus,  the 
completion  of  a  blast  furnace,  as  a 
condition,  is  satisfied  by  completion 
by  the  lessee.  Cornell's  Appeal,  114 
Pa.  St.  153  (18S6).  A  condition  that 
the  company  shall  construct  a  road 
from  and  to  specified  points  is  not 
fulfilled  by  the  construction  of  part 
of  the  way  and  running  over  another 
railroad  for  the  remainder  of  the 
distance.  Brown  v.  Dibble,  65  Mich. 
520  (1887).  Contra,  People  v.  Holden, 
82  111.  93  (1876).  In  the  case  of 
Martin  v.  Pensacola,  etc.  R.  R.,  8  Fla. 
370,  390  (1859),  it  is  stated,  in  a 
dictum,  that  a  strict  compliance  is 
necessarjr.  But  see  Branham  v.  Rec- 
ord, 42  Ind.  181  (1S73).  The  ques- 
tion of  whether  the  fulfillment  of  the 
condition  was  in  good  faith  and  not 
merely  temporary  may  be  for  the 
jury.  Tabor,  etc.  Ry.  v.  McCormick, 
90  Iowa,  446  (1894).  A  subscription 
to  an  enterprise,  conditional  upon 
the  performance  of  that  enterprise 
by  certain  named  parties  and  a  con- 
veyance of  the  results  to  a  corpora- 
tion, may  be  enforced  by  such  parties 
upon  due  performance.  Brewer  v. 
Stone,  77  Mass.  22S  (1858).  A  sub- 
scription to  a  railroad,  conditional 
upon  its  completing  the  road,  is  not 
enforceable  by  a  consolidated  com- 
pany which  succeeds  to  and  completes 
the  road.  Toledo,  etc.  R.  R.  v.  Hins- 
dale, 45  Ohio  St.  556  (1888).  Sub- 
stantial compliance  with  the  condi- 
tion is  sufficient.  Cravens  v.  Eagle, 
etc.  Co.,  120  Ind.  6  (1889).  Where 
a  subscription   is  on   condition   that 


the  railroad  company  subscribe  to 
the  stock  of  a  blast  furnace  company, 
a  purchase  of  the  furnace  company 
stock  by  the  railroad  company  is  not 
a  compliance  with  the  condition  prece- 
dent. Echols  v.  Bristol,  90  Va.  165 
(1893).  A  note  given  on  condition 
that  a  road  be  built  into  a  town  is 
not  collectible  if  only  a  branch  of 
that  road  was  built  into  the  town. 
Gulf,  etc.  Ry.  v.  Pittman,  4  Tex.  Civ. 
App.  167  (1S93).  It  is  no  defense 
that  the  condition  was  that  the  sub- 
scriber should  have  a  contract  and 
that  after  he  commenced  work  the 
company  stopped  the  work.  Cook  v. 
Hopkinsville,  etc.  Co.,  32  S.  W.  Rep. 
748  (Ky.  1895).  Where  the  condi- 
tion to  a  particular  subscription  is 
that  $50,000  be  subscribed,  the  verbal 
guaranty  of  an  individual  that  the 
$50,000  would  be  subscribed  is  not  a 
compliance  with  the  condition. 
Branch  v.  Augusta  Glass  Works,  95 
Ga.  573   (1895). 

1  Memphis,  etc.  Ry.  v.  Thompson, 
24  Kan.  170  (1S80). 

2  Chase  v.  Sycamore,  etc.  R.  R.,  38 
111.  215  (1865);  Slipher  v.  Earhart, 
83  Ind.  173  (1882);  Evansville,  etc. 
R.  R.  v.  Shearer,  10  Ind.  244  (1858); 
Ashtabula,  etc.  R.  R.  v.  Smith,  15 
Ohio  St.  328    (1864). 

3  Jewett  v.  Lawrenceburgh,  etc.  R. 
R.,  10  Ind.  539  (1858).  And  is  a 
question  for  the  jury.  St.  Louis,  etc. 
R.  R.  v.  Eakins,  30  Iowa,  279  (1870). 

4  By  parol.  St.  Louis,  etc.  R.  R.  v. 
Eakins,  30  Iowa,  279  (1870).  By 
corporate  records.  Penobscot,  etc.  R. 
R.  v.  Dunn,  39  Me.  587  (1855).  Per- 
formance must  be  alleged  in  the  com- 
plaint or  declaration.  Trott  v.  Sar- 
chett,  10  Ohio  St.  241  (1859) ;  Roberts 
v.   Mobile,   etc.   R.  R.,   32   Miss.   373 


320 


CH.   V.] 


CONDITIONxVL  SUBSCRIPTIONS. 


[§  87. 


§  87.  Where  the  condition  is  that  the  work  shall  be  begun,  con- 
tracted for,  or  completed  within  a  certain  time,  time  is  of  the 
essence  of  the  contract,  and  any  failure  to  perform  within  the  time 
so  specified  defeats  the  subscription.1  A  condition  that  the  road 
shall  be  "permanently"  located  on  a  specified  route  is  satisfied  by 
the  adoption  of  that  route  by  the  directors.2  Where  the  question 
of  whether  performance  has  been  completed  rests  in  the  decision  of 
the  directors,  their  conclusion  cannot  be  questioned,  unless  fraud  or 
bad  faith  is  proved.3  A  condition  that  the  subscription  shall  be 
applied  to  a  particular  portion  of  the  road  is  satisfied  by  the  com- 
pletion of  that  portion.4  Any  fraud  on  the  part  of  the  corporation 
in  the  performance  of  the  condition  may  be  shown  by  parol.5  All 
of  several  conditions  must  be  performed  before  calls  are  made.6 
But  if  one  part  of  the  subscription  be  free  from  condition,  that 
part  may  be  collected  independently.7  Where  there  are  differ- 
ent conditions  for  different  instalments,  compliance  with  the  first 
condition  entitles  the  company  to  the  instalment,  even  though  the 
second  condition  is  not  complied  with.8  Where,  after  part  pay- 
ment by  the  conditional  subscriber,  the  corporate  plans  are  changed, 


(1856) ;  Henderson,  etc.  R.  R.  v.  Leav-  sonable  time  after  the  time  specified 
ell,  16  B.  Mon.  (Ky.)  358  (1855)  in  the  condition  was  held  to  be  a 
i  Burlington,  etc.  R.  R.  v.  Boestler,  substantial  performance,  and  suffi- 
15  Iowa,  555  (1864),  per  Dillon,  J.;  cient,  the  grading  having  been  corn- 
Freeman  v.  Matlock,  67  Ind.  99  pleted  in  the  specified  time.  See  also 
(1879);  Memphis,  etc.  Ry.  v.  Thomp-  Moore  v.  Campbell,  111  Ind.  328 
son,  24  Kan.  170  (1880);  Portland,  (1887),  where  the  condition  was  in- 
etc.  R.  R.  v.  Hartford,  58  Me.  23  serted  in  a  promissory  note. 
(1870).  An  agreement  to  pay  a  cor-  2  Smith  v.  Allison,  23  Ind.  366 
poration  a  certain  sum  if  it  builds  (1864);  and  see  cases  in  §78,  supra. 
and  starts  a  factory  within  a  certain  So  also  a  condition  that  the  road 
time  is  not  collectible  if  the  contract  shall  cross  another  at  a  certain  point 
is  not  fulfilled  within  that  time.  Bohn  is  satisfied  by  its  being  so  located. 
Mfg.  Co.  v.  Lewis,  45  Minn.  164  Wear  v.  Jacksonville,  etc.  R.  R.,  24 
(1891).     If  the  directors  certify  that  111.  593   (1860). 

the  condition  was  performed  within  3  Cass    v.    Pittsburgh,    etc.    Ry.,    80 

the  specified  time,  the  subscriber  may  Pa.  St.  31  (1875). 

prove  the  falsity  of  their  certificate.  4  Nichols   i\  Burlington,  etc.  Co.,  4 

Morris   Canal,   etc.   Co.  v.   Nathan,   2  Greene    (Iowa),  42    (1853). 

Hall   (N.  Y.),  239   (1829).     Upon  the  5  New    York    Exchange    Co.    v.    De 

failure  of  the  corporation  to  comply  Wolf,  31  N.  Y.   273    (1865). 

with   the   condition   the  subscription  6  Porter  v.  Raymond,  53  N.  H.  519 


ceases   to   have   any  vitality   "by   its 
own     limitation."       Ticonic     Water- 


(1873). 
7  St.   Louis,   etc.   R.   R.   v.   Eakins, 


power,  etc.   Co.  v.  Lang,   63  Me.   480     30  Iowa,  279   (1870), 


(1874).     In  Missouri  Pac.  Ry.  v.  Ty- 

gard,  84  Mo.  264    (1884),  however,  a     584    (1897). 

completion  of  the  road  within  a  rea- 

(21)  321 


8  Coos   Bay,  etc.  v.  Dixon,   30  Ore. 


88.] 


CONDITIONAL  SUBSCRIPTIONS. 


[CII.   V. 


so  that  the  condition  is  not  complied  with,  the  money,  it  has  been 
held,  may  be  recovered  back.1  Where  a  stock  subscription  is  pay- 
able when  the  road  is  finished  the  statute  of  limitations  does  not  be- 
gin to  run  until  such  road  is  actually  finished.2 

§  88.  Waiver  of  the  condition. — A  conditional  subscriber  to  the 
stock  of  a  corporation  may  waive  the  condition  and  performance 
thereof,  and  thus  become  liable  on  his  subscription,  as  though  it 
had  been  originally  an  absolute  one.  The  waiver  may  be  by  an 
oral  statement  or  agreement  of  the  subscriber.3  Certain  acts  of  the 
subscriber  have  been  held  to  indicate  an  intent  to  waive  a  condition 
to  the  subscription,  and  to  be  equivalent  to  a  direct  waiver.  Thus, 
acting  as  a  director,4  or  as  president  of  the  corporation,5  paying 
the  whole  of  the  subscription, (i  giving  an  absolute  promissory  note 
without  conditions  in  payment  of  the  subscription,7  have  each  been 


i  Jewett  v.  Lawrenceburgh,  etc.  R. 
R.,  10  Ind.  539  (1858).  Where  the 
condition  of  a  municipal  subscription 
for  stock  is  that  the  money  shall  be 
expended  when  necessary  and  within 
the  county,  the  company  may  exer- 
cise its  reasonable  judgment  as  to 
such  necessity,  and  even  if  the  money 
is  misappropriated,  yet  a  suit  against 
the  company  is  barred  after  twenty 
years.  Marion  County  v.  Louisville, 
etc.  R.  R.,  78  S.  W.  Rep.  437  (Ky. 
1904). 

2  The  transfer  of  its  cars  by  a 
ferry,  pending  the  construction  of  a 
bridge,  is  not  a  completion  of  the 
road,  even  though  the  directors  have 
declared  it  finished  before  such  bridge 
was  completed.  Garner  v.  Hall,  122 
Ala.    221     (1899). 

3  Hanover  Junction,  etc.  R.  R.  v. 
Haldeman,  82  Pa.  St.  36  (1876).  See 
also  Woonsocket  Union  R.  R.  v.  Sher- 
man, 8  R.  I.  564  (1867).  A  munici- 
pality may  waive  conditions  which  it 
makes  to  its  subscription.  Graves  v. 
Saline  County,  161  U.  S.  359  (1896). 
Conditions  may  be  waived  by  the  acts 
of  the  subscriber.  Seymour  v.  Jef- 
ferson, 74  N.  W.  Rep.  149  (Minn. 
(1898). 

4  Lane   v.    Brainerd,    30    Conn.    565 
(1862). 

A  subscriber  who  acts  as  an  incor- 


porator and  director  thereby  waives 
a  condition  to  his  preliminary  sub- 
scription that  a  certain  amount  must 
be  subscribed.  Wright  v.  Agelasto, 
104  Va.  159   (1905). 

Where  a  person  subscribes  for  pre- 
ferred stock,  but  no  preferred  stock 
is  provided  for,  and  he  becomes  a  di- 
rector and  acts  as  such  for  several 
years,  he  is  liable  on  such  stock  to 
corporate  creditors,  as  though  it  were 
a  subscription  for  common  stock. 
Tama  Water-power  Co.  v.  Hopkins,  79 
Iowa,  653    (1890). 

5  Dayton,  etc.  R.  R.  v.  Hatch,  1 
Disney  (Ohio),  84  (1855). 

6  Parks  v.  Evansville,  etc.  R.  R.,  23 
Ind.  567  (1864).  The  condition  is 
waived  by  the  subscriber  where  he  ac- 
cepts the  stock  and  sells  it.  Wyman 
v.  Bowman,  127  Fed.  Rep.  257  (1904). 

7  Chamberlain  v.  Painesville,  etc. 
R.  R.,  15  Ohio  St.  225  (1864) ;  Slipher 
v.  Earhart,  83  Ind.  173  (1882) ;  Evans- 
ville, etc.  R.  R.  v.  Dunn,  17  Ind.  603 
(1861) ;  Keller  v.  Johnson,  11  Ind. 
337  (1858);  O'Donald  v.  Evansville, 
etc.  R.  R.,  14  Ind.  259  (1860).  But 
not  where  the  note  was  given  by 
reason  of  false  representations  that 
the  condition  has  been  complied  with. 
Parker  v.  Thomas,  19  Ind.  213 
(1862) ;  Taylor  v.  Fletcher,  15  Ind.  80 
(1860). 


322 


CH.  V.] 


CONDITIONAL  SUBSCRIPTIONS. 


[§  88. 


held  to  constitute  a  waiver  of  the  condition  to  a  subscription.  Where 
the  condition  of  a  proposition  to  donate  land  to  a  corporation  is 
that  a  certain  amount  of  stock  should  be  subscribed  by  responsible 
parties,  the  fact  that  a  part  of  the  subscriptions  was  not  by  respon- 
sible parties  cannot  be  set  up,  where  the  party  himself  subscribed 
and  had  not  paid.1  Mere  silence  may  be  a  waiver;2  but  payment 
of  part  of  the  subscription,3  or  aid  in  the  attempt  to  start  the  enter- 
prise, by  soliciting  subscriptions  and  being  elected  to  a  corporate 
office,  may  not  amount  to  a  waiver.4  It  is  not  a  waiver  of  the  per- 
formance of  the  condition  that  the  subscriber  brought  suit  to  have 
the  subscription  canceled  on  the  ground  that  he  had  been  induced 
to  subscribe  by  fraud.5  A  condition  is  not  waived  by  partial  pay- 
ment, such  payment  being  made  without  knowledge  that  the  con- 
dition had  not  been  performed.6  "Where  a  subscription  of  stock  is 
conditional  and  the  subscribers  are  falsely  informed  that  the  con- 
ditions have  been  complied  with,  they  may  defend  against  the  sub- 
scription, even  though  they  have  made  partial  payments,  and  even 
though  corporate  debts  have  been  incurred.7 


i  Work     v.     Welsh,     160     111.     4G8  scribers  obtaining  stock  on  condition 

(1896).  that  a  building  contract  be  given  to 

2  Burlington,  etc.  R.  R.  t\  Boestler,  them  cannot  rescind  for  non-perform- 
15  Iowa,  555  (1864);  Bucksport,  etc.  ance  by  the  company,  where  the  sub- 
R.  R.  v.  Brewer,  67  Me.  295  (1877).  scribers  long  delayed  rescission,  after 
Even  though  two  persons  signed  the  such  refusal  of  the  company  to  per- 
articles  of  incorporation  as  incorpo-  form.  Rankin  v.  Hop,  etc.  Co.,  20  L. 
rators  and  as  subscribers  of  stock,  on  T.  Rep.  207  (1869).  Failure  of  a 
condition  tbat  the  articles  would  not  subscriber  conditionally,  for  a  long 
be  used  unless  a  certain  other  party  time,  to  have  his  name  taken  off  the 
signed,  and  even  though  the  latter  list,  renders  him  liable  on  the  wind- 
party  did  not  sign  and  the  articles  up.  Wheatcroft's  Case,  29  L.  T.  324 
were  filed  and  the  stock  subsequently  (1873). 

tendered  to  such  signers,  which  they  3  Pittsburgh,  etc.  R.  R.  v.  Stewart, 

refused,  yet  if  they  took  no  steps  to  41  Pa.  St.  54   (1861);  Roberts's  Case, 

remove    their    names    as    subscribers  2  Macm.  &  G.  192   (1850);   Jewett  v. 

from    the    books   they    are    liable   as  Lawrenceburgh,   etc.   R.    R.,    10    Ind. 

stockholders  to  corporate  creditors  on  539   (1858).     But  see  Mack's  Appeal, 

a     statutory    liability.      Rehbein    v.  7   Atl.   Rep.    481    (Pa.   1886),   where, 

Rahr,  109  Wis.  136   (1901).     In  Ore-  however,    a    substantial   performance 

gon  it  is   held  that  where  the  con-  had  been  made. 

dition  was  the  subscribing  of  a  cer-  4  Ridgefield,     etc.    R.    R.    v.    Rey- 

tain  amount  within   a  certain  time,  nolds,  46  Conn.  375   (1878). 

which    was   not   done,   but  was   per-  5  Re  Thomas,   etc.   Sons,    77   L.   T. 


formed  soon  after  that  time,  the  con- 
ditional subscriber  is  bound,  where 
he  did  not  cause  his  subscription  to 
be  stricken  from  the  books.  Lee  v. 
Imbrie,   13   Oreg.   510    (1886).     Sub- 


Rep.  521    (1897). 

6  Johnson   v.  Schar,  9   S.  Dak.  536 
(1897). 

7  Hawkins  v.  Citizens',  etc.  Co.,  38 
Oreg.    544    (1901). 


323 


89.J 


CONDITIONAL  SUBSCRIPTIONS. 


[CH.  V. 


§  89.  Notice  of 'performance  and  calls.  — There  is  some  doubt  a3 
to  whether,  upon  performance  of  the  condition,  the  subscriber  is 
entitled  to  notice  of  such  performance.  The  better  rule  seems  to  be 
that  he  is  entitled  to  such  notice,  and  that  a  general  "call"  for  the 
payment  of  part  or  all  of  the  subscriptions  for  stock  does  not  ap- 
ply to  conditional  subscribers,  unless  the  condition  has  been  per- 
formed, and  the  fact  of  performance  has  been  brought  to  the  atten- 
tion of  the  subscriber.1 

Subscriptions  payable  in  property  are  not  subject  to  calls,  and  a 
demand  for  the  property  must  be  made  by  the  corporation.2  Upon 
failure  of  the  subscriber  to  furnish  the  property,  or  upon  insolvency 
of  the  corporation,  such  subscriptions  become  payable  in  cash.3 


i  Chase  v.  Sycamore,  etc.  R.  R.,  38 
111.  215  (1865);  Trott  v.  Sarchett,  10 
Ohio  St.  241  (1859).  Contra,  Nichols 
v.  Burlington,  etc.  Co.,  4  Greene 
(Iowa),  42  (1853);  Spartanburg,  etc. 
R.  R.  v.  De  Graffenreid,  12  Rich.  L. 
(S.  C.)  675  (I860),  holding  that  no 
"call"  is  necessary.  An  underwriters' 
agreement  to  subscribe  if  called  upon 
so  to  do  does  not  render  them  liable 
on  a  winding  up  if  they  were  not  so 
called  upon.  Re  Harvey's  Oyster  Co., 
[1894]  2  Ch.  474.  A  subscription  pay- 
able when  the  road  reaches  a  certain 
point  becomes  absolutely  payable 
then,  upon  demand.  The  statute  of 
frauds  does  not  apply  to  such  a  sub- 
scription. Webb  v.  Baltimore,  etc.  R. 
R.,  77  Md.  92   (1893). 


2  Ohio,  etc.  R.  R.  v.  Cramer,  23  Ind. 
490  (1864).  Payment  cannot  be  re- 
quired in  installments.  Id.  But  upon 
demand  the  subscriber  must  ascertain 
when  and  where  the  materials  are  to 
be  delivered.  McClure  v.  People's 
Freight  Ry.,  90  Pa.  St.  269   (1879). 

3  Haywood,  etc.  Co.  v.  Bryan,  6 
Jones,  L.  (N.  C.)  82  (1858);  Sperry 
v.  Johnson,  11  Ohio,  452  (1842); 
Wheatcroft's  Case,  29  L.  T.  Rep.  324 
(1873).  See  n.  3,  p.  115,  supra.  Cf. 
Dayton,  etc.  R.  R.  v.  Hatch,  1  Disney 
(Ohio),  84  (1855).  A  subscription  on 
condition  of  being  appointed  local 
manager  is  not  enforceable  on  the 
wind-up,  the  appointment  not  having 
been  made.  Rogers's  Case,  L.  R.  3 
Ch.   App.   633    (1868). 


324 


CHAPTER  VI. 
MUNICIPAL  SUBSCRIPTIONS. 


§  90.  A  municipal  corporation  has  no 
implied  power  or  authority 
to  subscribe  for  stock  in  any 
other  corporation. 

91.  The    legislature    may    authorize 

municipal  subscriptions  to 
public  but  not  to  private  en- 
terprises. 

92.  Constitutional     provisions     pro- 

hibiting municipal  subscrip- 
tions. 

93.  Change  in  the  state  constitution, 

or  the  general  statutory  laws, 
after  the  municipal  corpora- 
tion has  voted  to  subscribe. 

94.  Statutory    formalities    must    be 

substantially    complied    with. 

95.  Submission  to  popular  vote. 


§96.  What  officer  or  agent  of  the 
municipality  may  make  the 
contract    of   subscription. 

97.  Municipal  subscriptions  may  be 

conditional. 

98.  When    may    a    municipal    sub- 

scription be  paid  in  bonds  in- 
stead of  money? 

99.  A    municipal    corporation    as    a 

stockholder. 

100.  A  municipality  may  enforce  de- 

livery   of    stock    to    itself    in 
a  proper  case. 

101.  Division     of     the     municipality 

after  the  subscription. 

102.  103.  Consolidation  of  companies 

after    the    municipal    aid    is 
voted. 


§  90.  A  municipal  corporation  has  no  implied  power  or  author- 
ity to  subscribe  for  stock  in  any  other  corporation.  —A  municipal 
corporation,  being  in  its  nature  and  purposes  a  very  different  legal 
institution  from  an  ordinary  private  corporation,  being  indeed  but 
a  mode  or  department  of  government— "an  investing  the  people  of 
a  place  with  the  local  government  thereof,"1— it  is  plain  that  the 
general  rules  of  law  applicable  to  private  corporations  having  capi- 
tal stock  are,  for  the  most  part,  not  applicable  when  the  rights,  du- 
ties, powers,  and  liabilities  of  municipal  corporations  are  sought  to 
be  accurately  determined.2 

It  is  proposed  to  consider  the  right  of  a  municipality  to  enter 
into  the  contract  of  subscription  to  the  capital  stock  of  other  cor- 
porations, and  of  the  liabilities,  rights,  and  duties  growing  out  of 
such  a  subscription.  The  subject  practically  narrows  itself  to  the 
right  of  municipal  corporations  to  subscribe  to  the  stock  of  railroad 
corporations,  inasmuch  as  this  right,  wherever  it  exists,  is  almost 
universally  exercised  in  favor  of  these  corporations,  and  the  adju- 
dicated cases  almost  all  present  phases  of  the  question  applying  to 
railroad  corporations  alone. 

It  is  a  well-settled  rule  of  law  that  municipal  corporations  have 

lCuddon   r.   Eastwick,  1   Salk.   183     44    (1871);    State    v.   Leffingwell,    54 
(1704);  Dillon,  Mun.  Corp.,  §§19,  20.     Mo.   458    (1873);    Norton   v.   PecK,   3 

2  People   v.   Morris,    13   Wend.    325     Wis.    714    (1854);    Ottawa   v.   Carey, 
(1835);   People  v.  Hurlbut,  24  Mich.     108  U.   S.  110    (1883). 

325 


§90.] 


MUNICIPAL  SUBSCRIPTIONS. 


[cn.  VI. 


no  implied  right  or  authority  to  subscribe  for  the  stock  of  any 
other  incorporated  company.1  In  order,  therefore,  to  establish  the 
validity  of  a  municipal  subscription  to  the  stock  of  a  railway  com- 
pany, an  express  grant  of  authority  from  the  legislature  must  be 
shown.2  The  right  to  subscribe  is  derived  from  the  legislative 
enactment;  and  whether  or  not  an  enabling  act  is  sufficient  to  vali- 
date a  subscription  is  a  question  of  law  for  the  court,  not  for  the 


jury.0 

i  "To  become  stockholders  in  pri- 
vate corporations,"  says  Judge  Dil- 
lon, "is  manifestly  foreign  to  the 
purposes  intended  to  be  subserved  by 
the  creation  of  corporate  municipali- 
ties." Dillon,  Mun.  Corp.,  §  161;  Kel- 
ley  v.  Milan,  127  U.  S.  139  (1888). 
See  also  Kenicott  v.  Supervisors,  16 
Wall.  452  (1872) ;  Thomson  v.  Lee 
County,  3  Wall.  327  (1S65);  Bell  v. 
Railroad  Co.,  4  Wall.  598  (1866); 
Wells  v.  Supervisors,  102  U.  S.  625 
(18S0) ;  Lamoille  Valley  R.  R.  v.  Fair- 
field,  51  Vt.  257  (1878);  Barnes  v. 
Lacon,  84  111.  461  (1877),  holding  that 
a  vote  of  the  people  of  a  town  to  sub- 
scribe for  stock  without  the  authoriza- 
tion of  law  is  not  binding  upon  the 
town.  To  same  effect,  Allen  v.  Lou- 
isiana, 103  U.  S.  80  (1880);  Pennsyl- 
vania R.  R.  v.  Philadelphia,  47  Pa.  St. 
189  (1864);  Jonesboro  v.  Cairo,  etc. 
R.  R.,  110  U.  S.  192  (1883),  holding 
that  a  general  power  to  borrow  money 
and  issue  bonds  therefor  does  not  con- 
fer the  right  to  subscribe  for  stock, 
even  with  the  sanction  of  the  voters 
at  a  general  election.  Cf.  Gelpcke  v. 
Dubuque,  1  Wall.  175,  220  (1863); 
Campbell  v.  Paris,  etc.  R.  R.,  71  111. 
611  (1874);  East  Oakland  v.  Skin- 
ner, 94  U.  S.  255  (1S76);  Lynchburg 
v.  Slaughter,  75  Va.  57  (1880);  Bro- 
die  v.  McCabe,  33  Ark.  690  (187S). 
A  municipality  has  no  inherent  power 
to  acquire  stock  in  a  waterworks  cor- 
poration nor  to  issue  bonds  in  pay- 
ment therefor.  Voss  r.  Waterloo,  etc. 
Co.,  163  Ind.  69  (1904).  A  munici- 
pal corporation  cannot  enforce  a  penal 
bond,  given  to  it  by  a  plank-road 
company,  conditioned  that  the  latter 


will  use  to  build  its  road  certain 
bonds  issued  by  the  former,  it  ap- 
pearing that  the  aid  to  the  plank-road 
company  was  ultra  vires  of  the  mu- 
nicipality. Montgomery  v.  Montgom- 
ery, etc.  Co.,  31  Ala.  76  (1857).  The 
attorney-general  may  restrain  a  mu- 
nicipality from  illegally  issuing  bonds 
to  a  railroad  company.  State  v.  Saline 
County  Court,  51  Mo.  350  (1873),  re- 
viewing the  English  and  American 
cases. 

2  Sharpless  v.  Philadelphia,  21  Pa. 
St.  147  (1853);  Leavenworth  County 
v.  Miller,  7.  Kan.  479  (1871).  Cf. 
Welch  v.  Post,  99  111.  471  (1SS1); 
Marsh  v.  Fulton  County,  10  Wall.  676 
(1870),  holding  that  the  power  to 
subscribe  to  the  stock  of  a  railroad 
is  not  sufficient  to  authorize  a  sub- 
scription to  a  new  incorporation  of 
a  part  of  it;  Lafayette  v.  Cox,  5  Ind. 
38  (1854);  Dillon,  Mun.  Corp.,  §161; 
Ottawa  v.  Carey,  108  U.  S.  110  (1883) ; 
Lewis  v.  Shreveport,  108  U.  S.  282 
(1883).  A  city  has  no  inherent  power 
to  aid  a  railroad.  It  cannot  do  so  in- 
directly by  way  of  a  monthly  rental 
for  water-works,  the  water-works  com- 
pany obligating  itself  to  construct  the 
railroad.  A  lease  by  a  water-works 
company  of  its  plant  to  individuals, 
with  an  agreement  on  the  part  of  the 
company  to  construct  a  railroad,  the 
plan  being  for  the  individuals  to  then 
sublet  only  the  water  to  the  city,  the 
whole  scheme  being  a  device  to  obtain 
the  city  aid  in  the  construction  of  the 
railroad,  is  not  enforceable.  Higgins 
v.  City  of  San  Diego,  45  Pac.  Rep.  824 
(Cal.   1S96). 

3  Post  v.  Supervisors,  105  U.  S.  667 


326 


ch.  vl]  municipal  subscriptions.  [§  91. 

Every  holder  of  municipal  bonds  issued  to  raise  money  to  pay 
such  a  subscription,  whether  he  receives  them  directly  from  the 
town  or  county,  or  from  the  railroad  company  to  which  they  may 
have  been  delivered,  or  takes  them  from  some  prior  holder  in  the  ordi- 
nary course  of  business,  is  chargeable  with  notice  of  the  statutory 
provisions  under  which  they  were  issued.1 

The  right  to  make  a  donation  to  a  railroad  or  other  work  of  in- 
ternal improvement  must  equally  be  derived  from  the  act  of  the 
legislature.  Without  such  express  authority  of  law,  a  donation  or 
issue  of  bonds  as  a  gift  to  a  railroad  company  is  invalid  and  void.2 

§  91.  The  legislature  may  authorize  municipal  subscriptions  to 
public  but  not  to  private  enterprises. — It  was  long  a  question 
whether  the  legislature  had  the  constitutional  right  to  authorize  a 
municipality  to  subscribe  money,  or  donate  it,  in  furtherance  of  any 
enterprise  not  governmental  in  its  nature.  It  has  been  contended 
with  great  ability  and  learning  that  such  a  right  does  not  inhere 
in  the  legislative  branch  of  the  government  in  this  country,  and 
consequently  that  such  assumed  grants  are  unconstitutional  and 
void.3  But  it  is  now  a  well-settled  rule  that  the  legislature  has  the 
constitutional  power  to  authorize  a  municipal  corporation,  by  its 
charter  or  an  express  act,  to  subscribe  to  the  stock  of  a  railroad  or 
other  quasi-public  corporation,  and  to  issue  and  sell  its  bonds  for 
that  purpose.4     By  reason  of  the  decisions  to  that  effect,  hundreds 

(1SS1) ;    Leavenworth  County  v.  Mil-  scription  payable  in  bonds  where  part 

ler,  7  Kan.  479   (1871).  of    the    bonds    are    turned    back    for 

lOgden  v.  Daviess  County,  102  U.  stock.     See  Wesson  v.  Saline  County, 

S.  634    (1880);    Lewis  v.  Shreveport,  73   Fed.   Rep.   919    (1896),  overruling 

108  U.  S.  282  (183)  ;  Ottawa  v.  Carey,  Post  v.  Pulaski  County,  49  Fed.  Rep. 

108  U.  S.  110  (1883);  McClure  v.  Ox-  628   (1892). 

ford,   94   U.   S.  429    (1876).     This   is  3  Cooley,  Const.  Lim.  (5th  ed.),  pp. 

the  settled  rule  of  the  supreme  court  261-266;  Dillon,  Mun.  Corp.,  §§  12,  117, 

of- the  United  States  on  this  point.  153.     For  the  rule  in  Michigan,  Iowa 

2  Dixon  County  v.  Field,  111  U.  S.  and  New  York,  see  next  note. 
83  (1884).  4  So  held  by  the  supreme  court  of 
The  power  of  the  legislature  to  the  United  States.  Knox  County  r. 
authorize  a  municipality  to  donate  Aspinwall,  21  How.  539  (1858) ;  Za- 
funds  or  bonds  herein  is  absolutely  de-  briskie  v.  Cleveland,  etc.  R.  R.,  23 
nied  in  Hanson  v.  Vernon,  27  Iowa,  How.  381  (1859);  Amey  ».  Allegheny 
28  (1869) ;  Sweet  v.  Hulbert,  51  Barb.  City,  24  How.  364,  376  (1860) ;  Curtis 
312  (1S68).  Cf.  Leavenworth  County  v.  Butler  County,  24  How.  435  (1860) ; 
r.  Miller,  7  Kan.  479  (1871).  The  rail-  Gelpcke  v.  Dubuque,  1  Wall.  175 
road  cannot  collect,  as  a  donation,  (1863);  Mercer  County  v.  Hackett,  1 
money  which  was  voted  as  a  subscrip-  Wall.  83  (1863) ;  Seybert  v.  Pittsburg, 
tion.  Crooks  v.  State,  4  N.  E.  Rep.  1  Wall.  272  (1863);  Van  Hostrup  v. 
589  (Ind.  1886).  Madison,  1  Wall.  291  (1863);  Have- 
As  to  a  gift  of  bonds  and  a  sub-  meyer  v.   Iowa  County,   3   Wall.   294 

327 


§  91.] 


MUNICIPAL  SUBSCRIPTIONS. 


[CH.  VI. 


of  millions  of  dollars  of  municipal  bonds  were  issued  in  aid  of  rail- 
roads. But  when  the  time  came  to  pay  the  bonds,  many  efforts  were 
made  to  avoid  payment.     This  inclination,  however,  of  municipali- 

(1865);    Thomson   v.    Lee   County,   3  pay    it,    does    not   constitute    such    a 

Wall.  327   (1865);  Rogers  v.  Burling-  contract   with   the    bondholders   that 

ton,  3  Wall.  654  (1865),  holding  that  the   state   cannot   afterwards   modify 

power  "to  borrow  money  for  any  pub-  the  taxation  even  by  the  exemption 

lie  purpose"   gives  authority   to  bor-  of  portions   of  taxable  property;    01- 

row     to    aid    a     railroad    company;  cott    v.     Supervisors,     16    Wall.    678 

Mitchell    v.   Burlington,   4    Wall.    270  (1872);   Rock  Creek  v.  Strong,  96  U. 

(1866);    Von    Hoffman   v.   Quincy,    4  S.    271     (1877);     Seven    Hickory    v. 

Wall.   535    (1866);    Campbell  v.  Ken-  Ellery,    103   U.    S.   423    (1880);    Clay 

osha,  5  Wall.  194  (1866),  holding  that  County  v.  Society  for  Savings,  104  U. 

a   subscription   may  be   validated   by  S.    579    (1881);    Taylor   v.   Ypsilanti, 

subsequent  legislation,  and  such  valid-  105  U.  S.  60  (1881) ;  Lewis  v.  Barbour 

ation  may  be  by  implication;  holding  County,  105  U.  S.  739   (1881>;   Amos- 

also  that  the  levy  of  a  tax  and  pay-  keag  Bank  v.  Ottawa,  105  U.  S.  667 

ment   of    interest   validate   bonds    ir-  (1881);     Gilman     v.     Sheboygan,     2 

regularly  issued;  Meyer  v.  Muscatine,  Black,  510;   Scipio  v.  Wright,  101  U. 

1   Wall.    384    (1863);    Lee   County   v.  S.    667    (1879).     And    in   the   circuit 

Rogers,    7   Wall.    181    (1868);    Beloit  and    district    courts    of    the    United 


v.  Morgan,  7  Wall.  619  (1868);  Ken 
osha  v.  Lamson,  9  Wall.  477  (1869); 
Railroad  Co.  v.  Otoe  County,  16  Wall. 
667  (1872) ;  s.  c,  1  Dillon,  338  (1871) ; 
s.  c.  sub  nom.  Chicago,  etc.  R.  R.  v 


States.  Long  v.  New  London,  9  Biss. 
539  (1880);  s.  c,  5  Fed.  Rep.  559; 
Sibley  v.  Mobile,  3  Woods,  535  (1876) ; 
s.  c,  22  Fed.  Cas.  57. 

Alabama:    Stein  v.  Mobile,  24  Ala. 


Otoe  County,  5  Fed.  Cas.  598,  holding     591     (1854).    0pelika    v     Daniel     59 

that    unless  restrained  by  provisions     Ala.  2n  (iS77);  Ex  parte  Selma,  etc 
of  the  constitution  of  a  state,  its  leg- 
islature  may   authorize   a   county   to 
issue  bonds  and  donate  them  to  the     (i860) 


R.   R.,   45   Ala.   696    (1871);    Gibbons 
v.    Mobile,    etc.    R.    R.,    36    Ala.    410 


railroad  company  which  will  give  it  a 


Arkansas:    Mississippi,  etc.  R.  R.  v. 


valuable  connection  with  some  other     r  ~TiJ'  A  TXZTt^  * 

region       A*  t„  «.«  i^i.i.h™.   — ~      Camden<  23  Ark'  300   <1861)>-  English 


region.     As  to  the  legislative  power, 


v.  Chicot  County,  26  Ark.  454  (1871) ; 


donations  and  subscriptions  for  stock       '  T  7      ™  .  U*'I; : 

utanfl  nn   th«  «.m»  —*      n™.      Jacksonport  v.   Watson,   33   Ark.   704 


stand  on  the  same  ground.  Queens- 
bury  v.  Culver,  19  Wall.  83  (1873); 
Woods  v.  Lawrence  County,  1  Black, 
386    (1861),   holding   that  where,   by 


(1878);    Chicot  County  v.  Sherwood, 
148  U.  S.  529    (1893). 

California:    Robinson  v.  Bidwell,  22 


statute,  the  grand  jury  of  a  county     Cal-  379    (1863)>*    People  v.  Coon,  25 
is  required  to  fix  the  amount  of  the     CaI'   635    (1864)>'   NaPa  Valley  R.  R 


subscription,  their  act  in  pursuance 
thereof  cannot  afterwards  be  ques- 
tioned by  the  county  as  to  such 
amount;  and  if  payment  is  to  be  made 


v.  Napa  County,  30  Cal.  435  (1866); 
Stockton,  etc.  R.  R.  v.  Stockton,  41 
Cal.  147    (1871). 

Colorado:    People  v.  Pueblo  County, 


as  may  be  agreed  upon,  an  issue  of  2  Col°-  360  (1874);  Chaffee  County  v. 
bonds  for  that  purpose  is  binding  Potter,  142  U.  S.  355  (1892). 
upon  the  county;  Gilman  v.  Sheboy-  Connecticut:  Bridgeport  v.  Housa- 
gan,  2  Black,  510  (1862),  holding  tonic  R.  R.,  15  Conn.  475  (1843),  hold- 
that  a  statute  authorizing  a  city  to  ing  that  a  subscription  made  by  a 
borrow  money,  and  to  tax  property  to  city  without  authority  may  be  made 

328 


CH.  VL] 


MUNICIPAL  SUBSCRIPTIONS. 


[§  91. 


ties  to  repudiate  their  obligations   after  receiving  the  benefits  of 
those  obligations  has  been  thwarted  by  the  courts.     And  the  result 


valid  by  subsequent  legislative  ac- 
tion; in  this  case  the  validating  stat- 
ute was  passed  upon  the  application 
of  the  city  making  the  subscription; 
Beardsley  v.  Smith,  16  Conn.  368 
(1844);  Society  for  Savings  v.  New 
London,  29  Conn.  174  (1860);  Doug- 
las v.  Chatham,  41  Conn.  211  (1874). 
Florida:  Cotten  v.  Leon  County,  6 
Fla.,610  (1856). 

Georgia:  Winn  v.  Macon,  21  Ga.  275 
(1857) ;  Powers  v.  Inferior  Court  of 
Dougherty  County,  23  G-a.  65  (1857). 
Illinois:  Shaw  v.  Dennis,  10  111. 
405  (1849);  Prettyman  v.  Tazewell 
County,  19  111.  406  (1858),  holding 
that  an  injunction  on  the  ground  of 
fraud  at  an  election  authorizing  a 
subscription  will  not  be  granted  to 
one  who  delays  until  others  have 
acted  upon  the  faith  that  the  muni- 
cipal corporation  will  aid  an  enter- 
prise; Robertson  v.  Rockford,  21  111. 
451  (1859);  Schuyler  County  v.  Peo- 
ple, 25  111.  181  (1860);  Butler  v.  Dun- 
ham, 27  111.  474  (1861);  Dunnovan 
v.  Green,  57  111.  63  (1870) ;  Madison 
County  v.  People,  58  111.  456  (1871); 
Chicago,  etc.  R.  R.  v.  Smith,  62  111. 
268  (1871);  Decker  v.  Hughes,  68 
111.  33  (1873);  Quincy,  etc.  R.  R.  v. 
Morris,  84  111.  410  (1877);  Chicago, 
etc.  R.  R.  v.  Aurora,  99  111.  205 
(1881) ;  Olcott  v.  Supervisors,  16  Wall. 
678  (1872).  But  see  Weightman  v. 
Clark,  103  U.  S.  256   (1880). 

Indiana:  Aurora  v.  West,  9  Ind.  74 
(1857);  s.  c,  22  Ind.  88  (1864); 
Evansville,  etc.  R.  R.  v.  Evansville, 
15  Ind.  395  (1860);  Bartholomew 
County  v.  Bright,  18  Ind.  93  (1862); 
Thompson  v.  Peru,  29  Ind.  305  (1868) ; 
Lafayette,  etc.  R.  R.  v.  Geiger,  34 
Ind.  185  (1870);  John  v.  Cincinnati, 
etc.  R.  R.,  35  Ind.  539  (1871);  Craw- 
ford County  v.  Louisville,  etc.  Ry., 
39  Ind.  192  (1872);  Mount  Vernon 
v.  Hovey,  52  Ind.  563  (1876)  ;  Indiana, 
etc.  Ry.  v.  Attica,  56  Ind.  476  (1877) ; 


Williams  v.  Hall,  65  Ind.  129  (1879); 
Bittinger  v.  Bell,  65  Ind.  445  (1879); 
Brocaw  v.  Gibson  County,  73  Ind. 
543  (1881);  Peed  v.  Millikan,  79  Ind. 
86    (1881). 

Iowa:    "In  Iowa,  up  to  1858,  it  was 
held    that    such    acts    were    constitu- 
tional; but  from  that  time  up  to  1869 
they  were  held  to  be  unconstitutional, 
when  the  court  seems  to  have  under- 
gone a  radical  change,  and  from  that 
time  to  the  present  the  constitution- 
ality of  such  measures  has  been  sus- 
tained."    Wood,  Railw.    (1st  ed.),  p. 
264,    citing    Dubuque    County    v.   Du- 
buque, etc.  R.  R.,  4  Green,  1   (1853); 
State  v.  Bissell,  4  Greene,  328  (1854) ; 
Clapp   v.   Cedar   County,    5    Iowa,   15 
(1857);    McMillen   v.   Lee   County,   6 
Iowa,  391  (1858).    The  above  authori- 
ties,   prior   to   1858,   hold   these   acts 
constitutional,    as    do    the    following, 
since  1869:     Stewart  v.  Polk  County, 
30  Iowa,  9   (1870);  Bonnifield  v.  Bid- 
well,    32    Iowa,    149    (1871);    Jordon 
v.   Hayne,   36   Iowa,   9    (1872);    Mus- 
catine, etc.  R.  R.  v.  Horton,  38  Iowa, 
33    (1873);    Wapello   County   v.   Bur- 
lington,   etc.    R.    R.,    44    Iowa,    585 
(1876);    McMillen  v.  Boyles,  6  Iowa, 
304    (1858);    Games  v.  Robb,  8  Iowa, 
193   (1859);    Chamberlain  v.  Burling- 
ton, 19  Iowa,  395  (1865),  holding  that 
a  charter  authorizing  a  city  to  bor- 
row money  for  "any  public  purpose" 
does  not  confer  power  to  aid  in  con- 
structing    a     railroad;      particularly 
King  v.  Wilson,  1  Dillon,  555  (1871); 
s.   c,    14    Fed.    Cas.    563,    as   to   how 
far  the  federal  courts  will  follow  the 
state   courts    as    to   the    constitution- 
ality of  such  statutes;   while  the  fol- 
lowing  cases,    decided    between    1858 
and    1869,    hold    such    acts    unconsti- 
tutional  and   void:      Stokes   v.   Scott 
County,  10   Iowa,   166    (1859);     State 
v.    Wapello    County,     13     Iowa,     388 
(1862);  Myers  v.  Johnson  County,  14 
Iowa,   47    (1862).     See  also,   in  gen- 


329 


91.] 


MUNICIPAL  SUBSCRIPTIONS. 


[CH.  VI. 


is  a  satisfactory  one.     Any  other  decision  would  have  checked  the 
growth  of  the  country,   unsettled   investments,   and   brought  upon 

eral,    Doon    v.    Cummins,    142    U.    S.     49  Me.  507  (18G0) ;   Stevens  v.  Anson, 


366   (1892). 

Kansas:  Atchison  v.  Butcher,  3 
Kan.  104  (1865) ;  Leavenworth  County 
v.  Miller,  7  Kan.  479  (1871);  South- 
ern Kansas,  etc.  R.  R.  v.  Towner,  41 
Kan.  72  (1889);  Morris .  v.  Morris 
County,  7  Kan.  576  (1871);  State  v. 
Nemaha  County,  7  Kan.  542  (1871); 
Burnes  v.  Atchison,  2  Kan.  454 
(1864);  Leavenworth,  etc.  R.  R.  v. 
Douglas  County,  18  Kan.  169  (1877); 
Turner  v.  Woodson  County,  27  Kan. 
314  (1882),  holding  that,  where  the 
amount  of  bonds  voted  to  be  issued 
was  in  excess  of  the  amount  which  a 
township  might  legally  issue,  the  vote 
was  a  nullity  only  as  to  excess.  Kan- 
sas City,  etc.  R.  R.  v.  Rich  Township, 
45  Kan.  275  (1891);  Hutchinson,  etc. 
R.  R.  v.  Kingman  County,  48  Kan. 
70   (1892). 

Kentucky:  Talbot  v.  Dent,  9  B. 
Mon.  526  (1849);  Slack  v.  Maysville, 
etc.  R.  R.,  13  B.  Mon.  1  (1852);  Mad- 
dox  v.  Graham,  2  Mete.  (Ky.)  56 
(1859) ;  Shelby  County  Court  v.  Cum- 
berland, etc.  R.  R.,  8  Bush.  (Ky.), 
209  (1871),  holding  that  a  subscrip- 
tion not  authorized  by  law  may  be 
validated  by  later  legislation;  Alli- 
son v.  Louisville,  etc.  R.  R.,  10  Bush, 
1  (1873);  Christian  County  Court  v. 
Smith,  12  S.  W.  Rep.  134  (Ky.,  1889) ; 
on  rehearing,  13  S.  W.  Rep.  276.  A 
railroad  cannot  be  taxed  to  aid  in 
paying  a  municipal  subscription  to 
its  construction.  Louisville,  etc.  R. 
R.  v.  Commonwealth,  89  Ky.  531 
(1890);  Brown  v.  Tinsley,  21  S.  W. 
Rep.    535    (Ky.    1893). 

Louisiana:  Police  Jury  v.  McDon- 
ogh,  8  La.  Ann.  341  (1853);  Parker 
v.  Scogin,  11  La.  Ann.  629  (1856). 
Cf.  Wilson  v.  Shreveport,  29  La.  Ann. 
673  (1877).  Municipal-aid  bond  case. 
Reynolds,  etc.  Co.  v.  Monroe,  45  La. 
Ann.  1024   (1893). 

Maine:    Augusta  Bank  v.  Augusta, 


73  Me.  489  (1882).  A  town  may  main- 
tain a  bill  in  equity  against  many 
bondholders  to  compel  them  to  de- 
liver up  their  bonds  as  having  been 
illegally  issued  in  aid  of  a  railroad. 
Farmington  Village  Corp,  v.  Sandy 
River  Nat.  Bank,  85  Me.  46  (1892). 

Massachusetts:  Portage  County  v. 
Wisconsin  Cent.  R.  R.,  121  Mass.  460 
(1877),  holding  that  the  legislature  of 
Wisconsin  has  power  to  authorize 
counties  to  subscribe  for  stock  in  aid 
of  railroads  and  to  issue  bonds  there- 
for. 

Michigan:  In  Michigan  the  courts 
hold  that  statutes  authorizing  munici- 
pal corporations  to  subscribe  to  the 
stock  of  a  railroad  or  vote  bonds  to  it 
are  void,  and  the  subscription  and 
bonds  are  void.  People  v.  Salem,  20 
Mich.  452  (1870);  Thompson  v.  Port 
Huron,  27  Mich.  320  (1873) ;  People 
v.  State  Treasurer,  23  Mich.  499 
(1871);  People  v.  Detroit,  28  Mich. 
228  (1873).  But  see  Talcott  v.  Pine 
Grove,  1  Flip.  (U.  S.)  120  (1872); 
s.  c,  23  Fed.  Cas.  652,  where  the 
position  taken  by  the  court  of  Michi- 
gan was  held  to  be  so  contrary  to  pre- 
cedent and  so  unexpected  as  to 
operate  as  a  surprise  upon  the  com- 
munity; s.  c.  affirmed,  sub.  nom.  Pine 
Grove  v.  Talcott,  19  Wall.  666  (1873), 
which  was  adhered  to  in  Taylor  v. 
Ypsilanti,  105  U.  S.  60  (1881).  See 
also  Chickaming  v.  Carpenter,  106 
U.  S.  663  (1882).  Where  the  issue 
of  municipal  bonds  in  aid  of  a  rail- 
road is  illegal,  as  in  Michigan,  the 
law  cannot  be  evaded  by  issuing  bonds 
nominally  for  public  improvements, 
but  really  in  aid  of  a  railroad.  Risley 
v.  Howell,  57  Fed.  Rep.  544   (1893). 

Minnesota:  Davidson  v.  Ramsey 
Co.,  18  Minn.  482  (1872);  State  v. 
Clark,  23  Minn.  422  (1877);  Kimball 
v.  Lakeland,  41  Fed.  Rep.  289  (1890). 

Mississippi:    Strickland  v.  Railroad 


330 


CH.  VI.] 


MUNICIPAL   SUBSCRIPTIONS. 


[§  91. 


American  municipalities  the  disgrace  and  disastrous  loss  of  credit 
which  arise  from  repudiation. 


Co.,  Miss  MSS.,  cited  in  1  Dillon,  Mun. 
Corp.  (4th  ed.),  p.  225,  n.;  New  Or- 
leans, etc.  R.  R.  v.  McDonald,  53 
Miss.  240  (1876) ;  Wells  v.  Super- 
visors, 102  U.  S.  625  (1880) ;  Madison 
County  v.  Priestly,  42  Fed.  Rep.  817 
(1890);  Barnum  v.  Okolona,  148  U. 
S.  393    (1893). 

Missouri:  St.  Louis  v.  Alexander, 
23  Mo.  483  (1856);  St.  Joseph,  etc. 
R.  R.  v.  Buchanan  County  Court,  39 
Mo.  4S5  (1867);  State  v.  Macon 
County    Court,    41    Mo.    453     (1867); 


New  Jersey:  Bernards  Township  v, 
Morrison,  133  U.  S.  523    (1890). 

New  York:  In  New  York  the  courts 
have  unwillingly  sustained  the  va- 
lidity of  such  grants.  Clarke  v.  Ro- 
chester, 28  N.  Y.  605  (1864)  ;  Grant 
v.  Courter,  24  Barb.  232  (1857);  Ben- 
son v.  Albany,  24  Barb.  248  (1857); 
People  v.  Henshaw,  61  Barb.  409 
(1S70) ;  Ex  parte  Taxpayers  of  Kings- 
ton, 40  How.  Pr.  444  (1870);  Gould 
v.  Oneonta,  71  N.  Y.  298  (1877); 
Sweet  v.  Hulbert,  51  Barb.  312  (1868), 


Chillicothe,  etc.  R.  R.  v.  Brunswick,     denying    the    constitutionality    of    a 


44  Mo.  553  (1S69) ;  State  v.  Linn  Co., 
44  Mo.  504  (1869);  State  v.  Sullivan 
County  Court,  51  Mo.  522  (1873); 
Osage  Valley,  etc.  R.  R.  v.  Morgan 
County  Court,  53  Mo.  156  (1873); 
Smith  r.  Clark  County,  54  Mo.  58 
(1873) ;  State  v.  Green  County,  54  Mo. 
540  (1874);  State  v.  Hannibal,  etc. 
R.  R.,  101  Mo.  136    (1890). 

Nebraska:  Hallenbeck  v.  Hahn,  2 
Neb.  377  (1873) ;  Reineman  v.  Cov- 
ington, etc.  R.  R.,  7  Neb.  310  (1878), 
holding  that,  if  a  county  votes  aid  to 
a  railroad  in  excess  of  the  sum  al- 
lowed by  law,  such  act  is  void  and 
will  not  authorize  the  issue  of  any 
bonds  whatever;  Railroad  Co.  v.  Otoe 
County,  16  Wall.  667  (1872);  Dixon 
County  v.  Field,  111  U.  S.  83  (1884). 
In  Nebraska  a  failure  to  construct 
the  road  in  the  municipality,  and  the 
construction  of  the  road  by  a  vendee, 
are  both  fatal.  Midland  Township 
v.  Gage  County,  37  Neb.  582  (1893). 
If  voters  have  been  induced  to  favor 
bonds  by  false  and  fraudulent  repre- 
sentations, a  court  of  equity  will  en- 


donation  of  bonds.  Cf.  People  v. 
Batchellor,  53  N.  Y.  128  (1873),  hold- 
ing that  a  municipal  corporation  can- 
not be  compelled  by  the  legislature, 
against  its  consent  and  that  of  its 
taxpayers,  to  become  a  stockholder 
in  a  corporation  which  is  private  in 
character  (as  here,  a  railroad)— a 
statute  for  such  a  purpose  is  void; 
Queensbury  v.  Culver,  19  Wall.  83 
(1S73),  in  which  the  New  York  doc- 
trine is  denied  by  the  supreme  court 
of  the  United  States. 

But  the  law  is  clear,  in  New  York, 
that  such  statutes  and  subscriptions 
thereunder  are  constitutional.  Bank 
of  Rome  v.  Rome,  18  N.  Y.  38  (1858) ; 
Starin  v.  Genoa,  23  N.  Y.  439  (1861)  ; 
Solon  v.  Williamsburgh  Sav.  Bank,  114 
N.  Y.  122  (1889);  Alvord  v.  Syracuse 
Sav.  Bank,  98  N.  Y.  599  (1885),  hold- 
ing that  the  legislature  may  give  to 
the  bonds  a  negotiability  which  is  not 
given  to  them  by  the  court;  Craig  v. 
Andes,  93  N.  Y.  405  (1883),  holding 
that  bonds,  even  in  bona  fide  hands, 
are  void  where  part  of  the  consents 


join  the  delivery.     Nash  v.  Baker,  37     thereto  were  conditional,  even  though 


Neb.  713    (1S93). 

Nevada:  Gibson  v.  Mason,  5  Nev. 
283  (1869);  Lincoln  County  v.  Lun- 
ing,  133  U.  S.  529  (1890). 

New  Hampshire:  Perry  v.  Keene, 
56  N.  H.  514  (1876). 


the  bond  recites  that  all  legal  steps 
to  comply  with  the  law  were  taken; 
Lyons  v.  Chamberlain,  89  N.  Y.  578 
(1S82),  where  the  person  to  whom 
illegal  bonds  were  issued  was  held  to 
account  for  them;  Cagwin  v.  Hancock, 


331 


§91.] 


MUNICIPAL  SUBSCRIPTIONS. 


[CH.  VI. 


The  act  of  the  legislature,  however,  authorizing  a  municipal  sub- 
scription will  not  avail  to  validate  such  a  contract,  unless  it  is  duly 


84  N.  Y.  532  (1881),  holding  that  the 
town  may  set  up  that  a  majority  did 
not  vote  for  the  issue  of  the  bonds; 
that    the    federal    decisions    will    not 
be  followed;  that  an  innocent  holder 
is  not  protected,  and  that  "the  bond- 
ing acts  are  now  regarded  as  hostile 
to  a  sound  public  policy;"  Springport 
v.  Teutonia  Sav.  Bank,  84  N.  Y.  403 
(1881),  also  holding  that  the  affidavit 
of  assessors   as   to   the  vote  is   only 
prima  facie  evidence.    To  same  effect 
see  Dodge  v.  Piatt  County,  82  N.  Y. 
218     (1880),    declaring    void    certain 
Missouri    municipal    bonds;    Duanes- 
burgh  v.  Jenkins,  57  N.  Y.  177  (1874), 
sustaining    the    constitutionality    of 
bonding  acts  and  reviewing  the  New 
York    cases;    People    v.    Mitchell,    35 
N.  Y.  551   (1866);    s.  c,  45  Barb.  208 
(1865);    People  v.   Spencer,  55   N.   Y. 
1    (1873);    Williams  v.  Duanesburgh, 
66     N.     Y.     129     (1876);     Horton    v. 
Thompson,  71  N.  Y.  513    (1878);   af- 
firmed   in    Scipio   v.   Wright,    101    U. 
S.   665    (1879).     In  New  York  an  ef- 
fectual   remedy    against    the    illegal 
bonding  of  a  town  in  aid  of  a  railroad 
is  found  in  holding  liable  to  the  town 
the    parties    who    promoted    the    aid, 
for    all    sums    paid    by    the   town    to 
bona  fide  holders  of  the  bonds.    Farn- 
ham  v.  Benedict,  107  N.  Y.  159  (1887). 
A    suit    in    equity    to    cancel    illegal 
municipal  bonds  does  not  lie,  except 
where   the   defendant   fails   to  allege 
that  there  is  a  remedy  at  law.    Mentz 
v.  Cook,  108  N.  Y.  504   (1888).     Long 
delay  may  bar  the  right  of  a  munici- 
pality to   have   such   bonds  canceled. 
Calhoun    v.    Millard,    121    N.    Y.    69 
(1890).     See  also,  in  general,   Solon 
v.  Williamsburgh,   etc.  Bank,   114   N. 
Y.    122    (1899);    Brownell    v.    Green- 
wich,  114   N.   Y.   518    (1889). 

North  Carolina:  Taylor  v.  New- 
berne,  2  Jones,  Eq.  141  (1855);  Cald- 
well v.  Burke  County,  4  Jones,  Eq. 
323    (1858);    Hill  v.  Forsyth  County, 


67  N.  C.  367  (1870)  ;  Wood  v.  Oxford, 
97  N.  C.  227  (1887);  McDowell  v. 
Massachusetts,  etc.  Co.,  96  N.  C.  514 
(1887);  Goforth  v.  Rutherford,  etc. 
Co.,  96  N.  C.  535  (1887).  The  United 
States  courts  will  not  follow  a  de- 
cision of  the  supreme  court  of  North 
Carolina  declaring  invalid  certain 
municipal  bonds,  where  none  of  the 
bondholders  were  parties  to  that  suit. 
Board  of  Commissioners,  etc.  v.  Coler, 
113  Fed.  Rep.   705    (1902). 

Ohio:  Cincinnati,  etc.  R.  R.  v.  Clin- 
ton County,  1  Ohio  St.  77  (1852); 
Steubenville,  etc.  R.  R.  v.  North  Town- 
ship, 1  Ohio  St.  105  (1852);  Cass  v. 
Dillon,  2  Ohio  St.  607  (1853) ;  Thomp- 
son v.  Kelly,  2  Ohio  St.  647  (1853); 
State  v.  Union  Township,  8  Ohio  St. 
394  (1858) ;  State  v.  Hancock  County, 
11  Ohio  St.  183  (I860) ;  Knox  County 
v.  Nichols,  14  Ohio  St.  260  (1863); 
State  v.  Perrysburg,  14  Ohio  St.  472 
(1863);  State  v.  Goshen,  14  Ohio  St. 
569  (1S63);  Walker  v.  Cincinnati,  21 
Ohio  St.  14  (1871);  s.  c,  1  Cin.  121 
(1871). 

Pennsylvania:  Com'th  v.  McWill- 
iams,  11  Pa.  St.  61  (1849);  Brown  v. 
Commissioners,  21  Pa.  St.  37  (1853); 
Sharpless  v.  Philadelphia,  21  Pa.  St. 
147  (1853) ;  Moers  v.  Reading,  21  Pa. 
St.  188  (1853);  Com'th  v.  Allegheny 
County,  32  Pa.  St.  218  (1858)  ;  Com'th 
v.  Pittsburgh,  34  Pa.  St.  496  (1859); 
Com'th  v.  Pittsburgh,  41  Pa.  St.  278 
(1861) ;  Com'th  v.  Perkins,  43  Pa.  St. 
400  (1862);  Pennsylvania  R.  R.  v. 
Philadelphia,  47  Pa.  St.  189  (1864); 
Riddle  v.  Philadelphia,  etc.  R.  R.,  1 
Pittsb.  (Pa.)  158  (1854);  Armstrong 
County  v.  Brinton,  47  Pa.  St.  367 
(1864). 

South  Carolina:  State  v.  Charleston 
County,  10  Rich.  L.  491  (1857);  Lan- 
caster County  v.  Cheraw,  etc.  R.  R., 
28  S.  C.  134  (1888);  State  v.  White- 
sides,  30  S.  C.  579  (1889);  Floyd  V. 
Perrin,  30  S.  C.  1   (1888). 


332 


CH.  VI.] 


MUNICIPAL  SUBSCRIPTIONS. 


[§  91. 


passed  in  accordance  with  all  the  constitutional  formalities.1  In 
California  the  courts  go  even  to  the  extent  of  holding  that  the 
legislature  may  compel  a  municipality  to  subscribe  to  the  stock  of 
a  railway  company  and  to  issue  its  bonds  in  payment  thereof.2  But 
this  extreme  view  is  disapproved  in  New  York  3  and  in  Illinois,4  the 
courts  in  these  states  taking  the  better  ground  that,  while  it  is  com-' 
petent  for  the  legislature  to  authorize  a  municipal  subscription  in 
a  proper  case,  there  is  no  power  anywhere  to  compel  such  a  sub- 
scription or  donation. 

While  it  may  be  conceded  that,  from  a  constitutional  standpoint 
as  well  as  from  that  of  public  policy  and  expediency,  there  are  grave 
objections  to  the  existence  or  exercise  of  this  power,  which 
has  plainly  been  monstrously  abused,5  it  is  clear  that  the  courts, 
almost  universally,   as  has  been  shown,  have  taken  and  will  con- 


Tennessee:  City,  etc.  v.  Charleston, 
etc.  R.  R.,  100  Tenn.  138  (1897); 
Taxpayers  of  Milan  v.  Tennessee,  etc. 
R.  R.,  11  Lea,  329  (1883);  Wilson 
County  v.  Nat.  Bank,  103  U.  S.  770 
(1880) ;  Nichol  v.  Nashville,  9  Hump. 
252  (1848);  Louisville,  etc.  R.  R.  v. 
Davidson  County  Court,  1  Sneed,  637 
(1854);  Williams  v.  Duck  River,  etc. 
R.  R.,  9  Baxt.  488  (1876);  Clay  v. 
Hawkins  County,  5  Lea,  137  (1880); 
Lauderdale  County  v.  Fargason,  7 
Lea,  153  (1881);  Winston  v.  Tennes- 
see, etc.  R.  R.,  1  Baxt.  60  (1873). 

Texas:  San  Antonio  v.  Jones,  28 
Tex.  19  (1866)  ;  San  Antonio  v.  Lane, 
32  Tex.  405  (1869);  San  Antonio  v. 
Gould,  34  Tex.  49    (1870). 

Vermont:  Bennington  v.  Park,  50 
Vt.  178  (1877);  First  Nat.  Bank  v. 
Concord,  50  Vt.  257   (1877). 

Virginia:  Goddin  v.  Crump,  8 
Leigh,  120  (1837);  Cumberland  Coun- 
ty v.  Randolph,  89  Va.  614  (1893). 
See  also  Goshorn  v.  Ohio  County,  1 
W.  Va.  308   (1865). 

Wisconsin:  State  v.  Common  Coun- 
cil, 96  Wis.  73  (1897);  Clark  v.  Janes- 
ville,  10  Wis.  136  (1860) ;  s.  c,  13  Wis. 
136;  Bushnell  v.  Beloit,  10  Wis.  195 
(1860);  Foster  v.  Kenosha,  12  Wis. 
616  (1860);  Veeder  v.  Lima,  19  Wis. 
280  (1865) ;  Fisk  v.  Kenosha,  26  Wis. 
23  (1870);  Phillips  v.  Albany,  28 
Wis.   340    (1871);     Rogan  v.   Water- 


town,  30  Wis.  259  (1872);  Lawson 
v.  Milwaukee,  etc.  R.  R.,  30  Wis.  597 
(1872);  Oleson  v.  Green  Bay,  etc., 
36  Wis.  383  (1874).  Cf.  Whiting  v. 
Sheboygan,  etc.  R.  R.,  25  Wis.  167 
(1870).  Municipal  gift  of  land  to  a 
railroad.  Northern  Pac.  R.  R.  v. 
Roberts,  42  Fed.  Rep.  734  (1890);  aff'd, 
158  U.  S.  1.  A  county  cannot  donate 
land  to  a  railroad.  Ellis  v.  Northern, 
etc.  R.  R.,  77  Wis.  114   (1890). 

The  leading  cases  upon  the  consti- 
tutionality of  statutes  authorizing 
municipal  subscription  to  railroads 
are  Goddin  v.  Crump,  8  Leigh  (Va.) 
120  (1837)— which  is  said  by  Judge 
Dillon  to  be  the  first  in  a  long  series; 
Leavenworth  County  v.  Miller,  7  Kan. 
479  (1871);  Slack  v.  Maysville,  etc. 
R.  R.,  13  B.  Mon.  (Ky.)  1  (1852); 
Knox  Co.  v.  Aspinwall,  21  How.  (U. 
S.)  539  (1858);  Sharpless  v.  Mayor, 
21  Pa.  St.  157   (1853). 

1  Amoskeag  Bank  v.  Ottawa,  105 
U.  S.  667  (1881). 

2  Napa  Valley  R.  R.  v.  Napa  Coun- 
ty, 30  Cal.  435  (1866). 

3  People  v.  Batchellor,  53  N.  Y.  128 
(1873).  Cf.  Queensbury  v.  Culver,  19 
Wall.  (U.  S.)  83  (1873). 

4  Cairo,  etc.  R.  R.  v.  Sparta,  77  111. 
505   (1875). 

5  Dillon,  Mun.  Corp.,  §§12,  117, 
157;  Cooley,  Const.  Lim.,  pp.  261  et 
seq. 


333 


91.] 


MUNICIPAL  SUBSCRIPTIONS. 


[CH.  VI. 


tinuo  to  hold  the  most  liberal  views  as  to  the  legislative  preroga- 
tive in  this  respect.  Such  authority  inhering  in  the  legislature  is 
generally  conceded. 

A  municipality  which  has  not  yet  been  incorporated  cannot  hold 
an  election  and  vote  a  subscription  for  stock.  The  subscription  is 
void.1  But  a  de  facto  municipal  corporation  recognized  by  the  leg- 
islature cannot  defeat  its  bonds  by  alleging  irregular  incorporation.2 
It  is  no  objection  to  the  validity  of  the  legislative  act,  or  the  munici- 
pal subscription,  that  the  subscription  is  made  to  a  railroad  com- 
pany not  yet  in  existence,3  or  to  the  company  that  first  builds  the 
road.4 

It  must  not  be  overlooked,  however,  that  municipalities  never  have 
the  power,  by  virtue  of  any  of  these  legislative  enactments,  to  tax 
themselves  for  the  benefit  of  enterprises  or  objects  which  are  pri- 
vate in  their  nature.  Municipal  subscriptions  can  only  be 
made  to  the  stock  of  companies  of  an  essentially  public  character. 
This  is  a  rule  conclusively  settled.5     Municipal  aid  can  lawfully  be 


i  Clark  v.  Janesville,  13  Wis.  414 
(1861);  s.  c,  10  Wis.  136;  Roches- 
ter v.  Alfred  Bank,  13  Wis.  432 
(1861);  Berliner  v.  Waterloo,  14 
Wis.  378  (1861).  See  Lewis  v.  Clar- 
endon, 5  Dillon,  329  (1878);  s.  c,  15 
Fed.  Cas.  474,  to  the  effect  that,  if 
authority  is  given  "to  any  incorpo- 
rated town  or  city"  to  subscribe  for 
stock,  it  is  not  limited  to  such  towns 
as  are  incorporated  when  the  act  was 
passed. 

2  Comanche  County  v.  Lewis,  133  U. 
S.  198    (1890). 

3  In  Daviess  County  v.  Huidekoper, 
98  U.  S.  98  (1878),  it  is  held  that 
county  bonds  in  the  hands  of  a  bona 
fide  holder  for  value  are  not  rendered 
void  by  the  fact  that,  at  the  time  the 
vote  authorizing  the  subscription  was 
taken,  the  company  to  be  benefited 
was  not  created  according  to  law.  To 
same  effect,  James  v.  Milwaukee,  16 
Wall.  159  (1872);  Railroad  Co.  v. 
Falconer,  103  U.  S.  821  (1880).  Con- 
tra, Rubey  v.  Shain,  54  Mo.  207 
(1873) ;  People  v.  Franklin,  5  Lans. 
(N.  Y.)  129  (1871);  Concord  v. 
Portsmouth  Sav.  Bank,  92  U.  S.  625 
(1875). 


4  North  v.   Platte  County,  29   Neb. 
447  (1890). 

5  Loan  Assoc,  v.  Topeka,  20  Wall. 
655  (1874);  Weismer  v.  Douglas,  64 
N.  Y.  91  (1876) ;  Bissell  v.  Kankakee, 
64  111.  249  (1872);  Brewer  Brick  Co. 
v.  Brewer,  62  Me.  62  (1873);  Allen 
v.  Jay,  60  Me.  124  (1872);  Lowell 
v.  Boston,  111  Mass.  454  (1873); 
State  v.  Osawkee,  14  Kan.  418  (1875)  ; 
McConnell  v.  Hamm,  16  Kan.  228 
(1876);  Union  Pac.  R.  R.  v.  Smith, 
23  Kan.  745  (1880);  Clark  v.  Des 
Moines,  19  Iowa,  199  (1865);  Fred- 
erick v.  Augusta,  5  Ga.  561  (1848); 
Commercial  Nat.  Bank  v.  Iola,  2  Dill. 
353  (1873);  s.  c,  6  Fed.  Cas.  221; 
aff'd,  22  U.  S.  (Lawy.  Ed.)  463;  Citi- 
zens' Sav.  Assoc,  v.  Topeka,  3  Dill. 
376  (1874);  s.  c,  5  Fed.  Cas.  737; 
aff'd,  20  Wall.  655.  Cf.  Bloodgood  v. 
Mohawk,  etc.  R.  R.,  18  Wend.  9,  65 
(1837);  Chapman  v.  Gates,  54  N.  Y. 
132,  144  (1873);  Osborne  v.  Adams 
County,  109  U.  S.  1  (1883);  s.  c, 
106  U.  S.  181  (1882);  Ottawa  v. 
Carey,  108  U.  S.  110  (1883);  Free- 
land  v.  Hastings,  92  Mass.  570  (1865) ; 
Jenkins  v.  Andover,  103  Mass.  94 
(1869);     People   v.   Salem,   20   Mich. 


334 


CH.  VL] 


MUNICIPAL  SUBSCRIPTIONS. 


[§91. 


extended  only  to  railroads  or  other  enterprises  of  a  distinctly  pub- 
lic or  quasi-public  character.  Many  instances  of  the  application  of 
this  principle  of  constitutional  law  are  given  in  the  notes  below.1 


452  (1870);  Curtis  v.  Whipple,  24 
Wis.  350  (1869);  Cook  v.  Sumner 
Spinning,  etc.  Co.,  1  Sneed  (Tenn.), 
698  (1854) ;  Cooley,  Const.  Lira.  (5th 
ed.),  p.   261. 

i  A    municipal    donation    to    a   pri- 
vate manufacturing  concern   is  void. 
Cole  v.  La  Grange,  113  U.  S.  1  (1884). 
Aid     to     bridge-manufacturing     and 
iron-works  company  held  void.    Loan 
Assoc,  v.  Topeka,  20  Wall.  655  (1874). 
Same  as  to  hydraulic  works.     Weis- 
mer  v.  Douglas,  64  N.  Y.  91   (1876). 
Also    to    linen    company.      Bissell    v. 
Kankakee,   64   111.  249    (1872).     Also 
exempting   manufacturing  companies 
from    taxes    for   ten   years.     Brewer 
Brick  Co.  v.  Brewer,  62  Me.  62  (1873). 
Also  loan   of  credit  to  saw-mill   and 
box-factory.    Allen  v.  Jay,  60  Me.  124 
(1872).      Also    loan    to    persons    re- 
building after  a  fire.     Lowell  v.  Bos- 
ton,   111    Mass.    454     (1873).      Or    to 
relieve   the   destitute   poor.     State  v. 
Osawkee,  14  Kan.  418   (1875).     Or  to 
aid    in    constructing    a    woolen-mill. 
McConnell    v.    Hamm,    16    Kan.    228 
(1876).     Or  to  build  a  dam.     Union 
Pac.     R.     R.     v.     Smith,     23     Kan. 
745    (1880).     Or   to   construct  a   toll 
bridge.    Clark  v.  Des  Moines,  19  Iowa, 
199    (1865).     Or   to    aid   a   company 
which    manufactures    bridges,    plows, 
stoves,   etc.      Commercial   Nat.   Bank 
v.    Iola,   2    Dill.    353    (1873);     B.C.,    6 
Fed.   Cas.  221;     Citizens'   Sav.  Assoc. 
v.  Topeka,   3  Dill.  376    (1874);     s.  c, 
5  Fed.  Cas.  737.     Cf.  Bloodgood  r.  Mo- 
hawk,   etc.    R.    R.,    18    Wend.    9,    65 
(1837) ;   Chapman  v.  Gates,  54  N.  Y. 
132,  144   (1873).     Or  to  aid  a  steam 
grist-mill.    Osborne  v.  Adams  County, 
109  U.   S.   1    (1883);    s.  c,   106  U.   S. 
181    (1882).     Or  to  aid  the   develop- 
ment  of    a    water-power.     Ottawa   v. 
Carey,  10S  U.  S.  110  (1883).    Or  to  re- 
pay to  persons  money  paid  by  them 
for  substitutes  in  the  army.   Freeland 


v.  Hastings,  92  Mass.  570  (1865).  As 
to  tax  for  a  school-house,  see  Jenkins 
v.  Andover,  103  Mass.  94  (1869).  As 
to  payment  of  money  on  account  of 
drafting  of  soldiers,  see  Thompson  v. 
Pittston,  59  Me.  545  (1871);  Tyson 
v.  Halifax,  51  Pa.  St.  9  (1865).  A 
state  may  employ  a  private  corpora- 
tion to  care  for  children  who  are  a 
public  charge.  Wisconsin,  etc.  School 
v.  Clark  County,  103  Wis.  651  (1899). 
Aid  to  a  private  school  is  void.  (Cur- 
tis v.  Whipple,  24  Wis.  350  —  1869); 
or  to  a  manufacturing  company. 
Cook  v.  Sumner  Spinning,  etc.  Co.,  1 
Sneed  (Tenn.),  698  (1854);  Cooley, 
Const.  Lim.,  5th  ed.,  p.  263  et  seq. 
A  municipal  corporation  has  no  power 
to  aid  a  private  manufacturing  estab- 
lishment. Sutherland-Innes  Co.  v. 
Village,  etc.,  86  Fed.  Rep.  597  (1898). 
Township  bonds  issued  to  raise  money 
to  pay  for  the  construction  and  op- 
eration of  mills  to  manufacture  sugar 
are  illegal,  the  purpose  being  private 
and  not  public.  Dodge  v.  Mission  Tp., 
107  Fed.  Rep.  827  (1901).  A  city 
has  no  power  to  extend  municipal 
aid  to  a  mutual  life  insurance  asso- 
ciation. Park  v.  Modern,  etc.  of 
America,  181  111.  214  (1899).  A  mu- 
nicipality has  no  power  to  invest  in 
the  stock  of  a  steamship  company 
(Pennsylvania  R.  R.  v.  Philadelphia, 
47  Pa.  St.  189  —  1864);  nor  to  oper- 
ate free  ferries  (Jacksonport  v.  Wat- 
son, 33  Ark.  704  —  1878);  but  a  sub- 
scription to  a  turnpike  company  has 
been  held  legal.  Clark  v.  Leathers, 
5  S.  W.  Rep.  576  (Ky.  1887).  And 
to  obtain  a  water  supply.  Frederick 
v.  Augusta,  5  Ga.  561  (1848).  See 
Sutherland-Innes  Co.  v.  Village  of 
Evart,  86  Fed.  Rep.  597  (1898).  Even 
though  a  city  has  paid  $2,500  to  a 
manufacturing  concern  to  locate  in 
the  city  and  has  taken  a  bond  that 
it  will  continue  the  business  there, 
35 


§92.] 


MUNICIPAL  SUBSCRIPTIONS. 


[CH.  VI. 


A  municipal  corporation  may,  however,  be  authorized  by  the  legis- 
lature to  build  irrigation  ditches,  the  cost  thereof  to  be  defrayed  by 
taxation.1 

§  92.  Constitutional  provisions  prohibiting  municipal  subscrip- 
tions.— The  unchecked  exercise  of  this  power  on  the  part  of  the 
state  legislatures  has  entailed  upon  the  people  of  the  states  such  a 
burden  of  taxation  2  that  in  many  states  are  found  constitutional  pro- 
hibitions rendering  it  unlawful  for  municipal  corporations  to  make 
subscriptions  or  lend  their  credit  to  any  incorporated  company  or 
enterprise,  not  strictly  and  exclusively  governmental  in  its  nature 
and  constitution.  This  is  the  case  in  Pennsylvania,3  Ohio,4  Illi- 
nois,5    New    York,6     Indiana,7     Missouri,^     Mississippi,9     and     in 


such  bond  cannot  be  enforced,  the 
entire  transaction  being  ultra  vires. 
Collier,  etc.  Co.  v.  City  of  Washington, 
38  Ind.  App.  370  (1905). 

i  Fallbrook  Irrigation  Dist.  v. 
Bradley,  164  U.  S.  112   (1896). 

2  Dillon,  Mun.  Corp.,  §§156,  160. 
The  sum  of  municipal  indebtedness  in 
this  country  is  said  to  exceed  one 
thousand  millions  of  dollars,  and  the 
amount   is   constantly   increasing. 

3  Amend,  to  Const.  1857,  §  7,  art. 
II;  Pennsylvania  R.  R.  v.  Philadel- 
phia, 47  Pa.  St.  189    (1864). 

4  Const.,  art.  VIII,  §6;  Walker  v. 
Cincinnati,  21  Ohio  Stat.  14  (1871); 
Cass  v.  Dillon,  2  Ohio  St.  607  (1853) ; 
State  v.  Perrysburg,  14  Ohio  St.  472 
(1863);  Thompson  v.  Kelly,  2  Ohio 
St.  647  (1853);  Wyscaver  v.  Atkin- 
son, 37  Ohio  St.  80  (1881). 

5  Const.  1870;  Concord  v.  Ports- 
mouth Sav.  Bank,  92  U.  S.  625 
(1875);  Louisville  v.  Savings  Bank, 
104  U.  S.  469  (1881);  Harter  v.  Ker- 
nochan,  103  U.  S.  562  (1880);  Fair- 
field v.  Gallatin  County,  100  U.  S. 
47  (1879);  Chicago,  etc.  R.  R.  v. 
Pinckney,  74  111.  277  (1874);  Moul- 
trie County  v.  Rockingham,  etc.  Bank, 
92  U.  S.  631  (1875);  Robertson  v. 
Rockford,  21  111.  451  (1859).  The 
constitutional  prohibition  in  Illinois 
against  lending  credit  applies  to  the 
state  only,  and  not  to  counties  or  cities. 

c  Amend.  Const.,  Jan.  1,  1875;  Peo- 
ple   v.    Fort    Edward,    70    N.    Y.    28 


(1877);  Dodge  v.  Platte  County,  82 
N.  Y.  218  (1SS0),  reversing  s.  c,  16 
Hun,  285. 

7  Const.,  art.  X,  §10;  Lafayette, 
etc.  R.  R.  v.  Geiger,  34  Ind.  185 
(1870);  John  v.  Cincinnati,  etc.  R. 
R.,  35  Ind.  539  (1871);  Aspinwall  v. 
Daviess  County,  22  How.  (U.  S.)  364 
(1859) ;  Brocaw  v.  Gibson  County,  73 
Ind.  543   (1SS1). 

s  Const.,  art.  XI,  §14;  Schuyler 
County  v.  Thomas,  98  U.  S.  169 
(1878) ;  Smith  v.  Clark  County,  54 
Mo.  58  (1873);  Macon  County  v. 
Shores,  97  U.  S.  272  (1877);  Ray 
County  v.  Vansycle,  96  U.  S.  675 
(1877);  Scotland  County  v.  Thomas, 
94  U.  S.   682    (1876). 

9  Const.,  art.  XII,  §14;  Calhoun 
County  v.  Galbraith,  99  U.  S.  214 
(1878);  Hayes  v.  Holly  Springs,  114 
U.  S.  120  (1885);  Grenada  County  v. 
Brogden,  112  U.  S.  261  (1884).  Cf. 
State  v.  Young,  29  Minn.  474  (1881). 
Where  municipal-aid  bonds  were  is- 
sued under  an  unconstitutional  stat- 
ute, but  are  enforced  by  the  United 
States  courts  in  favor  of  bona  fide 
holders,  the  municipality  may  recov- 
er back  from  the  railroad  company  or 
its  successor  the  amounts  so  paid  to 
such  bona  fide  holders.  Plainview  v. 
Winona,  etc.  R.  R.,  36  Minn.  505 
(1887).  In  Walker  v.  Cincinnati,  21 
Ohio  St.  14  (1871),  the  building  of 
the  Cincinnati  Southern  Railway  by 
the  city  of  Cincinnati  was  held  legal, 


336 


CH.  VL] 


MUNICIPAL  SUBSCRIPTIONS. 


[§92. 


some  other  states.1  In  general  it  will  be  found  that  these  constitu- 
tional provisions  forbid  in  terms  any  subscription  or  lending  of  credit 
by  any  municipality  in  the  state,  or  by  the  state  itself,  to  any  com- 
pany, association,  or  corporation  whatsoever.  Sometimes  the  pro- 
hibition is  absolute,  and  at  other  times  two-thirds  or  a  majority  of 
the  qualified  electors  of  the  municipality  must  vote  to  render  such 
aid.  The  constitutional  or  statutory  provisions  which  prohibit 
municipal  subscriptions  are  construed  to  be  prospective  only,  urn 
less  they  contain  express  words  making  them  retroactive.2  This 
principle  is  frequently  applied  when  the  constitutional  enactment 
is  passed  after  a  municipal  subscription  is  voted,  but  before  it  is 
actually  completed.3 

notwithstanding  the  state  constitu-  U.  S.  686  (1884).  The  legis- 
tion  forbade  the  legislature  from  au-  lature  cannot,  after  the  adoption 
thorizing  any  city,   etc.,   becoming  a     of   a   constitutional    amendment   pro- 


"stockholder  in  any  joint-stock  com- 
pany, corporation,  or  association 
whatever." 


hibiting  municipalities  from  voting 
aid,  remedy  defects  in  votes  taken 
before   the  amendment  was   adopted. 


i  Where     the     statutes     limit     the  Katzenberger  v.  Aberdeen,  121  U.  S. 

amount  of  debt  which  a  county  may  172    (1887);     Decker   v.    Hughes,    68 

incur  in  aid  of  railroads,  and  aid  is  111.  33   (1873),  holding  that,  where  a 

voted  to  the  full  amount,  subsequent  new     state     constitution     has     been 

aid   is   void.     Chicago,   etc.  R.   R.   v.  adopted,   the  old   one   governs   as   to 

Osage  County,  38  Kan.  597   (1888).  bonds    issued    under     its    authority, 

2  Moultrie    County   v.   Rockingham,  though  not  actually  issued  until  after 

etc.  Bank,  92  U.  S.  631  (1875);    Gren-  the  adoption  of  the  new  one;    Moul- 

ada  County  v.  Brogden,  112  U.  S.  261  trie    County   v.    Fairfield,    105    U.    S. 

(1884);    Fairfield  v.  Gallatin  County  370   (1881),  holding  that  where  a  do- 

100  U.  S.  47  (1879) ;  Randolph  County  nation  in  aid  of  a  railroad  had  been 

v.  Post,  93  U.  S.   502    (1876);    Ralls  voted  by  a  county  before  the  adoption 

County    v.    Douglass,    105    U.    S.    728  of   the   new   constitution   of    Illinois, 

(1881) ;    Henry  County  v.  Nicolay,  95  bonds  to  pay  it  might  be  issued  after 

U.  S.  619   (1877),  holding  that  when  its    adoption.     In    Louisville   v.    Sav- 

authority  had  been  granted  to  a  coun-  ings  Bank,  104  U.   S.  469    (1881),  it 

ty  in  Missouri  to  subscribe,  the  power  was  held  that  the  court  would  even 

was   not   subject   to   a   constitutional  take  cognizance  of  the  fractions  of  a 

amendment   requiring   the   assent   of  day  in  order  to  do  justice  in  such  a 

two-thirds  of  the  voters  of  the  coun-  case.     Schall  v.  Bowman,  62  111.  321 

ty;    Cass  County  v.  Gillett,  100  U.  S.  (1872);    Richards  v.  Donagho,  66  111. 

585    (1S79),  following  and  approving  73    (1872);   Wright  v.   Bishop,  88  111. 

last  case;     Callaway   County  v.   Fos-  302   (1878).     Contra,  Jeffries  v.  Law- 
ter,  93  U.  S.  567   (1876),  to  same  ef- 
fect,   same    constitution ;     Louisiana 

v.   Taylor,   105   U.    S.    454    (1881),   to  (1877);    List  v.  Wheeling,   7  W.  Va. 

same  effect,  same  constitution;    Dur-  501     (1874).       Cf.     Hayes    v.     Holly 


rence,  42  Iowa,  498  (1876) ;    Falconer 
v.   Buffalo,   etc.  R.  R.,   69   N.  Y.   491 


kee  v.  Board  of  Liquidation,  103  U. 
S.  646  (1880)  ;  Howard  County  v. 
Paddock,  110  U.  S.  384  (1884); 
Dallas     County     v.     McKenzie,     110 


Springs,  114  U.  S.  120   (1885)  ;    Hen- 
derson v.  Jackson  County,  2  McCrary, 
615    (1881). 
3  For    cases    involving   a    construe- 


(22) 


337 


§   93,]  MUNICIPAL  SUBSCRIPTIONS.  [CH.  VI. 

It  has  been  held  that  a  provision  restricting  the  power  of  a  state 
to  make  subscriptions  in  aid  of  railroads  cannot  be  construed  so  as 
to  prohibit  the  municipal  subdivisions  of  the  state  from  subscrib- 
ing.1 And  a  restriction  as  to  the  power  of  a  country  will  not  be 
held  applicable  to  a  city.2  School  districts  have  no  power  to  sub- 
scribe to  the  stock  of  a  railroad,  and  bonds  issued  to  pay  such  a  sub- 
scription are  void.3 

§  93.  Change  in  the  state  constitution  or  the  general  statutory 
laivs  after  the  municipal  corporation  has  voted  to  subscribe. — Con- 
stitutional provisions  or  general  statutes  prohibiting  municipal  cor- 
porations from  subscribing  to  the  stock  of  other  corporations,  or 
from  lending  their  credit  thereto,  are,  as  already  stated,4  prospective 
in  their  application. 

That  which  a  corporation  has  the  constitutional  or  statutory  right 
to  do,  and  which  it  has  done  in  pursuance  of  that  right  or  author- 
ity, cannot  be  affected  or  undone  by  subsequent  constitutional 
change  or  amendment,  or  by  the  passage  of  general  statutes.  This 
is  a  "fundamental  rule  of  constitutional  law.5     If,  however,  a  pop- 

tion  of  the  Illinois  constitution  and  county,  unless  the  residents  outside 
its  effects  on  previous  donations,  see  of  the  town  vote  in  favor  of  it.  Ken- 
Fairfield  v.  Gallatin  County,  100  U.  tucky  Union  R.  R.  v.  Bourbon  Coun- 
S.  47  (1879);  Chicago,  etc.  R.  R.  v.  ty,  85  Ky.  98  (1887);  Dillon,  Mun. 
Pinckney,  74  111.  277  (1874) ;  Lippin-  Corp.,  §  162,  citing  Butz  v.  Muscatine, 
cott  v.  Pana,  92  111.  24  (1879);  Mid-  8  Wall.  575  (1869);  Learned  v.  Bur- 
dleport  v.  JEtna  L.  Ins.  Co.,  82  111.  lington,  2  Am.  L.  Reg.  (N.  S.)  394 
562  (1876).  Cf.  Moultrie  County  v.  (1863),  and  n.;  Leavenworth  v.  Nor- 
Fairfield,  105  U.  S.  370  (1881);  En-  ton,  1  Kan.  432  (1863);  Burnes  v. 
field  v.  Jordan,  119  U.  S.  680  (1887).  Atchison,  2  Kan.  454  (1864).  And 
i  Pattison  v.  Yuba  County,  13  Cal.  see  Commonwealth  v.  Pittsburgh,  34 
175  (1859);  New  Orleans  v.  Graihle,  Pa.  St.  496  (1859);  Amey  v.  Alle- 
9  La.  Ann.  561  (1854);  Slack  v.  gheney  City,  24  How.  (U.  S.)  364 
Maysville,  etc.  R.  R.,  13  B.  Mon.  (1860);  State  v.  Perrysburg,  14  Ohio 
(Ky.)  1  (1852);  Leavenworth  Coun-  St.  472  (1863);  Cumberland  v.  Ma- 
ty v.  Miller,  7  Kan.  479  (1871) ;  Pret-  gruder,  34  Md.  381  (1871) ;  Assessors 
tyman  v.  Tazewell  County,  19  111.  406  v.  Commissioners,  3  Brewst.  (Pa.) 
(1858).  The  courts  are  inclined  to  333  (1869);  State  v.  Guttenberg,  38 
hold  that  a  limit  on  the  rate  of  taxa-  N.  J.  L.  419  (1876). 
tion  that  a  city  may  levy  does  3  Weightman  v.  Clark,  103  U.  S. 
not  apply  to  a  tax  in  aid  of  256  (1880). 
municipal  subscriptions  to  railroads.  4  §  92,  supra. 

Cf.    People    v.    State    Treasurer,    23  5  See,    in     regard    to    the    Illinois 

Mich.   499    (1871);    Pitzman  v.  Free-  constitution,   Clay   County  v.   Society 

burg,  92  111.  Ill    (1879).  for   Savings,   104   U.    S.    579    (18S1); 

2  Thompson    v.    Peru,    29    Ind.    305  People  v.   Logan   County,    63   111.    374 

(1868);     Aurora  v.  West,   9   Ind.   74  (1S72) ;    Moultrie  County  v.  Rocking- 

(1857).      The    statute    may   prescribe  ham,    etc.    Sav.    Bank,    92    U.    S.    631 

that    the    aid    voted    shall    not    bind  (1875);    Louisville  v.  Savings  Bank, 

property   outside   of   a   town    in    the  104    U.    S.    469    (1881);     Choisser  v. 

338 


CH.  VI.] 


MUNICIPAL  SUBSCRIPTIONS. 


[§   93. 


ular  vote  does  not  give  the  company  proposed  to  be  benefited  a 
vested  right  to  the  subscription  by  the  municipality,  and  if,  until 
the  subscription  is  actually  made,  the  contract  is  unexecuted,  and 
therefore  obligatory  upon  neither  party,  there  is  ground  for  hold- 
ing that  a  constitutional  prohibition,  taking  effect  after  the  elec- 
tion, but  before  the  subscription  is  made  pursuant  to  authority  con- 
ferred by  the  popular  vote,  will  be  sufficient  to  invalidate  the  sub- 
scription. This  was  the  view  taken  by  the  supreme  court  of  the 
United  States  in  the  case  of  Aspinwall  v.  Commissioners  of  the 
County  of  Daviess,1  and  approved  in  some  later  cases.2  There  are 
cases  of  authority,  however,  in  favor  of  the  rule  that,  after  the 
corporation  has,  by  a  popular  vote  at  an  election  lawfully  held, 
voted  to  subscribe  for  stock,  subsequent  changes  of  the  constitution 
or  the  general  statutes  will  not  affect  the  right  of  the  municipality 
to  go  on  and  complete  the  contract,  to  make  the  formal  subscrip- 
tion, and  to  issue  the  bonds  or  levy  the  special  tax  to  pay  the  calls.3 


People,  140  111.  21    (1892).     See  also 
Nelson  v.  Haywood  County,  87  Tenn. 
781    (1889).     An  irregular  vote  to  is- 
sue bonds  before  a  constitutional  pro- 
vision is  enacted  cannot  be  legalized 
by   legislative   act  afterwards.     Will- 
iams  v.   People,    132    111.    574    (1890). 
Where  the  original  subscription  was 
conditional,   the   condition  cannot  be 
waived   after   a   constitutional   provi- 
sion   prohibiting   these    subscriptions 
has  been  passed.    Richeson  v.  People, 
115  111.  450  (1886).     To  the  same  ef- 
fect, with  regard  to  the  constitution 
of  1875  of  Nebraska,  see  State  v.  Lan- 
caster   County,    6    Neb.    214    (1877); 
and  as  to  constitution  of  Missouri  of 
1865,    see    Louisiana    v.    Taylor,    105 
U.    S.    454    (1881);    Cass    County    v. 
Gillett,  100  U.  S.  585  (1879) ;  Scotland 
County    v.    Thomas,    94    U.     S.     682 
(1876);    Ray  County  v.  Vansycle,  96 
U.   S.   675    (1877);     Callaway  County 
v.  Foster,  93  U.  S.  567   (1876);  Ralls 
County    v.    Douglass,    105   U.    S.    728 
(1881),  in  which  bonds  issued  under 
a  city  charter  without  a  popular  vote 
were  held  valid  notwithstanding  the 
provisions  of  a  constitution  adopted 
afterwards,    but    in    force   when    the 
bonds  were  issued,  required  a  submis- 
sion of  such  matters  to  a  vote;    State 

3! 


v.  Macon  County  Court,  41  Mo.  453 
(1867),  to  the  same  effect;  State  v. 
Sullivan  County  Court,  51  Mo.  522 
(1873),  to  the  same  effect.  Cf.  State 
v.  Dallas  County  Court,  72  Mo.  329 
(1880),  where  a  later  statute  was 
held  to  have  taken  away  the  power 
under  a  former  one.  A  statute  passed 
subsequently  to  a  constitutional  pro- 
hibition may  legalize  an  irregular 
subscription  made  before  the  prohibi- 
tion. Bolles  v.  Brimfield,  120  U.  S. 
759  (1887).  The  repeal  of  the  act 
authorizing  a  tax  for  municipal  aid 
before  any  money  has  been  expended 
by  the  railroad,  excepting  a  small 
sum  for  surveys,  prevents  a  lessee  of 
the  railroad  enforcing  payment  when 
the  taxes  were  not  assigned  to  the 
lessee.  Barthel  v.  Meader,  72  Iowa, 
125    (1887). 

122  How.  364  (1859). 

2  Norton  v.  Brownsville,  129  U.  S. 
479  (1889);  Wadsworth  v.  Supervis- 
ors, 102  U.  S.  534  (1880).  See  also 
Railroad  Co.  v.  Falconer,  103  U.  S. 
821  (1880);  German  Sav.  Bank  v. 
Franklin  County,  128  U.  S.  526  (1888) ; 
Eddy  v.  People,  127  111.  428  (1889). 

3  United  States  v.  Jefferson  Coun- 
ty, 5  Dill.  310  (1878)  ;  s.  c,  26  Fed. 
Cas.  597;    Maenhaut  v.  New  Orleans, 


§94.] 


MUNICIPAL  SUBSCRIPTIONS. 


[cn.  vi. 


After  a  subscription  is  made,  any  act  of  the  legislature  restricting 
or  abridging  the  taxing  power  so  as  to  deprive  the  municipality  of 
the  power  to  pay  the  bonds  is  unconstitutional  and  void.1 

§  9  4.  Statutory  formalities  must  be  substantially  complied  with.— 
A  substantial  compliance  with  the  formalities  prescribed  by  a  stat- 
ute authorizing  a  municipal  subscription  to  stock  is  all  that  the  law 
requires ;   but  such  a  compliance  is  requisite  to  the  validity  thereof.2 

3  Woods,  1  (1876);  s.  c,  16  Fed.  Cas.  Hoppess,  69  Ind.  324  (1879),  where 
380;  Sibley  v.  Mobile,  3  Woods,  535  an  election,  and  a  tax  voted  and  lev- 
ied in  pursuance  of  it,  were  held  not 
invalidated  on  account  of  a  canvass 
of  the  votes  which  was  not  entirely 
regular;  People  v.  Dutcher,  56  111. 
144    (1870),    holding   that   when    the 


(1876);  s.  c,  22  Fed.  Cas.  57;  Nico- 
lay  v.  St.  Clair  County,  3  Dill.  163 
(1874);  s.  c,  18  Fed.  Cas.  227; 
Huidekoper  v.  Dallas  County,  3  Dill. 
171    (1875);     s.  c,  12  Fed.  Cas.  845 


Cf.  Red  Rock  v.  Henry,  106  U.  S.  596     statute  does  not  prescribe  a  mode  of 


(1882),  and  cases  in  note  5,  p.  338 

1  Wolff  v.  New  Orleans,  103  U.  S. 
358  (18-S0).  Cf.  Edwards  v.  William- 
son, 70  Ala.  145  (1881);  Hays  v. 
Dowis,  75  Mo.  250  (1881). 

2  Bonds  issued  by  municipalities 
to  aid  railroads  are  valid  only  when 


election  it  should  be  held  in  accord- 
ance with  the  law  of  the  organization 
of  the  municipality;  People  v.  Logan 
County,  63  111.  374  (1872).  This  case 
was  an  application  for  mandamus  to 
compel  a  subscription.  A  demurrer 
to  an  answer  alleging  that  the  vote 


issued  in  compliance  with  the  statute  in  favor  of  subscription  was  obtained 

authorizing  them.     Young  v.  Claren-  by  fraudulent  votes  with  the  knowl- 

don    132  U.   S.   340    (1889);     Hoff  v.  edge  of  the   corporation  to  be  bene- 

Jasper  County,  110  U.  S.  53    (1884),  fited  was  overruled;    Pana  v.  Lippin- 

following   the   ruling   in   Anthony   v.  cott,  2  111.  App.  466   (1877),  where  a 

Jasper  County,  101  U.  S.  693   (1879),  vote  taken  at  a  special  town  meeting, 

where   it  was 'held  that  a  bona  fide  when   the   statute   required    it   to   be 


holder  of  bonds  could  not  maintain 
an  action  on  bonds  not  registered 
with  the  state  auditor  as  required  by 
statute;  Bissell  v.  Spring  Valley,  110 
U.  S.  162  (1884),  holding  that  when 
a  statute  required  bonds  to  be  at- 
tested by  the  county  clerk  under  the 
seal  of  the  county,  bonds  issued  with- 
out his  signature  were  not  valid; 
Hamlin  v.  Meadville,  6  Neb.  227 
(1877),  holding  that  a  vote  authoriz- 
ing a  subscription  gives  no  power  to 
make  a  donation;  Cairo,  etc.  R.  R. 
v.  Sparta,  77  111.  505  (1875),  where 
bonds  were  authorized  by  a  vote  upon 


taken  at  a  regular  meeting,  was  held 
not  to  confer  authority  to  subscribe; 
People  v.  Smith,  45  N.  Y.  772  (1871), 
holding  that,  when  the  act  requires 
a  petition  of  taxpayers,  the  power  is 
personal  to  them  and  cannot  be  exer- 
cised by  an  agent;  Wetumpka  r. 
Wetumpka  Wharf  Co.,  63  Ala.  611 
(1879),  holding  that  a  judgment  on 
bonds  issued  by  a  municipality  is 
conclusive  upon  it  as  to  the  validity 
of  the  bonds  and  as  to  all  defenses 
which  might  have  been  urged  against 
it  at  law;  but  in  a  bill  in  equity  to 
enforce   a   statutory   trust   by   which 


a   proposition   that   they   should    run     the  property,   etc.,  of  the  municipal- 


twenty  years,  when  the  statute  sub- 
mitted a  proposition  to  be  voted  upon 
'for  bonds  to  run  not  exceeding  ten 
years,  the  court  refused  to  compel 
the  city  to  issue  them;    Mustard  v 


ity  was  pledged  to  pay  them,  it  may 
show  that  the  bonds  were  issued  in 
violation  of  the  conditions  of  the 
statute;  Munson  v.  Lyons,  12  Blatchf. 
539   (1875);    s.  c,  17  Fed.  Cas.  1002; 


340 


CH.  VI.] 


MUNICIPAL  SUBSCRIPTIONS. 


[§  94. 


Where  the  statute  authorizing  municipal-aid  bonds  requires  that  the 
road  should  be  constructed  before  the  bonds  are  good,  a  purchaser 
may  rely  on  the  fact  that  the  trustee  holding  the  bonds  in  escrow 
had  decided  that  the  condition  had  been  complied  with.1  A  city 
having  power  to  issue  its  bonds  for  stock  in  a  domestic  railroad  cor- 
poration is  not  thereby  given  power  to  issue  bonds  for  stock  in  a 
foreign  corporation.2  If  the  statute  requires  the  profile  and  esti- 
mates to  be  made  before  municipal  aid  is  given,  a  subsequent  varia- 
tion releases  the  subscription.3 

But  not  every  failure  to  observe  all  the  formalities  prescribed  by 
the  statute  is  sufficient  to  invalidate  a  subscription.  When  the  omis- 
sion is  a  matter  of  form  more  than  of  substance,  it  will  not  invali- 
date the  subscription.4 


aff'd,   99  U.   S.   684,  holding  that  an 
objection  which  would  be  good  in  a 
direct  review  of  the  proceedings — as 
here,   that  the   petition   of  taxpayers 
gave   the   authorities   no   jurisdiction 
— may  be  of  no  avail  as  against  bona 
fide  holders  of  bonds;     Thompson  v. 
Perrine,  103  U.   S.  806    (1880) ;     Jas- 
per County  v.  Ballou,  103  U.   S.  745 
(18S0),    and    Massachusetts,    etc.    Co. 
v.  Cherokee,  42  Fed.  Rep.  750  (1890), 
holding  that  a  subsequent  statute  may 
correct     errors.       See     also     Carroll 
County    v.     Smith,    111     U.     S.     556 
(1884);     Hawley    v.    Fairbanks,    108 
U.  S.  543  (1883);    Buchanan  v.  Litch- 
field,  102  U.   S.   278    (1880);     People 
v.  Hulburt,  46  N.  Y.  110  (1871) ;    Peo- 
ple v.  Suffern,  68  N.  Y.  321   (1877); 
Wilson    v.    Caneadea,    15    Hun,    218 
(1878) ;    Angel  v.  Hume,  17  Hun,  374 
(1879);     People   v.   Hutton,   18   Hun, 
116     (1879);     People    v.    Barrett,    18 
Hun,  206  (1879)  ;    Wheatland  r.  Tay- 
lor, 29  Hun,  70  (1883).     A  municipal 
subscription,  authorized  by  statute,  to 
a  corporation  to  construct  locks  and 
dams,  and  duly  made,  cannot  be  en- 
forced to  pay  for  repairing  old  locks 
and  dams.     Jessamine  County  v.  Swi- 
gert's  Adm'r,  3   S.  W.  Rep.   13    (Ky. 
1887).     Where  judgment  is  taken  by 
default  the   facts   alleged    cannot   be 
disputed    in   the   mandamus   proceed- 
ings.   Harshman  v.  Knox  County,  122 
U.  S.  306   (1887).     A  vote  of  munici- 


pal aid  is  void  if  the  grantee  is  in 
the  alternative.  State  v.  Roggen,  22 
Neb.  118  (1887).  In  Kansas  a  tax- 
payer cannot  enjoin  the  board  from 
declaring  the  vote  on  municipal  aid. 
He  must  wait  and  enjoin  the  sub- 
scription. State  r.  Wabaunsee  County, 
36  Kan.  180  (1887);  People  v.  Santa 
Anna,  67  111.  57  (1873),  where  an 
election  was  held  illegal  because  held 
without  a  registration  of  voters  as 
required  by  law;  People  v.  Laenna, 
67  111.  65  (1873),  a  similar  case;  Chi- 
cago, etc.  R.  R.  v.  Mallory,  101  111. 
583  (1882),  where  an  election  pre- 
sided over  by  one  moderator  with  one 
clerk,  when  the  law  required  three 
judges  and  two  clerks,  was  held  void, 
conferring  no  authority  upon  a  town 
to  issue  bonds.  Municipal  bonds  is- 
sued without  the  order  of  the  grand 
jury,  as  required  by  statute,  are  not 
collectible  by  an  owner  who  does  not 
show  that  he  is  a  bona  fide  holder. 
Frick  v.  Mercer  County,  138  Pa.  St. 
523    (1891). 

i  Provident  Life,  etc.  Co.  v.  Mercer 
County,  170  U.  S.  593  (1898),  rev'g 
Mercer  County  v.  Provident,  etc.  T. 
Co.,  72  Fed.  Rep.  623  (1896). 

2  Travelers',  etc.  Co.  r.  Mayor,  etc., 
99  Fed.  Rep.   663    (1900). 

3  State  v.  Morristown,  93  Tenn.  239 
(1893). 

4  Pana  v.  Bowler,  107  U.  S.  529 
(1882),  holding  that  the  fact  that  an 

41 


§  94.] 


MUNICIPAL  SUBSCRIPTIONS. 


[CH.  VI. 


Many  of  these  defenses,  however,  are  defeated  by  the  fact  that 
the  municipality  is  estopped  from  setting  up  the  illegality,  there 
having  been  long  delay,  or  the  recitals  on  the  bonds  themselves 
having  represented  that  the  legal  formalities  were  duly  observed.1 


election    was    irregularly    conducted 
could  not  avail  as  a  defense  to  bonds 
in  the   hands  of  a  bona  fide  holder, 
the  court  refusing  to  follow  the  rul- 
ing of  the  Illinois  supreme  court  in 
Lippincott  v.  Pana,  92  111.  24   (1879), 
which  declared  the  bonds  void;  John- 
son  County  v.   Thayer,    94  U.   S.  631 
(1S76),  where  the  court  said:     "De- 
fects,  irregularities,   or   informalities 
which  do  not  affect  the  result  of  the 
vote  do  not  affect  its  validity;"  Bel- 
fast, etc.  R.  R.  v.  Brooks,  60  Me.  568 
(1872),  where  a  call  for  a  town  meet- 
ing "to  see  if  the  town  will  loan  its 
credit  to  aid  in  the  construction"  of 
a   railroad   named  was   held  to   give 
reasonable  notice  that  a  proposition 
to   subscribe   for   its  stock  would  be 
acted    upon;     Draper    v.    Springport, 
104   U.    S.   501    (1881),   in  which   the 
absence  of  a  seal  was  held  not  to  af- 
fect the  right  of  a  bona  fide  holder 
to  recover  upon  bonds  issued  in  pay- 
ment   of    a    subscription;    Clarke    v. 
Hancock  County,  27   111.   305    (1862), 
where    the    informality    consisted    in 
submitting   two   propositions   by  one 
vote,  and  it  was  held  not  to  invali- 
date bonds  in  the  hands  of  bona  fide 
holders;    Supervisors    v.    Schenck,    5 
Wall.    772    (1866),    where   bonds    is- 
sued   under    a    vote    ordered    by    a 
"county    court,"    instead    of    by    the 
"board     of    supervisors"    were    held 
valid  because  taxes  had  been  levied 
and  interest  paid  upon  them  by  the 
proper  authorities  for  nine  years  be- 
fore the  claim  was  made  that  they 
were  void.     Cf.  Jasper  County  v.  Bal- 
lou,   103  U.    S.   745    (1880);    Pana  v. 
Bowler,  107  U.  S.  529   (1882);  John- 
son v.  Stark  County,  24  111.  75  (1860) ; 
Singer  Mfg.   Co.  v.  Elizabeth,  42   N. 
J.   L.   249    (1880);    New  Haven,  etc. 
R.    R.    v.    Chatham,    42    Conn.    465 
(1875),   where  a  vote  which   should 


have  been  by  ballot  was  taken  by 
division  of  the  house,  and  no  objec- 
tion was  made  thereto  until  a  rail- 
road had  in  good  faith  issued  bonds 
which  were  to  be  guaranteed  by  the 
town. 

i  Nugent   v.    Supervisors,    19    Wall. 
241    (1873),   is  the  leading  case.     It 
holds  that  the  ,delivery  of  the  munici- 
pal bonds  to  the  railroad  in  exchange 
for  the  stock,  together  with  the  levy 
of  a  tax  to  pay   the  interest  on  the 
bonds,    and    the    act    of   the    munici- 
pality   in    voting    as    a    shareholder, 
estop  it  from  denying  the  legality  of 
the  subscription.    Menasha  v.  Hazard, 
102    U.    S.    81     (1880),    where    bonds 
were  issued  to  be  valid  when  it  was 
certified  on  them  that  certain  condi- 
tions  had   been   performed.     Such   a 
certificate  was  held  to  estop  the  town 
from  denying  their  validity;  Whiting 
v.    Potter,    2    Fed.   Rep.    517    (1880), 
in  which  it  was  held  that  retaining 
railroad  stock  received  for  bonds,  and 
paying   interest  on   the  bonds   for   a 
long    time,    estopped    a    municipality 
from  questioning  their  validity,  such 
acts    being    a    direct    ratification    of 
the   issue;    Lamb  v.   Burlington,   etc. 
R.   R.,   39   Iowa,   333    (1874),  holding 
that  voting  a  tax  in  aid  of  a  railroad, 
and  remaining  silent  for  a  year,  dur- 
ing  which   the    road    was    completed 
upon  the  faith  of  the  tax,  and  until 
the  benefits  accruing  from  the   com- 
pletion   were    realized,    estopped    the 
township   from   denying  the   validity 
of  the  tax;   Leavenworth,  etc.  R.  R. 
v.     Douglas     County,     18     Kan.     169 
(1877),   where  the   failure  of  a  rail- 
road  to   comply  with   the  conditions 
of  an  agreement  by  which  it  was  to 
receive  bonds  was  a  matter  of  public 
knowledge,    and    the    county    issuing 
the  bonds  made  no  objection,  but  paid 
interest  on  the  bonds  for  years.  These 


342 


CH.  VI.] 


MUNICIPAL  SUBSCRIPTIONS. 


[§94. 


A  bona  fide  holder  of  a  municipal  bond  issued  on  payment  of  a 
subscription  to  stock  need  not  inquire  as  to  whether  the  bonds  were 
issued  upon  the  petition  of  two-thirds  of  the  freeholders,  inasmuch 
as  the  recitals  in  the  bonds  to  that  effect  will  protect  him.1 

The  meeting  must  be  duly  called  and  by  the  proper  officer  ;2  the 
notice  of  the  meeting  must  be  duly  posted  for  the  full  time  pro- 
vided in  the  act.3     Where  a  municipality  has  subscribed  for  stock 


circumstances  were  considered  a  rati- 
fication of  the  acts  of  the  county  offi- 
cers in  issuing  them;  Lyons  v.  Mun- 
son,    99    U.    S.    684    (1878),    holding 
that   where,   under   the    act   of   New 
York,  the  county  judge  decides  upon 
an  application  of  taxpayers,  his  judg- 
ment,   recited   in    the   bonds,   cannot 
be  attacked  by  the  town  in  an  action 
on  bonds  by  a  dona  fide  holder,  and 
the   town   is   estopped   to   deny  their 
validity  on  that  account;   Hackett  v. 
Ottawa,  99  U.  S.  86    (1878),    holding 
that,    when    bonds    purport   on   their 
face  to  have  been  issued  to  provide 
for  a  loan  for  municipal  purposes,  the 
city    is    estopped    from    setting    up 
against    an    innocent    purchaser    for 
value   that   they    were   void    because 
the    proceeds    were    appropriated    to 
other  purposes — as  for  a  donation  to 
a     private     corporation.       Pendleton 
County  v.  Amy,  13  Wall.  297   (1871), 
holding  that  where  the  issue  of  bonds 
by   county   officers,   without  previous 
fulfillment  of  conditions,  would  be  a 
misdemeanor,  the  presumption  is  that 
the    conditions    were    fulfilled;     and 
the  receiving  of  stock  in  payment  and 
holding  it  for  seventeen  years  work 
an  estoppel;  First  Nat.  Bank  v.  Wol- 
cott,  19  Blatch.  370  (1881),  where  the 
retaining  of  stock  received  for  bonds, 
and    paying    interest    on    the    bonds, 
was  held,  as  against  bona  fide  hold- 
ers, to  be  a  ratification   of  the  act 
of  commissioners  in  issuing  them,  the 
recital  on  them  being  that  they  were 
issued  in  pursuance  of  a  certain  stat- 
ute;   Block  v.   Commissioners,   99   U. 
S.  686  (1878),  in  which  a  county  was 
held  estopped   from  asserting  that  a 
majority  of  the  electors  had  not  voted 


in  favor  of  the  issue  of  bonds,  the 
bonds  having  been  issued  three  years 
after  the  vote  was  declared  and  re- 
corded; Carroll  County  v.  Smith,  111 
U.  S.  556  (1883),  holding  that  a 
recital  in  a  bond  that  it  is  author- 
ized by  a  particular  statute  does  not 
estop  the  municipality  from  setting 
up  that  it  was  not  authorized  by  a 
proper  majority  of  voters, — in  this 
case  two-thirds.  See  also  Amey  v. 
Allegheny  City,  24  How.  364  (1860); 
Cagwin  v.  Hancock,  84  N.  Y.  532 
(1881),  rev'g  s.  c,  22  Hun,  201;  Or- 
leans v.  Piatt,  99  U.  S.  676  (1878). 

i  Evansville  v.  Dennett,  161  U.  S. 
434    (1896). 

2  Windsor  v.  Hallett,  97  111.  204 
(1880);  Richland  County  v.  People,  3 
111.  App.  210  (1878);  Jacksonville, 
etc.  R.  R.  v.  Virden,  104  111.  339 
(1882);  Bowling  Green,  etc.  R.  R.  v. 
Warren  County  Court,  10  Bush  (Ky.), 
711  (1874).  But  see  Sauerhering  v. 
Iron  Ridge,  etc.  R.  R.,  25  Wis.  447 
(1870);  Athens  County  v.  Baltimore, 
etc.  R.  R.,  37  Ohio  St.  205   (1881). 

3McClure  v.  Oxford,  94  U.  S.  429 
(1876);  Harding  v.  Rockford,  etc.  R. 
R.,  65  111.  90  (1872),  where  bonds 
were  held  invalid  because  the  notice 
of  election  was  posted  less  than 
thirty  days,  as  required  by  law;  Pack- 
ard v.  Jefferson  County,  2  Colo.  338 
(1874),  holding  that  a  change  in  the 
.  proposition  to  vote  bonds  which  is 
in  effect  a  new  proposition  cannot  be 
legally  voted  upon  at  an  election  al- 
ready called,  there  not  being  suffi- 
cient time  remaining  before  the  elec- 
tion to  give  the  required  notice;  An- 
derson County  v.  Beal,  113  U.  S.  227 
(1S84),  holding  that,  if  the  bonds  on 


343 


§   95.]  MUNICIPAL  SUBSCRIPTIONS.  [CH.  VI. 

illegally,   any  other  stockholder  may  bring  suit  to  have  the   sub- 
scription canceled.1 

§  95.  Submission  to  popular  vote. — While  the  legislature  may 
authorize  a  municipality  to  make  a  subscription  to  the  stock  of  a 
railway  or  other  corporation  Avithout  submitting  the  question  to  a 
vote  of  the  people,2  it  has  the  power  to  direct  that  the  question 
shall  be  so  submitted.  Such  an  act  does  not  amount  to  a  delega- 
tion of  legislative  powers.3     When  it  is  provided  that  a  subscrip- 

their   face   recite  that  they  were  is-  Court,  51  Mo.  522    (1873).     Cf.  State 

sued  in  pursuance  of  a  vote  held  on  a  v.   Dallas   County   Court,   72  Mo.   329 

certain  day,  the  statement  is  equiva-  (1880);    McCallie   v.    Chattanooga,    3 

lent  to  one  that  the  vote  was  regular  Head    (Tenn.),   317    (1859);    Chicago, 

in  form  as  to  prior  notice,  and  the  etc.  R.  R.  v.  Aurora,  99  111.  205  (1881); 

municipal     corporation     is     estopped  Burr  v.  Chariton  Co.,  2  McCrary,  603 

from  showing  that  it  was  held  with-  (1880).     In   this    case   a   charter    of 

out  proper  notice  in  an  action  by  a  a    railroad    authorized    it    to    receive 

bona  fide  holder;    George   v.   Oxford,  subscriptions    from   counties  without 

16  Kan.  72  (1876),  holding  that  when  a  vote  of  the  people.    Bonds  so  issued 

an  election   authorizing  the  issue  of  were  held  valid  though  a  prior  spe- 

bonds  was  held  upon  insufficient  no-  cial  act  required  a  vote  of  taxpayers 

tice,    and    the    facts    appeared    upon  as  a  condition  precedent  to  such  sub- 

the  face  of  the  bonds,  the  bonds  were  scriptions. 

void;   Williams  v.  Roberts,  88  111.  11  3  Starin    v.    Genoa,    23    N.    Y.    439 

(1878),  where  an  election  called  by  (1861);    Gould  v.   Sterling,  23   N.  Y. 

twelve  voters   instead   of  twenty,  as  456   (1861);   Bank  of  Rome  v.  Rome, 

required,    upon    a    ten    days'    notice,  18  N.  Y.  38    (1858);    s.  c,  19   N.  Y. 

where    the    statute    required    twenty  20  (1859);  People  v.  Batchellor,  53  N. 

days,   was  held   a   nullity.     See  also  Y.   128,   138    (1873);    Duanesburgh  v. 

Wells  v.  Pontotoc  County,  102  U.  S.  Jenkins,   57   N.   Y.   177,    192    (1874); 

625  (1880);  Lincoln  v.  Cambria  Iron  Hobart  v.   Butte   County,   17   Cal.   23 

Co.,  103  U.  S.  412   (1880).  But  where  (1860);  Slack  v.  Maysville,  etc.  R.  R., 

the  notice  was  required  by  the  stat-  13  B.  Mon.    (Ky.)    1   (1852);   Winter 

ute  to  be  "posted  by  the  town  clerk  v.   Montgomery,   65   Ala.   403    (1880). 

or    supervisors,"    it    was    held    that  In  Harrington  v.  Plainview,  27  Minn, 

this    did    not    require    a    posting    by  224    (1880),  it  is  held  that  where  a 

these   officers   in   person,   but  that  it  submission  to  the  people  is  provided 

was  sufficient  if  they  procured  others  for,    it   must   be    to    legal   voters    of 

to    post   the   notice.     Phillips   v.   Al-  the  municipality,  and  cannot  lawfully 

bany,  28  Wis.  340   (1871);  Lawson  v.  be    confined    to    resident    taxpayers, 

Milwaukee,    etc.    Ry.,    30    Wis.    597  whether  legal  voters  or  not.    Cf.  Bab- 

(1872);    Jones   v.   Hurlburt,   13    Neb.  cock  v.  Helena,  34  Ark.  499   (1879); 

125    (1882).  Walnut  v.  Wade,  103  U.  S.  683  (1880). 

i  Stebbins  v.  Perry  County,  167  111.  Again,   where   a  popular  vote,   taken 

567  (1897).  in  accordance  with  a  statute,  author- 

2  Otoe   County   v.   Baldwin,    111   U.  ized    a  subscription  to   a   designated 

S.  1  (1883);  Thomson  v.  Lee  County,  railway,   and   the  bonds  were  issued 

3  Wall.  327    (1865);   Ralls  County  v.  to  a  consolidated  road  including  the 

Douglass,  105  U.  S.  728  (1881) ;  State  first — these    facts    appearing    on    the 

v.  Macon   County   Court,   41  Mo.   453  face  of  the   bond, — the   invalidity   of 

(1867);     State    v.    Sullivan    County  the  transaction  was  held  to  appear  on 

344 


CH.  VI.  J 


MUNICIPAL  SUBSCRIPTIONS. 


[§  95. 


tion  can  be  made  only  upon  the  petition  of  a  certain  proportion  of 
the  legal  voters,1  there  must  be  a  substantial  compliance  with  the 
spirit  as  well  as  the  letter  of  the  act.2 

When  the  enabling  act  provides  for  municipal  aid  to  railways 
and  other  quasi-public  enterprises  upon  the  assent  of  a  majority 
or  two-thirds  of  the  legal  voters  of  the  town  or  county,  this  is  con- 
strued universally  to  mean  that  the  measure  is  to  be  approved  by 
a  majority  or  a  two-thirds  vote,  as  the  case  may  be;  that  is  to  say, 
by  a  majority  or  two-thirds  of  the  voters  who  vote  at  the  election 
called  for  the  purpose,  and  not  two-thirds  or  a  majority  of  all  the 
qualified  electors  in  the  territory.     Those  who  fail  to  vote  against 


the  face  of  it.  Bates  County  v.  Win- 
ters, 97  U.  S.  83  (1877).  Cf.  Chicot 
County  v.  Lewis,  103  U.  S.  164 
(1880);  Schaeffer  v.  Bonham,  95  111. 
368  (1880).  But  where  a  town  is 
authorized  to  subscribe  not  exceeding 
a  certain  sum  to  a  designated  rail- 
road, several  subscriptions  made  at 
different  times  and  authorized  by  as 
many  elections,  the  aggregate  not  ex- 
ceeding the  amount  named  in  the  act, 
are  valid.  Empire  v.  Darlington,  101 
U.  S.  87  (1S79).  See  also  Hurt  v. 
Hamilton,  25  Kan.  76  (1881);  So- 
ciety for  Savings  v.  New  London,  29 
Conn.  174  (1860);  First  Nat.  Bank  v. 
Concord,  50  Vt.  257   (1877). 

i  E.  g.  in  New  York,  People  v. 
Hulbert,  46  N.  Y.  110,  rev'g  59  Barb. 
446  (1871);  People  v.  Peck,  62  Barb. 
545  (1S72);  People  v.  Oliver,  1  T.  & 
C.  570  (1873);  People  v.  Hughitt,  5 
Lans.  89  (1871);  People  v.  Franklin, 
5  Lans.  129  (18.71);  People  v.  Smith, 
45  N.  Y.  772  (1871);  Wellsborough 
v.  New  York,  etc.  R.  R.,  76  N.  Y.  182 
(1879).  Cf.  St.  Joseph  v.  Rogers,  16 
Wall.  644  (1872) ;  Syracuse  Sav.  Bank 
r.  Seneca  Falls,  21  Hun  (N.  Y.),  304 
(1880);  aff'd,  86  N.  Y.  317;  Faris  v. 
Reynolds,  70  Ind.  359    (1880). 

2  People  v.  Smith,  45  N.  Y.  772 
(1871) ;  Craig  v.  Andes,  93  N.  Y.  405 
(1883);  People  v.  Oldtown,  88  111. 
202  (1878).  If  the  statute  requires  a 
written  application  by  ten  legal  voters 
before  the  clerk  should  call  an  elec- 
tion, such  application  is  necessary  to 


the  validity  of  the  election,  and  with- 
out proof  of  it  the  municipality  can- 
not be  compelled  to  issue  bonds. 
Monadnock  R.  R.  v.  Peterborough, 
49  N.  H.  281  (1870),  holding  that  a 
town  cannot  delegate  its  power  to 
authorize  subscriptions  to  a  commit- 
tee; and  a  statute  requiring  the  vote 
of  "two-thirds  of  the  legal  voters  pres- 
ent and  voting  at"  the  meeting  must 
be  strictly  obeyed.  Mercer  County  v. 
Pittsburgh,  etc.  R.  R.,  27  Pa.  St.  389 
(1856),  in  which  a  statute  desig- 
nated the  grand  jury  of  a  county  to 
decide  upon  a  subscription.  It  was 
held  that  the  grand  jury  could  not 
delegate  the  power  so  conferred  to 
county  commissioners,  and  that  the 
commissioners  could  only  subscribe 
in  accordance  with  the  decision  of  the 
grand  jury.  Where  the  municipal 
bonds  recite  that  the  vote  was  on  an 
application  of  fifty  voters,  where  the 
statute  required  that  the  application 
should  be  by  voters  and  taxpayers, 
held,  that  the  bonds  were  void,  where 
the  application  was  not  by  taxpayers. 
Gilson  v.  Dayton,  123  U.  S.  59 
(1887).  Municipal  bonds  issued  on  a 
vote  of  a  minority  of  the  voters,  in- 
stead of  a  majority,  as  required  by  the 
statute,  in  aid  of  a  railroad,  are  void. 
Onstott  f.  People,  123  111.  489  (1888). 
In  Prettyman  v.  Tazewell  County,  19 
111.  406,  414  (1858),  a  case  of  sub- 
scription by  a  county  to  railroad 
stock,  a  taxpayer  waited  four  months 
before  alleging  fraud  in  the  election. 


345 


§95.] 


MUNICIPAL  SUBSCRIPTIONS. 


[cn.  vi. 


the  measure  arc  not  considered  nor  counted  as  having  the  power 
to  vote.1 

The  legislature  may  render  effective  a  prior  vote  of  a  municipal- 
ity, taken  without  statutory  authority,  in  aid  of  a  railroad.  If  the 
state  courts  vary  in  their  decisions  on  municipal  aid  to  railroads 


Held  equivalent  to  acquiescence,  and 
too  late.  See  also  People  v.  Van  Val- 
kenburgh,  63  Barb.  105  (1872); 
Evansville,  etc.  R.  R.  v.  Evansville, 
15  Ind.  395  (1SG0);  Chicago,  etc.  R. 
R.  v.  Mallory,  101  111.  5S3  (1882). 
For  the  manner  in  Indiana  of  con- 
testing an  election,  see  Goddard  v. 
Stockman,   74   Ind.   400    (1881). 

i  Cass  County  v.  Johnston,  95  IT. 
S.  360  (1877);  Carroll  County  v. 
Smith,  111  U.  S.  556  (1884);  Cass 
County  v.  Jordan,  95  U.  S.  373  (1877) ; 
Hawkins  v.  Carroll  County,  50  Miss. 
735  (1874);  Louisville,  etc.  R.  R.  v. 
State,  8  Heisk.  (Tenn.)  663  (1875); 
State  v.  Brassfield,  67  Mo.  331  (1878) ; 
Webb  v.  Lafayette  County,  67  Mo.  353 
(1878);  People  v.  Harp,  67  111.  62 
(1873).  Contra,  People  v.  Chapman, 
66  111.  137  (1872).  Cf.  Dunnovan  v. 
Green,  57  111.  63  (1870),  holding  that 
a  statute  which  authorizes  a  subscrip- 
tion, provided  a  majority  of  votes  are 
in  favor  of  it,  means  a  majority  of 
votes  cast,  not  a  majority  of  all 
voters;  Culver  v.  Fort  Edward,  8 
Hun,  340  (1876),  holding  that  if  the 
statute  requires  a  vote  of  the  majority 
of  taxable  inhabitants,  the  consent  of 
a  majority  who  attended  the  meeting 
is  not  sufficient;  Walnut  v.  Wade,  103 
U.  S.  683  (1879),  holding  that  "in- 
habitants," as  used  in  an  enabling 
act,  meant  legal  voters;  St.  Joseph  v. 
Rogers,  16  Wall.  644  (1872),  where  a 
law  of  Illinois,  requiring  a  vote  of 
'a    majority   of    the    legal   voters   of 


— as  non-residents;  Milner  v.  Pensa- 
cola,  2  Woods,  632  (1875);  s.  c,  17 
Fed.  Cas.  407,  where  a  statute  re- 
quired the  "consent  of  a  majority  of 
the  corporation  composing"  the  city. 
A  defense  to  an  action  on  the  bonds 
by  an  innocent  holder,  that  only  a 
minority  of  citizens  voted,  was  held 
not  good;  Melvin  v.  Lisenby,  72  111. 
63  (1874),  holding  that  the  presump- 
tion is  that  the  vote  cast  at  an  elec- 
tion held  according  to  law  is  the 
vote  of  the  whole  number  of  legal 
voters;  Reiger  v.  Beaufort,  70  N.  C. 
319  (1874),  where  a  majority  of  votes 
cast  at  an  election  was  held  suffi- 
cient under  a  statute  requiring  a  ma- 
jority of  the  voters  qualified  to  vote, 
although  a  majority  of  all  the  voters 
of  the  town  did  not  vote.  If  the  peti- 
tion must  be  signed  by  a  majority  of 
freeholders,  minors  and  married 
women,  etc.,  are  to  be  counted.  State 
v.  Kokomo,  108  Ind.  74  (1886).  See 
also  Cagwin  v.  Hancock,  84  N.  Y.  532 
(1881).  And  for  a  contrary  rule, 
well  argued  out,  see  Harshman  v. 
Bates  County,  92  U.  S.  569  (1875) 
[overruled,  however,  in  Cass  County 
v.  Johnson,  95  U.  S.  360  (1877)], 
and  the  dissenting  opinions  of  Mil- 
ler and  Bradley,  JJ.,  in  Cass  County 
v.  Johnson,  95  U.  S.  360,  370  (1877). 
As  to  the  right  of  a  voter  or  signer 
to  revoke  his  consent  once  granted, 
see  Springport  v.  Teutonia  Sav.  Bank, 
84  N.  Y.  403  (1881);  People  v.  Saw- 
yer, 52   N.  Y.   296    (1873);    People  v. 


any  township"  in  one  section,  and  a     Wagner,  1  T.  &  C.  221  (1873);  People 


majority  "voting  at  such  election," 
was  construed  to  mean  a  majority  of 
those  voting  at  the  election;  People  v. 
Oliver,  1  T.  &  C.  570  (1873),  holding 
that  "taxpayers"  includes  all  persons 
whose  names  are  on  the  assessment 
roll  as  such,  though  wrongfully  taxed 


v.  Hatch,  1  T.  &  C.  113  (1873).  Cf. 
First  Nat.  Bank  v.  Dorset,  16  Blatchf. 
62  (1879)  s.  c,  9  Fed.  Cas.  98;  Noble 
v.  Vincennes,  42  Ind.  125  (1873); 
and  see  Hannibal  v.  Fauntleroy,  105 
U.  S.  408   (1881). 


346 


en.  vi.] 


MUNICIPAL  SUBSCRIPTIONS. 


[§  96. 


the  federal  court  will  decide  upon  its  own  judgment.1  The  fact  that 
the  proposition  to  vote  aid  is  defeated  at  one  election  does  not  pre- 
vent the  calling  of  another  election  to  submit  the  question  again.2 
Nor  does  a  vote  of  aid  to  one  railroad  prevent  a  subsequent  vote  of 
aid  to  another  railroad.3 

§  96.  What  officer  or  agent  of  the  municipality  may  make  the  con- 
tract of  subscription. — In  the  absence  of  any  express  provision  in 
the  enabling  act,  the  proper  persons  to  execute  the  contract  of  sub- 
scription for  a  municipal  corporation  are  those  whose  duty  it  is  to  ex- 
ecute other  contracts  for  and  in  the  name  of  the  municipality.  A 
subscription  is  a  contract,  to  be  executed  in  the  ordinary  way  in 
which  any  other  contract  may  properly  be  made.  But  the  act  au- 
thorizing the  subscription  frequently  provides  by  whom  and  in  what 
manner  the  contract  shall  be  executed.  When  this  is  the  case  the 
provisions  of  the  statute  are  to  be  strictly  complied  with.4 

It  has  been  held  that,  in  order  to  constitute  a  valid  municipal 


1  Anderson  v.  Santa  Anna,  116  U. 
S.  356  (1886).  Cf.  State  v.  Holladay, 
72  Mo.  499  (18S0);  Smith  v.  Fond  du 
Lac,  8  Fed.  Rep.  289  (1881);  McCall 
v.  Hancock,  10  Fed.  Rep.  8  (1882). 

2  Calhoun  County  v.  Galbraith,  99 
U.  S.  214  (1878);  Society  for  Savings 
v.  New  London,  29  Conn.  174   (1860). 

3  Chicot  County  v.  Lewis,  103  U. 
S.  164  (1880). 

4  Walnut  v.  Wade,  103  U.  S.  683 
(1880);  Douglas  v.  Niantic  Sav. 
Bank,  97  111.  228  (1881) ;  Windsor  v. 
Hallett,  97  111.  204  (1880).  The  com- 
missioners cannot  bind  the  munici- 
pality by  a  modification  of  the  sub- 
scription voted  by  it.  Bell  v.  Railroad 
Co.-,  4  Wall.  598  (1866).  A  subscrip- 
tion for  a  municipality  by  officers  in 
a  supposed  office  which  does  not  con- 
stitutionally exist  is  void.  Norton  v. 
Shelby  County,  118  U.  S.  425  (1886). 
So,  for  example,  where  the  act  pro- 
vides for  the  appointment  of  a  board 
of  commissioners  to  make  the  sub- 
scription, they  only  are  competent  to 
make  it;  they  are  for  this  purpose 
the  agents  of  the  municipality  for 
which  they  act;  they  may  insert  con- 
ditions into  the  contract  which,  un- 
less repudiated  by  the  corporation, 
are  valid,  and  will  bind   all   parties 


concerned;  their  powers  are  to  be  ex- 
ercised jointly,  and  therein  all  must 
act — a  majority  not  being  sufficient 
by  their  act  to  bind  the  municipality; 
their  acts  when  once  fully  performed 
are  final  and  binding,  and  cannot  be 
recalled  or  revoked.  Danville  v. 
Montpelier,  etc.  R.  R.,  43  Vt.  144 
(1870).  Cf.  First  Nat.  Bank  v.  Ar- 
lington, 16  Blatchf.  57  (1879)  ;  s.  c, 
9  Fed.  Cas.  95;  First  Nat.  Bank  v. 
Concord,  50  Vt.  257  (1877);  People  v. 
Hitchcock,  2  T.  &  C.  (N.  Y.)  134 
(1S73);  State  v.  Hancock  County,  11 
Ohio  St.  183  (1860);  s.  c,  12  Ohio 
St.  596.  Cf.  Jackson  County  v.  Brush, 
77  111.  59  (1875) ;  Kankakee  v.  JEtna 
Life  Ins.  Co.,  106  U.  S.  668  (1882); 
Bissell  v.  Spring  Valley,  110  U.  S. 
162  (1884);  Re  Bradner,  87  N.  Y.  171 
(1881).  If  the  officers  or  agents  of  a 
municipality  have  a  discretion  with 
reference  to  the  subscription,  to  make 
it  or  not,  as  they  may  think  best  un- 
der the  circumstances,  their  exercise 
of  that  discretion  is  final  and  cannot 
be  reviewed  or  questioned.  Mercer 
County  v.  Pittsburgh,  etc.  R.  R.,  27 
Pa.  St.  389  (1856).  Cf.  Falconer  v. 
Buffalo,  etc.  R.  R.,  69  N.  Y.  491 
(1877);  First  Nat.  Bank  v.  Concord, 
50  Vt.  257   (1877). 


347 


97.] 


MUNICIPAL  SUBSCRIPTIONS. 


[CH.  VI. 


subscription  to  the  stock  of  a  railway  company,  it  is  not  necessary 
that  there  be  an  actual  act  of  subscribing.1 

But  the  vote  of  the  taxpayers  or  inhabitants,  as  the  case  may  be, 
is  not  a  subscription,  nor  does  it  amount  to  a  subscription;  nor  does 
it  in  general  vest  in  the  company  for  whose  proposed  benefit  the 
vote  was  taken  a  right  to  have  a  subscription  made.2 

It  has  been  held  that  the  officers  authorized  to  make  the  subscrip- 
tion have  a  certain  amount  of  discretion  in  fixing  the  terms  of  pay- 
ment.3 

§  97.  Municipal  subscriptions  may  be  conditional.  — A  municipal 
corporation  may  annex  to  its  subscription  any  condition  that  an 
individual  subscriber  might  lawfully  prescribe,  and  may,  in  conse- 
quence, make  the  payment  of  the  subscription  depend  upon  the  per- 
formance   thereof.4     Moreover,    a    municipal    corporation    is    en- 


i  Nugent  v.  Supervisors,  19  Wall. 
241  (1873),  holding,  also,  that  a  reso- 
lution by  a  duly  authorized  board  of 
agents,  declaring  a  subscription  made, 
is,  upon  the  acceptance  of  the  sub- 
scription in  that  shape  by  the  rail- 
way company,  and  a  notice  to  the  mu- 
nicipality of  the  acceptance,  a  good 
and  binding  subscription,  although 
there  was  no  subscription  made  in 
the  books  of  the  company.  To  same 
effect  see  Moultrie  County  v.  Rocking- 
ham, etc.  Bank,  92  U.  S.  631  (1875); 
Cass  County  v.  Gillett,  100  U.  S.  585 
(1879).  Cf.  State  v.  Jennings,  48 
Wis.  549  (1879).  The  board  whose 
duty  it  is  to  make  the  subscription 
may  do  so  through  the  county  clerk. 
Chicago,  etc.  R.  R.  v.  Stafford  County, 
36  Kan.  121  (1887).  The  bonds,  if 
signed  on  Sunday,  will  be  invalid, 
although  the  signature  is  by  the 
proper  officer.  De  Forth  v.  Wisconsin, 
etc.  R.  R.,  52  Wis.  320  (1881);  Bank 
of  Statesville  v.  Statesville,  84  N. 
C.  169  (1881),  where  an  omission 
of  commissioners  to  sign  bonds  was 
held  not  fatal,  the  requirement  being 
directory. 

2  Cumberland,  etc.  R.  R.  v.  Barren 
County  Court,  10  Bush  (Ky.)  604 
(1874);  Bates  County  v.  Winters,  97 
U.  S.  83  (1877).  A  mere  vote  of 
the   municipality    is    not   a   subscrip- 


tion. If  the  road  is  foreclosed  before 
subscription,  and  the  conditions  of 
the  subscription  are  not  fully  com- 
plied with,  no  suit  lies  to  collect. 
Hamilton  County  v.  State,  115  Ind. 
64  (1888);  Bates  County  v.  Winters, 
97  U.  S.  83  (1877),  holding  that 
where,  after  an  election  in  favor  of 
making  a  subscription,  the  county 
court  made  an  order  for  a  subscrip- 
tion, and  its  agent  reported  that  the 
railroad  company  had  no  stock 
books,  for  which,  and  other  reasons, 
he  did  not  make  the  subscription,  it 
was  held  that  these  acts  were  not 
final  and  self-executing,  and  did  not 
constitute  a  subscription.  Wads- 
worth  v.  St.  Croix  County,  4  Fed.  Rep. 
378    (1880). 

3  Syracuse  Sav.  Bank  v.  Seneca 
Falls,  86  N.  Y.  317  (1881),  where  it 
was  held  that  after  regular  proceed- 
ings had  been  taken  to  bond  a  town, 
the  commissioners,  under  the  law, 
had  a  right  to  make  the  bonds  paya- 
ble at  one  time  or  at  different  times. 
Winter  v.  Montgomery,  65  Ala.  403 
(1880),  where  a  vote  authorized  the 
issue  of  bonds  to  an  amount  not  ex- 
ceeding $1,000,000,  and  it  was  held 
that  the  corporate  authorities  had  dis- 
cretionary power  to  issue  them  for  a 
less  amount. 

*  Brocaw     v.     Gibson     County,     73 


348 


CH.  VL] 


MUNICIPAL  SUBSCRIPTIONS. 


[§  97. 


titled  to  the  benefit  of  any  implied  conditions  to  which  an  individ- 
ual subscriber  would  be  entitled.1 

Where  a  condition  precedent  has  not  been  fulfilled  the  subscrip- 
tion is  not  enforceable,  and  bonds  issued  in  payment  will  be  invalid 
even  in  the  hands  of  bona  fide  holders ;  as,  for  example,  where  the 


Ind.  543   (1881);  Portland,  etc.  R.  R. 
v.    Hartford,    58    Me.    23    (1870).      A 
municipality  authorized  to  vote  a  sub- 
scription to   the  stock  of  a  railroad 
company  may  impose  conditions  that 
shops  be  built  in  the  town.    Casey  v. 
People,  132  111.  546   (1890);  Chicago, 
etc.  R.  R.  v.  Aurora,  99  111.  205  (1881), 
holding  that  if,  of  two  conditions,  one 
is  legal  and  the  other  unauthorized, 
,and  they  are  severable,  the  illegal  one 
may  be  rejected  and  the  bonds  issued 
held  good  as  to  the  other;   Ncesen  v. 
Port  Washington,  37  Wis.  168  (1875) ; 
Perkins  v.  Port  Washington,  37  Wis. 
177  (1S75);  Platteville  v.  Galena,  etc. 
R.    R.,    43   Wis.    493    (1878),    holding 
that,  where  a  town  accepted  a  writ- 
ten proposition  from  a  railroad  com- 
pany, the  terms  and  construction  of 
it  were  not  allowed  to  be  modified  by 
reason    of    representations    made    by 
the  company  to  the  voters  before  the 
election;    Foote  v.  Mount  Pleasant,  1 
McCrary,  101  '(1878) ;  s.  c,  9  Fed.  Cas. 
368.    In  this  case  the  proceeds  of  city 
bonds   issued    in   payment   of   a  sub- 
scription to  a  railroad  were  to  be  ex- 
pended within  the  county  limits.     It 
was   held   that,   as   between   the   city 
and.the  road  or  its  assignees  with  no- 
tice, the  bonds  could  not  be  enforced 
if  no  part  of  the  proceeds  had  been 
so  expended.     Atchison,  etc.  R.  R.  v. 
Phillips  County,  25  Kan.  261   (1881). 
Cf.  Memphis,   etc.  Ry.  v.  Thompson, 
24    Kan.    170    (1880);    Red   Rock   v. 
Henry,  106  U.  S.  596    (1882);    Shurt- 
leff  v.  Wiscasset,  74  Me.  130   (1882); 
State  v.  Hancock  Co.,  11  Ohio  St.  183 
(1860).     In  this  case  commissioners 
who  were  authorized  to  subscribe  for 
stock   in    a    railroad   to   run   through 
their  county  and  to  issue  bonds  there- 
for, and  who  had  subscribed  for  the 
stock,  were  allowed,  as  against  a  pro- 


ceeding   to    compel    them    to     issue 
bonds,  to  set  up  the  defense  that  the 
road   had   not   been   located    in   their 
county.     A  certificate  of  the  munici- 
pal authorities  that  the  condition  has 
been     complied     with     renders     the 
bonds  issued  on  that  certificate  valid 
and    enforceable,    though   the    certifi- 
cate was  a  fraud  on  the  municipality. 
Oregon    v.    Jennings,    119    U.    S.    74 
(1886);    People  v.   Holden,  82   111.  93 
(1876).      In    this    case    the    comple- 
tion of  a  road,  except  about  one  mile, 
and   the   operation   of   its   trains   for 
that  distance  over  another  road  so  as 
to  supply  all  the  wants  of  the  public, 
were   held    a   substantial    compliance 
with   a  condition   requiring  its   com- 
pletion.    Hodgman   v.    St.   Paul,   etc. 
Ry.,    23    Minn.    153    (1876),    holding 
that  a  condition  calling  for  the  com- 
pletion of  a  road  to  a  certain  point 
did     not     require     the     building     of 
a  bridge  across  a  river,  other  facili- 
ties   for   crossing   it   being   provided. 
See  also  on  conditional  subscriptions, 
Concord    v.    Portsmouth    Sav.    Bank, 
92   U.    S.    625    (1875);     Railroad   Co. 
v.   Falconer,    103    U.    S.    821    (1880); 
ch.    V.    supra.      In    Madison     County 
Court    v.    Richmond,    etc.    R.    R.,    80 
Ky.  16   (1882),  it  is  held  that,  while 
a  county  may  make  such  conditions 
as  may  seem  proper  to  it  before  sub- 
mitting the   question   of   a   subscrip- 
tion  to   a   popular   vote,    the   county 
court  cannot,  after  the  vote  is  taken, 
require     other     conditions,     or    alter 
those  already  imposed,  or  by  a  second 
election  change  the  terms  of  the  con- 
tract   of    subscription    as    originally 
made  and  entered  into.    See  also  Car- 
roll County  v.   Smith,   111  U.   S.   556 
(1884). 

i  Lamb  v.  Anderson,   54   Iowa,   190 
(1880). 


349 


§98.] 


MUNICIPAL  SUBSCRIPTIONS. 


[CH.  VI. 


location  of  a  railway  in  a  certain  place  is  the  condition,  and  the  lo- 
cation is  not  made  as  required  by  the  condition.1  But  if  it  be  a 
condition  subsequent,  as  where  a  town  subscribed  for  stock  in  a 
railway  company  upon  condition  that  the  road  should  "be  built 
through  the  town  on  the  line  as  run  by  the  engineer,  with  a  suitable 
depot  for  the  convenience  of  the  public,"  a  failure  to  perform  is  not 
a  defense  to  an  action  to  collect  assessments.2 

§  98.  When  may  a  municipal  subscription  be  paid  in  bonds  in- 
stead of  money  ?  —The  express  power  of  a  municipality  to  sub- 
scribe for  stock  does  not  authorize  it  to  issue  negotiable  bonds  there- 
for.3     But    where     a     municipal     corporation     is     authorized     to 


1  Mellen  v.  Lansing,  19  Blatchf. 
512  (1881);  Chicago,  etc.  R.  R.  v. 
Marseilles,  84  111.  145  (187G);  Bucks- 
port,  etc.  R.  R.  v.  Brewer,  67  Me.  295 
(1877). 

2  Belfast,  etc.  R.  R.  v.  Brooks,  60 
Me.  568  (1872).  Cf.  Chicago,  etc.  R. 
R.  v.  Schewe,  45  Iowa,  79  (1876). 
Where  the  condition  of  a  municipal 
subscription  for  stock  is  that  the 
money  shall  be  expended  when  neces- 
sary and  within  the  county,  the  com- 
pany may  exercise  its  reasonable  judg- 
ment as  to  such  necessity,  and  even 
if  the  money  is  misappropriated,  yet 
a  suit  against  the  company  is  barred 
after  twenty  years.  Marion  County  v. 
Louisville,  etc.  R.  R.,  78  S.  W.  Rep. 
437  (Ky.  1904).  As  to  a  subsequent 
breach  of  a  condition  attached  to  the 
subscription,  see  People  v.  Rome,  etc. 
R.  R.,  103  N.  Y.  95  (1886).  A  con- 
tract to  keep  certain  shops,  etc.,  per- 
manently in  a  place,  in  consideration 
of  local  aid,  may  be  disregarded  by 
the  railroad  after  many  years,  when 
its  terminus  changes,  etc.  Texas,  etc. 
Ry.  v.  Marshall,  136  U.  S.  393  (1890). 
Lessees  of  the  purchaser  of  a  railroad 
purchased  at  foreclosure  sale  are  not 
bound  by  the  contract  of  the  first  rail- 
road company,  made  with  the  munici- 
palities voting  aid,  in  reference  to 
depots.  People  v.  Louisville,  etc.  R. 
R.,  120  111.  48  (1887).  See  also  People 
r.  Holden,  82  111.  93  (1876)  ;  Hodgman 
v.  St.  Paul,  etc.  R.  R.,  23  Minn.  153 
(1876);  State  v.  Clark,  23  Minn.  422 


(1877);  State  v.  Lime,  23  Minn.  521 
(1877).  See  also  §  78,  supra.  In  New 
York  it  is  held  that,  where  a  town 
imposes,  as  a  condition  precedent  to 
its  subscription,  that  the  road  be  lo- 
cated and  constructed  through  the 
town,  the  commissioners  have  no 
power  to  accept  any  agreement  from 
the  company  or  any  substitute  in  lieu 
of  full  compliance.  Falconer  v.  Buf- 
falo, etc.  R.  R.,  69  N.  Y.  491  (1877). 
Where  the  agent  of  the  railroad  rep- 
resented that  a  depot  was  to  be  con- 
structed at  a  certain  place,  a  failure 
to  so  construct  is  good  ground  for 
enjoining  the  issue  of  municipal-aid 
bonds.  Wullenwaber  v.  Dunigan,  30 
Neb.  877  (1890).  Cf.  ch.  IX,  infra. 
As  to  the  right  to  revoke  a  consent 
by   popular  vote,  see   §  94,  supra. 

3  Norton  v.  Dyersburg,  127  U.  S. 
160  (1888).  Even  though  a  munici- 
pal corporation  be  authorized  by 
statute  to  subscribe  to  the  stock  of 
a  railroad,  yet  it  cannot  issue  its 
negotiable  bonds  to  pay  such  subscrip- 
tion, there  being  no  statutory  author- 
ity for  the  issue  of  such  bonds.  Hill 
v.  Memphis,  134  U.  S.  198  (1890).  Cf. 
Seybert  v.  Pittsburg,  1  Wall.  272 
(1863) ;  Commonwealth  v.  Pittsburgh, 
41  Pa.  St.  278  (1861);  Concord  v. 
Portsmouth  Sav.  Bank,  92  U.  S.  625 
(1875). 

Statutory  authority  to  raise  money 
by  tax  and  appropriate  it  to  aid  of  a 
railroad  does  not  authorize  the  issue 
of  bonds  by  the  municipality  therefor. 


350 


CH.  VI.] 


MUNICIPAL  SUBSCRIPTIONS. 


[§  99. 


subscribe  to  the  stock  of  a  railway  or  other  corporation,  or  to  lend 
its  credit  thereto,  and  to  issue  bonds  to  that  end,  it  may,  in  the  ex- 
ercise of  its  proper  discretion,  instead  of  selling  the  bonds  and  apply- 
ing the  proceeds  to  the  payment  of  the  subscription,  deliver  the  bonds 
themselves  to  the  railway  company  in  exchange  for  an  equivalent 
amount  of  stock.1 

In  ISTew  York  a  contrary  viewT  prevails,  and  there  is  force  in  the 
New  York  argument  that  only  thus  can  the  full  par  value  of  the 
bonds  be  realized  for  the  purposes  of  the  enterprise.2 

§99.  A  municipal  corporation  as  a  stockholder. — When  a  mu- 
nicipal corporation  subscribes  to  the  stock  of  a  railroad  company, 
it  becomes  a  stockholder  in  just  the  same  sense  as  any  individual 
subscriber;  is  entitled  to  the  same  rights,  privileges,  and  emolu- 
ments; and  is  subject  to  the  same  burdens  of  duty  and  liability  as 
other  holders  of  the  stock.3 


Concord  v.  Robinson,  121  U.  S.  165 
(1887). 

i  Meyer  v.  Muscatine,  1  Wall.  384, 
392  (1863);  Evansville,  etc.  R.  R.  v. 
Evansville,  15  Ind.  395  (1860) ;  Curtis 
v.  Butler  County,  24  How.  (U.  S.) 
435  (1860);  Aspinwall  v.  Daviess 
County,  22  How.  364  (1859),  where, 
before  the  authorized  subscription 
was  made,  a  new  constitution  was 
adopted  making  such  subscriptions 
void  unless  paid  in  cash;  held,  that 
bonds  issued  to  pay  a  subscription 
made  after  the  new  constitution  was 
adopted  were  void.  Where  a  town 
issues  bonds  instead  of  paying  money, 
as  required  by  statute,  and  the  bonds 
are  declared  void,  the  holder  is  not 
subrogated  to  the  right  of  the  rail- 
road to  the  money  itself.  vE'tna  Life 
Ins.  Co.  v.  Middleport,  124  U.  S.  534 
(1888). 

2  Starin  v .  Genoa,  23  N.  Y.  439 
(1861);  Bank  of  Rome  v.  Rome,  19 
N.  Y.  20  (1S59) ;  Horton  v.  Thompson, 
71  N.  Y.  513  (1877);  People  v.  Batch- 
ellor,  53  N.  Y.  128,  136  (1873),  where 
the  court  says  that  if  the  bonds  were 
turned  over  to  the  railroad  the  latter 
would  sell  them  for  what  they  would 
bring,  which  would  generally  be  less 
than  par.  A  sale  of  municipal  bonds 
at  less  than  par  in  violation  of  the 


statute  renders  the  bonds  illegal. 
Citizens',  etc.  Bank  v.  Town  of  Green- 
burg,  31  N.  Y.  Misc.  Rep.  428  (1900). 
For  decisions  to  the  effect  that,  at 
common  law,  a  municipal  corporation 
cannot  sell  its  bonds  at  less  than 
par,  see  Neuse  River  Nav.  Co.  v. 
Newbern,  7  Jones,  L.  (N.  C.)  275 
(1859);  Dan.  Neg.  Inst.  (3d  ed.), 
§  1533;  Armstrong  County  v.  Brinton, 
47  Pa.  St.  367  (1864);  Gould  v.  Ster- 
ling, 23  N.  Y.  456,  460  (1861).  It  is 
apparent  that,  if  bonds  are  sold  below 
par,  the  rate  of  interest  is  thereby 
increased,  and  the  rate  of  interest  is 
generally  fixed  by  the  statute  author- 
izing the  issue  of  the  bonds. 

3  Shipley  v.  Terre  Haute,  74  Ind. 
297  (1881);  Kreiger  v.  Shelby  R.  R., 
84  Ky.  66  (1866);  Gray  v.  State,  72 
Ind.  567  (1880);  1  Dan.  Neg.  Inst, 
§436;  Murray  v.  Charleston,  96  U.  S. 
432  (1877).  See  also  Curran  v.  State, 
15  How.  304  (1853);  Robinson  v. 
Bank  of  Darien,  18  Ga.  65  (1855); 
Bank  of  U.  S.  v.  Planters'  Bank,  9 
Wheat.  904  (1824) ;  Morgan  County 
v.  Thomas,  76  111.  120  (1875);  State 
v.  Holladay,  72  Mo.  499  (1880); 
Marshall  v.  Western  N.  C.  R.  R.,  92 
N.  C.  322  (1885);  Morgan  County  v. 
Allen,  103  U.  S.  498  (1880),  holding 
that  the  creditors  of  an  insolvent  cor- 


351 


§  99.] 


MUNICIPAL  SUBSCRIPTIONS. 


[CH.  VI. 


This  doctrine  is  established  as  an  unquestioned  rule  of  law  by 
the  long  line  of  cases,  both  in  the  state  and  federal  courts,  which 
involve  the  validity  of  municipal  bonds  issued  in  aid  of  railroad  or 
other  corporations.  Where  a  state  is  a  stockholder  in  a  railroad 
corporation,  its  rights  are  no  different  from  those  of  a  private  in- 
dividual who  is  a  stockholder.1     Hence,  where  a  state  is  a  stock- 


poration  may  enforce  the  liability  of 
municipal  corporations  upon  their 
bonds;  Robinson  v.  Bidwell,  22  Cal. 
379  (1863);  People  v.  Coon,  25  Cal. 
635  (1S64),  holding  that  the  individ- 
ual members  of  a  municipal  corpora- 
tion have  no  such  interest  in  stock 
in  a  railroad  subscribed  for  by  it 
as  will  disable  the  legislature  from 
authorizing  it  to  compromise  with  the 
railroad.  A  county  holding  stock  in 
a  railroad  is  the  same  as  any  other 
stockholder.  Hinds  County  v.  Nat- 
chez, etc.  R.  R.,  85  Miss.  599  (1905). 
Where  a  municipality  becomes  a 
stockholder  of  a  railroad  company,  it 
becomes  such,  in  the  absence  of  stat- 
utory regulation,  in  just  the  same 
manner,  is  entitled  to  the  same 
rights,  and  subject  to  the  same  bur- 
dens as  an  individual  holder  of  stock. 
Marklove  v.  Utica,  etc.  R.  R.,  48  N. 
Y.  Misc.  Rep.,  268  (1905).  A  fore- 
closure of  the  railroad  on  a  mortgage 
closes  out  the  stock  which  a  munici- 
pality has  therein.  Spurlock  v.  Mis- 
souri Pac.  Ry.,  90  Mo.  199  (1886). 
See  also  §  890.  A  judgment  creditor 
may  reach  a  municipal  subscription 
payable  in  bonds  by  mandamus,  after 
acquiring  the  company's  right  thereto. 
Smith  v.  Bourbon  County,  127  U. 
S.  105  (1888).  A  municipality  as  a 
stockholder  may  assent  to  the  sale 
of  the  railroad  by  the  corporation 
to  another  reorganized  corporation. 
Foster  v.  Chesapeake,  etc.  Ry.,  47  Fed. 
Rep.  369  (1891).  A  municipality's 
stock  in  a  corporation  cannot  be 
reached  by  a  judgment  creditor  of 
the  municipality  except  by  proving 
that  the  subscription  was  legal. 
Hughes  v.  Craven  County,  107  N.  C. 
598    (1890).     Where  stock  in  a  rail- 


road is  owned  by  a  part  of  a  county, 
that  part  becomes  a  municipality  for 
the  purpose  of  owning  and  voting  the 
stock.  Hancock  v.  Louisville,  etc.  R. 
R.,  145  U.  S.  409  (1892).  Execution 
or  garnishee  process  cannot  be  levied 
on  stock  held  by  an  individual  as 
trustee,  where  the  debt  is  his  indi- 
vidual debt,  nor  can  it  be  levied  on 
the  dividends  from  such  stock.  So 
held  where  stock  was  owned  by  a  city 
in  trust  for  the  citizens.  Hitchcock  v. 
Galveston  Wharf  Co.,  50  Fed.  Rep. 
263   (1880). 

Where  a  municipality  is  the  vendor 
of  land  to  a  corporation  and  brings 
suit  to  set  aside  the  transfer  as 
fraudulent  and  illegal,  and  joins  the 
three  trustees  of  a  mortgage  of  the 
corporation  as  parties  defendant  and 
serves  them  by  publication,  and,  two 
of  the  trustees  having  died,  causes 
successors  to  be  appointed  by  the 
court  and  obtains  decree  against 
the  corporation,  and  the  trustees  of 
the  mortgage  canceling  their  title 
to  the  land,  the  decree  is  effective; 
and  even  though  the  mortgage  is 
afterwards  foreclosed  the  purchaser  at 
such  sale  takes  no  title  to  such  land, 
he  having  delayed  thirty  years  be- 
fore attacking  such  decree.  Bump  v. 
Butler  County,  93  Fed.  Rep.  290 
(1899).  On  the  other  hand,  where 
a  municipality  delays  for  thirty  years 
in  complaining  of  fraud  and  illegality 
.whereby  it  conveyed  land  to  a  cor- 
poration, the  court  will  not  grant  it 
any  relief.  Rummel  v.  Butler  County, 
93  Fed.  Rep.  304    (1899). 

i  Southern  Ry.  r.  North  Carolina 
R.  R.,  81  Fed.  Rep.  595  (1897).  A 
county  holding  stock  in  a  railroad 
corporation  holds  it  the  same  as  any 


352 


CH.  VI.]  MUNICIPAL  SUBSCRIPTIONS.  [§§   100,  101. 

holder,  and  by  statute  is  entitled  to  a  certain  vote  at  elections,  a 
subsequent  statute  cannot  give  to  the  state  a  larger  vote.1 

§  100.  A  municipality  may  enforce  delivery  of  stock  to  itself  in  a 
proper  case. — Under  the  same  circumstances  and  conditions,  and 
to  the  same  extent,  as  any  other  subscriber,  a  municipal  corporation 
may  compel  a  railway  or  other  corporation  to  deliver  to  it  stock 
to  which  the  subscribers  in  general  are  entitled.  Whatever  would 
prevent  an  individual  subscriber  from  enforcing  such  delivery  will 
equally  prevent  a  municipality  in  a  like  case.2  A  municipal  cor- 
poration, as  a  subscriber,  is  in  no  better  position  than  an  individual 
subscriber  in  this  respect.3 

§  101.  Division  of  the  municipality  after  the  subscription.— 
There  is  a  line  of  cases  in  the  reports  of  some  of  the  western  states 
which  deals  with  the  questions  which  have  grown  out  of  the  subdi- 
vision of  towns  and  counties  in  those  states,  after  a  donation  or  sub- 
scription has  been  made  to  some  railroad  or  other  corporation,  and 
before  the  bonds  have  been  issued,  or  before  they  have  become  due 
and  payable. 

It  is,  of  course,  not  competent  for  the  legislature  so  to  divide  a 
municipality  as  to  release  all  or  any  part  of  it  from  the  obligation 
of  any  contract  into  which  the  whole  had  previously  entered.4 
When  a  town  or  county  is  divided,  or  some  part  of  it  annexed  to 
some  other  town  or  county,  after  the  undivided  municipality  has 
voted  a  subscription,  and  it  is  provided  in  the  act  by  which  the 
division  is  accomplished  that  each  part  shall  remain  liable  for  the 
previous  municipal  indebtedness,  such  provision  is  held  to  mean 
nothing  more  than  that,  as  concerns  the  subscription  voted,  each 
part  is  liable  for  its  proportion  only  of  the  debt  according  to  the 
valuation  of  the  property  of  the  undivided  municipality  at  the  time 
the  vote  was  taken.5  This  rule,  however,  cannot  affect  the  cred- 
itor's right  to  hold  liable  the  whole  of  the  old  municipality. 

other  stockholder.    Adams  v.  Natchez,  City,    25   Minn.    404    (1S79);    Marion 

etc.  R.  R.,  76  Miss.  714   (1899).  County   v.    Harvey    County,    26    Kan. 

i  Tucker  v.  Russell,  82    Fed.    Rep.  181     (1881);     Henderson    v.    Jackson 

263    (1897).  County,  12  Fed.  Rep.  676  (1881). 

2  Wapello  County  v.  Burlington,  5  Hurt  v.  Hamilton,  25  Kan.  76 
etc.  R.  R.,  44  Iowa,  585  (1876).  In  (1881).  See  also  Eagle  v.  Beard,  33 
this  case  the  stock  was  to  be  issued  Ark.  497  (1878),  holding  that,  in  the 
only  when  fully  paid.  absence  of  statutory  provision,  the  de- 

3  Pittsburgh,  etc.  R.  R.  v.  Alle-  tached  part  of  a  county  is  released 
gheny  County,  79  Pa.  St.  210  (1875).  from  liability  for  the  debts  of  the 
Cf.  State  v.  Garroutte,  67  Mo.  445  county;  but  the  legislature  may  ap- 
(1878).  portion  the  debt  between  the  old  and 

4  Sedgwick  County  v.  Bailey,  11  the  new  counties;  McBride  v.  Hardin 
Kan.  631    (1873).     Of.  State  v.  Lake  County,  58  Iowa,  219  (1882),  holding 

(23)  353 


§§  102,  103.] 


MUNICIPAL   SUBSCRIPTIONS. 


[CH.  VI. 


§§  102,  103.  Consolidation  of  companies  after  the  municipal  aid 
is  voted. — When  the  company  proposed  to  be  benefited  unites  or  is 
consolidated  with  another  company  or  companies  of  a  similar  char- 
acter, after  the  aid  of  a  municipality  has  been  voted  and  before  the 
subscription  has  been  paid — the  company  having  before  the  elec- 
tion the  right  to  consolidate, — the  bonds  may  lawfully  be  issued 
to  or  sold  for  the  benefit  of  the  new  or  consolidated  company.1 
When,  however,  the  consolidation  works  such  a  fundamental  change 
in  the  constitution  and  purpose  of  the  original  corporation  that  in- 
dividual subscribers  are  thereby  released,  a  subscription  by  the 
municipality  will  be  invalidated,2  but  otherwise  not.3     Municipal 


that  a  county  is  not  responsible  for 
expenses  incurred  by  one  of  the  town- 
ships comprising  it  in  voting  taxes 
in  aid  of  a  railroad. 

i  Livingston  County  v.  Portsmouth 
Bank,  128  U.  S.  102  (1888);  New 
Buffalo  v.  Iron  Co.,  105  U.  S.  73 
(1S81);  Bates  County  v.  Winters,  97 
U.  S.  83  (1877);  Scotland  County  v. 
Thomas,  94  U.  S.  6S2  (1876);  East 
Lincoln  v.  Davenport,  94  U.  S.  801 
(1876) ;  Wilson  v.  Salamanca,  99  U.  S. 
499     (1878);     Empire    v.    Darlington, 

101  U.  S.  87  (1S79),  holding  that, 
where  stock  in  a  railroad  had  been 
subscribed  for  by  a  township  under 
statutory  authority,  an  additional  sub- 
scription after  it  was  consolidated 
with  another  road  and  under  a  new 
name  was  valid.    Menasha  v.  Hazard, 

102  U.  S.  81  (1880);  Harter  v.  Ker- 
nochan,  103  U.  S.  562  (1880),  holding 
that  where  township  records  showed 
that  bonds  were  directed  to  be  issued 
and  delivered  to  a  consolidated  com- 
pany, although  the  act  authorizing 
them  and  the  vote  under  it  con- 
templated the  issue  to  one  of  the  con- 
solidated companies,  the  township  was 
estopped  to  deny  their  validity.  Tip- 
ton County  v.  Locomotive  Works,  103 
U.  S.  523  (1880);  State  v.  Greene 
County,  54  Mo.  540  (1874);  Mount 
Vernon  v.  Hovey,  52  Ind.  563  (1876). 
See  also  Nugent  v.  Supervisors,  19 
Wall.  241  (1873);  Cantillon  v.  Du- 
buque, etc.  Ry.,  78  Iowa,  48  (1889); 
Henry   County   v.   Nicolay,   95    U.    S. 


619  (1S77).  In  this  case  a  railroad 
company  had,  after  the  subscription, 
transferred  its  franchises  to  another 
company.  In  a  suit  upon  the  bonds, 
paid  for  the  stock,  in  the  hands  of 
an  innocent  purchaser,  the  bonds  were 
upheld.  Schuyler  County  v.  Thomas, 
98  U.  S.  169  (1878).  Cf.  Harshman 
v.  Bates  County,  92  U.  S.  569  (1875). 
A  municipal  aid  cannot  be  enforced 
where  the  railroad  company  sells  all 
its  property  to  another  company. 
Cantillon  v.  Dubuque,  etc.  R.  R.,  35  N. 
W.  Rep.  620    (Iowa,  18S7). 

2  Lynch  v.  Eastern,  etc.  Ry.,  57 
Wis.  430  (1883);  Harshman  v.  Bates 
County,  92  U.  S.  569  (1875),  will 
hardly  be  followed.  It  does  not  ac- 
cord with  the  current  decisions.  See 
Crooks  v.  State,  4  N.  E.  Rep.  589  (Ind. 
1886).  Where  a  railroad  has  consol- 
idated with  another  before  a  munici- 
pal subscription  to  the  former  has 
actually  been  made,  such  subscription 
cannot  be  enforced.  Edwards  v.  Bates 
County,  117  Fed.  Rep.  526   (1902). 

3  Atchison,  etc.  R.  R.  v.  Phillips 
County,  25  Kan.  261  (1881);  Society 
for  Savings  v.  New  London,  29  Conn. 
174  (1860).  In  this  last  case  the  new 
company  was  substantially  the  same 
as  the  one  to  which  the  subscription 
was  made.  The  court  held  the  issue 
of  the  bonds  to  the  new  company 
valid;  Illinois,  etc.  Ry.  v.  Barnett, 
85  111.  313  (1877),  holding  that  the 
legal  purchase  of  another  road  will 
not  invalidate  subscriptions;   Howard 


154 


CH.  VI.] 


MUNICIPAL   SUBSCRIPTIONS. 


[§§    102,  103. 


bonds  voted  and  delivered  to  a  corporation  nnder  a  changed  name 
are  of  course  not  invalidated  by  such  change.1  Where  a  railroad 
company  has  received  local  aid  and  afterwards  removes  its  tracks, 
it  is  liable  to  the  municipality  for  the  aid  so  rendered.2 


County  v.  Booneville,  etc.  Bank,  108 
IT.  S.  314  (1882),  holding  that  the 
defense,  after  paying  interest  for 
several  years,  that  the  road  con- 
structed was  not  the  one  to  whose 
stock  the  subscription  was  authorized, 
was  not  good,  it  appearing  that  it 
was  a  branch  of  the  road  referred  to 
in  the  act.  Commonwealth  v.  Pitts- 
burgh, 41  Pa.  St.  278  (1861) ;  Lewis 
v.  Clarendon,  5  Dillon,  329  (1878); 
s.  c,  15  Fed.  Cas.  474;  Chickaming 
v.  Carpenter,  106  U.  S.  663  (1882). 
A  subsequent  consolidation  of  a  com- 
pany with  another  does  not  release 
the  municipality  from  its  obligation 
to  deliver  the  bonds.  Morrill  v. 
Smith  County,  89  Tex.  529  (1896). 
After  consolidation  of  a  railroad  a 
county  may  make  a  subscription  to 
its  stock,  even  though  the  statute  au- 
thorizing the  subscription  was  passed 
before  the  consolidation.  Board  of 
Com'rs  v.  Travelers'  Ins.  Co.,  128 
Fed.  Rep.  817  (1904). 

i  Reading  v.  Wedder,  66  111.  80 
(1872)  ;  Commonwealth  v.  Pittsburgh, 
41  Pa.  St.  278  (1861).  In  Marsh  v. 
Fulton  County,  10  Wall.  676   (1870), 


where  the  legislature  so  amended  the 
charter  of  a  railway  company  as  to 
divide  the  road  into  three  divisions, 
and  each  division  was  made  a  new 
company,  so  that  there  were  three 
distinct  corporations  in  place  of  the 
original  corporation,  it  was  held  by 
the  federal  supreme  court  that  a  sub- 
scription of  stock  and  issue  of  county 
bonds,  authorized  by  a  popular  vote 
to  be  made  to  the  original  corpora- 
tion, could  not  legally  be  made  to 
one  of  the  three  new  corporations. 
Consolidation  with  another  railroad 
is  no  defense  to  the  county,  where 
the  statute  authorizing  it  existed  at 
the  time  of  the  county  vote.  Chicago, 
etc.  R.  R.  v.  Stafford  County,  36  Kan. 
121  (1887);  Tipton  County,  etc.  v. 
Locomotive,  etc.,  103  U.  S.  523  (1880), 
holding  that  if  a  municipal  corpora- 
tion consents  to  a  consolidation  of 
roads  it  is  estopped  from  denying 
the  validity  of  its  bonds  in  the  hands 
of  a  bona  fide  holder. 

2  Town  of  Hinckley  v.  Kettle,  etc. 
R.  R.,  70  Minn.  105  (1897);  s.  c, 
80  Minn.  32.  See  also  note  2,  p.  350, 
supra. 


355 


CHAPTEK  VII. 


CALLS. 


§  104.  Definition  of  call. 

105.  Call   is   generally   necessary. 

106.  When  a   call   is  unnecessary — 

Payment  in  advance. 

107.  In    New    York    no    call    is    re- 

quired. 

108.  In  case  of  corporate  insolvency 

no  call  is  necessary. 

109.  Who    has    authority    to    make 

calls. 

110.  Calls  by   directors. 

111.  Assignment  of  subscriptions  by 

corporation    before    or    after 
call. 

112.  Interest    runs    from    the   time 

the  call  is  due. 


§  113.  Stockholder  cannot  question  ad- 
visability of  call. 

114.  Calls   must   be    impartial    and 

uniform. 

115.  Method    of    making    calls — No 

formalities  necessary. 

116.  Time,  place,  amount,  and  per- 

son to  whom  payable. 

117.  Notice  of  calls — Cases  holding 

it   not   necessary. 

118.  Notice  of  calls — Cases  holding 

it  necessary. 

119.  Methods   of   serving    notice    of 

calls. 

120.  Demand,  waiver,  pleadings,  etc. 


§  104.  Definition  of  call  — A  "call"  may  be  defined  to  be  an 
official  declaration,  by  the  proper  corporate  authorities,  that  the 
•whole  or  a  specified  part  of  the  subscriptions  to  the  capital  stock 
is  required  to  be  paid.1  The  term,  however,  is  used  with  different 
meanings,  and  may  refer  to  the  resolution  of  the  officials  that  a 
part  or  the  whole  of  the  subscription  must  be  paid,  or  to  the  reso- 
lution and  notification  thereof,  or  the  combination  of  facts  making 
the  parties  called  on  liable  to  an  action  for  the  non-payment  of 
the  money  called.2  An  assessment  is  a  term  often  used  to  desig- 
nate the  same  thing  as  a  call,  but  sometimes  refers  to  payments 
sought  to  be  recovered  from  the  stockholders,  above  and  in  addition 

i  Quoted  and  approved  in  Campbell  118    (1848),  holds  that  a  call  is  an 

v.  American,  etc.  Co.,  125  Fed.  Rep.  application  to  each  stockholder  for  a 

207  (1903) ;  Braddock  v.  Philadelphia,  proportion  of  his  share, 

etc.  R.  R.,   45   N.   J.   L.   363    (1883),  2  Quoted  and  approved  in  Germania 

holding  also  that  a  direction  by  the  Iron   Min.   Co.  v.   King,   94  Wis.   439 

directors   to  the  president  to  collect  (1896).     See   also  Queen  v.   London- 

the  subscriptions  is  a  call.    In  Spang-  derry,  etc.  Ry.,  13  Q.  B.  998    (1849). 

ler  v.   Indiana,   etc.   Ry.,   21   111.   276  In    Ambergate,   etc.   Ry.   v.   Mitchell, 

(1859),  a  call  or  assessment  is  rather  4   Exch.   540    (1849),   it  is  said   "the 

vaguely  defined  as  "a  rating  or  fixing  word  'call'  is  capable  of  three  mean- 

of  the  proportion,  by  the  board  of  di-  ings:    it  may   either   mean  the   reso- 

rectors,    which    every    subscriber    is  lution,  or  its  notification,  or  the  time 

to  pay  of  his  subscription,  when  noti-  when    it   becomes   payable.     It   must 

fied    of    it    and    when    called    on."  mean  either  one  of  these  three." 
Newry,  etc.  Ry.  v.  Edmunds,  2  Exch. 

356 


CH.  VII.] 


CALLS. 


[§  105. 


to  the  par  value  of  the  stock.1    An  instalment  is  one  of  the  several 
part  payments  into  which  a  single  call  may  be  divided. 

§  105.  Call  is  generally  necessary. — As  a  general  rule  a  call  must 
be  made  in  order  to  render  a  subscription  or  any  part  thereof  due 
and  payable  to  the  corporation.  A  contract  of  subscription  is  a 
promise  to  pay;  but,  unlike  other  contracts  to  pay  money,  the  pay- 
ment is  to  be  only  at  such  times,  and  in  such  part  payments,  as  may 
be  designated  by  the  corporate  authorities  in  a  formal  declaration 
known  as  a  "call."2     In  other  words,  the  subscription  is  a  debt 


i  Quoted  and  approved  in  Omo  v.  Case,    L.    R.    1    Ch.    App.    528,    535 

Bernart,  108  Mich.  43   (1895).  (1866);   Alabama,  etc.  R.  R.  v.  Row- 

2  "No  action  can  be  maintained  ley,  9  Fla.  508  (1861).  Even  where 
against  a  stockholder  for  an  instal-  the  stock  is  fraudulently  issued  as 
ment  on  his  subscription  until  the  paid  up,  in  payment  for  property,  and 
board  has  directed  the  call  to  be  the  transaction  is  impeached  for 
made."  Banet  v.  Alton,  etc.  R.  R.,  fraud,  a  call  is  necessary  before  the 
13  111.  504  (1851);  Spangler  v.  In-  subscription  can  be  enforced.  Granite 
diana,  etc.  Ry.,  21  111.  276  (1859);  Roofing  Co.  v.  Michael,  54  Md.  65 
Braddock  v.  Philadelphia,  etc.  R.  R.,  (1880).  Where,  however,  for  failure 
45  N.  J.  L.  363  (1883) ;  Ventura,  etc.  no  furnish  the  property  due  on  a  sub- 
Ry.  v.  Hartman,  116  Cal.  260  (1897).  scription,  a  suit  for  damages  is 
In  Grosse  Isle  Hotel  Co.  v.  I'Anson,  brought  by  the  corporation,  no  call 
42  N.  J.  L.  10  (1880);  aff'd,  43  need  precede  such  suit.  An  allegation 
N.  J.  L.  442  (1881),  the  court  said  of  a  general  demand  suffices.  Che- 
a  subscription  for  stock  "imports  an  raw,  etc.  R.  R.  v.  Garland,  14  S. 
agreement  not  to  pay  at  once  the  C.  63  (18S0) ;  Ohio,  etc.  R.  R.  v. 
whole  sum  representing  the  value  of  Cramer,  23  Ind.  490  (1864).  A  call 
the  shares  subscribed  for,  but  a  stip-  is  not  applicable  to  stock  which  was 
ulation  to  pay  such  sum  when  called  subscribed  for  after  the  call  was 
for  by  the  directors  in  amounts  duly  made.  Pike  v.  Bangor,  etc.  R.  R.. 
assessed."  And  in  Bank  of  South  68  Me.  445  (1878).  A  subscription 
Australia  v.  Abrahams,  L.  R.  6  P.  C.  payable  "in  such  instalments  and  at 
App.  265  (1875),  the  court  said:  such  times  as  may  be  decided  by  a 
"The  company  has  no  absolute  right,  majority  of  the  stockholders  or  board 
and  the  shareholder  is  under  no  ab-  of  directors,"  etc.,  is  not  collectible 
solute  liability  to  pay.  The  right  until  the  instalments  and  times  have 
only  arises  if  and  when  calls  are  been  so  fixed.  North,  etc.  R.  R.  v. 
made  by  the  directors.  .  .  .  The  Spullock,  88  Ga.  283  (1892).  A  call 
due  making  of  the  call  by  the  resolu-  must  be  alleged  where  the  subscrip- 
tion of  a  board  of  directors  is  an  tion  liability  is  set  up  by  the  de- 
essential  condition  precedent."  To  fendant  company  as  a  set-off.  Holt 
the  same  effect,  see  Wilbur  v.  Stock-  v.  Holt,  etc.  Co.,  79  Fed.  Rep.  597 
holders,  18  Nat.  Bankr.  Reg.  178  (1897).  Uncalled  subscriptions  are 
(1878);  s.  c,  29  Fed.  Cas.  1189.  not  a  debt.  They  become  a  debt  only 
Where,  by  statute  or  charter,  pay-  after  a  call  has  been  made.  Alex- 
ment  is  to  be  in  such  manner  and  ander  v.  Automatic,  etc.  Co.,  [1899] 
proportion  and  times  as  the  directors  2  Ch.  302;  rev'd  on  another  point 
may  order,  there  can  be  no  suit  to  in  [1900]  2  Ch.  56.  The  statute  of 
collect  until   after  a  call.     Grissell's  limitations   does  not  run  against  an 

357 


106.] 


CALLS. 


[CH.  VII. 


payable  at  a  future  time.1     The  time  when  it  shall  be  paid  is  indefi- 
nite until  fixed  by  a  call. 

§  106.  When  a  call  is  unnecessary — Payment  in  advance. — If, 
however,  a  subscription  contains  a  promise  to  pay  upon  a  certain 
clay,  no  call  is  necessary;  but  the  subscriber  is  bound  to  pay,  at  all 
events,  upon  the  day  named.2  So,  also,  if  by  statute  or  the  charter 
the  subscription  becomes  payable  at  a  certain  specified  time,  a  call 
is  thereby  dispensed  with,  and  is  not  required.3  A  stockholder,  on 
the  other  hand,  is  not  obliged  to  wait  for  a  call  even  when  entitled 
to  it.  He  may  pay  at  any  time.4  Where  stockholders  advance 
money  in  prepayment  of  calls,  the  company  may  pay  them  interest 
on  the  same  up  to  the  time  that  the  call  is  due,  even  though  such 
interest  is  paid  out  of  the  capital.5     A  note  given  in  payment  for  a 


unpaid  subscription  until  a  call  and 
assessment  has  been  made.  McCarter 
v.  Ketcham,  72  N.  J.  L.  247   (1905). 

1  The  subscription  "is  a  present 
debt,  payable  at  a  future  day."  Pitts- 
burgh, etc.  R.  R.  v.  Clarke,  29  Pa.  St. 
146  (1857).  The  subscription  "creates 
a  debt,  but  the  debt  does  not  accrue 
due  until  a  call  is  made."  Grissell's 
Case,  L.  R.  1  Ch.  App.  528,  535 
(1866).  In  Re  China  Steamship,  etc. 
Co.,  38  L.  J.  (Ch.)  512  (1869),  the 
court  said:  "The  moment  the  call 
is  made  it  is  a  debt  due  in  every  re- 
spect," although  it  cannot  be  collected 
by  suit  until  later. 

2  Estell  v.  Knightstown,  etc.  Tump. 
Co.,  41  Ind.  174  (1872);  New  Albany, 
etc.  R.  R.  v.  Pickens,  5  Ind.  247 
(1854);  Ross  v.  Lafayette,  etc.  R.  R., 
6  Ind.  297  (1855) ;  Breedlove  v.  Mar- 
tinsville, etc.  R.  R.,  12  Ind.  114 
(1859)  ;  Waukon,  etc.  R.  R.  v.  Dwyer, 
49  Iowa,  121  (1878).  Where  a  sub- 
scriber gives  a  note  in  payment  of  the 
subscription  the  assignee  of  the  cor- 
poration may  enforce  the  note,  al- 
though no  calls  have  been  made  on 
subscriptions.  Ruse  v.  Bromberg,  88 
Ala.  619  (1889).  No  call  is  necessary 
where  the  subscription  itself  fixes  the 
time  of  payment.  Williams  v.  Taylor, 
99  Md.  306    (1904). 

3  Phoenix  Warehousing  Co.  v.  Bad- 
ger, 67  N.  Y.  294    (1876). 


4  Marsh  v.  Burroughs,  1  Woods,  463 
(1871) ;  s.  c,  16  Fed.  Cas.  800;  Poole's 
Case,  L.  R.  9  Ch.  D.  322  (1878).  But 
if  such  payment  is  by  the  directors 
themselves,  and  it  is  immediately  re- 
paid to  them  for  fees,  the  corporation 
being  insolvent,  the  transaction  will 
be  set  aside.  Sykes's  Case,  L.  R. 
13  Eq.  Cas.  255  (1871).  So,  also,  a 
payment  in  advance,  on  an  agreement 
that  such  payment  shall  be  only  a 
loan  if  the  corporation  is  successful, 
but  shall  be  a  payment  of  the  sub- 
scription if  the  corporation  becomes 
insolvent,  is  held  to  be  a  loan,  though 
insolvency  occurs.  Barge's  Case,  L. 
R.  5  Eq.  Cas.  420  (1868).  Frequently 
a  subscription  is  paid,  before  a  call, 
by  applying  to  its  payment  money 
due  the  subscriber  from  the  corpora- 
tion. Adamson's  Case,  L.  R.  18  Eq. 
Cas.  670  (1874).  A  subscription  for 
bonds,  the  amount  being  payable  on 
call,  may  be  paid  at  once  and  the 
bonds  demanded.  Watjen  v.  Green, 
48  N.  J.  Eq.  322  (1891).  A  stock- 
holder who  offers  to  pay  his  subscrip- 
tion in  full,  which  offer  is  declined 
by  the  corporation,  is  not  thereby  re- 
leased from  his  obligation  if  he  con- 
tinues to  act  as  a  stockholder.  Potts 
v.  Wallace,  146  U.  S.  689  (1892). 

5  Lock  v.  Queensland,  etc.  Co., 
[1896]  A.  C.  461.  H.  L.  aff'g  [1896] 
1  Ch.  397.    Where  the  purchase  price 


358 


CH.  VII.  J  CALLS.  [§    107. 

subscription  does  not  bear  interest  unless  the  note  itself  so  provides, 
especially  where  no  call  on  the  subscription  has  been  made.1 

Where  the  pledgor  files  a  bill  to  redeem  and  the  pledgee  claims 
that  the  stock  is  sold  and  not  pledged,  and  the  court  decides  that 
the  transaction  was  a  pledge  and  decrees  the  amount  to  be  paid  by 
the  pledgor  to  redeem,  and  the  pledgee  then  appeals  and  pays  as- 
sessments on  the  stock,  pending  the  appeal,  the  pledgee  may 
recover  back  such  assessments  from  the  pledgor,  even  though  the 
judgment  was  affirmed  on  appeal.2 

§  107.  New  York  rule. — In  ISTew  York  it  seems  that  a  peculiar 
rule  prevails.  In  that  state  there  is  a  tendency  to  hold  that  no  call 
is  necessary  before  suit  is  brought  on  a  subscription  for  stock.  The 
subscriber's  obligation  to  pay,  and  the  time  and  manner  of  pay- 
ment, must  be  sought  for  in  the  contract  itself.  Unless  the  con- 
tract provides  for  calls,  the  subscription  is  payable  absolutely  and 
at  once,  or  as  soon  as  the  corporation  is  duly  organized.3  Accord- 
ingly, in  an  action  brought  to  collect  a  subscription,  it  is  not  neces- 
sary to  allege  that  a  call  has  been  made,  unless  the  terms  of  the 
subscription  or  the  provisions  of  the  corporate  charter  expressly  pro- 
vide for  calls.  These  rules,  however,  seem  not  to  have  been  directly 
passed  upon  by  the  highest  court  in  ISTew  York,  and  cannot  be  con- 
sidered as  clearly  established  in  that  state.4 

of  stock   is   to  be  in   ten  equal  pay-  collect    uncalled    subscriptions,    since 
ments,  and  interest  is  to  be  allowed  "tbe   only    condition   upon    wbicb   he 
if  payment  is  made  in  advance,  the  (the    subscriber)     could    have    been 
interest  may  be  collected.     Porter  v.  made   liable   to   the   corporation   was 
Beacon    Constr.    Co.,    154    Pa.    St.    8  by   regular  calls  made  in  pursuance 
(1S93).  of  the  charter."     See  also  Bouton  v. 
i  Seattle  T.  Co.  v.  Pitner,  18  Wash.  Dry  Dock,  etc.  Co.,  4  E.  D.  Smith,  420 
401    (1898).  (1S55);    Seymour  v.   Sturgess,    26   N. 
2  Irvine    v.    Angus,    93    Fed.    Rep.  Y.  134   (1862);    Savage  v.  Medbury,  19 
629    (1899).  N.    Y.    32     (1859);     Howland    v.    Ed- 
s-Lake Ontario,  etc.  R.  R.  v.  Mason,  monds,  24  N.  Y.  307  (1862) ;  Williams 
16  N.  Y.  451    (1857);    Phoenix  Ware-  v.  Taylor,  120  N.  Y.  244  (1890),  rev'g 
housing  Co.  v.  Badger,  67  N.  Y.  294,  Williams  v.  Meyer,  41  Hun,  545. 
300  (1876).    In  the  former  case,  how-  4  These   rules   seem  to   be   peculiar 
ever,    calls    were    made    and    notice  to  New  York.    The  decisions  in  some 
given    by    advertisement   in   a   news-  of  the  other  states  hold,  however,  that 
paper.      In    the    latter    case,    by   the  no  notice  of  calls  is  necessary.     See 
terms    of    the    charter,    all    subscrip-  §  117,  infra.    Practically,  such  a  rule 
tions  were  due  at  the  time  when  suit  is  equivalent  to  requiring  no  call  at 
was     commenced.      Hence,     in    both  all,  since  in  both  cases  collection  is 
cases,  the  statements  in  reference  to  made    only    by    direction    of    the    di- 
calls   have  the   appearance   of   dicta,  rectors  or  other  officers,  and  in  both 
In  Mann  r.  Pentz,  3  N.  Y.  415  (1850),  cases  the  subscriber  need  not  be  in- 
it  was  held  that  a  receiver  could  not  formed  of  such  directions.    No  notice 

359 


§  108.]  calls.  [cn.  VII. 

§  108.  In  case  of  corporate  insolvency  no  call  is  necessary.— 
When  a  corporation  becomes  insolvent,  and  there  exist  subscrip- 
tions which  have  not  been  fully  paid  in,  the  directors  frequently 
neglect  or  refuse  to  make  the  calls  necessary  for  the  purpose  of 
paying  the  corporate  debts.  In  such  cases  a  court  of  equity  will 
disregard  the  formality  of  a  call,  and  will  order  the  unpaid  sub- 
scriptions to  be  paid  to  a  receiver  for  the  benefit  of  the  corporate 
creditors.1  The  courts  very  properly  hold  that  it  is  not  discretion- 
ary with  the  directors  to  say  whether  the  company's  debts  shall  be 
paid  or  not.    And  this  is  the  rule  even  though  the  statute  provides  that 

of  a  call  need  be  given  before  en-  necessary  when  a  trustee  in  bank- 
forcing  the  same.  United  Growers  ruptcy  has  been  appointed.  Rathbone 
Co.  v.  Eisner,  22  N.  Y.  App.  Div.  1  v.  Ayer,  84  N.  Y.  App.  Div.  186 
(1897).  (1903).  The  United  States  bankruptcy 
i  "It  is  well  settled  that  when  court  may  order  an  assessment  on 
stock  is  subscribed  to  be  paid  upon  holders  of  unpaid  stock  and  may 
call  of  the  company,  and  the  company  direct  the  trustee  in  bankruptcy  to 
refuses  or  neglects  to  make  the  call,  bring  suit  at  law  therefor  in  the  state 
a  court  of  equity  may  itself  make  the  court.  Clevenger  v.  Moore,  71  N.  J.  L. 
call,  if  the  interests  of  the  creditors  148  (1904).  A  creditor  may  file  a  bill 
require  it."  Scovill  v.  Thayer,  105  U.  to  collect  unpaid  subscriptions  with- 
S.  143  (1881);  Glenn  v.  Williams,  60  out  a  call  being  first  made  by  the 
Md.  93  (1882);  Glenn  v.  Semple,  SO  directors,  where  the  company  has  dis- 
Ala.  159  (1885).  "A  company  call  is  posed  of  all  its  property  and  is  in- 
but  a  step  in  the  process  of  collec-  solvent.  Chilberg  v.  Siebenbaum,  41 
tion,  and  a  court  of  equity  may  pur-  Wash.  663  (1906).  An  order  of  the 
sue  its  own  mode  of  collection,  so  court  deciding  the  amount  of  debts 
that  no  injustice  is  done  to  the  and  the  necessity  of  collecting  sub- 
debtor."  Hatch  v.  Dana,  101  U.  S.  205  scriptions  to  pay  the  same  and  speci- 
(1879).  No  call  is  necessary  before  fying  payments  to  be  made  by  stock- 
stockholders  are  liable  to  creditors,  on  holders,  and  authorizing  suit  for  that 
their  unpaid  subscription,  even  though  purpose,  constitutes  an  assessment, 
the  charter  provides  for  a  call.  Hill  McCarter  v.  Ketcham,  67  Atl.  Rep. 
v.  Merchants'  Mut.  Ins.  Co.,  134  U.  610  (N.J.  1907).  Where  the  corpora- 
S.  515  (1890).  See  also  Myers  v.  tion,  being  indebted,  has  the  power 
Seeley,  10  Nat.  Bankr.  Reg.  411  to  call,  and  does  not  choose  to  exer- 
(1874);  Sanger  v.  Upton,  91  U.  S.  cise  it,  equity  at  the  instance  of  cred- 
56  (1875);  Wilbur  v.  Stockholders,  itors  will  exercise  it.  Marsh  v.  Bur- 
18  Nat.  Bankr.  Reg.  178  (1879) ;  s.  c,  roughs,  1  Woods,  463  (1871) ;  s.  c,  16 
29  Fed.  Cas.  1189;  Carnahan  v.  Camp-  Fed.  Cas.  800;  Boeppler  v.  Menown, 
bell,  158  Ind.  226  (1902).  An  assess-  17  Mo.  App.  447  (1885);  Adler  v. 
ment  is  necessary  before  suit  against  Milwaukee,  etc.  Mfg.  Co.,  13  Wis.  57 
a  subscriber,  and  such  assessment  (1860) ;  Glenn  v.  Dodge,  3  Cent.  Rep. 
must  be  made  by  the  corporation  if  283  (1885);  Great  Western  Tel.  Co. 
solvent,  and  by  the  court  if  insolvent,  v.  Gray,  122  111.  630  (1887);  Ward 
The  assessment  by  the  court  will  be  v.  Griswoldville  Mfg.  Co.,  16  Conn, 
on  all  stockholders,  and  if  part  cannot  593  (1844);  Miller's  Case,  54  L.  J. 
be  collected  a  further  assessment  may  (Ch.)  141  (1884);  Henry?;.  Vermil- 
be  made  later.  Covell  v.  Fowler,  144  lion,  etc.  R.  R.,  17  Ohio,  187  (1848); 
Fed.    Rep.    535    (1906).      No   call    is  Ogilvie  v.  Knox  Ins.  Co.,  22  How.  380 

360 


CH.  VII.] 


CALLS. 


[§  108. 


calls  shall  be  made  by  the  directors.1     A  call  may  be  made  by  the 
court,  and  its  discretion  in  that  respect  cannot  be  contested.2 

There  has  been  some  doubt  as  to  whether  the  writ  of  mandamus 
would  lie  to  compel  the  directors  to  make  the  call  ;3    but  the  author- 


(1859);    Curry  v.  Woodward,  53  Ala. 
371    (1875);     Chandler    v.   Keith,   42 
Iowa,  99  (1875);    Shockley  v.  Fisher, 
75  Mo.  498    (1882).  The  filing  of  the 
bill  in  the  suit  in   equity  is  equiva- 
lent to  a  call.    Hatch  v.  Dana,  101  U. 
S.    205    (1879);    Thompson    v.    Reno 
Sav.  Bank,  19   Nev.  103,  245    (1885). 
See    also    Yeager    v.    Scranton,    etc. 
Bank,  14  Weekly  N.  Cas.  296  (1884). 
It  is  settled  law  that  a  decree  in  a 
chancery  suit  is  equivalent  to  a  call. 
Glenn  v.  Saxton,  68  Cal.  353   (1886). 
If  the  court  orders  that  notice  of  the 
call  be  given,  the  receiver  cannot  col- 
lect   by    suit    unless    such    notice    is 
given.    Franklin  Savings  Bank  v.  Fat- 
zinger,    4    Atl.    Rep.    912    (Pa.    1886). 
"Where  the  whole  of  the  unpaid  sub- 
scriptions are  needed  to  pay  corporate 
debts,    no    assessment,    even    by    the 
court,  is  necessary.     But,  unless  the 
evidence  clearly  shows  such  necessi- 
ty, it  is  for  the  jury  to  say  whether 
the   whole  unpaid   subscription   shall 
be  paid.     Citizens',  etc.  Co.  v.  Gilles- 
pie,   115    Pa.    St.    564    (1887),    citing 
cases.     See   §  207,   infra.     Where    an 
assignment  is  made   by  the  corpora- 
tion for  the  benefit  of  creditors,  the 
statute  of   limitations  begins  to   run 
within  a  reasonable  time,  even  if  no 
call   is  made.     Glenn  v.   Dorsheimer, 
24   Fed.  Rep.   536    (1885).     Cf.    §195, 
infra.     In  Missouri  it  has  been  held 
that  there  can  be  no  garnishment  of 
an  unpaid  subscription  until  after  a 
call  has  been  made.    Parks  v.  Heman, 
7  Mo.  App.  14  (1879).     In  New  York 
there   are   a   few   dicta  to   the   effect 
that  calls  by  the  directors  are  neces- 
sary before  unpaid  subscriptions  can 
be   enforced    for   the   benefit   of   cor- 
porate   creditors.      Seymour   v.    Stur- 
gess,  26  N.  Y.  134    (1862);    Mann  r. 
Pentz,  3  N.  Y.  415   (1850).     But  the 
prevailing  rule  is  sustained  in  Sagory 


v.  Dubois,  3  Sandf.  Ch.  466  (1846), 
where  the  court  says:  "The  articles, 
it  is  true,  in  effect  require  that  calls 
should  be  made  by  the  directors,  and 
probably  the  association  could  not 
maintain  an  action  at  law  until  such 
calls  were  regularly  made;  but  that 
does  not  impair  the  remedy  in  be' 
half  of  the  receiver."  An  assignee  for 
the  benefit  of  creditors  of  a  corpora- 
tion may  collect  a  subscription  with- 
out any  call.  McKay  v.  Elwood,  12 
Wash.  579  (1895).  Where  by  a  de- 
cree a  company  is  ordered  to  pay  the 
subscriptions  to  its  stock  to  one  of 
its  creditors,  the  attorney  for  the  com- 
pany who  collects  the  subscriptions 
cannot  retain  them  for  his  fees.  Gray 
v.  Overby,  37  S.  W.  Rep.  159  (Ky. 
1S96).  No  call  is  necessary  where  a 
corporate  creditor  files  a  bill  to  reach 
unpaid  subscriptions.  Adamant  Mfg. 
Co.  v.  Wallace,  16  Wash.  614   (1897). 

1  Glenn  v.  Saxton,  68  Cal.  353 
(1SS6);  Crawford  v.  Rohrer,  59  Md. 
599  (1882).  Contra,  Louisiana  Paper 
Co.  v.  Waples,  3  Woods,  34  (1877); 
s.  c,  15  Fed.  Cas.  968,  where  the  char- 
ter prescribed  that  calls  should  be 
only  by  a  three-fourths  vote  of  the 
stockholders.    Cf.  46  S.  Rep.  285. 

2  Re  Minnehaha,  etc.  Assoc,  53 
Minn.  423  (1893).  The  order  of  the 
court  levying  an  assessment  is  bind- 
ing on  the  stockholders,  even  though 
no  notice  was  given  to  them.  Brown 
v.  Allebach,  156  Fed.  Rep.  697  (1907). 

3  "A  chancellor  will  compel  the  di- 
rectors to  make  the  calls  required  by 
the  charter  whenever  his  aid  is  in- 
voked by  creditors  or  the  representa- 
tive of  creditors."  Germantown  Pass. 
Ry.  v.  Fitler,  60  Pa.  St.  124  (1869). 
The  three  English  cases  usually  cited 
on  this  point  do  not  hold  that  a  man- 
damus lies  herein.  Queen  v.  Victoria 
Park  Co.,  1  Q.  B.  288  (1S41);    Queen 


361 


109.] 


CALLS. 


[CH.  VII. 


ities  seem  to  hold  that  the  writ  will  not  lie  for  this  purpose.  The 
usual  procedure  to  collect  unpaid  subscriptions  is  an  order  of  a  court 
of  equity  made  in  a  suit  brought  by  corporate  creditors  for  the  pur- 
pose of  applying  corporate  assets  to  corporate  debts.1  The  court 
may  direct  the  receiver  to  make  a  call  instead  of  the  court  making 
the  call  itself  directly.2  Where,  at  the  instance  of  the  attorney- 
general,  a  bank  has  been  declared  insolvent  and  the  transaction  of 
further  business  enjoined,  an  assessment  on  the  stock  levied  before 
the  decree,  but  payable  after  the  decree,  cannot  be  enforced  by  the 
bank.3 

§  109.  Who  has  authority  to  make  calls. — A  call,  in  order  to  be 
legal  and  enforceable,  must  be  made  by  the  proper  corporate  au- 
thorities. Generally,  the  power  to  make  calls  is  vested  in  the  di- 
rectors or  in  the  stockholders  at  large.  Unless  the  charter  or  a 
statute  makes  provision  therefor,  the  question  as  to  who  shall  make 
calls  is  a  question  of  internal  arrangement.  If  no  provision  what- 
ever is  made  for  the  exercise  of  the  power,  it  devolves  upon  the  di- 
rectors, on  the  general  principle  that  they  alone  have  power  to 
manage  and  superintend  the  financial  matters  of  the  corporation 
and  to  exercise  all  corporate  powers,  except .  those  required  to  be 
exercised  at  corporate  meetings.4     Even  though  the  statute  author- 


v.  Ledgard,  1  Q.  B.  616  (1841) ;  Rex 
v.  Katharine  Dock  Co.,  4  B.  &  Ad.  360 
(1832).  In  the  case  of  Dalton,  etc. 
R.  R.  v.  McDaniel,  56  Ga.  191  (1876), 
the  court  held  that  a  mandamus  wag 
unnecessary,  on  the  ground  that  the 
remedy  by  bill  was  easier  and  more 
complete,  and  that  justice  would  be 
better  administered  in  this  way  by  an 
account  of  all  the  corporate  debts, 
and  of  all  liabilities  of  solvent  stock- 
holders, taken  by  a  master  in  chan- 
cery. In  Hatch  v.  Dana,  101  U.  S. 
205  (1879),  the  court  says  a  man- 
damus "can  avail  only  when  there 
are  directors.  The  remedy  in  equity 
is  more  complete."  In  Ward  v.  Gris- 
woldville  Mfg.  Co.,  16  Conn.  593 
(1844),  the  court  refused  a  manda- 
mus because  it  would  enforce  the  col- 
lection of  only  a  few  debts,  whereas 
the  remedy  in  equity  would  enforce 
all  proportionately. 

i  "Under  such  circumstances,  be- 
fore there  is  any  obligation  upon  the 
stockholder  to  pay  without  an  assess- 


ment and  call  by  the  company,  there 
must  be  some  order  of  a  court  of 
competent  jurisdiction,  or,  at  the  very 
least,  some  authorized  demand  upon 
him  for  payment."  Scovill  v.  Thayer, 
105  U.  S.  143  (1881).  In  bankruptcy, 
it  seems,  the  assignee,  by  succeeding 
to  all  the  rights  of  the  corporation, 
may  make  a  call  and  enforce  it. 
Hatch  v.  Dana,  101  U.  S.  205  (1879). 
See  also  §§  202,  207,  infra.  At  com- 
mon law  a  court  of  equity  could  not 
make  calls  for  benefit  of  corporate 
creditors.  Dictum,  Grain's  Case,  L. 
R.   1  Ch.  D.  307,  323    (1875). 

2Falk  v.  Whitman,  etc.  Co.,  55  N. 
J.   Eq.   396    (1897). 

3  Bank  of  National  City  v.  John- 
son, 133  Cal.  185    (1901). 

4  Budd  v.  Multnomah  St.  Ry.,  15 
Oreg.  413  (18S7).  The  directors  may 
make  calls  "as  they  may  do  all  things, 
except  such  as  are  to  be  done  by  the 
shareholders  at  a  general  meeting.'* 
Ambergate,  etc.  Ry.  v.  Mitchell,  4 
Exch.  540   (1849).     Directors  in  liqui- 


362 


CH.  VII.  J 


CALLS.  [§    110. 


izes  calls  by  the  stockholders,  yet  the  directors  also  have  the  same 
power.1 

§  110.  Calls  by  directors. — Where  the  power  to  make  calls  is 
vested  in  the  directors,  a  call  by  those  who  are  directors  de  facto 
will  be  upheld.2  The  directors,  in  whom  the  power  to  make  calls 
is  vested,  cannot  delegate  their  authority.3     It  is  a  power  the  exer- 

dating  a  company  may  call  in  unpaid  joined  on  the  ground  that  the  de 
subscriptions,  even  though  the  by-  facto  board  is  not  a  de  jure  board, 
laws  provided  that  no  calls  shall  be  Chandler  v.  Sheep,  etc.  Co.,  15  Utah, 
made  except  upon  a  two-thirds  vote  434  (1897).  In  England  the  courts 
of  the  outstanding  stock.  Union,  etc.  will  inquire  into  the  right  of  direc- 
v.  Leiter,  145  Cal.  696   (1905).  tors  to  their  office,  in  cases  involving 

i  Ambergate,  etc.  Ry.  v.  Mitchell,  4  the  validity  of  calls.  Swansea  Dock 
Exch.  540  (1849).  In  Ex  parte  Win-  Co.  v.  Levien,  20  L.  J.  (Ex.)  447 
sor,  3  Story,  411  (1844);  s.  c,  30  (1851).  If  the  directors  were  not  le- 
Fed.  Cas.  312,  it  was  held,  however,  gaily  elected,  their  calls  and  forfeit- 
that  where  the  charter  gave  to  the  ures  of  stock  based  thereon  will  be 
corporation  the  power  to  assess  stock  set  aside.  Garden  Gully,  etc.  Co.  v. 
it  must  be  exercised  exclusively  by  McLister,  L.  R.  1  App.  Cas.  39  (1875). 
the  stockholders  in  meeting  assem-  See  Healey  on  Companies,  3d  ed.,  p. 
bled.  On  the  other  hand,  in  Rives  v.  126.  If  the  corporate  organization 
Montgomery,  etc.  Co.,  30  Ala.  92  was  not  regular,  and  the  directors 
(1857),  the  court  held  that  stockhold-  were  not  legally  elected,  their  call  is 
ers  who  by  charter  have  power  to  not  enforceable.  Howbeach  Coal  Co. 
make  calls  may  delegate  that  power  v.  Teague,  5  Hurlst.  &  N.  151  (1860). 
to  the  directors.  See  also  Healey  on  Directors  elected  at  a  meeting  called 
Companies,  3d  ed.,  p.  125.  on    thirteen    days'    notice   instead   of 

2  "An  illegal  election  of  directors  fourteen  as  required  by  statute  may 
cannot  be  set  up  in  resistance  of  the  make  calls,  where  their  election  has 
payment  of  stock,  but  would  be  a  case  been  confirmed  by  a  subsequent  an- 
for  a  quo  warranto  to  oust  the  il-  nual  general  meeting.  Briton,  etc. 
legally  elected  directors."  Eakright  Assoc,  v.  Jones,  61  L.  T.  Rep.  384 
r.  Logansport,  etc.  R.  R.,  13  Ind.  404     (1889). 

(1859);  Johnson  v.  Crawfordsville,  3  Rutland,  etc.  R.  R.  v.  Thrall,  35 
etc.  R.  R.,  11  Ind.  280  (1858);  Fair-  Vt.  536  (1863),  the  court  saying: 
field  County  Turnp.  Co.  v.  Thorp,  13  "When  a  charter  requires  the  direc- 
Conn.  173  (1839);  Steinmetz  v.  Ver-  tors  to  do  some  specific  act,  there 
sailles,  etc.  Turnp.  Co.,  57  Ind.  457  seems  to  be  a  stronger  reason  why 
(1877);  Macon,  etc.  R.  R.  v.  Vason,  they  should  be  held  incapable  of 
57  Ga.  314  (1876);  Atherton  r.  Sugar  delegating  such  authority  than  when 
Creek,  etc.  Turnp.  Co.,  67  Ind.  334  mere  general  powers  are  conferred 
(1879).  In  People's  Mut.  Ins.  Co.  v.  on  them."  See  also  Banet  v.  Alton, 
Westcott,  80  Mass.  440  (1860),  how-  etc.  R.  R.,  13  111.  504  (1851);  Pike 
ever,  a  call  by  directors  elected  at  a  v.  Bangor,  etc.  R.  R.,  68  Me.  445 
meeting  held  without  notice  was  de-  (1878)  ;  Re  Bolt  &  Iron  Co.,  10  Pr.  R. 
clared  invalid  and  not  enforceable.  A  (Can.)  434  (1884);  Silver  Hook 
call  may  be  enjoined  on  the  ground  Road  v.  Greene,  12  R.  I.  164  (1878), 
that  the  directors  were  illegally  where  it  was  delegated  to  the  treas- 
elected.  Moses  v.  Tompkins,  84  Ala.  urer;  Farmers'  Mut.  F.  Ins.  Co.  v. 
613    (1888).      A    call    cannot    be    en-    Chase,    56   N.    H.    341    (1876),   citing 

363 


111.] 


CALLS. 


[CH.  VII. 


cise  of  which  involves  a  discretion  which  cannot  be  exercised  by 
others.  A  call  by  a  minority  meeting  of  the  directors,  no  quorum 
being  present,  is  void.1 

§  111.  Assignment  of  subscriptions  by  corporation  before  or  after 
call. — The  unpaid  and  uncalled  subscriptions  for  stock  cannot  be 
mortgaged  or  sold  by  the  corporation.  If  the  transfer  by  the  di- 
rectors were  allowed,  "the  consequence  would  be  that  the  discretion 
which  they  are  bound  to  exercise  would  be  wholly  defeated  and 
put  an  end  to."2  The  power  of  making  calls,  being  a  discretionary 
one,  cannot  be  transferred  to  other  parties.  The  transfer  is  void. 
The  subscribers  are  bound  to  pay  their  subscriptions  only  when,  in 
the  opinion  of  the  proper  corporate  authorities,  or  of  a  court  of 
equity,  the  money  is  needed  for  corporate  purposes.     This  power 


authorities;  Monmouth,  etc.  Ins.  Co. 
v.  Lowell,  59  Me.  504  (1871).  But 
where  the  power  is  delegated  and  ex- 
ercised, the  call  may  be  ratified  by 
the  directors,  and  will  then  be  valid. 
Read  v.  Memphis  Gayoso  Gas  Co.,  9 
Heisk.  (Tenn.)  545  (1S72);  Rutland, 
etc.  R.  R.  v.  Thrall,  35  Vt.  536  (1863). 
Although  the  directors  cannot  dele- 
gate the  power  to  make  a  call,  yet 
they  may  delegate  the  power  "to  de- 
termine the  amount  of  some  of  the 
installments,  and  to  designate  the 
times  of  payment."  Banet  v.  Alton, 
etc.  R.  R.,  13  111.  504  (1851).  It  is 
not  necessary  to  allege  that  the  di- 
rectors were  duly  elected.  Miller  v. 
Wild  Cat,  etc.  Co.,  52  Ind.  51  (1875); 
Steinmetz  v.  Versailles,  etc.  Turnp. 
Co.,  57  Ind.  457  (1887).  But  proof 
must  be  given  that  the  proper  author- 
ities made  the  call.  New  Jersey  Mid- 
land Ry.  v.  Strait,  35  N.  J.  L.  322 
(1872). 

i  Price  v.  Grand  Rapids,  etc.  R.  R., 
13  Ind.  58  (1859);  Hamilton  v.  Grand 
Rapids,  etc.  R.  R.,  13  Ind.  347  (1859) ; 
Bottomley's  Case,  L.  R.  1G  Ch.  D.  681 
(1880).  But  may  be  confirmed  by  a 
quorum.  Re  Phosphate  of  Lime  Co., 
24  L.  T.  932  (1871). 

2  Ex  parte  Stanley,  33  L.J.  (Ch.) 
535  (1864);  Re  Sankey  Brook  Coal 
Co.,  L.  R.  10  Eq.  381  (1870).  To  the 
same  effect,  see  New  Jersey  Midland 


Ry.  v.  Strait,  35  N.  J.  L.  322  (1872) ; 
Wells     v.     Rodgers,     50     Mich.     294 
(1883);    s.    c,    44    Mich.    411    (1886), 
involving    the    consolidation    of    two 
railroads.    See  also  Crooks  v.  State,  4 
N.  E.  Rep.  589   (Ind.  1866);  Walling- 
ford    Mfg.    Co.    v.    Fox,    12    Vt.    304 
(1840);    Bank  of  South  Australia  v. 
Abrahams,   L.   R.    6    P.    C.    App.   265 
(1875) ;  Hurlbut  v.  Root,  12  How.  Pr. 
511  (1855) ;  Hill  v.  Reid,  16  Barb.  280 
(1853);    Hurlbut  v.  Carter,   21   Barb. 
221   (1S55).     Cf.  Smith  v.  Hollett,  34 
Ind.  519    (1870),  where  the  subscrip- 
tion was  not  for  stock,  but  as  a  bonus. 
The    articles    of    incorporation    of    a 
company   may   authorize   a   mortgage 
on  unpaid  and  uncalled  subscriptions. 
Re  Pyle  Works,  L.  R.  44  Ch.  D.  534 
(1890);    s.    c.    [1891]    1    Ch.    173.      A 
transfer  of  the  "business  and  proper- 
ty" of  a  corporation    does  not  carry 
unpaid  subscriptions.    Bank  of  China 
v.  Morse,  44  N.  Y.  App.  Div.  435,  445 
(1899);    aff'd,  168  N.  Y.  458,     Where 
subscriptions  are  with  the  consent  of 
the   subscribers   pledged   to   secure   a 
debt  of  the  corporation,  the  pledgee 
may    enforce    the    subscriptions    al- 
though the  ten  per  cent,  required  by 
the  statute  to  be  paid  at  the  time  of 
the  subscription  was  not  paid.   Knick- 
erbocker T.  Co.  v.  Hard,  67  N.  Y.  App. 
Div.  463   (1902). 


364 


CH.  VII.] 


CALLS. 


[§   111. 


of  ascertaining  and  determining  the  extent  of  the  corporate  needs, 
being  a  discretionary  power,  cannot  be  transferred  or  delegated  to 
others.  A  different  rule  prevails,  however,  after  a  call  has  been 
made  but  not  yet  collected.  An  assignment  of  the  amount  already 
called  is  legal  and  valid.1  It  has  been  held  in  Connecticut  that  the 
right  to  collect  unpaid  subscriptions  may  be  sold  by  an  insolvent 
corporation.2  The  usual  railroad  mortgage  does  not  cover  sub- 
scriptions for  stock  in  the  sense  of  preventing  the  corporation  from 
collecting  them.3  Statutory  power  to  transfer  the  business  and 
property  of  a  corporation  does  not  authorize  a  transfer  of  its  unpaid 
subscriptions.4  In  Pennsylvania  a  statute  which  authorized  a  cor- 
poration to  transfer  a  subscription  from  one  enterprise  to  another 
has  been  held  unconstitutional.5 


l  Re  Humber  Iron-works  Co.,  16 
Weekly  Rep.  474,  667  (1868);  Wells 
v.  Rodgers,  50  Mich.  294  (1883);  Mil- 
ler v.  Malony,  3  B.  Mon.  (Ky.)  105 
(1842),  where  the  call  was  assigned 
to  the  contractor  who  owed  the  sub- 
scriber for  work  done;  Downie  v. 
Hoover,  12  Wis.  174  (1860) ;  Morris  v. 
Cheney,  51  111.  451  (1869),  where, 
however,  it  is  not  clear  that  a  call 
had  been  made.  A  call  which  had 
been  determined  upon,  but  not  defi- 
nitely made,  may  be  transferred  if  it 
is  afterwards  duly  made  by  the  direct- 
ors. Re  Sankey  Brook  Coal  Co.,  L. 
R.  9  Eq.  721  (1870).  See  s.  c,  L.  R. 
10  Eq.  381.  As  to  the  enforcement  of 
a  subscription  by  a  subsequently  cre- 
ated corporation  formed  by  consoli- 
dation, see  ch.  LIII.  A  mortgage  on 
all  the  land,  property  and  effects  of 
the  corporation  does  not  include  un- 
called subscriptions.  King  v.  Mar- 
shall, 33  Beav.  565  (1854).  Cf.  Re 
Marine  Mansions  Co.,  L.  R.  4  Eq.  601 
(1867);  Re  British  Prov.  L.  Ins.  Co., 
4  De  G.,  J.  &  S.  407  (1864) ;  Gardner 
v.  London,  etc.  Ry.  Co.,  L.  R.  2  Ch. 
201,  215  (1867);  Pickering  v.  Ilfra- 
combe  Ry.,  37  L.  J.  (C.  P.)  118 
(1868);  Lishmann's  Claim,  23  L.  T. 
Rep.  (N.  S.)  759  (1S70).  Where  a 
company  has  assigned  unpaid  sub- 
scriptions, the  company  itself  may 
not  be  able  to  collect  them.    Clark  v. 


Sigua,  etc.  Co.,  81  Fed.  Rep.  310 
(1897).  An  assignee  of  unpaid  sub- 
scriptions may  assign  to  still  another. 
Rand  v.  Wiley,  70  Iowa,  110  (1886). 
As  to  the  right  of  one  road  built  on 
the  line  of  an  abandoned  road  to  re- 
cover on  a  private  donation  to  the  lat- 
ter, see  Sickels  v.  Anderson,  63  Mich. 
421  (1886).  The  assignee  of  the  right 
of  a  corporation  to  collect  a  subscrip- 
tion may  collect  it  the  same  as  the 
corporation  could.  Chattanooga,  etc. 
R.  R.,  v.  Warthen,  98  Ga.  599  (1896). 
A  subscriber  is  liable  although  the 
company  under  its  charter  sells  its 
railroad  to  another  company,  the  sub- 
scription being  payable  to  the  com- 
pany and  its  assigns.  The  subscriber 
is  entitled  to  stock  in  the  successor 
company.  Chattanooga,  etc.  R.  R.  v. 
Warthen,  98  Ga.  599  (1896).  Where 
a  corporation  assigns  a  subscription 
for  stock,  the  receiver  of  the  corpora- 
tion is  not  a  necessary  party  to  a  suit 
to  collect  the  subscription.  Coler  v. 
Grainger  County,  74  Fed.  Rep.  16 
(1896). 

2  Fish    v.    Smith,     73     Conn.     377 
(1900). 

3  See  §  852,  infra. 

4  Bank  of  China  v.  Morse,   168  N. 
Y.  458  (1901). 

5  Pittsburgh,  etc.  R.  R.  v.  Gazzam, 
32  Pa.  St.  340  (1858). 


565 


§§  112,  113.]  CALLS.  [CH.  VII. 

§  112.  Interest  runs  from  the  time  the  call  is  due.— A  subscriber 
who  has  failed  to  pay  a  call  when  it  becomes  clue,  according  to  its 
terms,  is  properly  chargeable  with  interest  from  the  time  of  the  de- 
fault.1 Where  subscriptions,  by  their  terms,  are  payable  monthly, 
they  bear  interest  from  the  date  when  they,  become  due,  so  far  as 
creditors  are  concerned.2 

§  113.  Stockholders  cannot  question  advisability  of  call. — The 
necessity  or  advisability  of  making  a  call  is  a  matter  which  rests 
exclusively  within  the  discretion  of  the  corporate  authorities  who 
have  power  to  make  the  call.3  A  stockholder,  when  sued  upon  an 
unpaid  call,  cannot  set  up  in  defense  that  there  was  no  occasion  or 
use  for  the  money.  Whether  made  by  the  court  or  by  the  direct- 
ors, the  call  is  conclusive  evidence  of  the  necessity  therefor  unless 
directly  attacked  and  set  aside  by  judicial  proceedings.4     The  call, 

i  McCoy  v.  World's,  etc.  Exposi-  Chouteau  Ins.  Co.  v.  Floyd,  74  Mo. 
tion,  186  111.  356  (1900);  Gould  v.  286  (1881).  "The  question  whether 
Oneonta,  71  N.  Y.  298  (1877);  Rik-  those  necessities  demanded  the  pay- 
hoff  v.  Brown's,  etc.  Machine  Co.,  68  ment  of  the  money  was  for  the  direct- 
Ind.  388  (1879);  Casey  v.  Galli,  94  ors."  Judah  v.  American,  etc.  Ins. 
U.  S.  673  (1876).  See  also  Burr  v.  Co.,  4  Ind.  333  (1853);  Budd  v.  Mult- 
Wilcox,  22  N.  Y.  551  (1860),  and  nomah  St.  Ry.,  15  Oreg.  413  (1887). 
Parker  v.  Adams,  38  N.  Y.  Misc.  Rep.  One  cannot  object  to  a  call  on  the 
325  (1902).  Cf.  Stocken's  Case,  L.  R.  ground  that  the  motives  of  the  direct- 
5  Eq.  6  (1867);  aff'd,  L.  R.  3  Ch.  App.  ors  were  wrong.  Oglesby  v.  Attrill, 
412;  Cleveland  v.  Burnham,  55  Wis.  105  U.  S.  605  (1881).  Courts  cannot 
598  (1882);  s.  c,  64  Wis.  347.  In  in  the  absence  of  fraud  inquire  into 
Liggett  v.  Glenn,  51  Fed.  Rep.  381  the  necessity  of  an  assessment  by 
(1892),  interest  was  allowed  only  the  directors.  Nashua  Sav.  Bk.  v. 
from  the  date  of  suit  and  not  from  Anglo-American,  etc.  Co.,  189  U.  S. 
the  date  of  the  call.  Cf.  Hambleton  221  (1903),  citing  §113  supra.  The 
v.  Glenn,  72  Md.  331  (1890).  Interest  necessity  and  propriety  of  levying  an 
on  the  instalment  cannot  be  recov-  assessment  is  for  the  directors  to 
ered  if  no  notice  of  the  call  was  determine  and  their  discretion  can- 
given.  American  Pastoral  Co.  v.  Gur-  not  be  controlled  by  the  stockholders, 
ney,  61  Fed.  Rep.  41  (1894).  Inter-  Weber  v.  Delia,  etc.  Co.,  94  Pac.  Rep. 
est  is  due  only  from  the  day  the  sub-  441  (Idaho,  1908). 
scriber  was  placed  in  default.  Jack-  4  Great  Western  Tel.  Co.  v.  Purdy, 
son,  etc.  Co.  v.  Walle,  105  La.  89  162  U.  S.  329  (1896).  It  is  no  de- 
(1900).  Interest  is  allowed  from  the  fense  that  the  call  is  unnecessary, 
date  of  the  decree  fixing  the  liability  American  Alkali  Co.  v.  Campbell,  113 
on  the  particular  stockholders.  Flors-  Fed.  Rep.  398  (1902).  A  call  is  pre- 
heim  v.  Illinois,  etc.  Bank,  192  111.  382,  sumed  to  have  been  regularly  made, 
aff'g  93  111.  App.  297  (1901).  and  it  need  not  be  proved  that  the 

2  Hawkins  v.  Citizens',  etc.  Co.,  38  corporation  needed  the  money. 
Oreg.  544    (1901).  Nashua,  etc.  Bank  v.  Anglo-American, 

3  The  question  of  the  necessity  for  etc.  Co.,  189  IT.  S.  221  (1903).  Ne- 
the  call  "was  a  matter  for  the  deter-  cessity  or  advisability  of  a  call  can- 
mination  of  the  board  of  directors."  not  be  questioned  by  the  stockhold- 

366 


CH.  VII.] 


CALLS. 


[§  114. 


however,  must  be  for  the  bona  fide  purpose  of  raising  money  for  cor- 
porate purposes.  It  must  not  be  for  the  purpose  of  enabling  the 
stockholders  to  use  the  money  to  the  detriment  of  the  creditors  of 
the  failing  corporation.1  Moreover,  a  court  of  equity  will  set  aside 
calls  and  payments  made  and  managed  with  a  view  to  discharging 
the  stockholders'  liability  and  preventing  the  proceeds  from  being 
applied  to  the  general  corporate  debts.  If  the  purpose  of  a  call  is 
illegal,  the  call  cannot  be  collected.2  Equity,  however,  will  not  in- 
terfere with  a  call  merely  because  the  money  received  may  be  di- 
verted by  the  directors  to  an  act  or  enterprise  beyond  the  powers 
of  the  corporation.3  The  corporation  cannot  contract  to  postpone 
indefinitely  a  call.4  To  allow  such  postponement  would  be  unjust 
to  corporate  creditors  and  other  stockholders. 

§  114.  Calls  must  be  impartial  and  uniform. — A  call  cannot  be 
made  so  as  to  affect  a  part  only  of  the  subscribers.  It  must  be  made 
on  all  alike  or  it  will  be  void.5  The  courts  will  not  allow  the  di- 
rectors of  a  company  so  to  proceed  as  to  require  some  stockholders 
to  pay  calls,  and  not  to  require  others  to  do  the  same.       Any  such 

ers.    Fitzgerald's  Estate  r.  Union  Sav.  the  court  said   it   is   not  within   the 

Bank,  65  Neb.  97   (1902).     The  neces-  jurisdiction  of  courts  "to  take  the  ac- 

sity   or  wisdom  of  a  call   cannot  be  counts  and  make  the  inquiries  neces- 

questioned  by  the  stockholder  in  the  sary  for  the  purpose  of  ascertaining 

absence    of    fraud.      Anglo-American,  whether,   under  the  circumstances  to 

etc.     Co.     v.     Dyer,     1S1     Mass.     593  which   the  company   is   reduced,   and 

(1902).  in  a  continuing  concern,  it  is  proper, 

i  Habershon's    Case,    L.    R.    5    Eq.  in  the  due  management  of  the  affairs 

286  (1868).    Thus,  where  the  amount  of  the  company,   to   raise   money   by 

paid   in   is   immediately   paid   out  to  way  of  calls  from  the  shareholders." 

the  directors  for  fees,  the  transaction  Corporate  meetings  are  the  places  for 

is  fraudulent,  and  is  set  aside.  Sykes's  such   complaints.     See   also   Yetts   v. 

Case,  L.  R.   13    Eq.   Cas.  255    (1872).  Norfolk    Ry.,    3    De    G.    &    Sm.    293 

On  the  other  hand,  the  directors  can-  (1849). 

not    delay    calls    in   order    to   enable  4  McComb    v.    Credit    Mobilier,    13 

themselves  to  transfer  their  stock  and  Phila.  468   (1878);   Van  Allen  v.  Illi- 

avoid  liabilities.    Gilbert's  Case,  L.  R.  nois  Cent.  R.  R.,  7  Bosw.  515  (1861)  — 

5   Ch.    App.    559    (1870);    Preston   v.  the  last  case  holding,  however,  that 

Grand  Collier  Dock  Co.,  11  Sim.  327  this   principle   does   not   prevent   the 

(1840)  •  issue  of  bonds  convertible  into  stock 

2  Bank  of  China  v.  Morse,   16S  N.  whenever  the  stockholder  desires. 

Y.  458  (1901).  An  assessment  on  5  Pike  v.  Bangor,  etc.  R.  R.,  68 
irrigation  stock  to  be  used  for  a  pur-  Me.  445  (1878).  A  suit  to  collect 
pose  outside  of  the  charter  powers,  thirty-five  per  cent,  of  a  subscription 
cannot  be  collected,  and  a  forfeiture  fails  where  other  subscribers  have 
and  sale  of  the  stock  for  failure  to  paid  but  two  per  cent.  Great  West- 
pay  is  void.  Seeley  v.  Huntington,  ern  Tel.  Co.  v.  Burnham,  79  Wis.  47 
etc.  Assn.,  27  Utah  179    (1904).  (1S91) ;  Bowen  v.  Kuehn,  79  Wis.  53 

3  In  the  case   of  Bailey  v.  Birken-  (1891). 
head,  etc.  Ry.,  12   Beav.   433    (1850), 

367 


§   115.]  CALLS.  [CH.  VII. 

attempt  will  be  promptly  set  aside  and  rectified.1  If,  however, 
some  stockholders  have  already  contributed  more  than  others,  the 
new  call  may  equalize  the  contributions.2 

§115.  Method  of  making  calls — No  formalities  necessary. — 
There  are  no  prescribed  or  established  rules  stating  how  a  call  shall 
be  made  by  the  corporate  authorities  empowered  to  make  it.  Any 
act  or  resolution  which  in  a  court  of  law  would  prove  a  clear  offi- 
cial intent  to  render  due  and  payable  a  part  or  all  of  the  unpaid 
subscriptions  seems  to  be  sufficient.3  A  mere  street  conversation, 
however,  between  the  directors,  by  which  they  "agree"  that  sub- 
scriptions shall  be  called,  is  not  a  sufficient  call.4  The  call  need 
not  indicate  when,  or  to  whom,  or  where,  payment  is  required  to 
be  made.5     These  are  to  be  stated  in  the  notice  of  the  call.6     Mere 

i  Preston  v.  Grand  Collier  Dock  having  acted  in  good  faith.  Alex- 
Co.,  11  Sim.  327  (1840).  The  New  ander  v.  Automatic,  etc.  Co.,  [1900] 
York  courts  refused  to  Hold  a  New  2  Ch.  56,  rev'g  [1899]  2  Ch.  302.  If 
York  stockholder  in  an  English  cor-  directors  use  their  power  to  make 
poration  liable  for  his  unpaid  sub-  calls  oppressively,  they  will  be  re- 
scription  where  under  a  plan  of  re-  strained.  Cannon  v.  Trask,  L.  R.  20 
organization,  sanctioned  by  the  Eng-  Eq.  669  (1875).  As  where  the  object 
lish  courts,  in  accordance  with  Eng-  is  to  disqualify  from  voting  those 
lish  law,  the  amount  collected  is  to  who  cannot  pay.  Anglo,  etc.  Bank 
go  to  the  reorganized  company,  while  v.  Baragnon,  45  L.  T.  362  (1881). 
other  stockholders  need  not  pay  their  2  Brockway  v.  Gadsden,  etc.  Co., 
subscriptions  if  they  take  part  in  the  102  Ala.  620  (1894). 
reorganized  company  and  pay  a  small  3  Budd  v.  Multnomah  St.  Ry.,  15 
sum,  especially  where,  if  all  the  stock-  Oreg.  413  (1887);  Citizens',  etc.  Ins. 
holders  paid  in  full,  the  amount  Co.  v.  Sortwell,  92  Mass.  110,  112 
would  be  more  than  necessary  to  pay  (1865). 

the  debts.     Bank  of  China  v.  Morse,  4  Branch  v.  Augusta  Glass  Works, 

168   N.  Y.  458    (1901).     Even  though  95  Ga.  573    (1895). 

it  is  legal  under  the  statutes  of  Eng-  5  Quoted    and     approved     in     Ger- 

land  to  provide  that  no  calls  shall  be  mania  Iron  Min.  Co.  v.  King,  94  Wis. 

made  on  certain  shares,  except  upon  439    (1896);    Fox   v.   Allensville,    etc. 

a  winding  up,  yet  where  the  directors  Turnp.   Co.,   46   Ind.   31    (1874);    An- 

are   the   subscribers   for  such   shares  drews  v.  Ohio,  etc.  R.  R.,  14  Ind.  169 

and   do  not  fully   inform   other  sub-  (1860).     In  the  case  of  Great  North, 

scribers    of   the    situation,    they   may  etc.  Ry.  v.  Biddulph,  7  M.  &  W.  243 

be    compelled    at    the    instance    of    a  (1840),    Baron    Parke   held   that   the 

stockholder  to  pay  at  the  same  time  resolution   for   a  call   need   not  state 

that    the    others    pay,    even    though  the  place  of  payment  nor  the  person 

there  was  no  actual  fraud,  the  parties  to   whom   it   was   payable.     Compare 

o  Quoted  and  approved  in  Amer-  not  fatal,  even  though  the  charter 
ican  Pastoral  Co.  v.  Gurney,  61  Fed.  seemed  to  require  those  facts  to  be 
Rep.  41  (1894),  where  the  omission  stated;  and  holding  also  that  it  is 
in  the  call  to  state  where  and  to  sufficient  if  the  notice  of  the  call 
whom  the  call  was  payable  was  held    states  those  facts. 

368 


CH.  VII.]  CALLS.  [§    115. 

irregularities  are  disregarded,  and  will  not  invalidate  the  call.1  The 
substantial  fact  must  exist  that  the  proper  corporate  officers  voted 
or  declared  that  payment  be  required.  Hence  the  elements  of  a 
call  seem  to  be  that  it  shall  be  by  the  proper  persons  acting  offi- 
cially; and  that  a  resolution,  susceptible  of  legal  proof,2  be  passed 
that  a  certain  amount,  either  the  whole  or  part,3  of  the  subscrip- 
tions for  stock  shall  be  paid  in.  If  the  statute  prescribes  the  form 
of  the  call  this  form  must  be  followed.4  A  call  which  prescribes 
that  payment  may  be  in  cash  or  by  land  contract  is  too  indefinite 

Rutland,  etc.  R.  R.  v.  Thrall,  35  Vt.  etc.  R.  R.  v.  Vason,  57  Ga.  314  (1876). 
536  (1863),  to  the  effect  that  the  2  A  call  by  the  directors  is  valid 
place  must  be  stated.  A  call  made  in  although  no  entry  of  the  resolution 
a  new  name,  legally  assumed  by  the  is  made  in  the  minutes  of  the  direct- 
corporation-,  is  binding  on  subscrib-  ors'  meeting.  Hays  v.  Pittsburgh,  etc. 
ers  who  knew  of  the  change  of  name.  R.  R.,  38  Pa.  St.  81  (1860).  An  en- 
Shackleford  v.  Dangerfield,  L.  R.  3  try  of  the  resolution,  made  by  the 
C.  P.  407  (1868).  A  call  need  not  secretary  in  the  book  containing  the 
name  any  time,  place,  or  person  to  minutes,  is  sufficient.  Fox  v.  Allens- 
whom  payment  must  be  made.  Unless  ville,  etc.  Turnp.  Co.,  46  Ind.  31 
otherwise  specified  the  call  is  payable  (1874).  An  authorized  subsequent 
on  demand  at  the  office  of  the  com-  call  is  competent  proof  of  the  valid- 
pany  and  to  an  officer  authorized  to  ity  of  a  previous  call.  Bavington  v. 
receive  payment.  Western  Imp.  Co.  Pittsburgh,  etc.  R.  R.,  34  Pa.  St.  358 
v.  Des  Moines  Nat.  Bank,  103  Iowa,  (1859).  The  corporate  books  are 
455  (1897).  competent  to  prove  both  the  call  and 
i  Irregularities  are  no  defense,  the  mode  of  payment.  Bavington  v. 
The  remedy  is  to  revoke  or  set  aside  Pittsburgh,  etc.  R.  R.,  34  Pa.  St.  358 
the  call.  "Calls  in  fact  made,  means  (1859);  Comfort  v.  Leland,  3  Whart. 
that   if   made,    and    notice   be   given,  (Pa.)   81   (1837). 

.  .  .  a  party  shall  not  wait  to  take  3  The  call  may  be  for  the  whole 
advantage  of  any  irregularity  at  the  subscription.  Fox  v.  Allensville,  etc. 
trial."  Re  British  Sugar  Ref.  Co.,  3  Turnp.  Co.,  46  Ind.  31  (1874).  May 
K.  &  J.  408  (1857);  Southampton  be  for  the  whole  or  for  part.  Haun 
Dock  Co.  v.  Richards,  2  Railw.  Cas.  v.  Mulberry,  etc.  Co.,  33  Ind.  103 
215,  234  (1840);  s.  c,  1  Man.  &  Gr.  (1870);  Stone  v.  Great  Western  Oil 
448.'  See  also  Shackleford  v.  Dan-  Co.,  41  111.  85  (1866);  Spangler  v. 
gerfield,  L.  R.  3  C.  P.  407  (1868).  An  Indiana,  etc.  R.  R.,  21  111.  276  (1859)  ; 
error  in  the  call  may  be  corrected  Ross  v.  Lafayette,  etc.  R.  R.,  6  Ind. 
and  cured  by  a  subsequent  call  made  297  (1855).  Even  though  it  be  ex- 
after  the  first  liability  accrued  but  pressly  provided  that  only  a  certain 
before  suit.  Philadelphia,  etc.  R.  R.  sum  shall  be  assessed  at  one  time, 
v.  Hickman,  28  Pa.  St.  318  (1857).  yet  several  assessments,  each  one  not 
A  director  who  participated  in  mak-  in  excess  of  the  stated  sum,  may  be 
ing  the  call  cannot  set  up  informali-  ordered  by  a  single  vote.  Penobscot 
ties  for  the  purpose  of  defeating  it.  R.  R.  v.  Dummer,  40  Me.  172  (1855)  ; 
Hays  v.  Pittsburgh,  etc.  R.  R.,  38  Pa.  Penobscot,  etc.  R.  R.  v.  Dunn,  39  Me. 
St.  81   (1860).     Payment  and  acquies-  5S7   (1855). 

cence   in   informality   as   to  one   call  4  Germania  Iron  Min.  Co.  v.  King, 

waives  it  as  to  another  call.     Macon,  94  Wis.  439   (1896). 
(24)                                                 369 


§  116.] 


CALLS. 


[CH.  VII. 


to  sustain  a  unit,  inasmuch  as  it  does  not  prescribe  the  terms  upon 
which  the  land  contracts  will  be  received  and  does  not  state  at 
whose  option  payment  may  be  so  made.1  The  validity  of  a  call  by 
an  English  corporation  is  determined  by  English  law  so  far  as  for- 
malities are  concerned,2  but  not  where  it  violates  settled  principles 
of  the  common  law.3 

§  116.  Time,  place,  amount,  and  person  to  whom  payable.— The 
time  and  place  and  person  to  whom  calls  are  to  be  paid  need  not 
necessarily  be  designated  or  fixed  by  the  persons  authorized  to  make 
the  call.4  These  are  duties  which  may  be  performed  by  other 
officers  of  the  corporation,  and  frequently  either  the  president  or 
treasurer  of  the  corporation  performs  this  work.  The  time  of  pay- 
ment should  be  reasonable,5  as  also  should  be  the  place.  A  pro- 
vision in  the  by-laws  that  the  subscriptions  should  be  called  in  at 
certain  times  only  may  be  modified.  A  company  cannot  contract 
not  to  alter  its  by-laws.6  If  no  place  or  person  to  receive  payment 
is  designated,  it  is  to  be  paid  to  the  treasurer  at  his  office.7  The 
amount  called  need  not  be  made  payable  in  one  sum  at  one  time, 
but  may  be  made  due  in  instalments.8 


i  North,  etc.  Co.  v.  Bishop,  103 
Wis.  492  (1899),  the  court  saying  in 
regard  to  a  call,  "the  chief  requisites 
are  that  it  should  be  impartial  and 
uniform,    and    sufficiently    definite   to 


5  Fairfield  County  Turnp.  Co.  v. 
Thorp,  13  Conn.  173  (1839).  The 
time  between  payments  of  instal- 
ments is  entirely  within  the  discre- 
tion of  the  directors,  there  being  no 


enable  the  stockholder  to  comply  with    provision  regulating  the  subject.   Hall 


its  requirements." 

2  American  Pastoral  Co.  v.  Gurney, 
61  Fed.  Rep.  41   (1894). 

3  Bank  of  China  v.  Morse,  168   N. 
Y.  458    (1901). 

4  See    §  115,    note    4,     supra.     The 
directors  themselves  may  fix  the  time, 


v.  United  States  Ins.  Co.,  5  Gill  (Md.), 
484   (1847). 

6  Malleson  v.  National,  etc.  Corp., 
[1894]   1  Ch.  200. 

7  A  resolution  of  the  directors  that 
the  instalments  should  be  paid  in 
"at  the  times  therein  designated  im- 


place,  and  manner  of  payment,  even  ports  that  payments  should  be  made 
at  a  meeting  subsequent  to  the  meet-  to  the  treasurer,  who  is  the  proper 
ing  ordering  a  call.  The  call  may  be  and  only  officer  to  receive  and  keep 
prospective.  The  directors  may  order  the  moneys  of  the  corporation."  Dan- 
that  on  a  certain  date  a  call  payable  bury,  etc.  R.  R.  v.  Wilson,  22  Conn, 
at  a  later  date  shall  be  made.  Shef-  435  (1853).  As  to  a  tender  to  the 
field,  etc.  Ry.  v.  Woodcock,  7  M.  &  W.  president,  see  Mitchell  v.  Vermont, 
574  '(1841).  The  subscription  itself  etc.,  Co.,  67  N.  Y.  280  (1876).  Direct- 
may  regulate  the  time  of  payment,  ors  in  making  a  call  should  specify 
New  Jersey  Midland  Ry.  v.  Strait,  35  the  place  of  payment.  Provident,  etc. 
N.  J.  L.   322    (1872);   Roberts  v.  Mo-  Co.  v.  Wilson,  25  Q.  B.  Rep.  (Can.)  53 


bile,  etc.  R.  R.,  32  Miss.  373  (1856). 
Even  though  the  statute  provides  oth- 
erwise. Iowa,  etc.  R.  R.  v.  Perkins, 
28  Iowa,  281  (1869). 


(1S6G). 

8  Northwestern  Ry.  v.  McMichael, 
6  Exch.  273  (1851);  Birkenhead,  etc. 
Ry.  v.  Webster,  6  Exch.  277    (1851); 


370 


CH.  VII.  J  CALLS.  [§    117. 

§  117.  Notice  of  calls— Cases  holding  it  not  necessary. — There  is 
a  wide  and  irreconcilable  difference  of  opinion  among  the  authori- 
ties on  the  question  whether  notice  of  a  call  must  be  given  to  a 
stockholder  before  suit  can  be  brought  for  the  collection  of  a  call. 

Frequently  either  the  charter,  or  a  statute,  or  the  by-laws  of  the 
corporation,  require  notice  to  be  given;  and  in  such  cases  notice  is, 
of  course,  necessary  in  order  to  sustain  suit.1  But  where  there  is 
no  provision  in  the  charter,  or  statute,  or  by-laws,  or  subscription 
itself,  prescribing  that  notice  of  calls  shall  be  given  to  the  stock- 
holders, the  weight  of  authority  holds  that  no  notice  is  necessary, 
and  that  an  action  to  collect  the  call  may  be  maintained  without 
averring  or  proving  such  a  notice.2 

Ambergate,  etc.  Ry.  v.  Norcliffe,  6  terpretations  in  different  states.  The 
Exch.  629  (1851),  not  following  Strat-  usual  construction  is  that  the  notice 
ford,  etc.  Ry.  v.  Stratton,  2  B.  &  Ad.  required  therein  refers  only  to  the 
519  (1831).  In  Birkenhead,  etc.  Ry  forfeiture  proceedings,  and  does  not 
v.  Webster,  as  reported  in  6  Exch.  necessitate  notice  before  bringing  a 
277  (1851),  the  court  says:  "We  are  suit  at  law  for  the  collection  of  the 
unanimously  of  opinion  that  a  call  call.  Smith  v.  Indiana,  etc.  Ry.,  12 
payable  by  instalments  is  good,  al-  Ind.  61  (1859);  Lake  Ontario,  etc.  R. 
though  debt  will  not  lie  for  one  in-  R.  v.  Mason,  16  N.  Y.  451,  464  (1857). 
stalment  until  all  the  instalments  In  other  states  such  a  statute  is  con- 
are  due  and  payable."  In  Hays  v.  strued  to  require  notice  before  suit. 
Pittsburgh,  etc.  R.  R.,  38  Pa.  St.  81  Hughes  v.  Antietam  Mfg.  Co.,  34  Md. 
(1860),  the  court  held  that  the  direct-  316  (1870);  Granite  Roofing  Co.  v. 
ors  by  one  resolution  could  call  in  Michael,  54  Md.  65  (1880);  Dexter, 
the  balance  of  the  subscriptions,  mak-  etc.  Co.  v.  Millerd,  3  Mich.  91  (1854). 
ing  the  call  payable  in  instalments,  Illinois  River  R.  R.  v.  Zimmer,  20  111. 
due  at  different  times.  To  the  same  654  (1858),  holds  that  a  statute  regu- 
effect,  see  Rutland,  etc.  R.  R.  v.  Thrall,  lating  notice  of  calls  does  not  release 
35  Vt.  536  (1863) ;  Lewis's  Case,  28  L.  the  stockholder. 

T.  (N.  S.)  396  (1873).  Where  the  2  Wilson  v.  Wills  Valley  R.  R.,  33 
resolution  of  the  directors  specifies  Ga.  466  (1863);  Eppes  v.  Mississippi, 
that  the  call  shall  be  made  on  Sep-  etc.  R.  R.,  35  Ala.  33  (1859);  Grubb 
tember  16th  following,  and  shall  be  v.  Mahoning  Nav.  Co.,  14  Pa.  St.  302 
payable  in  instalments  at  specified  (1850);  Gray  v.  Monongahela  Nav. 
times  thereafter,  the  date  of  the  call  Co.,  2  W.  &  S.  (Pa.)  156  (1841); 
is  September  16th,  and  a  stockholder  Grubbs  v.  Vicksburg,  etc.  R.  R.,  50 
who  transfers  his  stock  after  Sep-  Ala.  398  (1873);  Eakright  v.  Logans- 
tember  16th  but  before  the  instal-  port,  etc.  R.  R.,  13  Ind.  404  (1859); 
ments  are  payable,  is  liable  for  such  Johnson  v.  Crawfordsville,  etc.  R.  R., 
instalments.  Campbell  v.  American,  11  Ind.  280  (1858);  New  Albany,  etc. 
etc.  Co.,  125  Fed.  Rep.  207  (1903).  R.  R.  v.  McCormick,  10  Ind.  499 
i  In  many  of  the  states  there  ex-  (1858);  Fisher  v.  Evansville,  etc.  R. 
ist  statutes,  very  similar  in  their  R.,  7  Ind.  407  (1856)  ;  Ross  v.  La- 
terms,  that  notice  shall  be  given  of  fayette,  etc.  R.  R.,  6  Ind.  297  (1855); 
calls,  and  that  in  case  of  non-payment  Hill  v.  Nisbet,  100  Ind.  341  (1884); 
the  stock  may  be  forfeited.  These  Smith  v.  Indiana,  etc.  Ry.,  12  Ind.  61 
statutes    have    received    different    in-  (1859).     In   the   last   case   the   court 

371 


118,  119.] 


CALLS. 


[CH.  VII. 


§118.  Notice  of  calls — Cases  holding  it  necessary. — There  is, 
however,  strong  authority  for  the  rule  that  notice  of  calls  must  be 
given  before  suit  is  brought  for  their  collection.1  The  reason  for 
this  rule  seems  to  accord  with  sound  legal  principles  and  with  busi- 
ness expediency.  It  is  a  well-established  principle  of  law  that, 
when  the  facts  or  circumstances  upon  which  the  performance  of 
a  contract  depends  lie  more  particularly  in  the  knowledge  of  the 
promisee  than  the  promisor,  the  former  must  give  the  latter  notice. 
Hence  it  would  seem  that  since  a  subscription  is  not  due  absolutely, 
but  only  on  call,  and  the  time,  place  and  amount  of  the  call  is  fixed 
by  persons  other  than  the  subscribers,  the  better  and  more  reasona- 
ble rule  would  be  that  notice  of  the  call  should  be  required  and  must 
be  given. 

§119.  Methods  of  serving  notice  of  calls. — The  manner  and 
mode  of  giving  notice  has  given  rise  to  some  controversy.  Unless 
provision  is  expressly  otherwise,  the  notice  must  be  given  by  handing 
to  the  subscriber  a  written  notice,  or  by  informing  him  orally  that 
the  call  has  been  made,  giving  the  amount,  time,  place,  and  per- 
son to  whom  payment  is  to  be  made.2    Where  the  notice  is  served, 


said:  "These  decisions  rest  upon  the 
ground  that  the  contract  to  pay  by- 
instalments  is  in  effect  a  promise  to 
pay  on  demand,  and  that  the  demand 
involved  in  the  suit  itself  was  alone 
sufficient."  Notice  of  calls  is  required 
by  the  Pennsylvania  railroad  act.  Mc- 
Carty  v.  Selingsgrove,  etc.  R.  R.,  87 
Pa.  St.  332  (1878).  In  New  York, 
since  no  call  is  necessary,  no  notice  is 
necessary.  Cf.  Macon,  etc.  R.  R.  v.  Va- 
son,  57  Ga.  314  (1876).  If  notice  of 
a  call  is  given  some  time  before  a 
suit  is  brought,  it  is  immaterial  that 
the  directors  authorized  the  com- 
mencement of  suit  at  the  time  notice 
was  given.  People's  etc.  Bank  v. 
Rauer,  2  Cal.  App.  445   (1906). 

l  Wear  v.  Jacksonville,  etc.  R.  R., 
24  111.  593  (1860);  Spangler  v.  In- 
diana, etc.  Ry.,  21  111.  276  (1859).  Cf. 
Peake  v.  Wabash  R.  R.,  18  111.  88 
(1856),  holding  that  notice  is  un- 
necessary. In  the  case  of  Carlisle  v. 
Cahawba,  etc.  R.  R.,  4  Ala.  (N.  S.) 
70  (1842),  the  court  says  that  notice 
must  be  given,  since  "the  times, 
amount  of   instalments,   and   manner 


of  payment  were  all  to  be  prescribed 
by  the  president  and  directors  of  the 
corporation,  depended  upon  their  voli- 
tion and  action,  and  consequently 
were  more  properly  within  their 
knowledge."  See  also  Scarlett  v. 
Academy  of  Music,  43  Md.  203 
(1875);  s.  c,  46  Md.  132;  Essex 
Bridge  Co.  v.  Tuttle,  2  Vt.  393  (1830) ; 
Rutland,  etc.  R.  R.  v.  Thrall,  35  Vt. 
536  (1863);  Miles  v.  Bough,  3  Q.  B. 
845  (1842);  Edinburgh,  etc.  Ry.  v. 
Hebblewhite,  6  M.  &  W.  707  (1840); 
Alabama,  etc.  R.  R.  v.  Rowley,  9  Fla. 
508  (1861).  In  Hughes  v.  Antietam 
Mfg.  Co.,  34  Md.  316  (1870),  the 
court  says:  "To  say  that  it  [notice] 
is  unnecessary,  because  the  subscrib- 
ers, who  may  be  living  in  different 
parts  of  the  country,  and  perhaps  the 
state,  are  presumed  in  law  to  know 
all  that  is  done  by  the  directory, 
seems  to  us  to  be  raising  a  presump- 
tion against  the  truth  itself." 

2  The  notice  need  not  be  written. 
Verbal  notification  suffices.  Smith  v. 
Tallassee,  etc.  Co.,  30  Ala.  650,  666 
(1857).     Notice  to  pay  to  the  treas- 


372 


CH.  VII.] 


CALLS. 


[§   119. 


not  personally,  but  by  mail,  the  notice  is  effective  only  in  case  it 
is  actually  received.1  Whether  it  was  so  received  is  a  question  for 
the  jury.2  A  publication  of  a  notice  in  a  newspaper  is  not  binding 
and  effectual  unless  it  be  proved  that  the  subscriber  who  is  sued 
actually  read  the  notice  as  published.3     A  personal  notice  is  suf- 


urer  sufficiently  indicates  the  place 
of  payment.  It  is  understood  to  be 
at  his  office.  Muskingum,  etc.  Co.  v. 
Ward,  13  Ohio,  120  (1844).  Contra, 
Dexter,  etc.  Co.  v.  Millerd,  3  Mich.  91 
(1854 J.  It  must  be  proved  to  have 
been  signed  by  authorized  persons. 
Miles  V.  Bough,  3  Q.  B.  845  (1842). 
Notice  to  various  parties  in  the 
neighborhood  is  not  sufficient.  New 
Jersey  Midland  Ry.  v.  S.trait,  35  N.  J. 
L.  322  (1872).  No  particular  form 
of  notice  is  necessary.  The  only 
question  is  "whether  the  notice  gives 
the  shareholder  to  understand  that  a 
call  has  been  made,  and  that  he  is 
required  to  pay  the  amount  on  a 
given  day."  Shackleford  v.  Danger- 
field,  L.  R.  3  C.  P.  407  (1868). 

i  "Constructive  notice  by  the  mail 
is  not  a  personal  notice,  although  in 
some  cases,  by  express  statutory  pro- 
vision, it  is  sufficient  to  bind  parties." 
Hughes  v.  Antietam  Mfg.  Co.,  34  Md. 
316  (1870).  Notice  of  a  call  for  the 
payment  of  a  subscription  must  be 
served  personally  and  service  by  mail 
is  insufficient,  unless  the  by-laws  au- 
thorize service  in  that  manner. 
North,  etc.  Co.  v.  Bishop,  103  Wis.  492 
(1899)." 

2  A  notice  of  a  call  may  be  by 
mail.  If  the  subscriber  denies  that 
he  received  it,  the  question  is  for  the 
jury.  Braddock  v.  Philadelphia,  etc. 
R.  R.,  45  N.  J.  L.  363  (1883).  Only 
the  person  actually  mailing  the  notice 
can  testify  to  that  fact.  Jones  v.  Sis- 
son,  72  Mass.  288  (1856). 

3  In  Alabama,  etc.  R.  R.  v.  Row- 
ley, 9  Fla.  508  (1861),  the  court  says 
such  a  mode  of  notice  "might  be  at- 
tended with  irreparable  injury  to  in- 
nocent parties."  See  also  dictum  in 
Lake  Ontario,  etc.  R.  R.  v.  Mason,  16 


N.  Y.  451  (1857).  In  Schenectady, 
etc.  Co.  v.  Thatcher,  11  N.  Y.  102 
(1854),  where  the  charter  prescribed 
notice  by  publication  or  by  mail,  a 
director  who  aided  in  giving  the  no- 
tices was  held  to  have  had  personal 
notice  and  to  be  bound.  "Personal 
service  of  due  notice  is  clearly  more 
advantageous  to  the  defendant  than 
either  an  advertisement  in  a  news- 
paper or  a  notice  sent  by  mail."  See 
also  Lexington,  etc.  R.  R.  v.  Chand- 
ler, 54  Mass.  311  (1847).  See  also 
§  130,  infra.  Notice  in  a  newspaper 
is  not  good  notice  unless  the  statute 
so  prescribes.  People's,  etc.  Assoc. 
v.  Furey,  47  N.  J.  Eq.  410  (1890). 

In  the  case  of  Lincoln  v.  Wright, 
23  Pa.  St.  76—1854  (not  a  corpora- 
tion case),  Judge  Jeremiah  Black 
said  that  a  notice  by  publication  in 
a  newspaper  was  no  notice  unless 
actually  read  by  the  person  charged 
with  the  notice.  "It  must  be  proved 
that  he  read  it;  otherwise  it  is  no 
stronger  than  proof  that  the  fact  was 
orally  and  publicly  uttered  at  a  place 
where  he  was  not  present."  On  the 
other  hand,  in  Hall  v.  U.  S.  Ins.  Co., 
5  Gill  (Md.),  484  (1847),  notice  of  a 
call  by  newspaper  was  held  sufficient. 
The  court  said:  "There  is  no  pro- 
portionate object  attained  for  the 
great  inconvenience,  labor,  and  ex- 
pense incident  to  'personal  notice.' 
The  substitution  of  such  newspaper 
publications  in  lieu  of  personal  no- 
tice has  so  long  been  an  universal 
usage,  and  of  a  notoriety  equal  to 
that  of  the  publication  of  newspapers 
themselves,  that  the  custom  of  doing 
so  has  become  a  part  of  the  law  of 
the  land."  See  also  Louisville,  etc. 
Co.  v.  Meriwether,  5  B.  Mon.  (Ky.) 
13    (1844),   to   the  same   effect,   and 


373 


«    219.1  CALLS.  [CH.  VIL 

ficicnt,  although  the  charter,  statute,  or  by-laws  provide  for  notice 
by  publication.1  An  express  promise  of  the  subscriber  to  pay  a  call 
which  has  been  already  made  is  presumptive  evidence  that  he  had 
notice  of  that  call.2  Notice  by  publication,  given  under  the  author- 
ity of  a  statute,  charter,  or  by-law,  must  strictly  comply  with  the  pro- 
visions prescribed  as  to  the  time  and  formalities.3  The  by-laws  of 
a  company  may  provide  that  notice  of  a  call  shall  be  given  by  post- 
ing the  same  at  the  office  of  the  company,  so  far  as  stockholders  are 
concerned  who  have  not  left  their  address  with  the  company.4  It 
has  been  held  in  England  that  after  a  stockholder  is  dead  and  the 
company  has  knowledge  of  that  fact,  notice  of  an  assessment  on  his 
stock  cannot  be  served  so  as  to  bind  his  estate  j  neither  can  a  notice 

dictum  in  Danbury,  etc.  R.  R.  V.  Wil-  by  actual  personal  notice."     Cf.  sem- 

son,    22   Conn.   435,   455    (1853),   and  hie,  in  Tomlin  v.  Tonica,  etc.  R.  R.,  23 

§§130,  131,  727  infra.  Ill-  429,  436  (1860). 

i  Even  though  the  by-laws  require  2  Miles    v.     Bough,    3    Q.    B.    845 

notice  of  assessment  to  be  given  by  (1842) ;    Fairfield  County  Turnp.  Co. 

publication,    yet    if    no    attention    is  v.  Thorp,  13  Conn.  173  (1839). 

ever   paid   to  the   by-law   and   actual  3  Where    twenty    days'    notice   was 

notice  is  given  of  an  assessment  and  required,   proof  of  sending  notice  is 

the  stockholder  objects  to  the  assess-  insufficient      The    time    of    sending 

ment  on  another  ground,  but  not  on  must  be  proved.     Cole  v.  Joliet  Opera 

that    ground,    he    cannot    thereafter  House  Co.,  79  111.  96   (1875).     Notice 

raise    the   objection   on   that   ground,  by   publication  "at  least  sixty  days" 

Grand  Valley,  etc.  Co.  v.  Fruita  Imp.  is  satisfied  by   one  publication  sixty 

Co.,  86  Pac.  Rep.  324   (Col.  1906).    In  days  or  more  before  the  time  of  pay- 

the  case  of  Mississippi,  etc.  R.  R.  v.  ment.     Muskingum,  etc.  Co.  v.  Ward, 

Gaster,  20  Ark.  455    (1859),  the  stat-  13   Ohio,   120    (1844);    Fox  v.   Allens- 

ute  prescribed  sixty   days'  notice  by  ville,    etc.    Turnp.    Co.,    46    Ind.    31 

publication.     Actual   personal   notice  (1874).      Fifty-nine    days    is    insuffi- 

was    given,    and    no   publication   was  cient  where  sixty  days  is  prescribed, 

had.     The  court  sustained  the   notice  Macon,   etc.   R.   R.   v.   Vason,   57   Ga. 

and  said:     "One  of  the  criterions  by  314  (1876).     The  printed  notice  must 

which  to   determine  whether  the  re-  be  put  in  evidence.     Rutland,  etc.  R. 

quirements   of  a  statute  are  impera-  R.  v.  Thrall,   35  Vt.   536    (1863).     A 

tive  or  merely  directory  is  that  those  copy    of   the   first   insertion    and   the 

acts  which  are  of  the  essence  of  the  testimony   of  the   publisher  that  the 

thing  required  to  be  done  are  impera-  other  insertions  were  duly  made  are 

tive,  while  those  which  are  not  of  the  prima  facie   evidence   of  publication, 

essence     are     directory.     .     .     .    The  Unthank  v.  Henry  County  Turnp.  Co., 

giving   of    sixty    days'   notice    is    im-  6  Ind.  125   (1855).     The  secretary  of 

perative    and    must   be   strictly    com-  the  corporation   cannot,  by  a  certifi- 

plied   with,   because   it  is  of   the  es-  cate,     prove     publication     of     notice, 

sence    of   the    thing    required    to   be  Tomlin  v.  Tonica,  etc.  R.  R.,   23  111. 

done;  the  mode  of  doing  so  is  direct-  429   (1860). 

ory,  because  not  of  the  essence,  and  4  Nashua  Sav.  Bank  v.  Anglo- 
may  be  either  by  publication  in  the  American,  etc.  Co.,  189  U.  S.  221 
manner  prescribed  by  the  charter  or  (1903). 

374 


CH.  VII.] 


CALLS. 


[§  120. 


threatening  forfeiture  of  his  stock  for  non-payment.     Neither  can 
the  notice  be  served  upon  the  executors.1 

§  120.  Demand,  waiver,  pleadings,  etc. — After  notice  has  been 
given,  no  demand  is  necessary  before  bringing  a  suit  to  collect  the 
subscription.2  The  subscriber  may,  by  his  acts  or  express  agree- 
ment, waive  the  call  itself,  or  informalities  in  its  making,  or  notice 
thereof.3  It  is  immaterial  that  other  shareholders  have  had  no  no- 
tice of  the  call.4  The  proof  of  calls  and  of  notice,  when  required, 
must  be  clear  and  complete.5  The  pleadings  in  an  action  on  calls 
must  allege  the  various  facts  which  complete  the  obligation  of  the 
subscriber  to  pay.6     Proof  of  a  call  duly  made  makes  out  a  prima 


i  Allen  v.   Gold   Reefs,   etc.,    [1899]  Dangerfield,  L.  R.  3  C.  P.  407  (1868). 

2  Ch.  40.  5  Scarlett  v.  Academy  of  Music,  43 

2  Penobscot  R.  R.  v.  Dummer,  40  Md.  203  (1875);  s.  c,  46  Md.  132. 
Me.  172  (1S55);  Goodrich  v.  Rey-  This  case  holds  also  that  calls  may 
nolds,  31  111.  490  (1863);  Winter  v.  be  proved  by  reading  extracts  from 
Muscogee  R.  R.,  11  Ga.  438  (1852).  the  minutes  of  the  directors'  meetings 
Cf.  Spangler  v.  Indiana,  etc.  R.  R.,  21  without  putting  the  books  in  evi- 
111.  276  (1859),  holding  that  one  de-  dence.  Where  a  meeting  of  the  board 
mand  made  for  several  assessments  of  directors  could  not  authorize  suit 
suffices.  to    collect    assessments    because    the 

3  State  Bank  Bldg.  Co.  v.  Pierce,  assessments  were  not  yet  due,  an  ad- 
92  Iowa,  668  (1894);  Macon,  etc.  R.  journed  meeting  of  that  meeting  can- 
R.  v.  Vason,  57  Ga.  314  (1876).  A  not  authorize  such  suit,  all  of  the 
stockholder  who  as  a  director  and  directors  not  being  present  at  the  ad- 
president  participated  in  making  journed  meeting  and  no  new  notice 
calls  cannot  object  to  the  regularity  thereof  having  been  given.  Bank  of 
of  such  calls.  Graebner  v.  Post,  119  National  City  v.  Johnston,  133  Cal. 
Wis.   392    (1903).     Payment  of   part  185   (1901). 

of  a  subscription  is  no  waiver  of  the  6  The  company  must  allege  that 
right  to  have  a  call  made  for  the  bal-  the  instalments  are  all  due  and  pay- 
ance  before  payment.  Grosse  Isle  able,  where  several  are  sued  on. 
Hotel  Co.  v.  I'Anson,  43  N.  J.  L.  442  Bethel,  etc.  Co.  v.  Bean,  58  Me.  89 
(1881).  The  vote  of  a  city  to  pay  a  (1870).  At  common  law  the  count 
call  is  no  waiver  of  its  invalidity,  set  out  in  the  declaration  should  be 
Pike  v.  Bangor,  etc.  R.  R.,  68  Me.  445  not  on  the  contract  of  subscription, 
(1878).  The  waiver  must  be  clearly  but  in  indebitatus  assumpsit  for  calls 
proved.  Rutland,  etc.  R.  R.  v.  Thrall,  or  instalments  due.  Peake  v.  Wa- 
35  Vt.  536  (1863).  A  director  par-  bash  R.  R.,  18  111.  88  (1856).  For 
ticipating  in  a  call  cannot  object  the  customary  averments,  see  Spang- 
thereto.  York  Tramways  Co.  v.  Wil-  ler  v.  Indiana,  etc.  R.  R.,  21  111.  276 
lows,  L.  R.  8  Q.  B.  D.  685  (1882).  (1859).  For  the  defendants'  plead- 
Where  a  subscriber,  upon  receiving  ing,  see  South  Eastern  Ry.  v.  Hebble- 
notice  of  a  call,  denies  that  he  is  a  white,  12  A.  &  E.  497  (1840).  The  call 
stockholder,  he  thereby  waives  fur-  and  notice  may  be  pleaded  in  general 
ther  notice.  Cass  v.  Pittsburgh,  etc.  language  in  the  complaint.  Walter, 
Ry.,80Pa.  St.  31  (1875),  95  Pac.Rep.39.  etc.    Co.    v.    Robbins,    56    Minn.,    48 

4  Newry,  etc.  Ry.  v.  Edmunds,  2  (1893).  In  a  suit  by  a  corporation 
Exch.    118     (1848);     Shackleford    v.  to  collect  a  call  the  corporation  need 

375 


§  120.] 


CALLS. 


[CH.  VII. 


facie  case  against  a  subscriber.1  A  stockholder  sued  on  a  call  can- 
not defend  on  the  ground  that  the  call  was  invalid.  His  remedy  is  a 
suit  to  set  aside  the  call.2 


not  allege  that  the  defendant  was  a 
stockholder  when  the  call  became 
due,  and  need  not  allege  any  agree- 
ment by  the  defendant  to  pay  the 
call.  American  Alkali  Co.  v.  Camp- 
bell, 113  Fed.  Rep.  398  (1902).  It  is 
sufficient  to  allege  that  the  defendant 
holds  stock  which  has  never  been 
paid  up.  The  defense  that  the  de- 
fendant  did    not   subscribe    for   the 


stock  or  did  not  agree  to  pay  for  it, 
or  that  he  is  not  liable,  must  be  set 
up  in  the  answer.  Atlantic  T.  Co.  v. 
Osgood,  116  Fed.  Rep.  1019   (1902). 

As    to   the    proofs,    see    §§    55,    72, 
supra. 

i  Crawford 
(1906). 

2  Campbell 
125  Fed.  Rep.  207  (1903). 


v.  Roney,   126   Ga.   763 
v.    American,    etc.    Co., 


376 


CHAPTER  VIII. 


FORFEITURE  OF  SHARES  FOR  NON-PAYMENT. 


i  121.  The  various  remedies. 

122,  123.  The  remedy  by  forfeiture 
and  sale  of  stock  is  by  statu- 
tory authority  only. 

124.  The    remedy    by    forfeiture    is 

cumulative. 

125,  126.  Forfeiture      relieves      the 

stockholder  whose  shares  are 
forfeited  from  liability  to  the 
corporation. 

127,  128.  The  same  rule  prevails  as 
to  corporate  creditors. 

129.  Statutory  formalities  and  gen- 
eral method  of  forfeiture. 


§  130.  Notice  in  cases  of  forfeiture. 

131.  Notice   is   not   the  same  thing 

as  forfeiture. 

132.  Tender,  by  stockholder,  before 

forfeiture0 

Surplus  after  valid  forfeiture 
belongs  to  the  corporation — 
Purchase  by  the  corporation 
— Liability  of  the  purchaser 
of  forfeited  stock. 

Equity  will  relieve  a  stock- 
holder from  an  unauthorized 
forfeiture — Action  at  law  for 
damages. 


133. 


134. 


§  121.  The  various  remedies. — When  a  subscriber  fails  or  re- 
fuses to  pay  for  the  shares  of  stock  for  which  he  has  subscribed, 
the  corporation  generally  has  several  methods  of  enforcing  the  con- 
tract. First,  there  is  the  common-law  action  to  collect  the  sub- 
scription as  a  debt.  This  remedy  always  exists,  except  in  a  few 
states  where  it  is  available  only  when  the  subscription  itself  or  the 
charter  creates  a  liability  to  pay.1  The  corporation  may  sue  on 
the  subscription,  obtain  judgment,  and  then  proceed  to  sell  the 
stock  under  an  execution  levied  to  collect  the  judgment.2  Second, 
the  corporation  may  bring  an  action  at  law  for  breach  of  contract, 
the  measure  of  damages  being  the  difference  between  the  value  of 
the  stock  at  the  price  which  the  subscriber  was  to  pay  and  the 
market  value  at  the  date  of  the  refusal  to  pay.3  A  third  and  very 
important  remedy  is  that  of  forfeiture.  It  is  the  subject  of  this 
chapter.  It  is  effected  in  one  of  two  ways:  the  forfeiture  may  be 
by  a  strict  foreclosure  of  the  stockholder's  stock — that  is,  the  tak- 
ing of  his  stock  by  the  corporation  itself;  or  it  may  be  by  a  pub- 
lic sale  of  the  stock  for  non-payment  of  the  subscription.4 

§§  122,  123.  The  remedy  by  public  sale  of  stock  is  by  statutory 
authority  only. — In  addition  to  the  remedy  of  an  action  at  law  to 
compel   payment  of  a   subscription  for  stock,   there  frequently  is 

i  See  §  74,  supra.  4  Quoted    and    approved    in    Thom- 

2  Chase  v.  East  Tenn.  etc.  R.  R.,  5    son's    Succession,    46   La.   Ann.   1074 
Lea  (Tenn.),  415   (1880).  (1894). 

3  Rand  v.  White  Mountains  R.  R., 
40  N.*H.  79   (1860). 

377 


§    124.]  FORFEITURE  OF  STOCK.  [en.  VIIL 

given  to  the  corporation  the  right  to  sell  the  subscriber's  stock  for 
non-payment  of  his  subscription  and  apply  the  proceeds  to  the  pay- 
ment of  that  subscription.  This  is  what  is  generally  known  as  a 
forfeiture  of  the  stock.  It  is  not  a  common-law  remedy,  and,  con- 
sequently, can  be  resorted  to  by  the  corporation  only  when  power  to 
make  the  sale  is  given  to  the  corporation  by  statute  or  by  the  act 
of  incorporation.1  It  has  been  held,  however,  that  the  right  to  for- 
feit may,  however,  be  created  by  the  consent  of  the  stockholders,  and 
be  indorsed  on  the  certificates  of  stock.2 

The  authority  to  forfeit  shares  for  non-payment  of  the  subscrip- 
tion cannot  be  created  by  a  by-law.3  Such  a  forfeiture  would  be 
wholly  void,  and  transfers  based  thereon  would  confer  no  rights 
upon  the  transferee.4 

§  124.  The  remedy  by  forfeiture  is  cumulative. — Frequently 
when  a  corporation  is  authorized  by  statute  to  forfeit  shares  for 
non-payment  of  the  subscription,  the  question  arises  whether  the 
statutory  remedy  of  forfeiture  is  exclusive,  thereby  preventing  a 
resort  to  the  common-law  remedy  of  an  action  of  assumpsit  on  the 

i  Westcott  v.  Minnesota  Min.  Co.,  3  Re  Long  Island  R.  R.,  19  Wend. 
23  Mich.  145  (1871);  Minnehaha,  etc.  37  (1837);  s.  c,  32  Am.  Dec.  429; 
Assoc,  v.  Legg,  50  Minn.  333  (1892);  Kirk  v.  Nowill,  1  T.  R.  118  (1786). 
Budd  v.  Multnomah  St.  Ry.,  15  Oreg.  Cf.  Kennebec,  etc.  R.  R.  v.  Kendall, 
413  (1887).  In  the  last  case  the  31  Me.  470  (1850) ;  Rosenback  v.  Salt 
statute  gave  the  corporation  power  to  Springs  Nat.  Bank,  53  Barb.  495,  506 
make  by-laws  for  forfeiture  of  stock.  (1868).  A  by-law  allowing  forfeit- 
There  being  no  by-law,  a  forfeiture  ure  of  stock  is  not  valid  as  against  a 
was  attempted  by  a  resolution  of  the  stockholder  who  was  such  before  the 
board  of  directors.  Held,  this  could  by-law  was  passed.  March  v.  Fair- 
not  be  done.  Barton's  Case,  4  De  G.  mount  Creamery  Assoc,  32  Pa.  Sup. 
&  J.  46  (1859),  is  similar  and  strong-  517   (1907). 

er,    as   public   notices   and   advertise-  i  Re  Long  Island  R.  R.,   19  Wend, 

ments  were  made   of  the   threatened  37   (1837).     Yet,  where  such  a  power 

forfeiture.     Perrin  v.  Granger,  30  Vt.  was   conferred    by   a   by-law   adopted 

595   (1858);   Clarke  v.  Hart,  6  H.  L.  at  a  meeting  of  the   stockholders,   a 

Cas.  633    (1858);   Stanhope's  Case,  L.  stockholder  whose  stock  has  been  de- 

R.  1  Ch.  App.  161   (1865).     In  Kelk's  clared  forfeited  under  the  by-law,  and 

Case,  L.  R.  9  Eq.  107  (1869),  the  for-  who  is  shown  to  have  assented  to  the 

feiture  was  provided  for  in  deed  of  by-law,  will  not  be  heard  to  question 

settlement,  and  hence  regular.    If  the  the  validity  of  the  forfeiture.     He  is 

corporation    purchases    at    forfeiture  estopped.     Lesseps  v.  Architects'  Co., 

sale,   as   it   may   by   statute   in    Cali-  4   La.  Ann.   316    (1849).     The   corpo- 

fornia,  execution  against  the  corpora-  ration    cannot,    by    a    by-law,    forfeit 

tion  cannot  be  levied  on  such  stock,  shares  temporarily,  until  penalties  or 

Robinson    v.    Spaulding,    etc.    Co.,    72  fines  shall  have  been  paid.     Adley  v. 

Cal.  32  (1887).  Reeves,  2  Maule  &  S.  53    (1813),  by 

2  Weeks  v.  Silver  Islet,  etc.  Co.,  55  Lord    Ellenborough.      Cf.    Cartan    v. 

N.  Y.  Super.  Ct.  1   (1887).     See  also  Father  Matthew,  etc.  Soc,  3  Daly.  (N. 

§  522,  infra.  Y.),    20    (1869);    Pentz   v.   Citizens', 

378 


CH.  VIII.  J 


FORFEITURE  OF  STOCK. 


[§  124. 


contract.  It  is  the  well-established  rule  that  it  does  not.1  A  grant 
of  the  power  to  declare  a  forfeiture  of  the  shares  of  a  subscriber  for 
non-payment  of  calls  does  not,  by  implication,  deprive  the  corpora- 
tion of  its  option  of  remedies;2  and  the  corporation  may,  in  its  dis- 
cretion, upon  the  failure  of  the  subscriber  to  pay  for  his  stock,  either 
proceed  against  him  by  suit  to  collect  the  unpaid  calls,  or  may  for- 
feit his  shares  of  stock.  The  corporation,  by  such  a  statute,  is  given 
its  choice  of  remedies,  and  may  pursue  either.  The  remedy  by  for- 
feiture is  additional.  In  legal  language  the  remedy  by  forfeiture  is 
cumulative.3 

It  is  to  be  borne  in  mind,  however,  that  in  the  New  England  states 


etc.  Co.,  35  Md.  73  (1871).  But  only 
the  stockholder  can  object  to  a  for- 
feiture on  the  ground  that  it  is  by 
by-law.  Detweiler  v.  Breckenkamp, 
83  Mo.  45  (1884).  Cf.  §§  131,  134, 
infra.  As  to  the  effect  of  acquies- 
cence or  waiver  by  the  stockholder, 
see  §§  129,  134,  infra. 

i  A  sale  or  forfeiture  of  the  sub- 
scriber's stock  is  not  a  condition 
precedent  to  a  suit  to  collect  the  un- 
paid subscription.  Nashua  Sav. 
Bank  v.  Anglo-American,  etc.  Co.,  189 
U.  S.  221  (1903). 

2  Quoted  and  approved  in  Camp- 
bell v.  American,  etc.  Co.,  125  Fed. 
Rep.  207   (1903). 

3  Quoted  and  approved  in  Amer- 
ican Alkali  Co.  v.  Campbell,  113  Fed. 
Rep.  398  (1902);  San  Joaquin,  etc. 
Co.  v.  Beecher,  101  Cal.  70  (1894); 
Denver  Chamber,  etc.  v.  Green,  8 
Colo.  App.  420  (1896) ;  Atlantic  Dyna- 
mite Co.  v.  Andrews,  97  Mich.  466 
(1893);  Puget  Sound,  etc.  R.  R.  v. 
Ouellette,  7  Wash.  265  (1893);  Dela- 
ware, etc.  Canal  v.  Sansom,  1  Bin. 
(Pa.)  70  (1803);  Instone  v.  Frank- 
fort Bridge  Co.,  2  Bibb  (Ky.),  576 
(1812);  Rensselaer,  etc.  Co.  v.  Bar- 
ton, 16  N.  Y.  457,  note  (1854);  Lake 
Ontario,  etc.  R.  R.  v.  Mason,  16  N.  Y. 
451  (1857) ;  Buffalo,  etc.  R.  R.  v.  Dud- 
ley, 14  N.  Y.  336  (1856)  ;  Tutwiler  v. 
Tuskaloosa,  etc.  Co.,  89  Ala.  391 
(1890);  HarlEem  Canal  Co.  v.  Seixas, 
2  Hall  (N.  Y.  Super.  Ct.),  504  (1829); 
Rensselaer,    etc.    Co.    v.    Wetsel,    21 


Barb.  56  (1855);  Sagory  v.  Dubois, 
3  Sandf.  Ch.  466  (1846);  Troy,  etc. 
R.  R.  v.  McChesney,  21  Wend.  296 
(1839);  Herkimer  Mfg.  Co.  v.  Small, 
21  Wend.  273  (1839);  Ogdensburgh, 
etc.  R.  R.  v.  Frost,  21  Barb.  541 
(1856);  Northern  R.  R.  v.  Miller,  10 
Barb.  260  (1851);  Troy,  etc.  R.  R.  v. 
Tibbits,  18  Barb.  297  (1854);  Troy, 
etc.  R.  R.  v.  Kerr,  17  Barb.  581 
(1S54);  Jenkins  v.  Union  Turnp. 
Co.,  1  Caines'  Cas.  86,  95  (1804); 
Goshen,  etc.  Co.  v.  Hurtin,  9  Johns. 
217  (1812);  McDonough  v.  Phelps, 
15  How.  Pr.  372  (1856);  Freeman  v. 
Winchester,  18  Miss.  577  (1848); 
Hartford,  etc.  R.  R.  v.  Kennedy,  12 
Conn.  499  (1838);  Mann  v.  Cooke,  20 
Conn.  178  (1850);  Connecticut,  etc. 
R.  R.  v.  Bailey,  24  Vt.  465  (1852); 
Rutland,  etc.  R.  R.  v.  Thrall,  35  Vt. 
536  (1863);  New  Hampshire,  etc.,  R. 
R.  v.  Johnson,  30  N.  H.  390  (1855); 
White  Mountains  R.  R.  v.  Eastman, 
34  N.  H.  124,  147  (1856);  Piscataqua 
Ferry  Co.  v.  Jones,  39  N.  H.  491 
(1859) ;  Hightower  v.  Thornton,  8  Ga. 
486,  502  (1850);  Hughes  v.  Antietam 
Mfg.  Co.,  34  Md.  316  (1870);  Beene 
v.  Cahawba,  etc.  R.  R.,  3  Ala.  (N.  S.) 
660  (1842);  Selma,  etc.  R.  R.  v.  Tip- 
ton, 5  Ala.  (N.  S.)  787  (1843);  Gratz 
v.  Redd,  4  B.  Mon.  (Ky.)  178  (1843); 
Boston,  etc.  R.  R.  v.  Wellington,  113 
Mass.  79  (1873).  [Compare  with  this 
case  Worcester  Turnp.  Corp.  v.  Wil- 
lard,  5  Mass.  80  (1809) ;  Andover,  etc. 
Co.  v.  Gould,  6  Mass.  40  (1809);  New 


379 


125,  126.] 


FORFEITURE  OF  STOCK. 


[CH.  VIII. 


the  right  to  forfeit  stock  for  non-payment  of  assessments  does  not 
imply  a  right  in  the  corporation  to  sue  for  such  assessments.  The 
latter  right  does  not  exist  at  all  unless  it  is  given  by  statute  or  by 
the  express  promise  of  the  subscriber.1  But  where  both  remedies 
exist,  the  corporation  has  its  election  which  remedy  to  pursue.2 

An  assessment  levied  by  stockholders  upon  themselves  in  a  na- 
tional bank  in  accordance  with  the  order  of  the  comptroller  cannot 
be  collected  by  suit,  inasmuch  as  a  remedy  is  given  by  the  act  of 
congress,  such  remedy  being  a  sale  of  the  stock  itself.3 

§§  125,  126.  Forfeiture  relieves  the  stockholder  whose  shares  are 
forfeited  from  liability  to  the  corporation. — Although  a  corporation 
having  the  right  to  declare  a  forfeiture  of  shares  for  non-payment 
of  calls  may  generally,  at  its  option,  either  forfeit  the  stock  or 
bring  an  action  to  collect  the  amount  due,  it  does  not  follow  that 
it  can  forfeit  the  stock  and  then  bring  an  action  for  the  unpaid 
calls,  or  any  part  thereof  that  may  remain  unsatisfied  by  the  for- 
feiture. The  corporation,  when  a  stockholder  is  in  default,  may 
pursue  either  the  one  remedy  or  the  other,  in  its  discretion;  but  it 
cannot  forfeit  the  stock  and  afterwards  sue  at  law.  The  first  rem- 
edy, when  exercised,  excludes  the  second.4     In  order,  however,  to 


Bedford,  etc.  Corp.  v.  Adams,  8  Mass.  etc.  Bank  v.  Anglo-American,  etc.  Co., 
138  (1811);  City  Hotel  v.  Dickinson,  189  U.  S.  221  (1903).  A  subscriber 
72     Mass.     586     (1856);     Mechanics',     for  stock  cannot  avoid  liability  to  the 


etc.  Co.  v.  Hall,  121  Mass.  272  (1876).] 
Mexican  Gulf  Ry.  v.  Viavant,  6  Rob. 
(La.)  305  (1843);  New  Orleans,  etc. 
Co.  v.  Briggs,  27  La.  Ann.  318  (1875) ; 
Greenville,   etc.   R.   R.  v.  Cathcart,  4 


corporation  by  setting  up  that  the 
corporation  has  a  lien  on  the  stock 
therefor  and  may  enforce  it.  Lank- 
ershim,  etc.  Co.  v.  Herberger,  82 
Cal.  600  (1890) .    The  corporation  may 


Rich.   L.    (S.   C.)    89    (1850);     Klein  sue   for  the  whole   subscription   and 

v.  Alton,  etc.  R.  R.,  13  111.  514  (1851) ;  need  not  sue  merely  for  the  deficiency 

Peoria,    etc.  R.   R.   v.   Elting,   17   111.  that    would    result    from   selling    the 

429    (1856)  ;    Kirksey  v.  Florida,  etc.  stock.      International,    etc.    Assoc,    v. 

Co.,  7  Fla.  23  (1857);  Tar  River  Nav.  Walker,  83  Mich.  386   (1890).     For  a 

Co.   v.    Neal,   3   Hawks    (N.   C),   520  learned    discussion    of    the     general 

(1825);  Stokes  v.  Lebanon,  etc.  Co.,  6  question  how  far  the  jurisdiction  of 

Humph.    (Tenn.)    241    (1845);    South  a  court  of  equity  may  be  affected  by 

Bay,    etc.    Co.    v.    Gray,    30    Me.    547  statutes    conferring   similar   jurisdic- 

(1849);    Franklin  Glass  Co.  v.  Alex-  tion  upon  the  courts  of  law, — an  in- 

ander,   2  N.   H.   380    (1821) ;    s.   c,  9  quiry  germane  to  the  matter  of  the 

Am.   Dec.    92,    and   note,    pp.    96-104.  present  section — see  note  to  Payne  v. 

Even   though   by   the   statutes   under  Bullard,    23    Miss.    S8    (1851),    in    55 

which  an  English  corporation  is  or-  Am.  Dec.  74,  77. 
ganized  the  company  has  a  lien  on 
the  stock  for  unpaid  assessments  and 
may  forfeit  the  stock  for  non-pay- 
ment, yet  this  does  not  prevent  a 
suit  to  collect  the  assessment.    Nashua, 


i  See  §  74,  supra. 

2  See  §§  125,  126,  infra. 

3  Hulitt   v.   Bell,    85    Fed.   Rep.    89 
(1898). 

4  Small    v.  Herkimer    Mfg.    Co.,    2 


3S0 


CH.  VIII.] 


FORFEITURE  OF  STOCK. 


[§§  125,  126. 


bar  the  remedy  of  an  action  on  the  contract,  the  forfeiture  must 
be  complete  and  actual.  Consequently,  a  mere  threat  that  a  for- 
feiture will  be  made  if  the  call  be  not  paid  on  or  before  a  day  named, 
or  an  unsuccessful  attempt  to  sell  the  stock,  will  not  be  sufficient  to 
bar  the  action.1  So  long  as  the  stockholder's  right  to  the  shares 
and  to  the  immunities  and  emoluments  attached  thereto  remains, 
his  obligation  to  pay  is  not  extinguished.2  Under  the  California 
statute  which  renders  stockholders  personally  liable  for  an  assess- 
ment on  their  stock  after  the  stock  has  been  advertised  for  sale,  the 
stockholders  are  not  liable  before  such  stock  has  been  advertised 
for  sale.3 

There  is,  however,  a  line  of  cases  in  which  a  contrary  rule  is  sus- 
tained. In  these  cases  it  is  held  that  the  forfeiture  of  shares  of  stock 
is  like  the  foreclosure  of  a  mortgage;  and  that,  just  as  a  mortgagee 
may  have  judgment  against  the  mortgagor  for  a  deficiency,  so  may 
a  corporation  have  its  action  of  assumpsit  against  a  subscriber  whose 
stock,  having  been  forfeited,  has  failed  to  sell  for  enough  to  pay 
his  entire  indebtedness  to  the  corporation  on  the  subscription.4  This 
rule    is    held    to    apply    equally    to    original    subscribers    or    their 


N.  Y.  330  (1849),  reversing  Herkimer    holder  failing  to  pay  the  assessment 


Mfg.  Co.  v.  Small,  21  Wend.  273 
(1839);  s.  c,  2  Hill,  127  (1841); 
Northern  R.  R.  v.  Miller,  10  Barb. 
260,  271  (1851);  Ogdensburgh,  etc. 
R.  R.  v.  Frost,  21  Barb.  541  (1856); 
Mills  v.  Stewart,  41  N.  Y.  384  (1869) ; 
Macauly  v.  Robinson,  18  La.  Ann.  619 
(1866);  Allen  v.  Montgomery  R.  R. 
11  Ala.  437  (1847);  Athol,  etc.  R.  R. 
v.  Prescott,  110  Mass.  213  (1872)  ; 
Mechanics,  etc.  Co.  v.  Hall,  121  Mass. 
272  (1876).  With  these  later  Massa- 
chusetts cases  compare  Andover,  etc. 
Co.  v.  Gould,  6  Mass.  40  (1809); 
Franklin  Glass  Co.  v.  White,  14  Mass. 
286  (1817);  Rutland,  etc.  R.  R.  v. 
Thrall,  35  Vt.  536  (1863);  Macon, 
etc.  R.  R.  v.  Vason,  57  Ga.  314  (1876) ; 
Ashton  v.  Burbank,  2  Dill.  435 
(1S73) ;  s.  c,  2  Fed.  Cas.  26.  A  mere 
by-law  cannot  give  to  the  corporation 
power  to  collect  by  suit  from  the 
stockholder  after  a  forfeiture  of  the 
stock  for  non-payment  has  been  made. 
Mandell  v.  Swan,  etc.  Co.,  154  111.  177 
(1895).  Where  stock  in  a  national 
bank  is  sold  on  account  of  a  stock- 


levied  upon  it  under  section  5205  of 
the  United  States  Revised  Statutes, 
the  sale  is  illegal  unless  the  stock 
brings  the  amount  of  the  assessment. 
Merchants'  Nat.  Bank,  etc.  v.  Fouche, 
103  Ga.  851  (1898). 

i  See  cases  cited  supra  and  §  131, 
infra. 

2  Instone  v.  Frankfort  Bridge  Co., 
2  Bibb  (Ky.),  576,  581  (1812).  Cf. 
Buffalo,  etc.  R.  R.  v.  Dudley,  14  N.  Y. 
336,  347  (1856).  It  has  been  held, 
also,  that  an  action  to  collect  a  sub- 
scription, when  prosecuted  to  judg- 
ment, is  a  bar  to  the  remedy  by  for- 
feiture. Giles  v.  Hutt,  3  Exch.  18 
(1848). 

3  Shively  v.  Eureka,  etc.  Co.,  129 
Cal.  293  (1900).  A  statutory  right 
of  the  corporation  to  waive  the  com- 
pletion of  forfeiture  and  bring  suit 
in  lieu  thereof  is  strictly  construed. 
National,  etc.  Co.  v.  Chappellet,  88 
Pac.  Rep.  506  (Cal.  1906). 

4  Carson  v.  Arctic  Min.  Co.,  5  Mich. 
288  (1858);  Danbury,  etc.  R.  R.  v. 
Wilson,  22  Conn.  435   (1853). 


381 


125,  126.] 


FORFEITURE  OF  STOCK. 


[CH.  VIII. 


transferees;  and  any  stockholder  is  liable,  under  this  rule,  for  the 
balance  due  upon  assessments,  after  deducting  the  amount  realized 
at  the  forfeiture  sale.1  It  has  been  held  that  a  by-law  cannot  render 
subscribers  liable  for  any  deficiency  left  on  the  sale  of  the  stock 
upon  non-payment  of  calls.2  In  England  the  certificate  of  incorpo- 
ration may  provide  that  a  stockholder  whose  stock  has  been  forfeited 
for  non-payment  of  calls  shall  be  liable  for  calls  unpaid  before  for- 
feiture.3 The  common-law  rule  in  England  seems  to  be  the  same 
as  in  the  United  States.4 


i  Merrirnac  Min.  Co.  v.  Bagley,  14 
Mich.  501  (1866).  Quoted  and  ap- 
proved in  Thomson's  Succession,  46 
La.  Ann.  1074  (1894).  Cf.  Hartford, 
etc.  R.  R.  v.  Kennedy,  12  Conn.  499 
(1838);  Brockenbrough  v.  James 
River,  etc.  Co.,  1  Patton  &  H.  (Va.) 
94  (1855);  Mann  v.  Currie,  2  Barb. 
294  (1848).  It  is  sometimes  so  pro- 
vided expressly  by  statute  or  by  the 
charter  of  the  company.  Brocken- 
brough v.  James  River,  etc.  Co.,  1  Pat- 
ton  &  H.  (Va.)  94  (1855);  Danbury, 
etc.  R.  R.  v.  Wilson,  22  Conn.  435,  456 
(1853);  Great  Northern  Ry.  v.  Ken- 
nedy, 4  Exch.  417  (1849);  Mann  v. 
Cooke,  20  Conn.  178  (1850).  But  see 
Athol,  etc.  R.  R.  v.  Prescott,  110 
Mass.  213  (1872);  Kennebec,  etc.  R. 
R.  v.  Kendall,  31  Me.  470  (1850); 
Allen  v.  Montgomery  R.  R.,  11  Ala. 
437  (1847);  Stokes  v.  Lebanon,  etc. 
Co.,  6  Humph.  (Tenn.)  241  (1845); 
Mills  v.  Stewart,  41  N.  Y.  384  (1869). 
Or  that  any  stockholder  whose  shares 
shall  have  been  forfeited  for  non-pay- 
ment of  assessments  shall  neverthe- 
less be  liable  to  pay  to  the  company 
all  calls  owing  on  such  shares  at  the 
time  of  the  forfeiture.  This  seems  to 
be  a  common  provision  in  the  articles 
of  association  of  English  companies. 
Creyke's  Case,  L.  R.  5  Ch.  App.  63 
(1869).  But  in  such  a  case  interest 
is  not  collectible.  Stocken's  Case,  L. 
R.  5  Eq.  6  (1867);  aff'd  L.  R.  3  Ch. 
App.  412.  It  is  otherwise  in  ordi- 
nary defaults.  Gould  v.  Oneonta,  71 
N.  Y.  298  (1877);  Rikhoff  v.  Brown, 
etc.  Co.,  68  Ind.  388  (1879).  Where 
forfeited  stock  is  re-issued  for  cash  at 


par,  corporate  creditors  have  no  claim 
against  the  first  subscriber.  First, 
etc.  Bank  v.  Peoria  Watch  Co.,  191  111. 
128   (1901). 

2  Mandel  v.  Swan,  etc.  Co.,  154  111. 
177,  186  (1895).  Contra,  Elizabeth, 
etc.  Mills  v.  Dunston,  121  N.  C.  12 
(1897). 

3  Ladies',  etc.  Assoc.  Ltd.  v.  Pul- 
brook,  81  L.  T.  Rep.  300  (1899) ;  aff'd, 
[1900]   2  Q.  B.  376. 

4  Such,  also,  seems  to  be  the  rule 
in  England.  King's  Case,  L.  R.  2  Ch. 
App.  714  (1867) ;  Knight's  Case,  L. 
R.  2  Ch.  321  (1867);  Snell's  Case,  L. 
R.  5  Ch.  22  (1869).  By  statute  in 
England  the  right  to  forfeit  and  the 
right  to  sue  may  be  exercised  to- 
gether; and  shares  may  be  forfeited 
for  non-payment  of  calls,  whether 
those  calls  have  been  sued  for  or  not. 
Great  Northern  Ry.  v.  Kennedy,  4 
Exch.  417  (1849);  Inglis  v.  Great 
Northern  Ry.,  1  Macq.  (Sc.  App.)  112 
(1852).  But  there  is  a  line  of  cases 
in  England  where,  by  the  terms  of 
the  deeds  of  settlement,  only  an  op- 
tion is  given  to  sue  or  to  forfeit,  and 
it  is  then  held  that  the  corporation 
is  concluded  by  its  election.  Inglis  v. 
Great  Northern  Ry.,  supra,  where, 
notwithstanding  the  forfeiture  and 
cancellation  of  shares  and  the  issue 
of  new  ones,  the  right  to  recover  in 
an  action  for  calls  was  held  to  re- 
main unimpaired  in  the  company. 
See  also  Birmingham,  etc.  Ry.  v. 
Locke,  1  Q.  B.  256  (1841) ;  Edinburgh, 
etc.  Ry.  v.  Hebblewhite,  6  M.  &  W. 
707  (1840);  London,  etc.  Ry.  v.  Fair- 
clough,  2  Man.  &  Gr.  674  (1841). 


382 


CH.  VIII.]  FORFEITURE  OF  STOCK.  [§§    127,  128. 

§§127, 128.  The  same  rule  prevails  as  to  corporate  creditors.— 
In  the  absence  of  fraud  and  collusion  it  is  a  settled  rule  that,  where 
a  corporation  has  authority  to  declare  a  forfeiture  of  stock  for  non- 
payment of  calls,  and  a  forfeiture  is  regularly  declared,  such  formal 
declaration  puts  an  end  to  the  liability  of  the  stockholder,  and  cor- 
porate creditors  cannot  subsequently  hold  such  an  expelled  or  re- 
leased stockholder  liable.1  This  is  the  rule  even  though  the  debt 
was  contracted  by  the  company  before  the  stock  was  forfeited.2  The 
same  principle  of  law  that  prevents  the  corporation  from  suing  on 
a  subscription  after  the  stock  has  been  forfeited  prevents  the  cor- 
porate creditors  also  from  doing  the  same.  But,  on  the  other  hand, 
inasmuch  as  fraud  vitiates  all  acts  into  which  it  enters,  a  forfeiture 
of  stock  by  collusion  between  a  stockholder  and  the  board  of  directors 
of  the  corporation  will  not  release  him  from  liability  to  contribute  in 
the  event  of  the  insolvency  of  the  company.3  In  such  a  case  the 
creditors  may  invoke  the  interposition  of  a  court  of  equity  to  pre- 
vent the  consummation  of  an  inchoate  forfeiture,  or  to  set  aside  one 
already  accomplished.4     Hence,  it  is  well  settled  that  the  power  of 

i  Mills  v.    Stewart,   41    N.    Y.    384  Case,   4  K.   &  J.   305    (1858);    Spack- 

(1869);   Allen  v.  Montgomery  R.  R.,  man's    Case,    11    Jur.     (N.    S.)     207 

11  Ala.  437,  450    (1847);   Macauly  v.  (1865);  aff'd  L.  R.  3  H.  L.  371;  Stan- 

Robinson,    18    La.   Ann.   619    (1866);  hope's    Case,    L.   R.    1    Ch.   App.    161 

Woollaston's  Case,  4  De  G.  &  J.  437  (1866);    Stewart's  Case,  L.  R.  1  Ch. 

(1859);  Ex  parte  Beresford,  2  Macn.  App.    511    (1866);    Gower's   case,    L. 

&  G.  197   (1850);   Kelk's  Case,  L.  R.  R.  6  Eq.  77   (1868).     It  is  no  defense 

9   Eq.   107    (1869);    Dawes's  Case,  L.  to  a  suit  for  an  assessment  by  order 

R.  6  Eq.  232   (1868);   Snell's  Case,  L.  of  the   directors  that  after  the  com- 

R.  5  Ch.  App.  22  (1869).    Nor,  on  the  pany  became  insolvent  the  board  of 

other     hand,     can     the      stockholder  directors  passed  a  resolution  that  the 

claim,  after  the  forfeiture,  any  of  the  stock   should   be   forfeited   and   sold, 

rights  of  stockholdership.     St.  Louis,  Union  Sav.  Bank  v.  Rinaldo,  92  Pac. 

etc.  Co.  v.  Sandoval,  etc.  Co.,  116  111.  Rep.  873  (Cal.  1907). 

170  (1S86).    In  a  suit  in  equity  by  a  4  German  town,    etc.    Ry.    v.    Fitler, 

corporate  creditor  against  stockhold-  60  Pa.  St.  124  (1869).   See  also  Grand 

ers    for    unpaid    subscriptions,    sub-  Rapids     Sav.    Bank    v.    Warren,    52 

scribers  who  did  not  pay  the  10  per  Mich.  557   (1884).     The  fact  that  the 

cent,    required    by    statute    to    make  corporation  might  have  forfeited  the 

them  stockholders  need  not  be  joined  stock  but  in   fact  did  not  is   no   de- 

as  parties  defendant  nor  subscribers  fense  as  against  the   corporate  cred- 

whose    shares    have    been    forfeited,  itors.      If    a    transaction    between    a 

Ford   v.   Chase,   118  N.  Y.  App.  Div.  shareholder   and   the   directors   is   ir- 

605   (1907).  regular,  but  is  alleged  to  have  been 

2  Mills  v.  Stewart,  41  N.  Y.  384  acquiesced  in,  it  is  incumbent  upon 
(1869).  the  stockholder  to  support  such  alle- 

3  Slee  v.  Bloom,  19  Johns,  456  gation  by  showing  that  the  transac- 
(1822);  Mills  v.  Stewart,  41  N.  Y.  tion  was  fully  made  known  to  the 
384  (1869);  Walter's  Second  Case,  3  general  body  of  the  stockholders. 
De  G.  &  Sm.  244  (1850);  Richmond's  Spackman's  Case,  11  Jur.  (N.  S.)  207 

383 


§   129.]  FORFEITURE  OF  STOCK.  [CH.  VO. 

forfeiture  cannot  lawfully  be  exercised  for  the  purpose  of  enabling 
members  to  escape  from  their  liability  on  their  stock,  either  to  the 
corporation  or  its  creditors.1  A  stockholder,  by  mere  abandonment 
of  his  shares,  cannot  forfeit  them  himself,  and  thus,  by  his  own  act, 
discharge  himself  from  his  obligation  on  the  subscription.2 

§  129.  Statutory  formalities  and  general  method  of  forfeiture. — 
The  general  method  of  forfeiting  stock  for  non-payment  of  calls  is 
usually  prescribed  in  detail  by  the  statute  authorizing  the  forfeit- 
ure. In  the  earlier  cases  there  may  be  observed  some  tendency  to 
hold  that  a  substantial,  in  distinction  from  a  strict,  compliance  with 
the  requirements  of  the  statute  is  all  that  is  necessary  to  a  valid 
forfeiture.3     But   in   later  cases,   English4   and  American,5    it   is 

(1865);   aff'd  L.  R.  3  H.  L.  371.     A  App.  412  (1867);  Kelk's  Case,  L.  R.  9 

stockholder   whose   stock   is  forfeited  Eq.  107  (1869);  Thomas's  Case,  L.  R. 

in    a    building    association    for    non-  13  Eq.  437   (1872).     It  is  no  defense 

payment   of   dues,    as    authorized   by  that    defendant    supposed    he    could 

the  charter,  cannot  recover  back  the  pay   the   balance   of  his   subscription 

money  paid  by  him.     Freeman  v.  Ot-  or  have  a  forfeiture  of  the  stock  at 

tawa,  etc.  Assoc,  114  111.  182  (1885).  his  option.    Ross  v.  Bank  of  Gold  Hill, 

i  Spackman  v.  Evans,  L.  R.  3  H.  20  Nev.  191  (1888). 
L.  171  (1868);  Stanhope's  Case,  L.  R.  3  Catchpole  v.  Ambergate,  etc.  Ry., 
1  Ch.  App.  161  (1866);  Richmond's  1  El.  &  B.  Ill  (1852);  Nolan  v.  Anna- 
Case,  4  Kay  &  J.  305  (1858);  Manisty's  bella  Gold  Min.  Co.,  6  Wyatt,  W.  & 
Case,  17  Sol.  Jour.  745  (1873);  Gow-  A'B.  (Australian  Cts.  of  Mines),  38 
er's  Case,  L.  R.  6  Eq.  77  (1868);  Ex  (1869).  Cf.  Woollaston's  Case,  4  De 
parte  Jones,  27  L.  J.  Ch.  666  (1858);  G.  &  J.  437  (1859);  Knight's  Case,  L. 
Hall's  Case,  L.  R.  5  Ch.  App.  707  R.  2  Ch.  App.  321  (1867). 
(1870);  Mills  v.  Stewart,  41  N.  Y.  384  4  Clark  V.  Hart,  6  H.  L.  Cas.  633 
(1869).  Cf.  Dixon  v.  Evans,  L.  R.  5  (1858);  Johnson  v.  Lyttle's  Iron 
H.  L.  606  (1872);  Belhaven's  Case,  11  Agency,  46  L.  J.  (Ch.)  786  (1877). 
Jur.  (N.  S.)  572  (1865);  s.  c,  12  L.  Cf.  Knight's  Case,  L.  R.  2  Ch.  App. 
T.  (N.  S.)  595  (1865) ;  3  De  G.  J.  &  S.  321  (1867) ;  Garden  Gully,  etc.  Co.  v. 
41;  Clarke  v.  Hart,  6  H.  L.  Cas.  633  McLister,  L.  R.  1  App.  Cas.  39  (1875) ; 
(1858);  Garden  Gully,  etc.  Co.  v.  Mc-  London,  etc.  Ry.  v.  Fairclough,  2  Man. 
Lister,  L.  R.  1  App.  Cas.  39  (1875);  &  G.  674  (1841).  In  England  a  for- 
Sweny  v.  Smith,  L.  R.  7  Eq.  324  feiture  may  be  made  after  a  call,  and 
(1869);  Chouteau  v.  Dean,  7  Mo.  App.  before  the  call  is  due.  The  call  is 
211(1879).  Cf.  Bedford  R.  R.  v.  Bow-  "owing"  from  the  time  when  it  is 
ser,  48  Pa.  St.  29  (1864).  Forfeiture  made.  Faure,  etc.  Co.  v.  Phillipart, 
cannot  be  for  the  benefit  of  the  stock-  58  L.  T.  Rep.  525  (1888),  where  the 
holder.  Common  v.  McArthur,  29  forfeiture  was  made  on  two  calls,  one 
Canada  S.  C.  Rep.  239  (1898).  past  due  and  one  not  yet  due. 

2  Rockville,  etc.  Turnp.  Co.  v.  Max-        5  Portland,    etc.   R.    R.   v.    Graham, 

well,  2  Cranch,  C.  C.  451  (1824) ;  s.  c,  52  Mass.  1   (Shaw,  C.  J.,  1846) ;   Ger- 

20  Fed.  Cas.  1079.     For  sundry  illus-  mantown,    etc.   Ry.   v.   Fitler,   60   Pa. 

trations  of  what  will  or  will  not  jus-  St.  124  (1869) ;  Eastern  Plank-road  v. 

tify    a    forfeiture,    see,    particularly,  Vaughan,  20  Barb.  155    (1855);    aff'd 

Sweny   v.    Smith,    L.    R.    7    Eq.    324  14    N.    Y.    546;    York,    etc.    R.   R.    v. 

(1869);   Stocken's  Case,  L.  R.  3  Ch.  Ritchie,  40  Me.  425   (1855);  Lewey's 

384 


CH.  VIII.] 


FORFEITURE  OF  STOCK. 


[§  129. 


plainly  declared,  and  it  may  be  taken  as  a  settled  rule,  that  the 
validity  of  the  forfeiture  and  sale  of  the  stock  of  a  subscriber  in 
arrears  depends  upon  a  strict  and  formal  compliance  with  the  re- 
quirements of  the  enabling  statute.1 

Thus,  a  sale  of  the  stock  at  private  sale,  when  a  sale  by  public 
auction  was  prescribed,  has  been  held  to  invalidate  the  forfeiture.2 
There  must  be  a  properly  constituted  board  of  directors  to  declare  a 


Island  R.  R.  v.  Bolton,  48  Me.  451 
(1860) ;  Downing  v.  Potts,  23  N.  J.  L. 
66  (1851);  Re  Long  Island  R.  R.,  19 
Wend.  37  (1837);  Mitchell  v.  Vermont 
Copper  Min.  Co.,  40  N.  Y.  Super.  Ct. 
406  (1876);  aff'd  67  N.  Y.  289;  Occi- 
dental, etc.  Assoc,  v.  Sullivan,  62  Cal. 
394  (1882).  Cf.  Johnson  v.  Albany, 
etc.  R.  R.,  40  How.  Pr.  193  (1870); 
rev'd  on  another  point  in  54  N.  Y. 
416;  Rutland,  etc.  R.  R.  v.  Thrall,  35 
Vt.  536  (1S63);  Perrin  v.  Granger,  30 
Vt.  595  (1S5S).  A  forfeiture  of  stock 
by  sale  at  public  auction  for  failure 
to  pay  assessments,  made  before  the 
amount  of  stock  required  by  statute 
to  be  subscribed  before  the  assess- 
ment can  be  levied  has  been  sub- 
scribed, may  be  set  aside  by  a  suit  in 
equity,  and  the  statute  of  limitations 
applicable  to  suits  to  set  aside  for- 
feitures on  the  ground  of  irregulari- 
ties does  not  apply.  A  pledgee  of  the 
stock  may  maintain  such  a  suit.  Her- 
bert, etc.  Bank  v.  Bank  of  Orland,  133 
Cal.  64  (1901).  In  forfeiting  stock 
every  condition  precedent  must  be 
strictly  and  literally  complied  with. 
Where  an  irregular  forfeiture  is  made 
in  1S78,  and  is  discovered  by  the 
stockholder  in  1885,  he  need  not  take 
active  remedies,  but  may  wait  and 
claim  a  share  in  the  assets  upon  dis- 
tribution. Where  notice  of  calls  must 
be  published  in  two  cities  before  for- 
feiture, publication  in  one  city  only 
is  insufficient.  Morris  v.  Metalline 
Land  Co.,  164  Pa.  St.  326  (1894).  A 
corporation  cannot  sell  stock  for  fail- 
ure to  pay  calls  where  the  by-laws 
do  not  provide  the  mode  of  sale,  and 
where  the  statute  authorizing  such 
sale  prescribes  that  it  shall  be  in  ac- 


cordance with  the  by-laws.  Clise 
Inv.  Co.  v.  Washington  Sav.  Bank,  18 
Wash.  8  (1897).  See  95  Pac.  Rep.  662. 

i  Quoted  and  approved  in  Corco- 
ran v.  Sonora,  etc.  Co.,  8  Idaho  651 
(1902),  where  the  statute  required 
the  proceedings  to  be  recorded  in  a 
corporate  book  and  this  had  not  been 
done,  and  hence  the  court  held  that 
the  assessment  and  sale  was  illegal. 
Where  a  statute  requires  that  a  call 
or  assessment  shall  specify  where  it 
is  payable,  a  forfeiture  for  non-pay- 
ment is  void  if  the  statute  is  not 
strictly  complied  with.  Ruck  v.  Cale- 
donia, etc.  Co.,  92  Pac.  Rep.  194 
(Cal.  1907).  See  also  Garden  Gully, 
etc.  Co.  v.  McLister,  L.  R.  1  App.  Cas. 
39  (1875);  Germantown,  etc.  Ry.  v. 
Fitter,  60  Pa.  St.  124   (1869). 

2  Lewey's  Island  R.  R.  v.  Bolton, 
48  Me.  451  (1860).  As  to  what  is,  in 
general,  sufficient  to  satisfy  the  re- 
quirements of  the  rule  that  powers  of 
forfeiture  are  to  be  construed  strict- 
ly and  exercised  or  pursued  strictly, 
see  Giles  v.  Hutt,  3  Exch.  18  (1848); 
Catchpole  v.  Ambergate,  etc.  Ry.,  1 
El.  &  B.  Ill  (1852)  ;  Birmingham, 
etc.  Ry.  v.  Locke,  1  Q.  B.  256  (1841); 
Graham  v.  Van  Diemen's  Land  Co.,  1 
Hurl.  &  N.  541  (1856);  Sweny  v. 
Smith,  L.  R.  7  Eq.  324  (1869) ;  Stock- 
en's  Case,  L.  R.  3  Ch.  App.  412 
(1867);  Keik's  Case,  L.  R.  9  Eq.  107 
(1S69);  Thomas's  Case,  L.  R.  13  Eq. 
437  (1872);  Gower's  Case,  L.  R.  6 
Eq.  77  (1868).  It  has,  however,  been 
held  in  an  English  case — Knight's 
Case,  L.  R.  2  Ch.  App.  321  (1867)  — 
that,  when  it  is  a  matter  of  mere 
form  rather  than  of  substance  that 
has  not  been  strictly  followed  in  pro- 


(25) 


385 


§  129.] 


FORFEITURE  OF  STOCK. 


[CH.  VIII. 


forfeiture  of  stock.1  It  is  held,  in  general,  that,  in  the  absence  of 
statutory  provisions  as  to  order  or  details,  the  mode  of  forfeiture 
must  be  reasonable  and  just.2  The  forfeiture  may  be  regularly  ef- 
fected by  a  resolution  of  the  board  of  directors,  ordering  a  sale  of 
all  stock  on  which  assessments  shall  remain  unpaid  at  a  day  named 
in  the  future.3 

After  forfeiting  the  stock  the  company  cannot  disregard  the  for- 
feiture and  hold  the  stockholder  liable  as  a  stockholder  on  the  ground 
that   its  proceedings   were   irregular.4      Even    though   the   statutes 


ceedings  to  forfeit  shares,  the  for- 
feiture will  not  necessarily  be  thereby 
invalidated. 

1  Garden   Gully,  etc.   Co.   v.  McLis- 
ter,  L.  R.  1  App.  Cas.  39,  55   (1875). 
A  stockholder   may   enjoin   a  forfeit- 
ure on  the  ground  that  the  directors 
were     illegally     elected.       Moses     v. 
Tompkins,    84    Ala.    613     (18S8).      A 
stockholder  cannot  enjoin  the  sale  of 
his  stock  for  non-payment  of  an  as- 
sessment   on     the    ground     that    an 
amendment  to  the  charter  increasing 
the  number  from  seven  to  nine  had 
not  been  filed   with  the  secretary  of 
state,  as  required  by  statute,  it  being 
shown  that  at  corporate  meetings  he 
had  voted  for  nine  directors  and  had 
accepted   certificates  of   stock   signed 
by  the  president  and  secretary  elect- 
ed   by    nine    directors.        Jackson    v. 
Crown    Point,    etc.    Co.,    21    Utah,    1 
(1899).    In  a  suit  brought  by  a  stock- 
holder to  set  aside  a  sale  of  the  stock 
for    non-payment    of    an    assessment, 
the  court  may  investigate  the  legality 
of  the  title  of  the  directors  to  their 
office,  and  if  they  have  not  taken  an 
oath   as   required   by   statute   the   as- 
sessment   made    by    them    is    illegal. 
Schwab  r.   Frisco,   etc.   Co.,  21   Utah, 
258  (1900). 

2  Rutland,  etc.  R.  R.  v.  Thrall,  35 
Vt.  53G  (1863);  Mitchell  v.  Vermont 
Copper  Min.  Co.,  67  N.  Y.  2S0  (1876). 

3  Rutland,  etc.  R.  R.  v.  Thrall,  35 
Vt.  536  (1863).  See  also  Woollas- 
ton's  Case,  4  De  G.  &  J.  437  (1859). 
Under  such  a  resolution  a  sale  of  the 
stock  is  not  necessary  to  complete 
the  forfeiture,  where  the  effect  of  the 


forfeiture  is  to  release  the  stockhold- 
er   from    any    future    liability,    and 
where  he  is  not  entitled  to  the  sur- 
plus,   if    any    there    be,    after    sale. 
Rutland,  etc.  R.  R.  v.  Thrall,  35  Vt. 
536     (1863).        It    is,    however,    said 
elsewhere  that  a  general   resolution, 
not  specifying  the  stock  which  is  for- 
feited,  but   merely   assuming   to   for- 
feit any  and  all  stock  whose  owners 
are  in  arrears,  does  not  affect  a  valid 
forfeiture.      Johnson    v.    Albany,    etc. 
R.  R.,  40  How.  Pr.  193   (1870);   rev'd 
on    another    point   in    54    N.    Y.    416. 
When,  after  default  made  in  the  pay- 
ment of  assessments,  notice  is  given 
by  the  corporation  that  the  shares  of 
owners    in   arrears    will    be   forfeited 
unless  full   payment  of  what  is  due 
be  made  by  a  day  named,  there  is  a 
presumption  that  the  subsequent  pro- 
ceedings of  the   company   looking   to 
perfecting  the  forfeiture  are  valid  and 
regular.     Knight's  Case,  L.  R.  2   Ch. 
App.  321   (1867),  holding  that  where, 
by  the  articles  of  association,  provi- 
sion is  made  for  forfeiture  by  resolu- 
tion   with    notice    upon    default,    the 
court  will   assume  that  the  requisite 
steps  have  been  taken  to  make  a  valid 
forfeiture,    even    though    it   does   not 
appear     that     such     resolution     was 
passed  or  that  notice  was  sent.     The 
notice  is  a  notice  that  the  forfeiture 
has   already   been   declared,   not  that 
it   will   be   made   on  further   default. 
That  notice  is  a  condition  precedent. 
4  Patterson    v.    Brown,    etc.    Co.,    3 
Colo.  App.  511    (1893). 
i     In  Austin's  Case,  24  L.  T.   (N.  S.) 
932    (1871),  it  is  said  that  a  corpo- 


386 


CH.  VIII.]  FORFEITURE  OF  STOCK.  [§    129. 

authorize  a  board  of  directors  to  waive  a  forfeiture  after  the  for- 
feiture has  been  completed,  yet  they  cannot  waive  it  except  with  the 
consent  of  the  stockholder.1  Where  both  the  stockholder  and  the 
corporation  acquiesce  in  a  forfeiture,  although  irregular,  corporate 
creditors  cannot  subsequently  object.2  It  is  a  well-established  rule 
that  a  forfeiture  of  shares,  where  the  forfeiture  was  irregular  or  de- 
fective in  its  form,  is  not  void,  but  voidable,  and  that,  by  subsequent 
knowledge  and  acquiescence,  the  stockholder  and  the  company  are 
alike  estopped  to  deny  its  validity.3  Under  the  California  code  a 
corporation  may  by  suit  foreclose  a  lien  which  it  has  on  its  stock.4 

ration,  after  forfeiting  shares,  cannot  98  (1841).     Cf.  Lyster's  Case,  L.  R.  4 

set  the  forfeiture  aside,  and  hold  the  Eq.   233    (1S67);    Teasdale's   Case,   L. 

owner  liable  as  a  subscriber,  on  the  R.  9  Ch.  App.  54   (1873);   Phosphate, 

ground  that  the  notice  given  him  was  etc.   Co.   v.   Green,   L.  R.   7  C.   P.   43 

irregular.      It    is    for    the   subscriber  (1871).     Here  the  company  had  pow- 

alone  to   raise   that  objection  to   the  er  to  forfeit  shares  for  non-payment 

validity  of  the  forfeiture.  and   to   compromise   debts,   but   were 

1  Re  Exchange  Trust  Ltd.,  [1903]  prohibited  from  purchasing  their  own 
1  Ch.  711.  shares.    The  transaction  in  issue  was 

2  Crissey  v.  Cook,  67  Kan.  20  held  to  be  such  a  purchase,  and  hence 
(1903).  Where  stock  is  sold  by  the  ultra  vires,  but  the  members  were 
corporation  for  non-payment  of  an  estopped  by  knowledge  and  acquies- 
assessment,  levied  at  a  meeting  of  the  cence.  In  this  case  it  was  also  said 
board  of  directors  where  a  quorum  is  that,  to  show  assent  and  asquies- 
not  present,  the  sale  may  be  set  aside,  cence  in  such  a  case,  it  is  not  neces- 
unless  the  stockholders  have  acqui-  sary  or  possible  to  prove  the  acqui- 
esced in  the  sale  and  the  stock  has  escence  of  each  individual  stockhold- 
passed  into  bona  fide  hands.  Hatch  er.  It  is  enough  to  show  circum- 
v.  Lucky  Bill  Min.  Co.,  25  Utah,  405  stances  which  are  reasonably  calcu- 
(1903).  lated  to  satisfy  the  court  or  a  jury 

3  Quoted  and  approved  in  Crissey  that  the  thing  to  be  ratified  came  to 
v.  Cook,  67  Kan.  20  (1903);  King's  the  knowledge  of  all  who  chose  to 
Case,  L.  R.  2  Ch.  App.  714,  731  inquire,  all  having  full  opportunity 
(1867);  Woollaston's  Case,  4  De  G.  &  and  means  of  inquiry.  Houldsworth 
J.  437.  (1859);  Webster's  Case,  32  L.  v.  Evans,  L.  R.  3  H.  L.  263  (1868); 
J.  (Ch.)  135  (1862);  Knight's  Case,  aff'g  L.  R.  3  Eq.  769;  Spackman  v. 
L.  R.  2  Ch.  App.  321  (1867);  Kelk's  Evans,  L.  R.  3  H.  L.  171  (1868). 
Case,  L.  R.  9  Eq.  107  (1869);  Austin's  Here  the  terms  of  the  withdrawal 
Case,  24  L.  T.  (N.  S.)  932  (1871) ;  were  not  in  accordance  with  the  deed 
Prendergast  v.  Turton,  1  Y.  &  C.  (Ch.)  of  settlement,  and  it  was  held  after 

4  Mechanics',  etc.  Assoc,  v.  King,  erty  does  not  entitle  the  vendee  to 
83  Cal.  440  (1890).  Where  the  stat-  stock  in  the  corporation  which  the 
ute  authorizes  a  suit  after  publication  corporation  itself  has  purchased  on 
of  the  intent  to  forfeit  by  sale,  such  a  sale  for  a  delinquent  assessment 
suit  cannot  be  brought  before  such  and  not  re-issued.  Tulare,  etc.  Dist. 
publication.  San  Bernardino  Inv.  Co.  v.  Kaweah,  etc.  Co.,  44  Pac.  Rep.  662 
v.   Merrill,   10S    Cal.    490    (1895).     A  (Cal.   1896). 

sale  by  a  corporation  of  all  its  prop- 

387 


130.] 


FORFEITURE  OF  STOCK. 


[cn.  viii. 


§  130.  Notice  in  cases  of  forfeiture.  — A  notice  to  the  delinquent 
subscriber  that  his  shares  will  be  forfeited  at  a  day  named  is  gen- 
erally requisite  to  effect  a  forfeiture.  The  subscriber  is  entitled  to 
full  knowledge  of  the  fact  that,  unless  he  pays  up  within  a  specified 
time,  he  will  lose  his  stock.  The  requirements  of  the  statute  or 
charter,  with  respect  to  the  contents  of  the  notice,  and  the  length 
of  time  which  is  to  elapse  between  the  notice  and  the  forfeiture, 
must  all  be  strictly  complied  with.1     It  is  accordingly  held  that  the 

years  that  the  party  was  still  liable  disentitle    the    holder    of    shares    to 

as  a  contributor.     In  Evans  v.  Small-  equitable    relief    against    an    invalid 

combe,   L.  R.   3  H.  L.  249    (1868),  a  declaration  of  forfeiture.     See  69  Atl. 

member    withdrawing    under    a   like  Rep.  528. 

arrangement  was  held  not  liable  on  l  Heaston  v.  Cincinnati,  etc.  R.  R., 

the   double  ground   of  lapse  of  time  16   Ind.  275    (1861);    Lewey's  Island 

and  a  clear  presumption  of  knowledge  R.  R.  v.  Bolton,  48  Me.  451    (1860) ; 

and    acquiescence.      In    Houldsworth  Rutland,  etc.  R.  R.  v.  Thrall,  35  Vt. 


v.  Evans,  L.  R.  3  H.  L.  263  (1868), 
an  irregularity  in  the  condition  of 
withdrawal  was  held  substantial  and 
the  transaction  ultra  vires.  (One 
lord  dissented,  on  the  ground  that 
years  of  acquiescence  retrospectively 
sanctioned  it.)  In  Brotherhood's 
Case,    31    Beav.    365    (1862),    dissen- 


536,  546  (1863);  Lake  Ontario,  etc. 
R.  R.  v.  Mason,  16  N.  Y.  451  (1857)  ; 
Sands  v.  Sanders,  26  N.  Y.  239  (1863) ; 
Mississippi,  etc.  R.  R.  v.  Gaster,  20 
Ark.  455  (1859);  Hughes  v.  Antie- 
tam,  etc.  Co.,  34  Md.  317  (1870); 
Johnson  v.  Lyttle's  Iron  Agency,  46 
L.  J.  (Ch.)   786  (1877);    Cockerell  v. 


tient  members  were  allowed  to  with-    Van  Diemen's  Land  Co.,  26  L.  J.    (C 


draw,  by  resolution,  upon  terms  which 
were  certainly  ultra  vires.  The  mas- 
ter of  the  rolls  said  that  the  trans- 
action might  have  been  set  aside  at 
the  time;  but  all  parties  having  had 
full  knowledge,  and  having  acqui- 
esced for  more  than  twelve  years,  the 
court  would  not,  after  such  a  lapse 
of  time,  touch  the  transaction.  In 
Lesseps  v.  Architects'  Co.,  4  La.  Ann. 
316  (1849),  the  court  regarded  a  gen- 


P.)  203  (1857);  Watson  v.  Eales,  23 
Beav.  294  (1856).  Cf.  Eppes  v.  Mis- 
sissippi, etc.  R.  R.,  35  Ala.  33  (1859) ; 
Schenectady,  etc.  Co.  v.  Thatcher,  11 
N.  Y.  102  (1854) ;  Harlaem  Canal  Co. 
v.  Seixas,  2  Hall  (N.  Y.),  504  (1829); 
Mitchell  v.  Vermont  Min.  Co.,  40  N. 
Y.  Super.  Ct.  406  (1876),  aff'd,  67  N. 
Y.  280;  New  Albany,  etc.  R.  R.  v. 
McCormick,  10  Ind.  499  (1858).  Cf. 
Lexington,  etc.  R.  R.  v.  Chandler,  54 


eral  acquiescence  in  a  by-law  for  a  Mass.  311  (1847),  where  notice,  pro- 
forfeiture,  itself  ultra  vires,  as  a  mat-  vided  for  by  a  by-law,  was  held  not  a 
ter  of  contract,  and  refused  equitable  condition  precedent,  but  only  direc- 
relief.  Cf.  Lindley  on  Companies,  p.  tory,  and  substantial  compliance  was 
533,  where  the  author  says:  "If  there  sufficient.  Knight's  Case,  L.  R.  2  Ch. 
is  power  to  forfeit,  and  the  shares  in-  App.  321  (1S67),  is  sometimes  wrong- 
tended  to  be  forfeited  are  treated  by  ly  cited,  for  the  reason  that  there  are 
the  company  and  the  shareholders  as  two  notices  provided  for:  (1)  notice 
forfeited,  the  company  will  be  pre-  that  forfeiture  will  be  made  on  de- 
cluded  from  afterwards  insisting  that  fault  at  future  time,  and  (2)  notice 
no  forfeiture  ever  took  place."  Gar-  after  forfeiture  that  it  has  been  made, 
den  Gully,  etc.  Co.  v.  McLister,  L.  R.  The  former  is  essential,  the  latter  not. 
1  App.  Cas.  39,  55  (1875),  holding  "Where  a  statute  authorizes  a  corpora- 
that  mere  laches  does  not,  of  itself,  tion  to  forfeit  a  subscriber's  stock  for 

388 


CH.  VIII.] 


FORFEITURE  OF  STOCK. 


[§  130. 


notice  must  state  correctly  the  amount  due  for  non-payment  of 
which  the  stock  is  to  be  forfeited.1  The  time,  also,  within  which 
payment  is  to  be  made  must  be  accurately  stated,2  and  also  the  place 
where  the  sale  is  to  be  made.3  The  mode  of  giving  notice  of  a  con- 
templated forfeiture  of  stock  is  generally  specified  in  the  statute 

In  England  it  is  held  that  after  a  stock- 


authorizing  the  forfeiture.4 


non-payment  on  written  notice  being 
given,  a  forfeiture  without  such  writ- 
ten notice  is  a  conversion  and  the 
corporation  is  liable  for  the  difference 
between  the  par  and  market  value, 
less  the  amount  due  on  the  stock. 
Nicholson,  etc.  Co.  v.  Urquhart,  32 
Tex.   Civ.    App.    527    (1903). 

i  So  where  the  notice  stated  that 
unless  the  amount  of  a  certain  call, 
together  with  lawful  interest  from 
the  date  of  the  call,  was  paid  on  or 
before  a  certain  day,  the  shares  would 
be  liable  to  forfeiture,  it  was  held 
that,  as  interest  was  only  payable 
from  the  day  fixed  for  payment,  and 
not  from  the  date  of  the  call,  the 
notice  was  irregular,  and  that  a  for- 
feiture founded  on  a  non-compliance 
with  such  a  notice  was  bad.  Johnson 
v.  Lyttle's  Iron  Agency,  46  L.  J.  (Ch.) 
786    (1877). 

2  A  notice  that  the  stock  will  be 
forfeited  "on  Monday,  the  9th,"  when 
in  point  of  fact  the  9th  comes  on  Fri- 
day, is  not  a  sufficient  notice.  Wat- 
son v.  Eales,  23  Beav.  294   (1856). 

3  Accordingly,  a  notice  in  all  other 
respects  regular,  which  does  not  state 
the  place  of  sale,  is  insufficient,  al- 
though it  names  the  day  of  sale,  and 
the  auctioneer,  who  was  and  had  long 
been  an  auctioneer  in  the  place  at 
which  the  notice  was  dated.  Lexing- 
ton, etc.  R.  R.  v.  Staples,  71  Mass. 
520  (1855).  In  the  absence  of  a 
statutory  provision  as  to  time,  it  is 
said  that  three  days'  notice  of  the 
time  and  place  of  the  sale  of  shares 
for  non-payment  of  assessments  is  too 
short  and  unreasonable,  where  the 
owner  of  the  shares  lives  at  a  distance 
in  another  state.  Lexington,  etc.  R. 
R.   v.   Staples,   71  Mass.   520    (1855). 


In  Rutland,  etc.  R.  R.  v.  Thrall,  35 
Vt.  536  (1863),  a  thirty  days'  notice 
is  said  to  be  sufficient  and  reasonable. 
And  where  the  charter  provided  that 
notice  of  an  assessment  should  be 
given  to  the  subscriber  thirty  days 
before  the  order  of  the  directors  to 
sell  the  shares,  a  notice  thirty  days 
before  the  sale  was  held  insufficient. 
Lewey's  Island  R.  R.  v.  Bolton,  48 
Me.  451  (I860);  Louisville,  etc.  Co. 
v.  Meriwether,  5  B.  Mon.  (Ky.)  13 
(1844).  A  printed  notice  in  desig- 
nated newspapers,  published  in  cities 
where  the  subscribers  reside,  is  good 
notice  of  a  call.  Louisville,  etc.  Turnp. 
Co.  v.  Meriwether,  5  B.  Mon.  13  (1844). 
4  In  Mississippi,  etc.  R.  R.  v.  Gas- 
ter,  20  Ark.  455  (1859),  it  is  said 
that  the  mode  of  giving  a  notice  in 
these  cases  is  directory  rather  than 
mandatory,  and  that  where  the  char- 
ter provided  that  notice  be  given  in 
certain  newspapers,  a  personal  notice 
would  be  sufficient.  See  also  Knight's 
Case,  L.  R.  2  Ch.  App.  321  (1867). 
So  where  a  by-law  provided  for  no- 
tice by  letter,  it  was  held  that  per- 
sonal notice  sufficed.  Lexington,  etc. 
R.  R.  v.  Chandler,  54  Mass.  311  (1847). 
But  see  Lewey's  Island  R.  R.  v.  Bol- 
ton, 48  Me.  451  (1860).  In  general, 
as  to  the  effect  of  a  notice  left  at 
one's  residence  or  place  of  business, 
but  which  never  reaches  the  person 
for  whom  it  is  intended,  see  Cockerell 
v.  Van  Diemen's  Land  Co.,  26  L.  J. 
(C.  P.)  203  (1857);  s.  c.  aff'd,  sub 
nom.  Van  Diemen's  Land  Co.  v.  Cock- 
erell, 1  C.  B.  (N.  S.)  732.  Cf.  Bir- 
mingham, etc.  Ry.  v.  Locke,  1  Q.  B. 
256  (1841) ;  Graham  v.  Van  Diemen's 
Land  Co.,  1  Hurl.  &  N.  541  (1856). 
See   also    South    Staffordshire  Ry.   v. 


389 


§§  131,  132.] 


FORFEITURE  OF  STOCK. 


[CII.  VIII. 


holder  is  dead  and  the  company  has  knowledge  of  that  fact,  notice 
of  an  assessment  on  his  stock  cannot  be  served  so  as  to  bind  his 
estate;  neither  can  a  notice  threatening  forfeiture  of  his  stock  for 
non-payment.  Neither  can  the  notice  be  served  upon  the  execu- 
tors.1 

§  131.  Notice  is  not  the  same  thing  as  forfeiture.  — A  notice  of  a 
probable  or  certain  forfeiture  in  the  future,  or  a  threat  of  forfeiture, 
is  not  forfeiture,  and  does  not  become  forfeiture  merely  by  non- 
payment of  the  call  or  assessment  within  the  time  specified  in  the 
notice.2  A  forfeiture  is  void  if  declared  for  the  non-payment  of 
assessments,  when  all  or  any  one  of  the  assessments  were  illegal  or 
unauthorized.3 

§  132.  Tender,  by  stockholder,  before  forfeiture. — Where  the 
amount  due  on  a  subscription  for  non-payment  of  which  a  forfeit- 
ure is  about  to  take  place  is  tendered  to  the  proper  officer  of 
the  corporation  at  any  time  before  the  sale  actually  takes  place,4 

Burnside,    5    Exch.    129    (1S50),    and     ure    does    not    constitute    forfeiture, 


§  119,  supra. 


and  is  no  bar  to  an  action.     Hays  v. 


i  Allen  v.  Gold  Reefs,   etc.,    [1899]     Franklin,  etc.  Co.,  35  Neb.  511  (1892). 


2  Ch.  40. 

2  Macon,  etc.  R.  R.  v.  Vason,  57  Ga. 
314   (1876);    Bigg's  Case,  L.  R.  1  Eq. 


In  Walker  v.  Ogden,  1  Biss.  287 
(1859);  s.  c,  29  Fed.  Cas.  41,  where 
the  articles   of   a  private   joint-stock 


309    (1SC5);     Cockerell    v.   Van    Die-  company    provided    for    a    forfeiture, 

men's  Land  Co.,  26  L.  J.   (C.  P.)  203  but  in   no  express  mode,   and   a  for- 

(1857);     Water    Valley    Mfg.    Co.    v.  feiture  was  declared  of  certain  shares 

Seaman,   53  Miss.  655    (1876),  where  which  thereafter  remained  undistrib- 

only   a  threat  was   made.     Cf.  §  125,  uted.    No  rights  of  third  parties  were 

supra.     But  see  Knight's  Case,  L.  R.  vested  in  consequence;    and  the  court 

2  Ch.  App.  321    (1867).     In  Knight's  of  equity,  never  favoring  forfeitures, 

Case  it  was  further  provided  that  the  decreed    that    upon    payment    of    the 

declaration  of  forfeiture  should  be  at  whole  amount  due,  principal  and  in- 

once  entered  in  the  register.     Entry  terest,  the  complainant  should  be  al- 

was  duly  made  of  the  date  of  the  for-  lowed  to  redeem  his  stock.    The  court 

feiture,  but  not  of  the  declaration  it-  did  not  rule,  but  was  "inclined  to  the 

self.   All  essentials  being  regular,  and  opinion,"  that  "the  mere  declaration 

there  being  no  strict  requirement  of  a  of  the  trustees"  could  not  "have  the 

written  resolution,  the  court  held  tbe  effect    to    foreclose    all    Walker's    in- 

forfeiture  valid  because  the  entry  of  terest,"  and  "that  a  judicial    decree 

forfeiture  could  not  have  been  prop-  of  foreclosure  upon  a  bill  filed  by  the 

erly  made  without  a  resolution  of  the  trustee  was  necessary  in  order  to  bar 

directors,   which  would  hence  be  as-  his  right  to  redeem  his  stock." 
sumed.     Cf.  Birmingham,  etc.  Ry.  v.        3  Stoneham  Branch  R.  R.  v.  Gould, 

Locke,  1  Q.  B.  256    (1841).     A  mere  68  Mass.  277  (1854);    Lewey's  Island 

declaration  of  forfeiture  is  not  suffi-  R.  R.  v.  Bolton,  48  Me.  451   (1860). 


cient  to  effect  it,  and  is  no  bar  to  an 
action  on  the  subscription.  Minne- 
haha, etc.  Assoc,  v.  Legg,  50  Minn. 
333    (1892).     A  resolution  of  forfeit- 


4  Mitchell  v.  Vermont  Copper  Min. 
Co.,  67  N.  Y.  280  (1876) ;  Sweny  v. 
Smith,  L.  R.  7  Eq.  324  (1869),  where 
a  bill  was  filed  to  annul  the  forfeit- 


390 


CH.  VIII.]  FORFEITURE  OF  STOCK.  [§    133. 

the  forfeiture  is  not  valid.  This  rule  is  just,  since,  Avhile  protect- 
ing the  corporation  and  the  public,  it  relieves  the  stockholder  from 
the  hardship  of  a  harsh  and  summary  remedy. 

§  133.  Surplus,  after  valid  forfeiture,  belongs  to  the  corpora- 
tion  — Purchase  by  the  corporation  — Liability  of  the  purchaser  of 
forfeited  stock.—  Upon  a  sale  of  the  stock  forfeited,  if  the  amount 
realized  is  more  than  the  debt  due  the  corporation,  the  surplus  be- 
longs to  the  corporation.1  The  purchaser  at  the  forfeiture  sale,  if 
the  stock  has  been  only  partially  paid  for,  must  pay  the  instal- 
ments due  and  to  come  due,  and  if  he  fail  to  make  these  payments 
the  stock  must  be  sold  again.2  It  seems,  however,  that  if  the  cor- 
poration purchases  the  stock  itself,  it  may  resell  the  stock  at  any 

ure,  which  was  made  because  the  ten-  tiflcate  reciting  on  its  face  how  much 
der  (although  in  time  and  place)  was  is  still  due,  and  the  holder  pledges 
accompanied  by  a  protest.  Held,  the  it,  and  no  transfer  to  the  pledgee  is 
protest  did  not  vitiate  the  tender,  made  on  the  corporate  books,  the  cor- 
Where  a  stockholder  whose  stock  in  poration  can  have  a  sale  of  the  stock 
the  company  is  advertised  for  sale  for  non-payment  of  the  balance  re- 
fer non-payment  of  a  call,  tenders  maining  due,  but  such  proportion  of 
the  money  to  the  secretary  with  in-  the  proceeds  will  be  paid  to  the 
terest  and  cost  of  advertisement  to  pledgee  as  the  amount  already  paid 
that  date,  but  the  company  sells  the  on  the  stock  bears  to  the  par  value 
stock  nevertheless,  he  may  by  bill  of  the  stock.  Ingles,  etc.  Co.  v.  Knox- 
in  equity  compel  the  company  to  ville,  etc.  Co.,  53  S.  W.  Rep.  1111 
treat   the  sale   as   invalid   and   issue  (Tenn.  1899). 

the  stock  to  him  on  the  above  pay-        2  Sturges   v.    Stetson,    1    Biss.    246, 
ment.      Wilson    v.    Duplin,    etc.    Co.,  251    (1858);     s.  c,  23  Fed.  Cas.  311. 
139  N.  C.  395  (1905).  "Where  stock  is  forfeited  and  sold  at 
i  Small  v.  Herkimer  Mfg.  Co.,  2  N.  a  price  which  does  not  give  the  com- 
Y.  330  (1849);    Great  Northern  Ry.  v.  pany  the  full   par  value  of  the  sub- 
Kennedy,  4  Exch.  417,  426  (1849),  by  scription  price  of  the  stock,  the  pur- 
Rolf  e,  B.   (ruling  on  the  language  of  chaser  is  liable  for  the  unpaid  part, 
a  special  act) :    "It  is  clear  that  the  Randt,   etc.   Co.   v.   New   Balkie,    etc. 
declaration  of  forfeiture  is  in  the  na-  Lim.,  85  L.  T.  Rep.  780  (1902) ;    aff'd, 
ture   of   a   mortgage.     The   company  [1903]  1  K.  B.  461.    The  purchaser  of 
are  -not  to   sell   more   of   the   shares  partly    paid    up    shares,    which   have 
than  will  be  sufficient,  as  nearly  as  been   forfeited   by  the   company   and 
can    be   ascertained,    to   pay    the    ar-  sold,    is    liable    for   the    unpaid    part 
rears  of  calls,  together  with  interest  when  called.     New  Balkis  Eersteling 
and   expenses;     and  if  there   be   any  v.  Randt,  etc.  Co.  Ltd.,   [1904]   A.  C 
surplus,   it  is  to  be  paid   to   the   de-  165.     Where  the  purchaser  of  stock 
faulter,  who  has  a  right  to   redeem  which  the  company  has  forfeited  for 
at  the  last  moment  before  sale.    That  non-payment  of   a   call    is  liable   for 
shows  that  the  forfeited   shares   are  the  unpaid  part  of  the  par  value  of 
a  securky  only  until  payment."     Cf.  the    stock,    a    subsequent    collection 
Freeman  v.  Harwood,  49  Me.  195,  198  from   the   former   owner  of  stock   is 
(1859),   dictum.     In   Tennessee  it   is  to   be  credited.     Re  Randt,   etc.  Co., 
held  that  where  stock  is  only  partly  [1904]    2   Ch.  468. 
paid  and  the  corporation  issues  a  cer- 

391 


§    134.]  FORFEITURE   OF   STOCK.  [CH.  VIII. 

price  it  pleases ;  1  but  in  England  it  has  been  held  that  shares  which 
have  been  forfeited  after  being  partially  paid  for  can  be  reissued  only 
at  a  price  equal  to  the  unpaid  subscription  price  or  a  sura  in  excess 
thereof.2  And  even  though  the  purchaser  of  forfeited  stock  may 
not  be  liable  for  unpaid  calls,  yet  under  the  charter  he  may  be  un- 
able to  vote  such  stock  unless  he  pays  such  unpaid  calls.3  Even 
though  the  charter  of  an  irrigation  company  provides  that  no  one 
shall  hold  stock  except  an  owner  of  land  to  the  amount  of  one  acre 
for  each  share  of  stock  held  by  him,  yet  where  the  stock  is  sold 
for  non-payment  of  assessments  the  purchaser  at  such  sale  is  en- 
titled to  a  transfer  on  the  corporate  books  although  he  owns  no 
land.  The  purchaser  may  file  a  bill  in  equity  to  determine  his 
rights.4  Where,  by  statute,  bank  stock  may  be  sold  for  non-pay- 
ment of  assessments,  levied  upon  it  to  restore  the  capital  stock,  the 
price  at  which  it  is  sold  belongs  to  the  stockholder  and  not  to  the 
bank.5 

§  134.  Equity  will  relieve  a  stockholder  from  an  unauthorized 
forfeiture  —  Action  at  laiv  for  damages. — The  stockholder  him- 
self, as  well  as  a  corporate  creditor,  may,  in  a  proper  case,  invoke 
the  aid  of  a  court  of  chancery  when  his  stock  has  been  forfeited 
in  an  unauthorized  or  unlawful  manner.  Usually,  in  such  a  case, 
the  stockholder  may,  by  a  bill  in  equity,  obtain  a  decree  annulling 
the  forfeiture.6     Where  an  illegal  assessment  has  been  made,  and 

1  See  §  46,  supra.  Even  though  a  the  price  at  which  the  stock  sells  he- 
corporation  purchases  shares  of  its  longs  to  the  stockholder  in  default, 
own  stock,  which  are  but  partially  Chicago,  etc.  Co.  v.  State  Bank,  121 
paid,    this    does    not    render    the   re-  Fed.  Rep.  58   (1902). 

maining   stockholders   liable   for   the  6  Sweny  v.  Smith,  L.  R.  7  Eq.  324 

balance   due  on   such  unpaid   shares  (1869) ;    Mitchell  v.  Vermont  Copper 

so    purchased.      Crawford    v.    Roney,  Min.  Co.,  67  N.  Y.  280  (1876);     Adley 

126  Ga.  763   (1906).  v.  Whitstable  Co.,  17  Ves.  315   (1810, 

2  Morrison  v.  Trustees,  etc.,  79  L.  by  Lord  Eldon) ;  Sloman  v.  Bank  of 
T.  Rep.   605    (1898).  England,  14    Sim.   475    (1845);     Nor- 

3  Randt,  etc.  Co.  v.  Wainwright,  man  v .  Mitchell,  5  De  G.,  M.  &  G.  648 
[1901]  1  Ch.  184.  (1854).     Thus,  a  forfeiture  of  shares 

4  The  court  found  it  unnecessary  for  non-payment  of  calls,  declared  at 
to  pass  on  the  question  as  to  whether  a  meeting  held  out  of  the  state  in 
such  a  restriction  as  to  the  stock  is  which  the  company  was  incorporated, 
legal.  Spurgeon  v.  Santa  Ana,  etc.  the  meeting  being  in  consequence  an 
Co.,  120  Cal.  71    (1898).  unlawful  meeting,   may  be  set  aside 

5  Chicago  T.  &  T.  Co.  v.  State  upon  a  proper  application  to  a  court 
Bank,  86  Fed.  Rep.  863  (1898).  On  of  chancery  at  any  time  within  the 
the  sale  of  bank  stock  for  non-pay-  period  prescribed  by  the  statute  of 
ment  of  an  assessment,  levied  to  limitations  for  bringing  an  action  for 
make  good  impaired  capital  stock,  conversion.  Ormsby  v.  Vermont  Cop- 
as   allowed   by   the   Indiana   statute,  per  Min.   Co.,   56  N.  Y.  623    (1874). 

392 


CH.  VIII.] 


FORFEITURE  OF  STOCK. 


[§  134. 


the  stock  is  about  to  be  sold,  a  stockholder  may  enjoin  the  sale  and 
cause  the  assessment  to  be  set  aside.1  Even  though  a  stockholder 
enjoins  an  assessment  and  the  directors  then  reduce  it,  the  judgment 
in  the  injunction  suit  is  not  conclusive  against  the  validity  of  the 
reduced  assessment.2  Where  the  directors  of  a  corporation  have 
misappropriated  the  funds  of  the  company,  created  fraudulent  debts, 
levied  assessments  upon  the  stock,  caused  the  stock  to  be  forfeited 
for  non-payment,  and  judgment  to  be  entered  on  said  debts  and  the 
property  to  be  sold  out,  a  stockholder  may  file  a  bill  to  set  aside  all 
the  transactions  and  to  compel  the  directors  to  account  and  to  wind 
up  the  company.3  If  the  corporation  refuses  to  allow  a  stockholder 
to  examine  the  books  in  order  that  he  might  ascertain  whether  he 
wished  to  continue  to  make  payments  on  his  stock,  a  forfeiture  by 
the  corporation  for  refusal  to  make  such  payments  will  be  set  aside, 
and  such  a  forfeiture,  even  before  it  is  set  aside,  is  not  a  bar  to  the 
stockholder's  suit  to  restrain  illegal  acts  on  the  part  of  the  corpora- 
tion.4    But  where  a  person's  stock  has  been  sold  for  failure  to  pay 


An  injunction  will  not  be  granted  to 
restrain  the  sale  of  stock  for  non- 
payment of  assessments,  though  no- 
tice thereof  was  illegal,  where  the 
plaintiff  does  not  offer  to  pay  the 
calls.  Burham  v.  San  Francisco,  etc. 
Co.,  76  Cal.  26  (1888).  See  also 
Burham  v.  San  Francisco,  etc.  Co.,  76 
Cal.  24  (1888).  Forfeiture  may  be 
enjoined.  Moore  v.  New  Jersey  Light- 
erage Co.,  5  N.  Y.  Supp.  192  (1889). 
The  forfeiture  will  not  be  set  aside  if 
the  organization  meeting  of  the  com- 
pany was  illegal,  having  been  held 
out  of  the  state,  inasmuch  as  the 
corporation  does  not  legally  exist. 
Smith  v.  Silver  Valley  Min.  Co.,  64 
Md.  85  (1885).  An  assessment  on 
irrigation  stock  to  be  used  for  a  pur- 
pose outside  of  the  charter  powers, 
cannot  be  collected,  and  a  forfeiture 
and  sale  of  the  stock  for  failure  to 
pay  is  void.  Seeley  v.  Huntington, 
etc.  Ass'n,  27  Utah,  179  (1904). 
Where  an  insane  person  has  been  de- 
frauded of  stock,  and  the  stock  is 
used  to  levy  an  assessment,  and  the 
corporation  is  about  to  sell  his  stock 
for  non-payment,   an   injunction  will 


be  granted  incident  to  a  suit  to  set 
aside  the  transaction.  "Weber  v.  Delia, 
etc.  Co.,  11  Idaho,  264   (1905). 

1  Green  v.  Abietine  Medical  Co.,  96 
Cal.  322  (1892).  Injunction  lies 
against  the  sale  of  stock  by  a  cor- 
poration for  non-payment  of  assess- 
ments which  were  levied  on  the  stock 
after  the  full  par  value  thereon  had 
been  paid  in,  where  such  assessments 
were  so  levied  by  virtue  of  a  statute 
which  is  unconstitutional.  Enterprise, 
etc.  Co.  v.  Moffitt,  58  Neb.  642  (1899). 
Even  though  the  legislature  has  re- 
served the  right  to  amend  a  charter, yet 
it  cannot  authorize  the  corporation  to 
assess  stock  which  was  issued  as  be- 
ing full-paid  and  non-assessable.  A 
minority  stockholder  may  enjoin  the 
sale  of  the  stock  for  non-payment  of 
such  an  assessment.  Garey  v.  St.  Joe 
Mining  Company,  91  Pac.  Rep.  369 
(Utah    1907).  See  98  L.  T.  Rep.  633. 

2  Grand  Valley,  etc.  Co.  v.  Fruita 
Imp.  Co.,  86  Pac.  Rep.  324  (Col. 
1906). 

3  Jellenik  v.  Huron,  etc.  Co.,  177  U. 
S.  1  (1899). 

4  Buker   v.    Leighton,    etc.    Assoc., 


393 


§  134.]  FORFEITURE  OF  STOCK.  [CH.  VHI. 

an  assessment,  lie  cannot  maintain  a  suit  in  belialf  of  the  corporation 
against  the  directors  for  misconduct,  even  though  such  misconduct 
caused  the  assessment  to  be  levied.1  An  assessment  upon  stock 
levied  by  a  board  of  directors  illegally  elected,  and  a  sale  of  the 
stock  thereunder,  docs  not  put  an  end  to  the  stockholder's  suit  to 
oust  such  board  of  directors  and  to  set  aside  such  assessment  and  to 
set  aside  contracts  made  by  such  board.  The  complaint  is  not  mul- 
tifarious.2 A  stockholder  may  obtain  an  injunction  against  the  for- 
feiture where  the  books  of  the  company  are  in  confusion  and  the 
stockholder  makes  out  a  prima  facie  case  that  the  company  owes  him 
more  than  the  amount  due  on  his  subscription.3 

So,  also,  equity  will  sometimes  set  aside  a  forfeiture  where  a  for- 
feiture was  declared  for  non-payment  of  calls,  which,  it  was  shown, 
were  not  paid  because  the  stockholder  had  died,  and  no  administrator 
had  been  appointed  before  the  time  for  payment  had  fully  elapsed.4 
A  corporation  cannot  single  out  the  stock  of  one  stockholder 
and  proceed  to  sell  it  for  non-payment  of  assessments,  where  other 
stockholders  are  also  in  arrears.5  But  it  seems  that  the  weight  of 
authority  is  to  the  effect  that  a  forfeiture  of  stock,  lawful  and  reg- 
ular, for  non-payment  of  assessments,  is  one  of  those  forfeitures 
from  which  equity  will  not  afford  relief  except  in  very  exceptional 
cases.6     When  the  stockholder  has  lost  his  shares  by  an  irregular 

164  N.  Y.  557    (1900),  rev'g  18  App.  239    (1904).     See  s.  c,  31  Mont.   563 

Div.  548.  (1905). 

i  Hanna  v.  People's  Nat.  Bank,  76  3  Schuetz   v.    German,   etc.    Co.,    21 

N.  Y.  App.  224    (1902);     modified  on  N.  Y.  App.  Div.  163  (1897). 

another  point  in  179  N.  Y.  107.  4  Glass    v.    Hope,    16    Grant     (Up. 

2  Whitehead     v.  Sweet,  126  Cal.  67  Can.  Ch.),  420  (1869).     Cf.  Walker  v. 

(1899).     A    suit    by    a    stockholder  Ogden,  1  Biss.  287    (1859);     s.  c,  29 

against  a  promoter  in  behalf  of  the  Fed.  Cas.  41. 

corporation,  to  require  him  to  pay  for  5  Hardee  v.  Sunset  Oil  Co.,  56  Fed. 

his   stock,  and   also  to  recover  dam-  Rep.  51    (1893). 

ages  for  false  representations  indue-  c  Sparks  v.  Liverpool  Water-works, 

ing  the   plaintiff   to   purchase   stock,  13   Ves.   428    (1807);     Prendergast  v. 

and  also  to  enjoin  a  proposed  sale  of  Turton,  1  Y.  &  C.    (Ch.)    98    (1841); 

plaintiff's  stock,   in   order  to  pay  an  Germantown,  etc.  Ry.  v.  Fitler,  60  Pa. 

assessment,   is  multifarious.     Pietsch  St.  124  (1869);    Clark  v.  Barnard,  108 

v.   Krause,   116   Wis.   344    (1903).     A  U.    S.   436,    456    (1882).      Equity   will 

stockholder  whose  stock  is  about  to  not  relieve  where,  on  the  reorganiza- 

be  forfeited  to  pay  an  illegal  assess-  tion  of  a  company,  old   stockholders 

ment,  may,  in  a  suit  to  enjoin  such  fail  to  exercise  their  options  for  se- 

forfeiture,    join    a    cause    of    action  curing  new  shares  before  the  expira- 

against  the   directors   for  illegal   sal-  tion  of  a  fixed  time   limit.     Vatable 

aries  and  other  illegal  acts.     McCon-  v.  New  York,  etc.  R.  R.,  96  N.  Y.  49, 

nell  v.  Combination,  etc.  Co.,  30  Mont.  57   (1884).     Equity    will    not    relieve 

394 


CH.  VIII.] 


FORFEITURE  OF  STOCK. 


[§  134. 


or  unlawful  forfeiture,  his  suit  should  be  for  the  recovery  of  his 
stock,  and  not  for  an  undivided  interest  in  the  property  of  the  com- 
pany.1 The  suit  to  set  aside  the  forfeiture  must  be  brought  in  the 
state  where  the  corporation  is  incorporated.2  Acquiescence  or 
delay,  as  we  have  seen,  on  the  part  of  the  stockholder,  will  usually 
bar  his  right  in  a  court  of  equity  to  have  the  forfeiture  set  aside.3 
If  the  forfeiture  is  irregular  the  party  deprived  of  his  stock  may 
collect  damages.4 


from  such  forfeiture,  because  to  do  so 
would,  it  is  said,  be  in  contravention 
of  the  direct  expression  of  the  legis- 
lative will.     Small  v.  Herkimer  Mfg. 
Co.,  2  N.  Y.  330,  340  (1849).     Neither 
can  a  stockholder  have   a  forfeiture 
set   aside    merely    because    the    ■calls 
which    he    refused    to   pay    were   for 
the   purpose    of    paying   debts   which 
the   company   would    not   have    owed 
but    for    the    previous    misappropria- 
tion  of   the   corporate    funds   by  the 
trustees.     Marshall  v.  Golden  Fleece, 
etc.    Co.,    16    Nev.    156,    179    (1881); 
Weeks  v.  Silver  Islet,  etc.  Co.,  55  N. 
Y.    Super.    Ct.    1    (1887);     Taylor   v. 
North    Star,    etc.    Co.,    79     Cal.    285 
(1889).    In  a  stockholder's  suit  to  en- 
join   an    assessment   and    to    recover 
back   stock   which   he   sold   when   he 
was  of  unsound  mind,  the  injunction 
will  not  lie  unless  it  is  shown  that 
the  assessment  would  not  have  been 
levied  if  he  still  held  the  stock.  Weber 
v.   Delia,   etc.    Co.,   94   Pac.   Rep.  441 
(Idaho  1908). 

1  Smith  v.  Maine  Boys  Tunnel  Co., 
18  Cal.  Ill   (1861). 

2  North  State,  etc.  Co.  v.  Field,  64 
Md.  151  (1885);  Sudlow  v.  Dutch 
Rhenish  Ry.,  21  Beav.  43  (1855).  See 
Wilkins  v.  Thorne,  60  Md.  253  (1883). 
The  courts  of  Maryland  will  not  issue 
a  mandavius  to  compel  a  foreign  cor- 
poration to  annul  a  forfeiture  of 
stock.  This  is  a  matter  to  be  liti- 
gated in  the  courts  of  the  state  creat- 
ing the  corporation.  North  State,  etc. 
Co.   v.  Field,   64  Md.  151    (1885). 

3  See    §  129,   supra.     Even   though 


a  forfeiture  of  stock  under  the  statute 
is  irregularly  and  illegally  made,  yet, 
if  for  three  years,  the  stockholder  ac- 
quiesces therein  with  knowledge,  he 
cannot,  after  the  stock  has  become 
valuable,  have  the  sale  set  aside. 
Raht  v.  Sevier  Mining,  etc.  Co.,  18 
Utah,  290  (1898).  A  forfeiture  of 
stock  by  sale  at  public  auction  for 
failure  to  pay  assessments,  made  be- 
fore the  amount  of  stock  required  by 
statute  to  be  subscribed  before  the 
assessment  can  be  levied  has  been 
subscribed,  may  be  set  aside  by  a 
suit  in  equity,  and  the  statute  of  lim- 
itations applicable  to  suits  to  set 
aside  forfeitures  on  the  ground  of 
irregularities  does  not  apply.  A 
pledgee  of  the  stock  may  maintain 
such  a  suit.  Herbert,  etc.  Bank  v. 
Bank  of  Orland,  133  Cal.  64  (1901). 
Where  a  suit  to  set  aside  a  forfeiture 
of  stock  by  the  corporation,  on  the 
ground  of  fraud,  is  compromised,  the 
same  stockholder  cannot,  eight  years 
thereafter,  file  another  suit  to  set 
aside  the  assessment  on  the  ground 
of  frauds  unknown  to  him  when  the 
first  suit  was  compromised.  Marks 
v.  Evans,  62  Pac.  Rep.  76  (Cal.  1900). 
A  stockholder  who  has  paid  assess- 
ments without  objection  cannot  at- 
tack a  forfeiture  of  the  stock  by  the 
corporation  for  non-payment  of  sub- 
sequent similar  assessments  on  the 
ground  that  the  assessments  were  il- 
legal. Boll  v.  Camp,  118  Iowa,  516 
(1902).    Cf.  69  Atl.  Rep.  528. 

4  Re  New  Chile,  etc.  Co.,  L.  R.  45 
Ch.  D.  598   (1890).     A  corporation  is 


395 


§  134.] 


FORFEITURE  OF  STOCK. 


[ch.  vm. 


Where  stock  is  forfeited  illegally  a  person  to  whom  it  is  then  issued 
with  knowledge  may  be  required  to  give  it  up.1 


liable  in  damages  for  selling  the 
stock  of  a  stockholder  for  non-pay- 
ment of  dues  where  such  sale  was 
irregular  and  illegal,  being  contrary 
to  the  requirements  of  the  by-laws, 
even  though  the  corporation  buys  the 
stock  itself  at  such  sale.  The  fact 
that  a  surplus  realized  at  the  sale  is 
sent  to  the  stockholder  by  check  and 
is  received  by  him  does  not  bar  his 
remedy,  he  being  in  ignorance  of  the 
illegality.  Allen  v.  American  Build- 
ing, etc.  Assoc,  49  Minn.  544   (1892). 


Where  at  a  public  sale  of  stock  for 
non-payment  of  an  assessment,  a 
pledgee  of  the  stock  prevented  com- 
petition by  stating  that  he  intended 
to  buy  the  stock  and  continue  to  hold 
it  as  security  he  cannot  hold  the  com- 
pany liable  for  refusal  to  transfer  the 
stock.  Young  v.  New  Standard,  etc. 
Co.,   14S   Cal.  306    (1905). 

l  New  York,  etc.  Co.  v.  Great  East- 
ern Tel.  Co.,  69  Atl.  Rep.  528  (N.  J. 
1908). 


39G 


CHAPTER  IX. 

DEFENSE  OF  PAROL  AGREEMENTS  AND  FRAUDULENT  REPRESEN- 
TATIONS INDUCING  SUBSCRIPTIONS  FOR  STOCK. 


§  135.  The  subject. 

136.  Definitions. 

137, 138.  Oral  agreements  and  exec- 
utory contracts. 

139, 140.  Corporations  are  charge- 
able with  the  fraudulent  rep- 
resentations of  their  agents. 

141.  The  misrepresentations  must  be 

by  the  authorized  agents. 

142.  Misrepresentations     at     public 

meetings. 

143.  Misrepresentations  by  prospect- 

uses. 

144.  Misrepresentations  by  reports. 

145.  What     misrepre  sentations 

amount  to  a  fraud. 

146.  Immaterial    misrepresentations. 

147.  Statements  as   to  questions  of 

law. 

148.  Misrepresentations  by  suppres- 

sion of  the  truth. 


§  149.  Misrepresentations     without 
knowledge  of  their  falsity. 

150.  Subscribers  not  bound  to  inves- 

tigate. 

151.  Subscription  not  void,  but  void- 

able. 

152.  Remedies. 

153.  Remedy   by   rescission  without 

legal  proceedings. 

154.  Remedy   by   defense   to    action 

for  calls. 
155, 156.  Remedy  by  bill  in  equity. 
157, 158.  Remedy   by   action   at  law 

for  deceit. 

159.  Remedy   by   action    for    money 

had  and  received. 

160.  Ratification  as  a  bar. 

161.  162.  Laches  as  a  bar. 

163, 164.  Corporate  insolvency  as  a 
bar. 

165.  Necessary  allegations,  contribu- 
tion, etc. 


§  135.  The  subject. — Parol  agreements  and  fraudulent  represen- 
tations inducing  subscriptions  to  stock  have  been  a  prolific  source  of 
litigation  both  in  this  country  and  in  England.  As  a  defense  to 
actions  brought  for  the  collection  of  subscriptions,  and  as  the  basis 
of  suits  in  equity  to  set  aside  subscriptions  and  compel  a  repay- 
ment of  money  already  paid  on  such  subscriptions,  the  agreements 
and  representations  made  to  induce  persons  to  subscribe  for  stock  have 
given  rise  to  intricate  principles  of  law  peculiar  to  this  subject. 

§  136.  Definitions.- — A  parol  agreement  includes  all  representa- 
tions and  stipulations  made  before  or  at  the  time  of  subscribing, 
but  not  included  in  the  written  subscription,  whereby  the  corpora- 
tion is  to  do  something  or  refrain  from  doing  something  in  the  fu- 
ture. A  fraudulent  representation,  on  the  other  hand,  is  a  state- 
ment as  to  past  acts  or  existing  facts,  or  the  omission  of  such  a  state- 
ment, which  amounts  to  a  fraud  on  one  who,  relying  thereon, 
subscribes  to  the  stock  of  the  company.  Difficulty  sometimes  arises 
in  determining  whether  a  statement  by  a  corporate  agent  inducing 
a  subscription  is  merely  a  parol  agreement  or  is  a  fraudulent  rep- 
resentation.    This  question  is  one  which  must  be  decided  first  of 

397 


137.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[CH.  IX. 


all;  since  the  rules  of  law  applicable  to  parol  agreements,  as  a  de- 
fense to  an  action  on  a  subscription,  differ  greatly  from  those  appli- 
cable to  fraudulent  representations. 

§137.  Oral  agreements  and  executory  contracts.  —  Where  a  sub- 
scription contract  is  absolute  on  its  face,  it  is  well  settled,  both  in 
equity  and  at  law,  that  parol  evidence  of  previous  or  contemporane- 
ous negotiations,  stipulations,  terms,  or  agreements  is  not  admissible 
to  vary  or  add  to  the  contract,  except  for  the  purpose  of  proving 
that  the  parties,  at  the  time  of  consummating  the  agreement,  in- 
tended and  understood  that  such  terms  and  stipulations  would  be 
incorporated  in  the  contract,  but  omitted  the  same  by  accident, 
fraud  or  mistake.1     This  rule,  forbidding  the  introduction  of  parol 

lPiscataqua  Ferry  Co.  v.  Jones,  39  Penoyer,  151  N.  Y.  564  (1896).  Parol 
N.  H.  491  (1859);  Kennebec,  etc.  R.  agreements  with  the  agent  who  pro- 
It.  v.  Waters,  34  Me.  369  (1852);  Ta-  cured  the  subscription  are  not  admis- 
bor,  etc.  Ry.  v.  McCormick,  90  Iowa,  sible.  Philadelphia,  etc.  R.  R.  v.  Con- 
446  (1894);  Nebraska,  etc.  Assoc,  v.  way,  177  Pa.  St.  364  (1896).  A  per- 
Townley,  46  Neb.  893  (1896);  Cm-  son,  who  by  writing  has  subscribed 
cinnati,  etc.  R.  R.  v.  Pearce,  28  Ind.  for  stock,  cannot  set  up  that  he 
502  (1867);  Scarlett  v.  Academy  of  agreed  with  the  president  that  he 
Music,  46  Md.  132  (1876);  Dill  v.  was  acting  merely  as  agent  for  oth- 
Wabash  Valley  R.  R.,  21  111.  91  ers.  American,  etc.  Co.  v.  Bean,  125 
(1859);  Merrick  v.  Consumers,  etc.  Fed.  Rep.  823  (1903);  rev'd  on  an- 
Co.,  Ill  111.  App.  Rep.  153  (1902);  other  point  in  134  Fed.  Rep.  57.  Cf. 
East  Tennessee,  etc.  R.  R.  v.  Gam-  §  68,  supra.  An  oral  condition  to  a 
mon,  5  Sneed  (Tenn.),  567  (1858);  subscription  cannot  be  set  up.  Ma- 
Corwith  v.  Culver,  69  111.  502  (1873);  sonic  Temple  Assoc,  v.  Channell,  43 
Jack  v.  Naber,  15  Iowa,  450  (1863);  Minn.  353  (1890).  An  oral  statement 
Thornburgh  v.  Newcastle,  etc.  R.  R.,  that  the  subscriptions  would  be  col- 

14  Ind.  499  (1860) ;    Gelpcke  v.  Blake,  lected  only  after  connection  had  been 

15  Iowa,  387  (1863),  holding  that  it  made  with  a  certain  place  is  no  de- 
is  immaterial  that  the  agent  acted  in  fense.  Anderson  v.  Middle,  etc.  R.  R., 
good  faith;  Johnson  v.  Pensacola,  etc.  91  Tenn.  44  (1891).  Parol  agree- 
R.  R.,  9  Fla.  299  (1860);  Mississippi,  ments  cannot  be  added  to  the  written 
etc.  R.  R.  v.  Cross,  20  Ark.  443  contract.  Shattuck  v.  Robbins,  68  N. 
(1859);  Ridgefield,  etc.  R.  R.  v.  H.  565(1896).  Where  a  subscription 
Brush,  43  Conn.  86  (1875);  Phoenix  is  absolute  upon  its  face  the  subscrib- 
Warehousing  Co.  v.  Badger,  6  Hun,  ers'  liability  cannot  be  changed  by 
293  (1875);  aff'd,  67  N.  Y.  294;  other  contemporaneous  agreements  as 
White  Hall,  etc.  R.  R.  v.  Myers,  16  between  them  and  creditors  who  had 
Abb.  Pr.  (N.  S.)  34  (1872).  But  see  no  notice  of  such  agreements.  "Cred- 
Brewers'  F.  Ins.  Co.  v.  Burger,  10  itors  are  entitled  to  the  full  benefit 
Hun,  56  (1877),  holding  that  where  of  the  stockholder's  contract  as  he 
the  original  subscription  contract  is  has  made  and  published  it  in  sub- 
verbal  and  complete,  and  a  part  only  scribing,  executing  and  filing  his  sub- 
of  it  is  afterwards  reduced  to  writing,  scription  to  the  stock  of  the  corpora- 
it  is  competent  to  prove  the  whole  tion."  Moore  v.  Universal,  etc.  Co., 
agreement.  Cf.  Eighmie  v.  Taylor,  122  Mich.  48  (1899).  Where  a  stock- 
98    N.    Y.    288     (1885);     Emmett    v.  holder  has  agreed  to  sell  and  deposit 

398 


CH.  IX.] 


DEFENSE  OP  PAROL  AGREEMENT,  ETC. 


[§  137. 


evidence  to  explain,  contradict  or 
plies  to  a  subscription  contract  for 

in  a  trust  company  720  shares,  but 
only  deposited  687  shares,  and  the 
vendee  has  on  his  part  deposited  the 
purchase  price  with  the  trust  com- 
pany to  be  paid  on  the  delivery  of 
the  720  shares,  the  vendor  cannot 
rescind  on  the  ground  that  there  was 
a  contemporaneous  oral  understand- 
ing that  G87  shares  would  be  suffi- 
cient. Dady  v.  O'Rourke,  172  N.  Y. 
447    (1902). 

In  Georgia,  under  section  3S03  of 
the  code,  where  the  subscription  does 
not  purport  to  contain  the  whole  con- 
tract, parol  evidence  is  admissible. 
Hendrix  v.  Academy  of  Music,  73  Ga. 
437   (18S4). 

In    Pennsylvania   the    case    of   Mc- 
Clure  v.  People's,  etc.  Ry.,  90  Pa.  St. 
2G9  (1S79),  sustains  the  general  rule, 
and    excludes    a    parol    agreement   or 
condition  allowing  payment  in  prop- 
erty.     But     Rinesmith     v.     People's 
Freight  Ry.,  90   Pa.   St.  262    (1879); 
Caley  v.  Philadelphia,  etc.  R.  R.,  80 
Pa.   St.   363    (1876);     Miller  v.   Han- 
over, etc.  R.  R.,  87  Pa.  St.  95  (1878); 
and  McCarty  v.  Selinsgrove,  etc.  R.  R., 
87    Pa.    St.    332    (1878),    allow    parol 
evidence   to   contradict  the   subscrip- 
tion contract  where  it  is  shown  that 
but  for  the  parol  agreement  the  sub- 
scription would  not  have  been  made; 
the   last  two   cases   saying,  however, 
that  the  evidence  is  inadmissible  if 
other   stockholders  are   interested   in 
opposition   to   such   parol   agreement. 
In   Pennsylvania  it  is  held  that  the 
oral    promise    of   the   president   of   a 
railroad  in  taking  a  deed  of  a  right 
of  way,  that  a  certain  crossing  would 
be     built,     will     be     enforced,     even 
though  it  changes  the  writing,  it  hav- 
ing been  made  at  the  time  and  used 
to  procure  the  execution  of  the  writ- 
ing.    Perkiomen  R.  R.  v.  Bromer,  66 
Atl.  Rep.  359  (Penn.  1907).     This  un- 
usual rule  probably  has  its  origin  in 
an    old    English    case     (Pulsford    v 


vary  a  written  instrument,  ap- 
stock  in  a  corporation.     Neither 

Richards,  17  Beav.  87—1853),  which 
holds  that  a  representation  is  to  be 
considered    fraudulent    when,    if    the 
real  truth  had  been  stated,  it  is  rea- 
sonable to  believe  the  plaintiff  would 
not   have   entered   into   the   contract. 
A  parol  agreement  that  part  payment 
in  contract  labor  should  be  allowed 
was  held  to  be  void,  inasmuch  as  it 
varied  the  terms  of  a  written  agree- 
ment.   Ridgefield,  etc.  R.  R.  v.  Brush, 
43   Conn.   86    (1875).     Contra,  Louis- 
ville,  etc.  R.  R.  v.  Thompson,   18   B. 
Mon.    (Ky.)    735    (1857);     McConahy 
v.  Centre,  etc.  Co.,  1  Pen.  &  W.  (Pa.) 
426  (1830),  followed  in  Swatara  R.  R. 
v.   Brune,    6    Gill    (Md.),    41    (1847); 
overruled   by   Nippenose   Mfg.   Co.   v. 
Stadon,   68   Pa.   St.   256    (1871).     See 
also    Weber    v.    Fickey,    52    Md.    501 
(1879);    s.  c,  47  Md.  196;    Liebke  v. 
Knapp,   79    Mo.    22    (1883).     A   parol 
condition    that   others    were   to    sign 
is  not  admissible.     Minneapolis,   etc. 
Co.    v.    Davis,    40   Minn.    110    (1889). 
Even  though  two  persons  signed  the 
articles  of  incorporation  as  incorpora- 
tors and  as   subscribers  of  stock,  on 
condition  that  the  articles  would  not 
be  used  unless  a  certain  other  party 
signed,    and    even    though   the   latter 
party   did   not  sign  and   the  articles 
were     filed     and     the     stock     subse- 
quently    tendered    to    such    signers, 
which     they     refused,     yet     if     they 
took  no  steps  to  remove  their  names 
as  subscribers    from   the   books   they 
are  liable  as  stockholders  to  corporate 
creditors  on  a  statutory  liability.  Reh- 
bein   v.  Rahr,   109   Wis.    136    (1901). 
But   it   has   been   held   that   a   parol 
agreement  herein,  made  after  the  sub- 
scription, and  on  a  new  consideration, 
is    valid.      Pittsburgh,    etc.    R.    R.    v. 
Stewart,   41   Pa.   St.   54    (1861).      See 
also   Tonica,   etc.   R.   R.   v.   Stein,   21 
111.   96    (1859).     Cf.   Bucher  v.   Dills- 
burg,  etc.  R.  R.,  76  Pa.  St.  306  (1874) ; 
Brewers'    F.    Ins.    Co.   v.    Burger,   10 
599 


138.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[CH.  IX. 


party  is  permitted  to  prove  a  different  contract  from  that  ex- 
pressed in  the  written  instrument.  Under  the  rule,  not  even  a  sepa- 
rate written  contemporaneous  contract  is  admissible  to  change  the 
subscription  contract.1 

§  138.  Thus,  an  oral  agreement  that  a  certain  location  will  be 
adopted,2  or  that  payment  may  be  made  in  a  certain  way  or  at  a 
certain  time,3  or  that  the  subscription  shall  be  merely  nominal,  for 


Hun,  56  (1877).  An  action  for  dam- 
ages for  breach  of  contract  lies 
against  the  corporation  if  the  agree- 
ment amounts  to  a  condition  subse- 
quent.   See  ch.  V,  supra. 

i  Quoted  and  approved  in  Beals  v. 
Buffalo,  etc.  Co.,  49  N.  Y.  App.  Div. 
589,  593  (1900).  In  this  case  the 
court  held  that  as  against  corporate 
creditors  a  subscriber  cannot  evade 
his  liability  by  showing  a  separate 
agreement  between  himself  and  the 
corporation  to  the  effect  that  the 
stock  was  to  be  delivered  to  him  at 
a  future  time,  and  that  in  the  mean- 
time he  was  to  advance  money  to  the 
corporation  to  the  amount  of  the  par 
value  of  the  stock  to  be  repaid  to 
him  out  of  contracts.  See  also  Brown- 
lee  v.  Ohio,  etc.  R.  R.,  18  Ind.  68 
(1862);  White  Mountains  R.  R.  v. 
Eastman,  34  N.  H.  124  (1856).  See 
also  §  191,  infra.  A  party  sued  upon 
a  subscription  for  stock  may  show 
that  a  letter  accompanied  the  sub- 
scription to  the  effect  that  he  would 
pay  a  certain  part  in  cash,  which  had 
been  done,  and  pay  the  balance  out 
of  his  monthly  accounts  with  the  cor- 
poration. Elliott  r.  New  York  En- 
dowment Co.,  73  Hun,  519  (1893); 
aff'd,  148  N.  Y.  752.  A  subscription 
before  incorporation  can  be  enforced 
by  the  company  only  in  accordance 
with  the  terms  on  which  it  was  de- 
livered by  the  subscriber  to  a  pro- 
moter to  be  delivered  to  the  corpora- 
tion, and  hence  it  may  be  shown  that 
the  stock  was  to  be  issued  for  the 
good  will  of  the  business.  Ottawa 
Dairy  v.  Soreley,  34  Can.  S.  C.  Rep. 
508  (1904).  A  subscription  payable 
to  whomsoever  might  lease  premises 


free  of  rent  to  a  stock  exchange,  may 
be  enforced  by  a  corporation  there- 
after organized  for  that  purpose,  and 
the  delivery  of  the  subscription  to  the 
person  obtaining  the  same  is  a  suffi- 
cient delivery.  A  separate  contract 
with  the  then  owners  of  the  building 
which  was  afterwards  acquired  by 
the  corporation  does  not  affect  such 
subscription,  the  corporation  having 
no  notice  thereof.  Merchants',  etc. 
Co.  v.  Chicago,  etc.  Co.,  210  111.  26 
(1904). 

2  North  Carolina  R.  R.  v.  Leach,  4 
Jones,  L.  (N.  C.)  340  (1857);  Wight 
v.  Shelby  R.  R.,  16  B.  Mon.  (Ky.)  4 
(1855);  Ellison  v.  Mobile,  etc.  R.  R., 
36  Miss.  572  (185S);  Mississippi,  etc. 
R.  R.  v.  Cross,  20  Ark.  443  (1859); 
Evansville,  etc.  R.  R.  v.  Posey,  12  Ind. 
363  (1859);  Eakright  v.  Logansport, 
etc.  R.  R.,  13  Ind.  404  (1859);  Car- 
lisle v.  Evansville,  etc.  R.  R.,  13  Ind. 
477  (1859);  Miller  v.  Wild  Cat,  etc. 
Co.,  52  Ind.  51  (1875);  s.  c,  57  Ind. 
241  (1877);  Miller  v.  Hanover,  etc. 
R.  R.,  87  Pa.  St.  95  (1878);  Gelpcke 
v.  Blake,  15  Iowa,  387  (1863);  Brad- 
dock  v.  Philadelphia,  etc.  R.  R.,  45 
N.  J.  L.  363  (1883);  Keller  v.  John- 
son, 11  Ind.  337  (1858),  holding  it 
immaterial  that  fraud  was  actually 
intended.  Contra,  Rives  v.  Montgom- 
ery, etc.  Co.,  30  Ala.  92  (1857).  Rep- 
resentations of  an  agent  that  the 
road  will  be  built  between  the  termini 
laid  down  in  the  charter  are  repre- 
sentations relative  to  the  future,  and 
are  not  fraudulent  though  not  carried 
out.  Armstrong  v.  Karshner,  47  Ohio 
St.    276    (1890). 

3  Noble  v.  Callender,  20  Ohio  St.  199 
(1870);    Henry  v.  Vermillion,  etc.  R. 


400 


CH.  IX.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[§  138. 


the  purpose  of  inducing  others  to  subscribe,1  or  that  the  subscription 
shall  be  in  fact  only  a  pledge  of  stock  by  the  corporation  to  the 
subscriber,  or  that  the  stock  may  be  surrendered,2  or  that  certain 
property  would  be  purchased  by  the  corporation,3  or  that  the  sub- 
scriber might  keep  his  stock,  but  should  not  be  liable  for  the  full 
par  value  thereof,4  or  that  payment  would  not  be  demanded  imtil 


R.,  17  Ohio,  187  (1848);  Methodist 
E.  Church  v.  Town,  49  Vt.  29  (1S76)  ; 
Ridgefield,  etc.  R.  R.  v.  Brush,  43 
Conn.  86  (1875) ;  Thigpen  v.  Missis- 
sippi Central  R.  R.,  32  Miss.  347 
(1S56).  A  lawyer  who  subscribes  for 
stock  on  an  oral  agreement  that  he 
should  pay  in  services  is  nevertheless 
liable  on  the  stock  to  corporate  cred- 
itors where  the  services  have  not  yet 
been  performed.  Caston's  Case,  7 
Ont.  Rep.  (Can.)  448  (1884).  Even 
though  subscribers  claim  that  their 
stock  was  to  be  paid  for  by  dividends, 
yet  such  an  agreement  is  no  defense 
as  against  creditors.  Hawkins  v. 
Citizens',  etc.  Co.,  38  Oreg.  544  (1901). 
i  Downie  v.  White,  12  Wis.  176 
(1860) ;  Wetherbee  v.  Baker,  35  N.  J. 
Eq.  501  (1882);  Centre,  etc.  Co.  v. 
McConaby,  16  Serg.  &  R.  (Pa.)  140 
(1827);  Phcenix  Warehousing  Co.  v. 
Badger,  6  Hun,  293  (1875);  aff'd,  67 
N.  Y.  294;  Peychaud  v.  Hood,  23  La. 
Ann.  732  (1871) ;  Galena,  etc.  R.  R. 
v.  Ennor,  116  111.  55  (18S6) ;  s.  c, 
Cleveland  Iron  Co.  v.  Ennor,  14  N.  E. 
Rep.  673;  Robinson  v.  Pittsburgh, 
etc.  R.  R.,  32  Pa.  St.  334  (1858) ;  Graff 
v.  Pittsburgh,  etc.  R.  R.,  31  Pa.  St. 
489  (1858);  Mann  v.  Cooke,  20  Conn. 
178  (1849);  Connecticut,  etc.  R.  R. 
v.  Bailey,  24  Vt.  465  (1852);  David- 
son's Case,  3  De  G.  &  S.  21  (1S49), 
holding  it  to  be  a  fraud  on  other  sub- 
scribers, without  requiring  proof  that 
there  were  such;  Bridger's  Case,  L. 
R.  9  Eq.  74  (1869);  aff'd,  L.  R.  5 
Ch.  App.  305 ;  New  Albany,  etc.  R.  R. 
v.  Slaughter,  10  Ind.  218  (1858); 
Blodgett  v.  Morrill,  20  Vt.  509  (1848); 
Minor  v.  Mechanics'  Bank,  1  Peters, 
46  (1828) ;  Bates  v.  Lewis,  3  Ohio  St. 
459      (1854);       Litchfield     Bank     v. 


Church,  29  Conn.  137  (I860);  Man- 
gles v.  Grand  Collier  Dock  Co.,  10 
Sim.  519  (1840);  Preston  v.  Grand 
Collier  Dock  Co.,  11  Sim.  327  (1840); 
Choteau  Ins.  Co.  v.  Floyd,  74  Mo.  286 
(1S81).  These  cases  hold  that  parol 
agreements  are  void  as  a  fraud  on 
corporate  creditors  and  on  other  sub- 
scribers, and  that  the  subscription  is 
enforceable  absolutely.  It  is  no  de- 
fense that  there  was  a  prior  or  con- 
temporaneous oral  agreement  that 
the  stock  was  not  to  be  issued  and 
the  subscriber  not  to  be  held  liable. 
Wurtzburger  v.  Anniston  Rolling 
Mills,  94  Ala.  640  (1891).  It  is  no 
defense  that  another  party  had  prom- 
ised the  stockholder  that  the  former 
would  pay  for  the  stock.  Williams 
v.  Benet,  34  S.  C.  112  (1S91).  A  per- 
son sued  as  a  subscriber  cannot  set 
up  that  he  subscribed  at  the  solicita- 
tion of  another  person  who  agreed  to 
take  the  subscription  off  his  hands 
at  once.  Stutz  v.  Handley,  41  Fed. 
Rep.  531  (1890);  reversed  on  other 
grounds,  Handley  v.  Stutz,  139  U.  S. 
417. 

2Melvin  v.  Lamar  Ins.  Co.,  80  111. 
446  (1875);  White  Mountains  R.  R. 
v.  Eastman,  34  N.  H.  124  (1856).  Cf. 
§§  247,  465,  infra.  Or  that  the  sub- 
scriber be  released.  Gill  v.  Balis,  72 
Mo.  424   (1880). 

3  Kelsey  v.  Northern  Light  Oil  Co., 
45  N.   Y.   505    (1871). 

4  Custar  v.  Titusville  Gas,  etc.  Co., 
63  Pa.  St.  381  (1869)  ;  Union  Mut.  L. 
Ins.  Co.  v.  Frear  Stone  Mfg.  Co.,  97 
111.  537  (1881);  Upton  v.  Tribilcock, 
91  U.  S.  45  (1875).  A  secret  agree- 
ment that  a  subscriber  for  stock  prior 
to  incorporation  shall  not  be  required 
to  take  the  stock  is  no  defense  as 


(26) 


401 


§  138.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[cn.  IX. 


certain  work  had  been  completed/  or  that  the  money  would  bo  ap- 
plied to  a  particular  part  of  the  road,2  or  that  a  certain  part  of  the 
road  would  be  completed  within  a  certain  time,3  or  that  the  road 
would  be  extended  to  a  certain  point,4  or  other  parol  conditions,5  or 


against  the  corporation.    Greater,  etc.  scribed  for,  although  thereafter  it  is 

Co    v    Riley,  210  Pa.   St.  283    (1904).  agreed  that  the  subscription  shall  be 

A   subscriber   cannot   defeat  his   sub-  paid  by  the  transfer  of  property,  yet, 

scription  on  the  ground  that  the  agent  if  no  actual  transfer  is  made,  a  sub- 

of  the  company  who  obtained  it  told  scriber   may   be   liable,    even   though 

him   that  he  would   never  be   called  he  understood  that  the  property  had 

upon   to   pay   anything.     Maries,   etc.  been    actually    transferred.      Crowley 

Co.  v.  Stulb,  215  Pa.  St.  91   (1906).  V.  Walton,  23  R.   I.   331    (1901).     An 

i  La  Grange,   etc.  Co.   v.  Mays,  29  oral  agreement  that  only  one-half  of 

Mo.   64    (1859);     Clem   v.   Newcastle,  the  subscription   need   be   taken   and 

etc   R.  R.,  9  Ink.  488   (1857),  holding  paid   for   is   not  legal.     Gathright  v. 

that  such  a  promise  is  contradictory  Oil  City,  etc.  Co.,  56  S.  W.  Rep.  163 

of  the  legal  effect  of  the  subscription;  (Ky.  1900).     A  subscriber  may  show 

Cincinnati,   etc.   R.   R.   v.   Pearce,   28  that   he  was   assured   that  he   might 

Ind   502(1867).    A  call  on  a  subscrip-  withdraw    from    the    subscription    if 

tion  cannot  be  enjoined  on  the  ground  he   wished  after  consulting  with  an- 

that   it    is    in    violation    of    a    parol  other  person,  and  that  he  actually  did 

agreement    of    the    promoters    as    to  so    withdraw.      Ada,    etc.    Assoc,    v. 


calls.     Christopher  v.  Noxon,  4   Ont 
Rep.    (Can.)    672    (1883). 

2  Smith  v.  Tallassee,  etc.  Co.,  30 
Ala.  650  (1857).  An  action  to  rescind 
the  purchase  of  stock  lies  where  the 


Mears,  123  Mich.  470  (1900).  Parol 
evidence  is  inadmissible  to  add  to  a 
condition  of  a  conditional  subscrip- 
tion. Miller  v.  Preston,  4  N.  M.  396 
(188S).     An   oral   agreement  to  take 


money  paid  therefor  was  to  be  ap-  stock  in  payment  of  a  note  is  no  de- 
plied  to  a  certain  purpose,  but  was  fense  to  the  note.  The  corporation 
not  so  applied  but  the  receiver  will  must  pay  it.  Tuscaloosa,  etc.  Co.  v. 
not  be  directed  to  give  up  the  money.  Perry,  85  Ala.  158  (1888).  Where 
Moore  v.  Robertson,  25  Abb.  N.  C.  the  agent  of  the  railroad  represented 
173    (1890)  that  a  dePot  would  be  constructed  at 

3  Blair  v.  Buttolph,  72  Iowa,  31  a  certain  place,  a  failure  to  so  con- 
/18g7)  struct  is   good   ground  for   enjoining 

4  Low  v.  Studabaker,  110  Ind.  57  the  issue  of  municipal-aid  bonds. 
(1887)  Oral  promises  and  statements  Wullenwaber  v.  Dunigan,  30  Neb.  877 
that  the  road  would  be  constructed  (1890).  An  oral  contract  that  the 
on  a  certain  route  are  no  defense  to  subscriber  was  to  be  allowed  to  pay 
a  written  subscription.  Chattanooga,  in  property  is  good  as  against  other 
etc.  R.  R.  v.  Warthen,  98  Ga.  599  stockholders  who  assented  thereto, 
^ogg-v'  but    such    contract    must    be    clearly 

5  Topeka  Mfg.  Co.  v.  Hale,  39  Kan.  proven.  Knoop  v.  Bohmrich,  49  N.  J. 
23  (1888);  Marshall  Foundry  Co.  v.  Eq.  82(1891).  Where  a  note  is  given 
Killian  99  N  C  501  (1888).  A  sub-  in  payment  for  stock,  and  recites  on 
scriber 'for  stock  may  show  that  pay-  its  face  that  it  is  for  value  received, 
ment  therefor  was  by  the  conveyance  parol  evidence  is  not  admissible  to 
of  land  or  an  interest  in  land.  Libby  show  that  the  sale  was  on  condition 
v  Mt.  Monadnock,  etc.  Co.,  68  N.  H.  that  the  stock  would  afterwards  pay 
444    (1S96).     Where    stock     is     sub-  a  certain  dividend,  and  in  case  such 

402 


CH.  IX.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[§  138. 


executory  contracts, — are  held  to  be  no  defense  to  an  action  to  col- 
lect the  subscription.1  Where,  for  the  purpose  of  obtaining  a  sub- 
scription, a  promise  was  made  in  behalf  of  the  corporation  that  a 
branch  road  would  be  built,  it  was  held  that  this  promise  was  but  an 
expression  of  an  existing  intention  which  was  liable  to  be  changed, 
and  was  no  defense.2  It  has  also  been  held  that  a  promise  which, 
if  carried  out,  would  necessitate  an  ultra  vires  act  by  the  corpora- 
tion, is  not  binding,  and  is  no  defense.3  In  a  contract  of  subscrip- 
tion covenants  of  the  company  to  do  certain  things  with  the  money 
are  independent  and  a  breach  thereof  is  no  defense  to  the  subscrip- 
tion.4 A  person  who  obtains  subscriptions  for  stock  is  not  person- 
ally liable  for  the  failure  of  the  corporation  to  carry  out  special  terms 
of  the  subscription  agreement,  and  a  subsequent  guaranty  that  such 
terms  will  be  carried  out  is  not  enforceable,  there  being  no  new  con- 
sideration.5 


dividend  was  not  paid  the  note  was 
not  to  be  paid.  Dinkier  v.  Baer,  92 
Ga.  432  (1893).  It  is  no  defense  to 
a  railroad  stock  subscription  that  de- 
fendant was  to  receive  stock  in  a  con- 
struction company,  or  that  the  con- 
trol would  not  change  hands,  or  that 
the  company  has  sold  all  its  property. 
Russell  v.  Alabama  Midland  Ry.,  94 
Ga.  510  (1894).  Where,  with  a  view 
to  organizing  a  corporation,  various 
parties  sign  a  subscription  list  on  the 
oral  agreement  that  they  might 
change  the  amount  of  their  subscrip- 
tions, and  one  who  signed  for  $5,000 
notified  the  chief  promoter  that  he 
wanted  but  $2,500,  and  the  corpora- 
tion, when  organized,  made  calls  on 
him  for  only  $2,500,  a  corporate  cred- 
itor cannot  hold  him  for  more.  Y/hite 
v.  Kahn,  103  Ala.  308  (1894).  Where 
the  capital  stock  proposed  is  stated, 
it  is  no  defense  that  an  attempt  was 
made  to  increase  it  and  that  the  sub- 
scriber supposed  it  was  to  be  in- 
creased. Glenn  v.  Hunt,  120  Mo.  330 
(1894). 

i  Piscataqua  Ferry  Co.  v.  Jones,  39 
N.  H.  491  (1859);  Crossman  v.  Pen- 
rose Ferry  Bridge  Co.,  26  Pa.  St.  69 
(1856);  New  Albany,  etc.  R.  R.  r. 
Fields,  10  Ind.  187  (1858)  ;  East  Ten- 
nessee, etc.  R.  R.  v.  Gammon,  5  Sneed 


(Tenn.),  567  (1858);  Saffold  v. 
Barnes,  39  Miss.  399  (1860);  Payson 
v.  Withers,  5  Biss.  269  (1873);  s.  c, 
19  Fed.  Cas.  29;  Goff  v.  Hawkeye 
Pump,  etc.  Co.,  62  Iowa,  691  (1884)  ; 
Corwith  v.  Culver,  69  111.  502  (1873). 
Contra,  Mahan  v.  Wood,  44  Cal.  462 
(1872),  where  the  par  value  of  the 
shares   was  not  what  was   promised. 

2  McAllister  v.  Indianapolis,  etc. 
R.  R.,  15  Ind.  11  (1S60).  It  is  no 
defense  that  the  subscribers  were  told 
that  branch  offices  would  be  estab- 
lished and  that  they  had  not  been. 
Guarantee,  etc.  Co.  v.  Mayer,  141  Pa. 
St.  511  (1891).  The  fact  that  the 
company  does  not  use  its  moneys  re- 
ceived from  subscriptions,  in  accord- 
ance with  a  contract,  is  no  defense  to 
another  subscriber.  Pacific  Mill  Co. 
v.  Inman,  etc.  Co.,  46  Oreg.  352  (1905). 

3  Johnson  v.  Crawfordsville,  etc.  R. 
R.,  11  Ind.  280  (1858),  where  aid 
from  another  railroad  was  promised; 
Peters  v.  Lincoln,  etc.  R.  R.,  14  Fed. 
Rep.  319  (1882),  where  an  ultra  vires 
lease  was  promised;  Baile  v.  Calvert, 
etc.  Soc,  47  Md.  117  (1877). 

4  Pacific  Mill  Co.  v.  Inman,  etc. 
Co.,  46  Ore.  352    (1995). 

5  McNaught  v.  Fisher,  96  Fed.  Rep. 
168  (1899).  The  subscriber's  remedy 
may  be  against  the  person  who  made 


403 


§§   139,  140.]  DEFENSE  OP  PAROL  AGREEMENT,  ETC.  [CH.  IX. 

§  13  9.  Corporations  are  chargeable  with  the  fraudulent  represen- 
tations of  their  agents. — At  an  early  day  in  England  it  was  held  in  a 
number  of  cases  that  corporations  were  not  bound  by  the  frauds  of 
their  agents  in  obtaining  subscriptions  to  stock.1  This  doctrine 
rested  on  the  theory  that  the  corporation  gave  the  agent  no  power 
or  authority  to  commit  a  fraud,  and  that,  consequently,  the  fraud 
rendered  the  agent  liable  personally,  but  did  not  release  or  affect  the 
subscription. 

§  140.  The  modern  doctrine,  however,  both  in  this  country  and 
in  England,  has  completely  exploded  the  theory  that  corporations 
are  not  chargeable  with  the  frauds  of  their  agents  in  taking  sub- 
scriptions. The  well-established  rule  now  is  that  a  corporation  can- 
not claim  or  retain  the  benefit  of  a  subscription  which  has  been  ob- 
tained through  the  fraud  of  its  agents.  The  misrepresentations  are 
not  regarded  as  having  actually  been  made  by  the  corporation,  but 
the  corporation  is  not  allowed  to  retain  the  benefit  of  the  contract 
growing  out  of  them,  being  liable  to  the  extent  that  it  has  profited 
by  such  misrepresentations.2  The  question  of  the  authority  of  the 
agent  taking  the  subscription  is  immaterial  herein.  It  matters  not 
whether  he  had  any  authority,  or  exceeded  his  authority,  or  concealed 
its  limitations.3     The  corporation  cannot  claim  the  benefits  of  his 

the   agreement   which   has   not   been  ciples  governing  these  contracts  are 

kept.     Felgate's  Case,  2  De  G.,  J.  &  the  same  as  the  principles  governing 

S.  456  (1865).  contracts  between  private  individuals. 

i  Dodgson's   Case,   3   De   G.   &   Sin.  Venezuela  Central  Ry.  v.  Kisch,  L.  R. 

85    (1849);    Bernard's  Case,  5  De  G.  2  H.  L.  App.  99   (1867);    Anderson  v. 

&  Sm.  283    (1852);    Gibson's  Case,  2  Newcastle,    etc.    R.    R.,    12    Ind.    376 

De  G.  &  J.  275   (1858);    Holt's  Case,  (1859);      Vreeland     v.     New     Jersey 

22   Beav.   48    (1856);    Felgate's   Case,  Stone  Co.,  29  N.  J.  Eq.  188    (1878); 

2  De  G.;  J.  &  S.  456  (1865) ;    Mixer's  Ranger  v.  Great  Western  Ry.,  5  H.  L. 

Case,  4  De  G.  &  J.  575  (1859),  where  Cas.  72    (1854);    Mackay  v.  Commer- 

a  prospectus  was  issued  by  the  direc-  cial  Bank,  L.  R.  5  P.  C.  394   (1874). 

tors;      Ayre's     Case,     25     Beav.     513  As   regards   representations   in   refer- 

(1858),   the    court    holding   that    the  ence  to   bonds   secured   by   mortgage 

corporation  is  bound  by  the  misrepre-  and  the  right  of  a  purchaser  of  bonds 

sentation    only    where    it    expressly  to  complain,  see  Van  Weel  v.  Winston, 

authorized    the    particular   statement  115  U.  S.  228  (1885),  and  §  830,  infra. 

made.     Cf.  Barry  v.  Croskey,  2  Johns.  3  Where     subscriptions     were     ob- 

&  Hem.  1   (1861).  tained    by    fraudulent    statements    of 

2  Western  Bank  v.  Addie,  L.   R.  1  the    officers,    the    corporation    cannot 

Sc.    App.    (H.    L.)    145    (1867);    Na-  defend   against  a   bill   to   rescind   by 

tional  Exchange  Co.  v.  Drew,  2  Macq.  setting  up  that  it  was  not  bound  by 

H.   L.    Cas.    103    (1855);     Henderson  such     representations.       Garrison     v. 

v.   Lacon,   L.   R.    5    Eq.    249    (1867);  Technic,  etc.  Works,  55  N.  J.  Eq.  708 

Ex  parte  Ginger,  5  Ir.  Ch.  174  (1856);  (1897);     s.    c,     59    N.    J.    Eq.    440; 

Montgomery    Southern    Ry.    v.    Mat-  Crump   v.    U.    S.    Min.    Co.,    7    Gratt. 

thews,  77  Ala.  357  (1884).    The  prin-  (Va.)      352      (1851).      Provided,     of 

404 


CH.  IX.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[§  141. 


fraud  without  assuming  also  the  representations  which  procured  those 
benefits.1  Parol  evidence  is  admissible  to  show  the  fraud,  since  it 
does  not  vary  or  contradict  the  contract,  but  shows  that  no  contract 
was  legally  entered  into.2 

§  141.  The  misrepresentations  must  be  by  authorized  agents. — 
False  representations  by  persons  who  do  not  act  as  intermediaries 
between  the  corporation  and  the  subscriber  in  forming  the  contract 
cannot  bind  the  corporation  nor  affect  the  subscription.  They  are 
statements  of  outside  parties.3  The  subscriber  may  have  his  ac- 
tion for  damages  against  such  persons  for  deceit,  but  he  cannot 
charge  the  corporation  with  their  misrepresentations.  Sometimes, 
also,  the  misrepresentations  even  of  persons  connected  with  the  cor- 
poration do  not  bind  the  corporation,  inasmuch  as  their  powers  are 
purely  statutory,  or  have  nothing  to  do  with  the  taking  of  subscrip- 
tions. Thus,  while  there  has  been  considerable  controversy  in  this 
country  over  the  question  of  fraudulent  representations  by  commis- 
sioners having  statutory  powers  to  take  subscriptions,  it  is  well  set- 


course,  that  the  misrepresentations 
were  made  by  persons  legally  con- 
nected with  the  taking  of  the  sub- 
scription. An  agent  to  obtain  sub- 
scriptions may  use  the  ordinary 
means  of  accomplishing  the  object  of 
his  appointment,  such  as  represent- 
ing the  location  and  quality  of  the 
lands,  and  the  like.  Sandford  v. 
Handy,  23  Wend.  260  (1840).  See 
also  Nelson  v.  Cowing,  6  Hill,  336 
(1844).  A  suit  in  equity  lies  to 
rescind  where  the  agent  obtaining  the 
subscription  falsely  represented  the 
amount  of  stock  already  subscribed 
and  also  the  names  of  the  subscrib- 
ers and  also  the  contracts  in  immedi- 
ate prospect.  It  is  immaterial  that 
no  express  authority  was  given  by 
the  corporation  to  the  agent  to  make 
suchi  representations.  Talmadge  v. 
Sanitary,  etc.  Co.,  31  N.  Y.  App.  Div. 
498  (1898).  A  national  bank  which 
sells  securities  to  a  person  by  means 
of  misrepresentations  of  its  president 
as  to  the  character  of  the  securities, 
and  by  means  of  a  breach  of  trust  on 
his  part,  is  liable  for  the  money  so 
paid  to  it.  Carr  v.  National  Bank, 
etc.,  43  N.  Y.  App.  Div.  10  (1899); 
aff'd,  167  N.  Y.  375.    False  represen- 


tations of  a  person  obtaining  sub- 
scriptions is  a  defense,  even  though 
the  person  was  not  authorized  to  ob- 
tain subscriptions.  Anderson  v.  Scott, 
70  N.  H.  350  (1900).  See  s.  c,  70  N. 
H.   534,  and   §  156,  supra. 

1  Quoted  and  approved  in  Mulhol- 
land  v.  Washington,  etc.  Co.,  35  Wash. 
315    (1904). 

2  New  York  Exchange  Co.  v.  De 
Wolf,  31  N.  Y.  273  (1865).  In  Penn- 
sylvania the  peculiar  rule  prevails 
that  the  agent's  misrepresentations 
affect  the  subscription,  and  are  a  de- 
fense only  when  the  agent  actually 
had  or  reasonably  appeared  to  have 
authority  to  make  representations. 
Custar  v.  Titusville  Gas,  etc.  Co.,  63 
Pa.  St.  381  (1869).  This  was  the 
ancient  English  doctrine  long  since 
abandoned. 

3  Cunningham  v.  Edgefield,  etc.  R. 
R.,  2  Head  (Term.),  23  (1858);  Jew- 
ett  v.  Valley  Ry.,  34  Ohio  St.  601 
(1878).  The  representations  made  to 
him  by  other  subscribers  or  outsiders 
are  immaterial  herein.  His  remedy 
is  against  them  personally.  Duran- 
ty's  Case,  26  Beav.  268  (1858) ;  Ex 
parte  Frowd,  30  L.  J.  (Ch.)  322 
(1861). 


405 


141.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[CH.  IX. 


tied  that  the  subscriber  is  bound  to  know  that  the  commissioners 
have  no  power  to  make  representations,  and  that  the  corporation  is 
not  bound  thereby.1  A  subscriber  cannot  rescind  on  the  ground  of 
misrepresentations  made  by  a  promoter.2  So,  also,  it  has  been  held 
that  the  representations  by  the  president  of  the  corporation  do  not 
bind  it  where  he  had  no  authority  to  take  subscriptions.3  Where 
all  the  stock  is  sold  through  the  executive  committee,  the  stockholders 
may  be  bound  by  the  false  representations  of  such  committee.4  A 
bank  may  be  chargeable  with  notice  of  a  fraud  perpetrated  by  some 
of  the  directors  in  issuing  the  stock  of  another  corporation  and  taking 
notes  therefor  and  endorsing  the  notes  and  discounting  them  with 
the  bank.5  A  director  has  no  power,  unless  specially  authorized, 
to  bind  the  company  by  a  representation.6  In  Indiana  it  is  held 
that  an  agent  taking  subscriptions  before  the  incorporation  of  the 
company  cannot  bind  it  by  his  misrepresentations.7     Misrepresen- 


i  Nippenose  Mfg.  Co.  v.  Stadon, 
68  Pa.  St.  256  (1871);  Bavington  v. 
Pittsburgh,  etc.  R.  R.,  34  Pa.  St.  358 
(1859);  Wight  v.  Shelby  R.  R.,  16 
B.  Mon.  (Ky.)  4  (1855);  Rutz  v. 
Esler,  etc.  Mfg.  Co.,  3  111.  App.  83 
(1878);  Syracuse,  etc.  R.  R.  v.  Gere, 
4  Hun,  392  (1875);  North  Carolina 
R.  R.  v.  Leach,  4  Jones,  L.  (N.  C.) 
340   (1857). 

2  Re  Metals  Constituents,  Limited, 
[1902]  1  Ch.  707.  See  158  Fed.  Rep. 
969. 

3  Crump  v.  U.  S.  Min.  Co.,  7  Gratt. 
(Va.)  352  (1851);  Rives  v.  Mont- 
gomery, etc.  Co.,  30  Ala.  92  (1857).  In 
all  such  cases,  however,  if  the  cor- 
poration accepts  a  subscription  taken 
by  an  unauthorized  agent,  it  cannot 
retain  the  subscription  and  repudi- 
ate the  representations.  It  must  as- 
sume both  or  neither.  A  company  is 
bound  by  a  fraudulent  statement 
made  by  its  president.  Zang  v. 
Adams,  23  Colo.  408  (1897).  Ma- 
terial false  representations  by  the 
president  and  agent  are  a  good  de- 
fense to  an  action  on  the  subscription. 
Queen  City,  etc.  Co.  v.  McAden,  131 
N.  C.  178   (1902). 

4  Garrett  Co.  v.  Appleton,  101  N. 
Y.  App.  Div.  507  (1905);  aff'd,  184 
N.   Y.   557. 


5  State  Bank  of  Indiana  v.  Ment- 
zer,  125  Iowa,  101    (1904). 

c  Milwaukee,  etc.  Co.  v.  Scho- 
knecht,  108  Wis.  457  (1901).  Repre- 
sentations and  declarations  of  a  di- 
rector to  procure  a  bonus  from  the 
citizens  of  a  town  are  ratified  by  the 
acceptance  of  the  bonus  by  the  com- 
pany. Gulf,  etc.  Ry.  v.  Pittman,  4 
Tex.  Civ.  App.  167    (1893). 

7  Miller  v.  Wild  Cat,  etc.  Co.,  57 
Ind.  241  (1877).  In  Lynde  v.  Anglo- 
Italian,  etc.  Co.,  [1896]  1  Ch.  178, 
the  court  laid  down  the  following 
rules  as  to  who  could  bind  the  com- 
pany by  representations:  (1)  Where 
the  misrepresentations  are  made  by 
the  directors,  or  other  the  general 
agents  of  the  company  entitled  to  act, 
and  acting  on  its  behalf;  (2)  where 
the  misrepresentations  are  made  by  a 
special  agent  of  the  company  while 
acting  within  the  scope  of  his  author- 
ity; (3)  where  the  company  can  be 
held  affected,  before  the  contract  is 
complete,  with  the  knowledge  that  it 
is  induced  by  misrepresentations;  (4) 
where  the  contract  is  made  on  the 
basis  of  certain  representations, 
whether  the  particulars  of  those  rep- 
resentations were  known  to  the  com- 
pany or  not,  and  it  turns  out  that 


406 


CH.  IX.]  DEFENSE  OF  PAROL  AGREEMENT,  ETC.     [§§  142,  143. 

tations  of  promoters  are  no  defense.1  A  committee  appointed  at  a 
public  meeting  to  solicit  subscriptions  to  a  proposed  corporation  do 
not  bind  the  corporation  by  tbeir  representations,  and  a  subscriber 
cannot  defend  on  the  ground  of  false  statements  made  by  the  com- 
mittee.2 If  there  is  conflicting  testimony  as  to  the  authority  and 
status  of  the  agent,  the  question  is  to  be  submitted  to  the  jury.3 

§  142.  Corporation  not  bound  by  misrepresentations  of  officers  at 
a  public  meeting. — There  is  a  difference  of  opinion  among  the  author- 
ities as  to  whether  fraudulent  representations  made  by  one  or  more 
of  the  company's  officers,  at  a  public  meeting  called  to  pro- 
mote the  procuring  of  subscriptions,  are  chargeable  against  the  cor- 
poration where  such  representations  were  not  expressly  authorized 
by  the  corporation.  In  New  York,  Iowa,  Alabama  and  Louisiana 
such  misrepresentations  do  not  bind  the  corporation.4  In  Georgia 
and  Wisconsin,  on  the  other  hand,  such  fraudulent  representations 
are  held  to  bo  admissible  in  evidence.5  The  former  rule  seems  to 
accord  most  with  the  modern  tendency  of  the  decisions,  which  go 
very  far  towards  the  enforcement  of  subscriptions  after  corporate 
creditors  and  other  subscribers  have  become  interested  in  the  en- 
terprise. 

§  143.  The  misrepresentations  may  arise  by  prospectuses. — A 
prospectus  issued  by  the  authority  of  the  directors  or  the  stock- 
holders of  a  corporation  may  be  relied  upon  by  a  person  in  subscrib- 
ing for  stock ;  and  if  the  prospectus  contains  a  false  representation, 
and  the  subscription  is  made  by  reason  thereof,  such  representation 

some   of   those   representations   were  3  Kelsey  v.  Northern  Light  Oil  Co., 

material  and  untrue.    The  court  held  45  N.  Y.  505  (1871);    Crump  v.  U.  S. 

that  a  promoter  who  was  not  acting  Min.  Co.,  7  Gratt.    (Va.)    352   (1851). 

for    the    company   (fid    not   bind   the  4  Buffalo,   etc.  R.  R.  v.  Dudley,  14 

company  by  his  statements.  N.  Y.   336    (1856) ;    First  Nat.   Bank 

A  stockholder  may  rescind  his  sub-  v.    Hurford,    29    Iowa,    579     (1870) ; 

scription    where   he   was    induced   to  Smith  v.  Tallassee,  etc.   Co.,  30   Ala. 

subscribe  by  a  promoter  who  realized  650   (1857),  on  the  ground  of  a  want 

a  secret  profit  from  his  option  on  the  of  authority,  which  the  subscriber  is 

sale  of  land  to  the  corporation,  the  bound   to   know;     Vicksburg,   etc.   R. 

promoter     representing     that     others  R.  v.  McKean,  12  La.  Ann.  638  (1857), 

were  the  vendors  of  the  land.     Vir-  on  the  ground  that,  if  the  rule  were 

ginia  Land  Co.  v.  Haupt,  90  Va.  533  otherwise,   "there  will  be  very  little 

(1894).  security  to  those  who  loan  money  or 

i  Oldham  v.  Mt.  Sterling  Imp.  Co.,  render    assistance   to    institutions    cf 

103  Ky.  529   (1898).     This  subject  of  this  kind." 

the    liability   of   the   corporation    for  5  Atlanta,  etc.  R.  R.  v.  Hodnett,  36 

the    acts    of    the    promoters    is    fully  Ga.   669    (1867);     McClellan  v.   Scott, 

considered  in  §707,  infra.  24  Wis.  81    (1S89).     The  question  of 

2  St.  Johns  Mfg.  Co.  v.  Munger,  106  representations   at   a   public   meeting 

Mich.  90   (1895).  was  submitted  to  the  jury  in  Weenis 

407 


143.] 


DEFENSE  OP  PAROL  AGREEMENT,  ETC. 


[cn.  IX. 


is  binding  upon  the  corporation.1  In  this  class  of  corporate  instru- 
ments, however,  it  is  held  that  some  high  coloring  and  even  ex- 
aggeration is  allowable.  "In  an  advertisement  of  this  description 
some  allowance  must  always  be  made  for  the  sanguine  expectations 
of  the  promoters  of  the  adventure ;  and  no  prudent  man  will  accept 
the  prospects  which  are  always  held  out  by  the  originators  of  every 
new  scheme  without  considerable  abatement."2  So,  also,  if  the 
language  used  in  the  prospectus  admits  of  two  meanings,  the  sub- 
scriber relying  on  it  must  ascertain  which  meaning  is  intended.3 


v.    Georgia,    etc.    R.    R.,    88    Ga.    303 
(1892). 

i  Oakes  v.  Turquand,  L.  R.  2  H.  L. 
App.  325  (1867) ;  Re  Metropolitan, 
etc.  Assoc,  [1892]  3  Ch.  1;  Ross  vl 
Estates  Investment  Co.,  L.  R.  3  Ch. 
App.  682  (1868);  Reese  River,  etc. 
Co.  v.  Smith,  L.  R.  4  H.  L.  64  (1869) ; 
Blake's  Case,  34  Beav.  639  (1865); 
Henderson  v.  Lacon,  L.  R.  5  Eq.  249 
(1867).  In  England  it  is  enacted, 
by  section  38  of  the  Companies  Act, 
1867:  "Every  prospectus  of  a  com- 
pany, and  every  notice  inviting  per- 
sons to  subscribe  for  shares  in  any 
joint-stock  company,  shall  specify  the 
dates  and  the  names  of  the  parties 
to  any  contract  entered  into  by  the 
company,  or  the  promoters,  directors, 
or  trustees  thereof,  before  the  issue 
of  such  prospectus  or  notice,  whether 
subject  to  adoption  by  the  directors 
or  the  company,  or  otherwise;  and 
any  prospectus  or  notice  not  specify- 
ing the  same  shall  be  deemed  fraud- 
ulent on  the  part  of  the  promoters, 
directors,  and  officers  of  the  company 
knowingly  issuing  the  same,  as  re- 
gards any  person  taking  shares  in 
the  company  on  the  faith  of  such  pros- 
pectus, unless  he  shall  have  had  no- 
tice of  such  contract."  For  the  ap- 
plication of  this  important  statute, 
see  Gover's  Case,  L.  R.  20  Eq.  114 
(1875);  aff'd,  L.  R.  1  Ch.  D.  182; 
Davidson  v.  Tulloch,  3  Macq.  7S3 
(1860) ;  Arkwright  v.  Newbold,  L.  R. 
17  Ch.  D.  301  (1881);  Twycross  v. 
Grant,  L.  R.  2  C.  P.  D.  469  (1877); 
Emma  Silver  Min.  Co.  v.  Lewis,  L.  R. 
4   C.   P.   D.   396    (1879);     Bagnall  v. 


Carlton,  L.  R.  6  Ch.  D.  371  (1877); 
Plympton  Min.  Co.  v.  Wilkins,  17 
Weekly  N.  66  (1882);  Sulivan  v. 
Mitcalfe,  L.  R.  5  C.  P.  D.  455  (1880)  ; 
Cornell  v.  Hay,  L.  R.  8  C.  P.  328 
(1873).  But  a  prospectus  containing 
statements  based  upon  a  report  of 
the  vendor  of  property  to  the  cor- 
poration, which  report  is  appended 
to  the  prospectus,  is  no  ground  for 
rescission,  even  though  the  report  is 
totally  false.  All  the  stockholders  and 
the  company  relied  equally  thereon. 
Ex  parte  Vickers,  56  L.  T.  Rep.  815 
(1887).  Several  subscribers  who  have 
been  induced  by  the  same  misrepre- 
sentations contained  in  a  prospectus 
to  subscribe  for  stock  may  join  in  a 
suit  in  equity  for  the  benefit  of  them- 
selves and  others  similarly  deceived, 
to  set  aside  their  subscriptions.  Bosh- 
•  er  v.  Richmond,  etc.  Co.,  89  Va.  455 
(1892).  See  also  §156,  infra.  Where 
the  corporation  itself  issues  a  pros- 
pectus which  is  false  and  which  aids 
to  induce  a  person  to  buy  its  stock 
from  the  promoter,  such  person  may 
have  the  purchase  set  aside  and  ob- 
tain a  money  judgment  against  the 
corporation  and  the  promoter.  Cox 
v.  National,  etc.  Co.,  56  S.  E.  Rep. 
494   (W.  Va.  1907). 

2  Venezuela  Central  Ry.  v.  Kisch, 
L.  R.  2  H.  L.  App.  99,  113   (1867). 

3  Smith  v.  Chadwick,  L.  R.  9  App. 
Cas.  187  (1884);  Hallows  v.  Fernie, 
L.  R.  3  Ch.  App.  467,  476  (1868), 
where  the  court  say:  "If  [the  words] 
may  be  construed  in  a  different  man- 
ner by  different  minds,  it  will  be  im- 
possible to  test  the  truth  of  any  one 


405 


CH.  IX.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[§  143. 


Unless  the  representation  distinctly  refers  to  what  is  actually  ex- 
isting at  the  time,  it  must  be  taken  to  represent  what  will,  result 
when  the  enterprise  is  carried  out,  and  will  then  be  merely  an  ex- 
pression of  opinion.  ^Nevertheless  a  subscriber  may  have  rescission 
where  the  prospectus  is  not  an  honest,  candid,  straightforward  docu- 
ment, but  suggests  that  which  is  untrue  and  is  in  a  high  degree  mis- 
leading.1 If  the  general  impression  given  by  a  prospectus  is  false 
and  fraudulent,  it  is  immaterial  that  no  specific  statement  taken 
by  itself  is  false.2  A  subscriber  can  have  rescission  of  his  subscrip- 
tion on  the  ground  that  false  representations  were  contained  in  a 
prospectus  issued  before  the  company  was  formed,  where  the  com- 
pany afterwards  approves  of  such  prospectus.3  At  common  law  an 
underwriter  cannot  obtain  damages  on  the  ground  that  the  prospec- 
tus did  not  state  all  the  facts,  where  he  does  not  prove  that  he  re- 
lied on  the  prospectus.4  Under  the  English  statute  requiring  a 
prospectus  to  state  the  important  contracts,  the  subscriber  cannot 
hold  the  directors  liable  for  omitting  a  contract  unless  he  proves  that 
it  was  material  and  that  he  was  damaged  by  its  omission.5 


man's  assertion  that  he  understood 
them  in  the  sense  in  which  they  in- 
volved a  misrepresentation."  See 
also  §§  352,  353,  infra. 

1  Quoted  and  approved  in  Mulhol- 
land  v.  Washington,  etc.  Co.,  35  Wash. 
315  (1904).  Scott  v.  Snyder,  etc.  Co., 
67  L.  T.  Rep.  104    (1S92). 

2  Aaron's  Reefs  v.  Twiss,  [1896] 
A.  C.  273.  Where  a  person  purchases 
property  for  the  sole  purpose  of  creat- 
ing a  corporation  to  take  it  over  from 
him  and  to  pay  him  therefor  an  ex- 
cessive price  in  cash  and  stock,  net- 
ting a  large  profit  to  him,  the  stock 
being  offered  to  the  public,  and  he 
causes  the  incorporation  to  be  made 
and  directors  to  be  named,  who  are 
his  dummies,  he  is  a  promoter  and 
can  be  held  liable  by  such  corpora- 
tion for  the  profit  he  has  made,  un- 
less he  fully  disclosed  in  a  prospectus 
the  fact  that  he  had  formed  the  cor- 
poration and  that  he  had  made  such 
profit.  Especially  is  this  the  rule 
where  the  prospectus  gave  a  false 
impression.  He  occupies  a  fiduciary 
relation  towards  the  purchasers  of  the 
stock.  It  is  immaterial  that  the  di- 
rectors  approved    of   the   transaction 


with  full  knowledge.  Non-disclosure 
in  such  a  case  is  a  misfeasance  in 
the  nature  of  a  breach  of  trust.  Re 
Leeds,  etc.,  [1902]  2  Ch.  809.  As  to 
promoter's   liability,   see   §  651,  infra. 

3  Re  Metropolitan,  etc.  Assoc,  [1892] 
3  Ch.  1. 

4  Baty  v.  Keswick,  85  L.  T.  Rep. 
18   (1901). 

5  Nash  v.  Calthorpe,  [1905]  2  Ch. 
237.  A  prospectus  need  not  state 
what  a  person  paid  for  property 
which  he  has  sold  to  the  company,  it 
appearing  that  he  was  the  absolute 
owner  of  the  property  when  he  sold 
it  to  the  company.  Brookes  v.  Han- 
sen, [1906]  2  Ch.  129.  In  order  for 
a  subscriber  to  collect  damages  under 
the  English  statute  against  directors 
for  issuing  a  prospectus  which  does 
not  mention  a  corporate  contract 
which  had  been  entered  into,  he  must 
prove  that  he  would  not  have  taken 
the  shares  if  he  had  known  of  the 
contract,  and  that  he  has  sustained 
damage  by  its  not  being  mentioned. 
Macleay  v.  Tait,  [1906]  A.  C.  24.  A 
subscriber  to  stock  in  an  English  cor- 
poration does  not  waive  the  statutory 
liability  of  the  directors  for  not  fairly 


409 


§§    144,  145.]  DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[CH.  IX. 


§  144.  Or  by  reports. — So,  also,  a  reporl  made  by  the  corporate 
officers  to  the  stockholders  may  be  relied  on  by  one  who  contem- 
plates subscribing  for  stock.1  The  corporation  cannot  say  that  such 
reports  were  intended  for  the  stockholders  alone.  The  law  holds 
that  the  report  is  known,  and  is  intended  to  bo  known,  to  all  persona 
who  contemplate  becoming  stockholders,  and  is  the  same  as  though 
published  to  the  world.2  A  subscriber  has  a  right  also  t<>  rely  <>n 
printed  statements  of  the  company  given  to  him  by  the  agent  to  in- 
duce him  to  subscribe.3 

§  145.  Misrepresentations  amounting  to  fraudulent  representa- 
tions.— Any  false  statement  by  the  authorized  agents  of  a  corpora- 
tion in  regard  to  the  past  or  present  status  of  the  corporate  niter- 
prise  or  material  matters  connected  therewith,  whereby  subscrip- 
tions are  obtained,  is  a  fraudulent  representation. 

Thus,  a  false  statement  that  a  certain  amount  of  stock  had  been 
subscribed  for;4  or  that  certain  property  had  been  purchased;"'  that 


disclosing  in  a  prospectus  the  prelim- 
inary contracts,  even  though  the  pros- 
pectus stated  that  certain  contracts 
existed  and  that  the  subscribers 
waived  all  claims  in  regard  thereto, 
the  basis  of  this  decision  being  that 
the  prospectus  did  not  fairly  disclose 
what  the  subscribers  waived.  Watts 
v.  Bucknall,  [1902]  2  Ch.  62S;  aff'd, 
[1903]   1  Ch.  766. 

1  Western  Bank  v.  Addie,  L.  R.  1 
Sc.  App.  Cas.  (H.  L.)  145  (1867); 
New  Brunswick,  etc.  Ry.  v.  Cony- 
beare,  9  H.  L.  Cas.  711   (1862). 

2  National  Exch.  Co.  v.  Drew,  2 
Macq.  H.  L.  Cas.  103  (1855);  Scott 
v.  Dixon,  29  L.  J.  (Ex.)  62,  n.;  ex- 
plained and  adopted  in  Peek  v.  Gur- 
ney,  L.  R.  6  H.  L.  377  (1873). 

3  Peterson  v.  People's,  etc.  Assoc, 
124  Mich.   573    (1900). 

4  Ross  v.  Estates  Investment  Co., 
L.  R.  3  Ch.  App.  682  (1868);  Hen- 
derson v.  Lacon,  L.  R.  5  Eq.  249 
(1867).  Where  a  subscription  paper 
was  to  be  binding  only  in  case  a  cer- 
tain amount  was  subscribed,  a  false 
representation  that  the  amount  had 
already  been  subscribed,  is  sufficient 
to  avoid  a  subscription  made  in  re- 
liance thereon.  Luetzke  v.  Roberts, 
130  Wis.  97  (1906).    A  suit  in  equity 


lies  to  rescind  where  the  agent  ob- 
taining the  subscription  falsely  repre- 
sented the  amount  of  stock  already 
subscribed  and  also  the  names  of  the 
subscribers  and  also  the  contracts  in 
immediate  prospect.  It  is  immaterial 
that  no  express  authority  was  given 
by  the  corporation  to  the  agent  to 
make  such  representations.  Talmadge 
v.  Sanitary,  etc.  Co.,  31  N.  Y.  App. 
Div.  498  (1898).  A  statement  that 
£200,000  had  been  subscribed,  when 
in  fact  owners  of  property  had  con- 
tracted to  convey  the  same  to  the 
company  for  £200,000  of  stock,  is  a 
material  misrepresentation.  Arnison 
v.  Smith,  [18S9]  41  Ch.  D.  348.  It 
is  fraud  to  state  that  a  certain  per- 
son had  subscribed  for  stock  when  in 
fact  his  stock  was  given  to  him.  It 
is  not  fraudulent  that  the  mine  on 
which  the  stock  is  sold  would  not  pay 
for  mining.  A  bill  in  equity  lies  to 
cancel  a  conveyance  of  land  to  pay 
for  the  stock.  Coles  v.  Kennedy,  81 
Iowa,  360    (1890). 

5  Waldo  v.  Chicago,  etc.  R.  R.,  14 
Wis.  575  (1861);  Ross  v.  Estates  In- 
vestment Co.,  L.  R.  3  Ch.  App.  682 
(1868).  Or  that  the  property  con- 
tained valuable  mines  in  full  oper- 
ation, and  with  large  daily  returns. 


410 


en.  ix.] 


DEFENSE  OP  PAROL  AGREEMENT,  ETC. 


[§  145. 


the  corporate  property  is  unincumbered;1  that  the  corporation  is  sol- 
vent and  prosperous;2  that  the  stock  had  a  certain  value;3  that 
other  stockholders  had  paid  for  their  stock  the  same  price  ;4  that  the 

Reese  River,  etc.  Co.  v.  Smith,  L.  R.     (1878);    "Western   Bank  v.  Addie,   L. 
4  H.  L.  64   (1869).    Where  a  prospec-    R.  1  Se.  App.  Cas.  (H.  L.)  145  (1867). 
tus  states  that  the  company  has  ac-    A    representation    that   the    stock    is 
quired  certain  stock   in  other  corpo-    worth    more    than    par    is    material 
rations     at    a   price    which    already    when  in  fact  the   corporation   is   in- 
shows  a  profit,  but  in  fact  the  com-    solvent.       Deppen    v.    German-Ameri- 
pany  does  not  acquire  such  stock  un-    can,  etc.  Co.,  70  S.  W.  Rep.  868   (Ky. 
til    several    days    after    the    plaintiff    1902);   s.  c,  72  S.  W.  Rep.  768.    Not 
subscribed,  he  may  hold  the  directors    so,  however,  where  the  directors  non- 
liable  for  the  price  paid  by  him.   Mc-    estly    figured    in   debts    which    after- 
Connel   v.  Wright,    [1903]    1   Ch.   546.    wards  turned  out  to  be  bad.    Jackson 
A  representation  that  a  certain  pat-    v.  Turquand,  L,  R.  4  H.  L.  305  (1869). 
cnt-right  owned  by  the  company  had    Directors  were  held  liable  to  deposi- 
been  tested  and  found  to  be  valuable,    tors  for  fraudulent  representations  as 
held  not  a  misrepresentation,  although    to   the    bank's    solvency    in    Seale   v. 
it  turns  out  to  be  worthless.    Denton    Baker,  70  Tex.  283   (1888). 
v   Macneil,  L.  R.  2  Eq.  352  (1S66).   A        3  Where  promoters  transfer  worth- 
representation  in  good  faith  that  title    less  copyrights  for  $100,000  common 
to  land  was  good  when  in  fact  it  was     stock  and  then  by  misrepresentations 
bad  is  not  a  misrepresentation.    New     as  to  the  value  of  the  preferred  stock 
Brunswick,   etc.   Ry.   v.   Conybeare,   9     sell   it,  in  order  to  raise   money  for 
H    L    Cas    711    (1S62).     But  a  mis-    the  company,  the  purchaser  may  hold 
representation     that     a     government     them  personally  liable,   even   though 
guaranty  had  been  obtained  is  mate-     with  each  share  of  preferred  stock  so 
rial      Kisch  v.  Central  Ry.,  34  L.   J.     sold    they   contributed   one-half   of   a 
(Ch)     545     (1S65).      It    is  fraud    to    share   of   common   stock.     Grover   v. 
state  that  the  company  has  purchased     Cavanaugh,  82  N.  E.  Rep.  104   (Ind. 
property  when  in  fact  it  has  merely    1907). 

purchased  an  option  which  the  pro-  U  person  induced  to  subscribe 
meters  had,  and  which  they  turned  for  stock  on  the  representation  of  the 
in  at  an  extravagant  figure.  Savage  president  that  the  other  stockholders 
v.  Bartlett,  7S  Md.  561  (1894).  Where  had  paid  for  their  stock  in  full  may 
the  secretary  and  treasurer  represent  defend  against  the  subscription  on 
that  $50,000  have  been  paid  in,  and  the  ground  that  the  stockholders  had 
that  a  mill  had  been  bought  and  paid  not  and  were  not  to  pay  anything  for 
for,  and  such  representations  were  their  stock  Alabama,  ete  Works  » 
false,  the  subscriber  may  have  the  Dallas,  127  Ala.  513  (1900)  It  is 
subscription  set  aside  and  may  re-  fraudulent  to  represent  that  a  sub- 
cover  back  the  land  and  money  which  scription  is  bona  fide  when  in  fact 
he  has  turned  over  to  the  corpora-  there  was  an  ag reement  that  the 
tion.  Ramsey  v.  Thompson  Mfg.  Co.,  subscriber  should  pay  only  half  as 
116  Mo.  313     1893).  niuch    as    other    subscriloers        Sate 

■  McClellan    v.    Scott,    24    Wis.    81    Bank  v.  Cook,  125     owa    111    (1904) 
<1869)-    Water    Valley    Mfg.    Co.    v.    A  false   statement  that  none   of   the 
Seam  n,  SmL    655  "(1876°).  stock  had  been  sold  at  less  than  par 

2  Tyler    v.    Savage,    143    U.    S.    79     is  a  material  xnisrepresentafaon.   Hub 
(1892)-     Bell's    Case,     22     Beav.     35    bard  v.   International,   etc.,   68   N.  J. 
(1S56);  Melendy  v.  Keen,  89  111.  395    Eq.  434   (1904). 

411 


§   145.]  DEFENSE  OF  PAROL  AGREEMENT,  ETC.  [CH.  IX. 

company  was  a  bona  fide  corporation  and  not  a  mere  "dummy  ;"* 
that  the  directors  have  subscribed  for  stock  ;2  that  certain  individuals 
are  directors  ;3  or  as  to  the  nature  of  the  business  to  be  undertaken  ;4 
or,  in  England,  where  the  memoranda  or  articles  of  association  are 
different  from  the  prospectus;5  or  that  work  on  the  enterprise  had 
reached  a  certain  stage  of  completion;0  or  that  a  certain  price  had 
been  paid  for  property  when  in  fact  a  large  part  of  the  price  went  to 
promoters  f  or  that  the  objects  of  the  enterprise  set  forth  in  the  sub- 

i  Money  paid  on  a  subscription  to  5  Downes  v.  Ship,  L.  R.  3  H.  L. 
the  stock  of  a  New  Jersey  corpora-  343  (1S6S);  Ex  parte  Briggs,  L.  R.  1 
tion  may  be  recovered  back,  it  being  Eq.  483  (1866);  Peel's  Case,  L.  R.  2 
shown  that  such  New  Jersey  corpo-  Ch.  App.  674  (1867);  Lawrence's 
ration  was  merely  a  dummy  corpora-  Case,  L.  R.  2  Ch.  App.  412  (1867); 
tion  to  enable  a  New  York  corpora-  Kincaid's  Case,  L.  R.  2  Ch.  App.  420 
tion  to  do  business  in  New  Jersey  (1867);  Wilkinson's  Case,  L.  R.  2 
without  making  a  deposit  required  by  Ch.  App.  536  (1867);  Stewart's  Case, 
the  statutes  of  New  Jersey,  and  it  L.  R.  1  Ch.  App.  574  (1866);  White- 
being  also  shown  that  it  was  falsely  house's  Case,  L.  R.  3  Eq.  790  (1867); 
represented  that  the  New  Jersey  com-  Tait's  Case,  L.  R.  3  Eq.  795  (1867) ; 
pany  was  a  bona  fide  corporation.  Re  Cachar  Co.,  36  L.  J.  (Ch.)  490 
Seeber  v.  People's,  etc.  Assoc,  36  N.  (1867);  Ship  v.  Crosskill,  L.  R.  10 
Y.  App.  Div.  312  (1899).  Eq.  Cas.  73    (1870). 

2  Henderson  v.  Lacon,  L.  R.  5  Eq.  o  Ogilvie  v.  Currie,  37  L.  J.  (Ch.) 
249   (1867).  541    (186S);    Ashley's   Case,   L.   R.   9 

3  Blake's  Case,  34  Beav.  639  Eq.  Cas.  263  (1870).  False  represen- 
(1865);  Munster's  Case,  14  W.  R.  957  tations  that  sufficient  funds  were  at 
(1866).  Persons  who  have  accepted  hand  to  build  a  specified  part  of  the 
are  directors,  although  without  the  road,  being  a  different  part  from  that 
qualification  shares.  Hallows  v.  Fer-  which  the  defendant  required  by  his 
nie,  L.  R.  3  Ch.  App.  467  (1868).  A  subscription  to  be  completed  before 
misrepresentation  as  to  the  directors  payment,  are  immaterial.  Blair  v. 
is  ground  for  repudiating  the  sub-  Buttolph,  72  Iowa,  31  (1887). 
scription.  Re  Metropolitan,  etc.  7  Capel  v.  Sim's,  etc.  Co.,  58  L.  T. 
Assoc,  64  L.  T.  Rep.  561  (1891);  Rep.  807  (1888).  A  misrepresenta- 
[1892]  3  Ch.  1.  Where  a  representa-  tion  by  the  president  that  he  had 
tion  is  made  that  a  certain  skilled  paid  $35,000  for  property  and  had 
person  is  to  be  at  the  head  of  the  turned  it  in  to  the  corporation  for 
company,  but  thereafter  and  before  that  amount,  when  in  fact  he  had 
the  stock  is  issued  he  resigns,  a  sub-  paid  only  $12,000  for  the  property, 
scriber  may  have  his  subscription  and  a  misrepresentation  that  other 
canceled.  Ex  parte  Brown,  95  L-.  T.  stockholders  had  paid  in  full  for  their 
Rep.  756   (1906).  stock,     are     material     misrepresenta- 

4  Blackburn's  Case,  3  Drew.  409  tions.  Alabama,  etc.  Works  v.  Dallas, 
(1856).  A  person  who  has  agreed  to  127  Ala.  513  (1900).  Where  promot- 
turn  in  property  for  stock  may  have  ers  having  an  option,  on  land  obtain 
the  contract  annulled  on  the  ground  subscribers  to  the  stock  of  a  proposed 
that  fraudulent  representations  were  corporation  on  a  prospectus  stating 
made  about  the  process  of  manufac-  that  the  land  was  worth  $250,000  and 
ture  by  the  corporation.  Kelley  v.  that  it  would  only  cost  $175,000,  and 
Owens,  30  Pac.  Rep.  596  (Cal.  1892);  it  turns  out  that  the  promoters  real- 
S.  C.  120  Cal.  502  (1898).  ized  a  secret  profit  of  $30,000  from 

412 


CH.  IX.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[§  145. 


scription  contract  were  of  a  certain  nature,  the  subscriber  not  reading 
or  bearing,  and  not  being  able  to  read,  the  contract1  or  other  ma- 
terial misstatements  of  fact,2  have  been  held  to  constitute  a  fraudu- 
lent representation,  entitling  the  subscriber  induced  thereby  to  sub- 
scribe to  the  remedies  provided  for  him  by  law  in  such  cases.  In  all 
these  cases,  however,  the  distinction  between  statements  relative  to 
the  prospects  and  capabilities  of  the  enterprise,  and  statements  speci- 
fically specifying  what  does  or  does  not  exist,  must  be  carefully  borne 


the  $175,000,  a  subscriber  to  the  stock 
is  not  bound  to  pay  unless  he  has 
ratified  the  transaction  with  full 
knowledge  of  the  facts,  even  though 
the  facts  do  not  come  to  his  knowl- 
edge for  a  long  time.  West  End,  etc. 
Co.  v.  Nash,  51  W.  Va.  341  (1902).  A 
false  statement  that  patents  which 
had  been  acquired  by  the  issue  of 
$24,000,000  of  full-paid  stock  and 
$1,000,000  cash  were  basic  patents,  is 
a  material  misrepresentation.  Ameri- 
can Alkali  Co.  v.  Salom,  131  Fed. 
Rep.  46  (1904).  "Where  promoters  buy 
[property  with  a  view  to  organizing  a 
corporation  to  take  it  over,  and  it  is 
taken  over  with  a  purchase-money 
mortgage  nearly  equal  to  the  price 
paid,  together  with  a  large  bonus  of 
stock,  yet  even  though  they  are  the 
only  stockholders,  if  thereafter  the 
balance  of  the  capital  stock  was  sold 
to  outsiders  to  whom  misrepresenta- 
tions were  made  as  to  the  cost  of  the 
land,  the  promoters  are  liaDie  to  the 
corporation  for  their  profits.  The 
suit  must  be  at  law  and  is  barred  by 
the  six  years'  statute  of  limitations. 
Pietsch  v.  Milbrath,  123  Wis.  647 
(1904).     See  also  §§705-707,  infra. 

1  Wert  v.  Crawfordsville,  etc.  Co., 
19  Ind.  242  (1862).  Where  a  sub- 
scriber signs  without  reading  the 
paper,  although  he  is  able  to  read  it 
and  has  an  opportunity  to  read  it,  he 
cannot  defend  on  the  ground  that  the 
contents  were  misrepresented  to  him. 
Mower,  etc.  Co.  v.  Hill,  113  N.  W.  Rep. 
467   (Iowa  1907). 

2  See  §  350,  infra.  A  representa- 
tion that  only  $3,000  of  stock  and  $12,- 
000  bonds  per  mile  would  be  issued 


is  fraudulent  where  $12,000  of  stock 
and  $15,000  of  bonds  per  mile  have 
already  been  issued.  Weems  v. 
Georgia,  etc.  R.  R.,  84  Ga.  356  (1890) ; 
s.  c,  88  Ga.  303.  A  statement  of  as- 
sets that  include  not  only  separate 
items  for  moving,  exhibiting,  etc.,  the 
aggregate  value  of  the  buildings  being 
given  also,  but  also  outstanding  ac- 
counts with  no  deductions  for  bad 
debts;  accrued  interest  with  no  allow- 
ance for  interest  on  liabilities;  ex- 
penses of  perfecting  a  machine,  the 
latter  not  yet  being  a  success;  and 
money  paid  for  expenses,  it  being 
also  included  in  the  value  of  the 
property, — is  a  false  statement  and 
sustains  an  action.  Hubbard  v. 
Weare,  79  Iowa,  67S  (1890).  Where 
the  promoters  paid  to  a  person  who  is 
to  act  as  chairman  of  the  directors, 
and  his  firm  who  underwrote  10,000 
shares,  a  commission  of  12,000  shares, 
the  court  held  that  10,000  of  the  12,- 
000  was  for  the  use  of  his  name  and 
only  2,000  shares  for  the  commission, 
and  hence  he  was  liable,  at  the  in- 
stance of  an  investor  in  the  stock,  to 
pay  to  the  corporation  the  difference 
between  the  amount  paid  for  the  stock 
and  its  actual  value  the  day  after  an 
allotment,  the  transaction  not  being 
fully  disclosed  in  the  prospectus.  A 
clause  in  the  prospectus  that  there 
"may"  be  various  trade  contracts  and 
business  arrangements  and  under- 
writers' agreements,  followed  by  the 
usual  waiver  as  to  them,  does  not 
apply  to  such  a  contract,  inasmuch 
as  the  word  "may"  was  misleading. 
Cackett  v.  Keswick,  85  L.  T.  Rep.  14 
(1901);  aff'd,  [1902]  2  Ch.  456;  Watts 


413 


§  146.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[Cil.  IX. 


in  mind.     The  former  are  matters  of  opinion;  the  latter  arc  material 
representations,  and  arc  fraudulent  if  false.3 

§  14G.  Misrepresentations  that  are  insufficient. — It  is  not  every 
misrepresentation  that  enables  a  subscriber  to  set  up  that  lie  was  in- 
duced to  subscribe  by  fraud.  Mere  matters  of  opinion  as  to  whether 
the  enterprise  can  be  completed,  or  when  it  will  be  completed,  or  the 
prospects  of  profits,  cannot  be  misrepresentations.  Tho  subscriber  is 
bound  to  know  that  these  are  all  matters  of  mere  conjecture.2    Thus, 

2   Ch.   G28,  aff'd 


v.   Bucknall,    [1902] 
[1903]  1  Ch.  766. 

1  Whether  the  statement  refers  to 
a  "possibility  or  a  contingency,  or  an 
intention,"  or  to  an  existing  fact,  is  a 
question  'sometimes  for  the  jury, 
sometimes  for  the  judge;  generally 
the  latter.  All  the  statements,  to- 
gether with  the  circumstances  and 
history  of  the  matter,  are  to  be  con- 
sidered in  deciding  whether  a  mis- 
representation was  made.  It  is  suf- 
ficient if  the  subscriber  relied  partly 
on  the  misrepresentation.  He  need 
not  have  relied  on  it  exclusively. 
Edgington  v.  Fitzmaurice,  L.  R.  29 
Ch.  D.  459  (1885).  See  also  Nicol's 
Case,  3  De  G.  &  J.  387,  420  (1858).  A 
statement  that  the  subscriptions  are 
to  be  used  entirely  to  purchase  and 
improve  real  estate  is  a  good  defense 
if  a  part  is  actually  used  afterwards 
to  pay  promoters.  West  End,  etc.  Co. 
v.  Claiborne,  97  Va.  734  (1900).  The 
subscriber  may,  by  contract,  waive 
his  right  to  rely  on  a  representation. 
Brownlie  v.  Campbell,  L.  R.  5  App. 
Cas.  925  (1880).  Cf.  Greenwood  v. 
Leather,  etc.  Co.  Ltd.,  [1900]  1  Ch.  421. 

2  Swan  v.  Mathre,  103  Iowa,  261 
(1897);  Brownlee  v.  Ohio,  etc.  R.  R„ 
18  Ind.  68  (1862);  Pickering  v  Tem- 
pleton,  2  Mo.  App.  424  (1876); 
Hughes  v.  Antietam  Mfg.  Co.,  34  Md. 
316  (1870);  Hardy  v.  Merriweather, 
14  Ind.  203  (I860);  Andrews  v.  Ohio, 
etc.  R.  R.,  14  Ind.  169  (I860)  ;  Bish  v. 
Bradford,  17  Ind.  490  (1861);  Walker 
v.  Mobile,  etc.  R.  R.,  34  Miss.  245 
(1857) ;  Coil  v.  Pittsburgh  Female 
College,  40  Pa.  St.  439  (1861).  A  state- 
ment that  the  profits  will  be  sufficient 


to  pay  the  subscription  price  is  not 
fraud.  State  Bank  of  Indiana  v. 
Mentzer,  125  Iowa,  101  (1904).  State- 
ments as  to  when  the  road  would  be 
completed  are  not  such  representa- 
tions as  will  avoid  a  subscription  for 
stock.  Jefferson  v.  Hewitt,  95  Cal.  535 
(1892);  s.  c,  103  Cal.  624.  Calcula- 
tions of  the  company  that  stock  will 
pay  certain  dividends  do  not  consti- 
tute false  representations.  Lane  v. 
Southern,  etc.  Assoc,  54  S.  W.  Rep. 
329  (Tenn.  1899).  A  statement  that 
the  stock  would  be  worth  par  within 
a  certain  time  is  not  sufficient  to 
avoid  a  subscription.  Johnson  v.  Na- 
tional, etc.  Assoc,  125  Ala.  465 
(1900).  A  representation  that  a  cer- 
tain plant  will  be  erected  is  not  a 
misrepresentation.  Milwaukee,  etc. 
Co.  v.  Schoknecht,  108  Wis.  457 
(1901).  A  statement  that  the  com- 
pany intended  to  buy  a  certain  news- 
paper and  was  to  have  associated 
press  news  is  not  fraudulent,  even  if 
not  carried  out,  it  being  merely  an 
opinion  or  a  statement  as  to  a  future 
event.  Shattuck  v.  Robbins,  68  N.  H. 
565  (1896).  A  statement  in  a  prospec- 
tus that  the  entire  preferred  stock 
must  be  subscribed  and  paid  for  does 
not  authorize  rescission  on  the  ground 
that  all  of  it  was  not  taken,  nor  does 
a  statement  that  it  has  been  all  taken, 
such  statement  being  made  after  the 
party  had  subscribed.  Bartol  v.  Wal- 
ton, etc  Co.,  92  Fed.  Rep.  13  (1899). 
The  fact  that  statements  as  to  the  af- 
fairs of  the  company  are  not  filed  as 
required  by  statute  does  not  amount 
to  fraud  in  the  sale  of  stock;  nor  do 
representations    that    the    stock    will 


414 


en.  ix.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[§  146. 


an  honest  mistake  of  judgment,  on  the  part  of  the  directors,  as  to  the 
collectibility  of  certain  debts,  whereby  a  company  represented  to  be 
solvent  turns  out  to  be  insolvent,  is  not  a  fraudulent  representation. 
So,  also,  of  a  representation  as  to  the  value  of  a  patent-right,  which, 
it  was  stated,  would  be  tested  further.  On  the  other  hand,  a  state- 
ment made  with  the  intent  to  defraud  the  subscriber,  but  without 
that  effect,  is  immaterial;  mere  intent  is  insufficient.1  A  misstate- 
ment as  to  the  contents  of  the  subscription  contract  which  the  sub- 
scriber signs  is  immaterial,  where  he  can  read  but  does  not.2  And 
where  false  representations  are  made,  but  before  the  subscription 
is  completed  the  representations  are  made  good  by  intervening  events 


pay  twenty  'per  cent,  dividends 
amount  to  fraud.  The  question  as  to 
validity  of  stock,  having  once  been  lit- 
igated, cannot  be  again  raised  in  an 
action  for  deceit  in  the  sale  of  the 
stock.  The  mere  act  of  conspiracy  is 
net  sufficient  to  sustain  the  action  un- 
less damage  is  shown.  Robertson  v. 
Parks,  76  Md.  US  (1892).  Represen- 
tations that  the  stock  would  be  a  good 
investment  and  pay  dividends,  etc., 
constitute  no  defense.  Weston  v. 
Columbus  Southern  Ry.,  90  Ga.  289 
(1892).  Statements  that  the  business 
will  be  profitable,  etc.,  are  mere  "trade 
talk,"  and  not  fraud.  Riley  v.  Trea- 
nor,  25  S.  W.  Rep.  1054  (Tex.  1S94). 
In  the  cases,  howeyer,  of  Gerhard  v. 
Bates,  2  El.  &  Bl.  476  (1853),  and 
Taylor  v.  Ashton,  11  M.  &  W.  401 
(1843),  it  was  held  that  a  false  guar- 
anty of  the  promoters  that  a  certain 
dividend  would  result  from  the  enter- 
prise constituted  a  false  representa- 
tion. ,  Re  National,  etc.  Fuel  Co.,  4 
Drew.  529  (1859),  held  that  one  sued 
as  a  contributory  cannot  plead  fraud- 
ulent misrepresentation  on  the  part 
of  the  company,  although  it  was  ar- 
ranged between  the  directors  and 
shareholders  that  certain  shares  (of 
which  these  were  a  part)  should  have 
a  preference.  A  statement  as  to  the 
purpose  for  which  the  proceeds  of 
bonds  will  be  used  by  the  company  is 
immaterial.  A  bondholder  cannot  re- 
scind. Banque,  etc.  v.  Brown,  34  Fed. 
Rep.  162,  198   (1888).    See  also  §  830, 


infra.  Stock  may  be  issued  before 
payment  by  machinery  is  made.  An 
action  by  another  stockholder  for 
cancellation  of  the  stock  on  the 
ground  of  fraud  fails  unless  there  is 
clear  proof  that  the  person  agreed 
that  the  machinery  would  succeed. 
Pendleton  Mfg.  Co.  v.  Mahanna,  18 
Pac.  Rep.  563  (Oreg.  1888).  See  Win- 
get  v.  Quincy,  etc.  Assoc,  128  111.  67 
(1889).  A  false  statement  as  to  the 
purposes  of  a  proposed  corporation  is 
held  not  to  be  material  in  Indiana. 
Shick  v.  Citizens'  Enterprise  Co.,  15 
Ind.  App.  329  (1896).  The  fact  that 
a  subscriber  understood  that  certain 
persons  controlled  the  proposed  cor- 
poration does  not  make  the  subscrip- 
tion conditional.  Smith  v.  First,  etc. 
Bank,  95  S.  W.  Rep.  1111  (Tex.  1906). 

1  Keller  v.  Johnson,  11  Ind.  337 
(1858);  Cunningham  v.  Edgefield,  etc. 
R.  R.,  2  Head  (Tenn.),  23  (1858). 
Even  though  the  agent  of  a  corpora- 
tion represents  to  it  that  a  party 
owns  certain  property  and  will  sell  it 
to  the  corporation  for  $7,500  in  bonds 
and  $30,000  in  stock,  and  the  pur- 
chase is  made  on  those  terms,  and 
the  vendor  keeps  the  bonds  and  gives 
the  stock  to  such  agent,  and  the  agent 
sells  a  portion  of  the  stock  to  a  bona 
fide  purchaser,  yet  the  latter  cannot 
rescind  the  sale  on  the  ground  of 
fraud.  Foushee  v.  Snyder,  54  S.  W. 
Rep.  730  (Ky.  1900). 

2  Thornburgh  v.  Newcastle,  etc.  R. 
R.,  14  Ind.  499  (1860). 


415 


§§    147,  148.]  DEFENSE  OP  PAROL  AGREEMENT,  ETC.  [CH.  IX. 

the  subscribers  cannot  complain.1  Misrepresentations  made  to 
others  to  induce  them  to  buy  the  stock  are  immaterial,  where  no 
sale  resulted  therefrom  and  no  fraud  was  actually  perpetrated.2 
Representations  subsequent  to  the  subscription  are  immaterial.3 
Frauds  of  the  directors  which  are  not  the  subject  of  a  representa- 
tion are  not  to  be  remedied  by  the  principles  of  law  governing  the 
subject  of  false  representations.4 

§  147.  Statements  as  to  questions  of  law. — Where  a  subscription 
is  obtained  by  a  false  representation  as  to  the  legal  effect  of  the 
subscription  contract,  or  of  corporate  rights  or  liabilities,  the  sub- 
scriber has  no  remedy.  He  is  bound  to  take  notice  of  the  law.5 
Thus,  a  misrepresentation  as  to  the  extent  to  which  the  subscribe 
would  be  liable  on  his  stock,0  or  that  he  may  allow  his  stock  to  be 
forfeited,7  or  that  payment  would  not  bo  demanded  until  the  enter- 
prise was  partly  or  wholly  completed,8  is  a  statement  as  to  the  law. 
It  states  that  something  can  be  done  which  the  law  prohibits  from 
being  done. 

§  148.  Misrepresentation  may  be  by  suppression  of  the  truth.  — 
The  misrepresentation  entitling  the  subscriber  to  his  remedies  may 
consist  in  the  suppression  of  what  is  true  as  well  as  in  the  asser- 

i  Ship  v.  Crosskill,  L.  R.  10  Eq.  73  be  a  defense,  where  it  was  made  in 

(1870).  one  state  with  reference  to  the  laws 

2  Darling  v.  Klock,  33  N.  Y.  App.  of  another  state.  See  also  Accidental, 
Div.  270  (1898),  aff'd  165  N.  Y.  623.  etc.  Ins.  Corp.  v.  Davis,  15  L.  T.  182 
A  subscriber  to  stock  in  an  unincor-  (1866),  where  it  was  represented  that 
porated  association  is  not  relieved  further  calls  were  not  contemplated, 
from  liability,  even  though  some  of  As  against  a  receiver  it  is  no  defense 
the  subscriptions  necessary  to  make  that  the  corporation  agreed  that  the 
up  the  amount  required  by  the  sub-  subscriber  need  pay  only  fifty  per 
scription  paper  were  forgeries  and  cent,  of  the  par  value  of  the  stock,  or 
others  obtained  by  false  representa-  that  fraudulent  representations  in- 
tions,  if  it  be  shown  that  the  associa-  duced  him  to  subscribe,  or  that  the 
tion  accepted  the  building  to  con-  full  capital  stock  was  not  subscribed, 
struct  which  it  was  formed.  Haney,  or  that  the  company  was  defectively 
etc.  Co.  v.  Adaza,  etc.  Co.,  108  Iowa,  organized,  or  that  the  name  of  the 
313    (1899).  company  was  different  from  the  one 

3  Reed  v.  Gold,  102  Va.  37  (1903).        contemplated.    Cox  v.  Dickie,  93  Pac. 
4Hornaday  v.  Indiana,  etc.  Ry.,  9    Rep.  523  (Wash.  1908). 

Ind.   263    (1857);    Heymann  v.  Euro-  7  Northeastern  R.  R.  v.  Rodrigues, 

pean,  etc.  Ry.,  L.  R.  7  Eq.  154  (1868).  10  Rich.  (S.  C.)  L,.  278  (1857). 

5  Parker  v.  Thomas,  19  Ind.  213  s  Clem  v.  Newcastle,  etc.  R.  R.,  9 
(1862).  Ind.  488  (1857);  New  Albany,  etc.  R. 

6  Upton  v.  Tribilcock,  91  U.  S.  45  R.  v.  Fields,  10  Ind.  187  (1858).  For 
(1875),  where  the  representation  was  representation  as  to  the  route,  see 
that  only  a  certain  percentage  could  Ellison  v.  Mobile,  etc.  R.  R.,  36  Miss, 
be  called  for.  In  Upton  v.  Englehart,  572  (1858) ;  Wight  v.  Shelby  R.  R.,  16 
3  Dill.  496  (1874);  s.  c,  28  Fed.  Cas.  B.  Mon.  (Ky.)  4  (1855). 

835,  this  representation  was  held  to 

416 


CH.  IX.] 


DEFENSE  OP  PAROL  AGREEMENT,  ETC. 


[§  148. 


tion  of  what  is  false.1  Where  any  statement  is  made  at  all,  it  must 
be  a  fair  and  full  statement  of  all  the  material  facts.  The  corporate 
authorities,  in  issuing  a  prospectus,  "are  bound  to  state  everything 
with  strict  and  scrupulous  accuracy,  and  not  only  to  abstain  from 
stating  as  facts  that  which  is  not  so,  but  to  omit  no  one  fact  within 
their  knowledge,  the  existence  of  which  might  in  any  degree  affect 
the  nature  or  extent  or  quality  of  the  privileges  and  advantages  which 
the  prospectus  holds  out  as  inducements  to  take  shares."  2  A  pros- 
pectus need  not  state  all  the  facts,  but  it  must  state  facts  the  omission 
of  which  would  render  the  prospectus,  as  it  stands,  misleading.3 
Thus,  an  omission  to  state  that  a  very  large  sum  had  been  paid  for 
property,  the  merits  of  which  were  fully  set  forth,  has  been  held  to 
be  equivalent  to  a  fraudulent  representation.4  On  the  other  hand, 
a  failuro  to  state  that  large  sums  wore  paid  to  the  directors  to  induce 
them  to  act  as  such  was  held  not  to  be  a  fraudulent  omission.5 

l  "No     misstatement     or     conceal-  as  though  made  to  the  subscribers  for 

ment  of  any  material  facts  or  circum-  the  stock.   Walker  v.  Anglo-American, 

stances  ought  to  be  permitted.     .     .     .  etc.  Co.,  72  Hun,  334,  341   (1893).     It 

The  suppression  of  a  fact  will  often  is  no  defense  that  the  party  taking 


amount  to  a  misrepresentation." 
Venezuela  Central  Ry.  v.  Kisch,  L.  R. 
2  H.  L.  App.  99,  113,  114  (1867).  In 
Oakes  v.  Turquand,  L.  R.  2  H.  L.  Cas. 
325,  342  (1867),  the  court  say  the 
prospectus  is  objectionable,  "not  that 
it  does  not  state  the  truth  as  far  as  it 
goes,  but  that  it  conceals  most  mate- 
rial facts  with  which  the  public  ought 
to  have  been  made  acquainted,  the 
very  concealment  of  which  gives  to 
the  truth  which  is  told  the  character 
of  falsehood." 

2  New  Brunswick,  etc.  Ry.  v.  Mug- 
geridge,  1  Dr.  &  Sm.  363,  381  (1860). 
Statements  that  a  large  part  of  the 
capital  stock  had  been  taken  by  the 
parties  themselves,  and  that  the  part- 
ies themselves  would  constitute  the 
management  of  the  concern,  the  con- 
cealment of  the  fact  that  a  large 
quantity  of  the  stock  was  to  be  issued 
for  the  good-will  of  the  business,  and 
statements  leading  to  the  conclusion 
that  all  subscribers  for  stock  stood 
on  an  equal  footing,  constitute  ma- 
terial misrepresentations,  and  will 
sustain  a  rescission  of  the  subscrip- 
tion if  untrue.     Such  statements  and 


the  subscription  concealed  the  fact 
that  the  charter  was  to  allow  the 
company  to  subscribe  for  stock  in 
other  companies,  the  subscription 
being  made  before  the  incorporation. 
Oil  City,  etc.  Co.  v.  Porter,  99  Ky.  254 
(1896). 

3  McKeown  v.  Boudard,  etc.  Co.,  74 
L.  T.  Rep.  712  (1896),  aff'g  74  L.  T. 
Rep.  310. 

4  Venezuela  Central  Ry.  v.  Kisch, 
L.  R.  2  H.  L.  App.  99  (1867).  In 
Gover's  Case,  L.  R.  1  Ch.  D.  182 
(1S75) ,  under  different  circumstances, 
the  contrary  was  held.  A  subscriber 
to  stock  may  rescind  where  a  pro- 
moter represented  that  the  corporation 
could  purchase  property  for  a  certain 
price  without  disclosing  that  the  price 
included  a  large  profit  to  such  pro- 
moter. Hall  v.  Grayson,  etc.  Bank, 
36  Tex.  Civ.  App.  317   (1904). 

5  Heymann  v .  European  Central 
Ry.,  L.  R.  7  Eq.  154  (1868).  A  dis- 
closure need  not  be  made  that  stock 
had  been  given  to  the  directors  and 
promoters  in  payment  for  services. 
Pulsford  v.  Richards,  17  Beav.  87 
(1853).  Nor  as  to  the  amount  of 
stock    already    subscribed.      Vane    v. 


concealments  made  to  agents  or  brok- 
ers who  are  selling  stock  are  the  same    Cobbold,  1  Exch.  798  (1848). 
(27)  417 


149.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[CH.  IX. 


Where  a  prospectus  contained  a  material  misrepresentation  which  in- 
duced a  person  to  subscribe,  he  may  maintain  a  suit  to  rescind  the 
subscription,  even  though  the  prospectus  stated  that  there  wire  cer- 
tain contracts  not  mentioned  in  the  prospectus  and  that  the  subscrib- 
ers would  be  held  to  have  had  notice  of  the  same,  and  even  though 
the  subscription  contract  contained  a  provision  that  the  subscriber 
had  notice  of  that  which  in  fact  was  concealed  from  him.1  Failure 
to  state  material  facts  in  a  prospectus  renders  directors  liable,  under 
the  English  statute,  hut  they  arc  not  liable  under  the  Directors'  Lia- 
bility Act,  1890,  for  statements  which  they  had  reasonable  ground 
to  believe  to  be  true.2 

§  149.  Misrepresentation  may  be  by  statements  made  without 
knowledge  of  their  falsity. — Statements  need  not  lie  intentionally 
false  in  order  to  amount  to  a  fraudulent  representation.3     A  false 


l  The  misrepresentation  in  this  in- 
stance was  a  misleading  and  ambigu- 
ous statement,  and  also  the  non-dis- 
closure of  an  agreement  to  which  the 
promoter  was  a  party,  such  agree- 
ment not  relating  to  the  formation 
of  the  company  or  his  subscription 
to  its  stock.  The  court  rescinded  the 
subscription  and  held  the  directors 
personally  liable  for  loss  sustained  by 
the  subscriber.  Greenwood  v.  Leather, 
etc.  Co.  Ltd.,  [1900]  1  Ch.  421.  Where 
the  directors  do  not  state  in  a  pro- 
spectus a  certain  contract,  which  the 
statute  required  them  to  state,  it  can- 
not set  up  as  a  defense  to  an  action 
by  a  shareholder  that  they  acted  in 
good  faith  and  on  legal  advice.  Shep- 
heard,  etc.  v.  Broome,  [1904]  A.  C. 
342. 

2De  La  Cour  v.  Clinton,  90  L.  T. 
Rep.  615  (1904).  A  statement  in  a 
prospectus  that  there  are  various 
contracts  of  the  ordinary  trade  char- 
acter, and  that  subscribers  are  bound 
to  take  notice  of  them,  is  not  a  waiver 
of  notice  of  such  contracts  on  the 
part  of  subscribers,  under  the  Eng- 
lish statutes.  Watts  v.  Bucknall, 
[1903]  1  Ch.  76G,  aff'g,  [1902]  2  Ch. 
628. 

3  Corporate  agents,  making  rep- 
resentations in  order  to  obtain  sub- 
scriptions, are  bound  to  know  the 
truth  or  falsity  of  such  statements. 
Reese  River,  etc.  Co.  v.  Smith,  L.  R. 


4  H.  L.  64  (1SG9),  aff'g  Smith  v.  Reese 
River  Co.,  L.  R.  2  Eq.  264  (1866); 
Glamorganshire  Iron,  etc.  Co.  v.  Ir- 
vine, 4  F.  &  F.  947  (18.66),  applying 
the  same  rule  at  law.  The  English 
case  of  Kennedy  v.  Panama,  etc.  Co., 
L.  R.  2  Q.  B.  580  (1S67),  holds,  how- 
ever, that  "where  there  has  been  an 
innocent  misrepresentation  or  misap- 
prehension, it  does  not  authorize  a 
rescission,  unless  it  is  such  as  to  show 
that  there  is  a  complete  difference  in 
substance  between  what  was  sup- 
posed to  be  and  what  was  taken,  so 
as  to  constitute  a  failure  of  consid- 
eration," and  that  to  hold  otherwise 
would  be  to  make  a  warranty  out  of 
the  representation.  In  Edgington  v. 
Fitzmaurice,  L.  R.  29  Ch.  D.  459 
(1885),  the  court  say  that  a  statement 
of  fact,  which  the  person  making  does 
not  know  the  truth  of,  is,  "in  the  eye 
of  the  law,  a  fraudulent  statement  as 
much  as  if  the  persons  making  it  had 
known  it  to  be  false."  In  this  coun- 
try the  cases  seem  to  favor  a  different 
rule.  The  party  making  the  represen- 
tations must  be  proven  "to  have  had 
a  fraudulent  purpose  in  contempla- 
tion, or  at  least  to  have  known  that 
the  statements  were  untrue."  Nugent 
v.  Cincinnati,  etc.  R.  R.,  2  Disney 
(Ohio),  302  (1858);  Selma,  etc.  R.  R. 
v.  Anderson,  51  Miss.  829  (1876); 
Cunningham  v.  Edgefield,  etc.  R.  R., 
2  Head  (Tenn.),  23  (1858).    See  also 


418 


CH.  IX.]  DEFENSE  OF  PAROL  AGREEMENT,  ETC.  [§  150. 

statement,  made  in  good  faith  but  in  ignorance,  is,  in  a  legal  point 
of  view,  the  same  as  an  assertion  which  the  party  knew  to  be  untrue.1 
A  misrepresentation  as  to  patents  may  be  fraudulent  in  law,  even 
though  the  party  believed  the  statement  to  be  true.2    Money  paid  on 
a  subscription  induced  by  a  material  misrepresentation  may  be  recov- 
ered back,  even  though  the  misrepresentation  was  innocently  made.3 
Thus,  where  the  promoters  stated  that  a  certain  part  of  the  plant 
was  in  full  operation,  yet  if  there  was  no  fraud,  and  that  part  of  the 
plant  was  put  in  operation  soon  afterwards,  the  court,  instead  of 
setting  aside  the  sale,  gave  damages  for  the  delay.     Misrepresenta- 
tions, although  not  fraudulent,  were  held  to  be  sufficient  ground  for 
relief.4     A  prospectus  issued  by  the  directors,  representing  the  cor- 
porate property  as  containing  valuable  mines,  all  of  which  was  in 
good  faith,  but  false,  is  the  same  as  though  the  statements  were  made 
with  knowledge  of  their  falsity.       Where,  however,  the  statement 
in  good  faith  was  that  the  corporation  had  a  government  contract, 
which,  upon  litigation,  was  found  to  be  untrue,  the  representation 
was  held  noi  to  be  fraudulent.5    An  agent  who  makes  representations 
in  good  faith  is  not  personally  liable  if  made   on  behalf  of  his 

principal.6 

§  1 5  0.  Subscriber  is  not  bound  to  investigate  the  truth  of  represen- 
tations.—-If  a  subscriber  has  used  reasonable  caution  and  judg- 
ment in  accepting  the  statements  of  corporate  agents,  it  is  no  an- 
swer to  his  claim  that  he  was  induced  to  subscribe  by  fraudulent 
representations,  to  say  that  by  proper  inquiry  he  might  have  learned 
the  truth,  or  bv  more  vigilance  he  might  have  discovered  the  de- 
ception.7 '  Where  the  representations  are  by  a  prospectus,  he  is  not 

Chitty  Contracts,  12th  ed.,  p.  692  et  subscriptions  need  not  be  paid  until 
sea  and  Montgomery  Southern  Ry.  the  road  is  built  to  a  certain  distance 
v.  Matthews,  77  Ala.  367  (1884).  The  is  no  defense,  there  being  no  proof 
vigorous  case  of  Henderson  v.  Rail-  that  the  party  making  the  represent* 
mad  Co  17  Tex  560  (1856),  effective-  tion  knew  it  to  be  untrue.  Tanner  v. 
y  presents  tie  opposite  view;  and  Nichols,  80  S.  W.  Rep.  225  (Ky.  1904). 
see  §§156  356,  infra.  See  also  1  6  Englesfield  v.  Londonderry,  H.  L. 
Storv  Eq.'jur.,  §  193;  Story,  Agency,  26  W.  R.  540  (1878). 
R8197    i        tW    452  7New  Brunswick,  etc.  Ry.  v.  Mug- 

^MwS.-^Oo...   Smith,  L.    geridge^l  Dr.  *  Ba  : 3CB  (I860) ;  Up 
tj    a.  w   T     fi4   (1869)  ton  v-  Englehart,  3  Dill.  496    (1874), 

.  Foulks,  etc.  Co.  v.  Thies,  26  Nev.    s.  c,  28  Fed   Ca..  835 ; Venezuela  Cen- 
1Ra    MQrm  tral  Ry.  v.  Kisch,  L.  R.  2  H.  L.  App. 

3  eI  G ubb,  [1900]  1  Ch.  354.  99    (1867);   Ex  parte  West,  56  D  T. 

4l!agunas   etc   Co.  Ltd.  v.  Lagunas    Rep.  622   (1887).    Of.  Hallows*.  Fer- 

SyndicTte    Ltd     [1899]    2  Ch.  392.  nie,  L.  R.  3  Ch.  App.  467  (1-868).    See 

^Kennedy  v!  Panama,  etc.   Co.,   L.    also   §  731,   infra.     The  subscriber  is 

T?    2  O  B   580  (1867).  A  statement  by    not  bound  to  investigate  the  truth  of 

a'soHcifor  of  subscriptions  that  the    statements    which    the    other    party, 

419 


S    l§l  1  DEFENSE  OP  PAROL  AGREEMENT,  ETC.  [CII.  IX. 

obliged  to  examine  documents  referred  to,  even  though  such  exam- 
ination would  have  shown  the  falsity  of  the  representations.1  It  is 
not  incumbent  upon  him  to  institute  inquiries,  and  to  susp  cl  fraud 
when  all  seems  fair.  But  where  the  means  of  information  arc  open 
equally  to  both  parties,  the  subscriber  has  no  right  to  rely  upon  the 
representations  of  the  corporate  agent,  unless  the  latter  dissuades 
the  subscriber  from  investigation.2  So,  also,  where  the  subscriber 
reads  several  documents,  ho  cannot  rely  on  representations  to  one 
which  are  corrected  and  limited  by  statements  in  the  others,  even 
though  he  claims  to  have  overlooked  such  corrections.3  Where  the 
corporation  itself  makes  the  false  representations  the  subscriber  is 
not  bound  to  investigate.4  Even  though  false  representations  were 
made,  yet,  if  the  parties  before  subscribing  have  an  agent,  investigate 
the  statements  made,  they  cannot  afterwards  complain.5 

§  151.  Subscriptions  induced  by  fraudulent  representations  are 
not  void,  but  only  voidable. — The  principle  of  law  that  fraud  viti- 
ates all  contracts  applies  to  a  contract  of  subscription,  but  this  prin- 
ciple means,  not  that  the  contract  is  void  per  se  from  the  formation 
of  the  contract,  but  that  the  contract  is  voidable,  at  the  option  or 
election  of  the  person  defrauded.'''  Until  such  election  is  exercised, 
the  contract  is  enforceable  by  both  or  either  of  the  parties.  Hence 
a  subscription  to  stock,  obtained  by  fraudulent  representations,  is 
not  void  from  the  time  when  it  was  made,  nor  is  it  void  until  it  is 

with  full  knowledge  of  the  facts,  to  the  truth  of  which  the  other  party- 
makes.  McClellan  v.  Scott,  24  Wis.  to  the  contract,  with  full  means  of 
81  (1869).  False  statements  as  to  knowledge,  has  deliberately  pledged 
who  are  the  other  subscribers  are  no  his  faith."  Mead  v.  Bunn,  32  N.  Y. 
defense  where  the  subscriber  has  op-  274  (18G5). 

portunity  to  ascertain  the  facts.   Has-  2  Jennings   v.   Broughton,   22   L.   J. 

kell     v.     Worthington,     94     Mo.     560  (Ch.)    5S5   (1853);   Walker  v.  Mobile, 

(1888).    A  subscriber  is  not  bound  to  etc.  R.  R.,  34  Miss.  245   (1857).     No 

suspect  fraud.    West  End,  etc.  Co.  v.  rescission  can  be  had,  if  the  subscrib- 

Claiborne,  97  Va.  734   (1900).  er  had  full  opportunity  to  inform  him- 

i  Kisch   v.   Venezuela   Central   Ry.,  self  and  neglected  to  do  so.    Chicago, 

34  L.  J.  (Ch.)  545  (1865);  Venezuela  etc.   Co.   v.   Summerour,   101   Ga.   820 

Central  Ry.  v.  Kisch,  L.  R.  2  H.  L.  (1897). 

App.   99    (1S67).     In  New  York  the  3  Scholey  v.  Venezuela  Central  Ry., 

general    principle   of    law   governing  L.  R.  9  Eq.  266,  n.  (1S6S). 

cases  of  misrepresentation  is  clearly  4  American    Alkali    Co.    v.    Salom, 

stated  to  be  that  "every  contracting  131  Fed.  Rep.  46  (1904). 

party  has  an  absolute  right  to  rely  on  5  Chicago,    etc.    Co.   v.    Higginboth- 

the  express  statement  of  an  existing  am,  29  S.  Rep.  79  (Miss.  1901). 

fact,  the  truth  of  which  is  known  to  6  Oakes  v.  Turquand,  L.  R.  2  H.  L. 

the  opposite  party,  and  unknown  to  App.  325  (1867);  Upton  v.  Ehglehart, 

him,  as  the  basis  of  a  mutual  engage-  3  Dill.  496  (1874) ;  s.  c,  28  Fed.  Cas. 

ment;  and  he  is  under  no  obligation  835;  Reese  River,  etc.  Co.  v.  Smith, 

to  investigate  and  verify  statements  L.  R.  4  H.  L.  64  (1869). 

420 


CH.  IX.]  DEFENSE  OF  PAROL  AGREEMENT,  ETC.  [§   152. 

ratified  and  confirmed  by  the  defrauded  subscriber,  but  it  is  valid 
until  it  is  expressly  rescinded  and  repudiated  by  the  subscriber.1 
This  principle  is  important  in  determining  the  method  of  rescission, 
and  particularly  the  time  within  which  a  rescission  must  be  made. 

§  152.  Remedies  of  a  subscriber  induced  to  subscribe  by  fraudu- 
lent representations.—  There  are,  in  general,  five  different  reme- 
dies which  are  open  to  a  subscriber  induced  to  subscribe  by  fraud. 
He  may,  upon  discovering  the  fraud,  rescind  the  subscription  by  no- 
tification to  the  corporate  authorities,  without  taking  legal  proceed- 
ings ;  or  ho  may  wait  until  sued  upon  the  subscription,  and  then  set 
up  the  fraud  as  a  defense  to  the  action  at  law ;  or  he  may  file  a  bill 
in  equity  to  restrain  such  suits  at  law,  and  to  set  aside  the  subscrip- 
tion contract,  and  also,  if  he  wishes,  to  recover  back  payments  al- 
ready made  on  the  subscription;  or  he  may  bring  an  action  at  law 
against  the  parties  fraudulently  inducing  the  subscription,  and  re- 
cover damages  for  the  deceit;  or  he  may  sue  for  money  had  and  re- 
ceived. A  person  who  lias  been  induced  to  transfer  property  to  a 
corporation  in  exchange  for  stock  may  maintain  a  mandamus  to  com- 
pel the  company  to  allow  him  to  examine  the  books,  papers  and  rec- 
ords of  the  company  to  ascertain  whether  certain  representations 
made  to  him  arc  hue,  to  the  effect  that  all  the  stock  had  been  issued 
for  full  value.2  An  officer  who,  by  false  and  fraudulent  statements, 
induces  parties  to  subscribe  and  pay  for  shares  of  stock  may  be  crim- 
inally liable  for  obtaining  money  under  false  pretenses,  even  though 
the  money  was  paid  to  the  corp<  "at ion  and  not  to  him.3  The  agent 
of  a  corporation  organized  for  fraudulent  purposes,  who  fraudulently 
induces  a  person  to  purchase  stock  of  the  corporation,  may  be  guilty 
of  grand  larceny.4  It  is  a  criminal  offense  in  England  for  any  direc- 
tor, manager,  or  officer  of  a  corporation  to  publish  false  statements 
with  intent  to  induce  persons  to  purchase  stock.5 

i  Tennant  v.  City  of  Glasgow  Bank,  sey  making  it  a  criminal  offense  for 

L.  -R.  4  App.  Cas.  615  (1879).  a  director  or  officer  to  make  or  con- 

2  State  v.  Pan-American  Co.,  5  Pen.  cur  in  making  any  written  false  state- 
(Del.)   391   (1904).  ment  with  intent  to  deceive,  evidence 

3  Commonwealth  v.  L/angley,  169  cannot  be  introduced  that  the  news- 
Mass.  S9  (1S97).  An  indictment  of  a  papers  had  denounced  the  corporation 
person  for  the  unlawful  obtaining  of  as  fraudulent  before  the  alleged 
money  by  selling  worthless  gold  min-  fraudulent  statement  was  issued  by 
ing  stock  is  not  good  when  the  stock  the  directors.  State  v.  Ware,  71  N.  J. 
was  paid    for   not   in  money,   but  by  L.  53  (1904). 

check.  Lory  v.  People,  82  N.  E.  Rep.  5  Under  this  statute  a  person  is  lia- 
261  (111.  1907).  ble  as  a  manager  for  such  acts,  if  he 

■i  People  v.  Walker,  85  N.  Y.  App.  acted  as  manager,  even  though  he 
Div.  556  (1903),  aff'd  178  N.  Y.  5G3.  was  never  appointed.  Rex  v.  Lawson, 
In  applying  the  statute  in  New  Jer-     [1905]  1  K.  B.  541.    In  England  there 

421 


§§    153,  154.]  DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[<   11.  IX. 


§153.  Rescission  without  legal  proceedings. — It  is  the  duty  and 
the  right  of  directors,  withoul  waiting  for  a  bill  in  equity  or  other  le- 
gal proceedings,  to  revoke  a  subscription  contract,  and  remove  from 
the  stockholders'  list  the  name  of  a  subscriber  who  reason- 
ably proves  that  he  was  induced  to  subscribe  by  fraudulenl  repre- 
sentations chargeable  to  the  corporation,  and  who  requests  a  rescis- 
sion of  the  subscription.1  The  directors  are  not  bound  to  make 
a  hopeless  defense.  It  is  an  ordinary  business  act  within  the  powi  rs 
of  the  directors,  and  their  discretion  is  not  to  be  controlled  unless 
unreasonably  exercised.  Where,  upon  such  a  demand  being  made  by 
the  subscriber,  the  directors  refuse  to  dissolve  the  subscription  con- 
tract, the  subscriber  need  not  always  resort  to  a  bill  in  equity  to  have 
the  contract  set  aside  for  fraud.-  A  mere  notification  to  the  corpora- 
tion is  generally  sufficient.8 

§  154.  False  representation  as  a  defense  to  an  action  at  laivfor 
calls.- — The  most  common  remedy  of  a  subscriber  induced  by  fraud 
to  subscribe  is  to  wait  until  the  corporation  brings  suit  to  collect 
the  subscriptions,  and  then  to  set  up  the  fraud  as  a  defense.  Nearly 
all  of  the  cases  in  this  country  are  cases  where  this  remedy  has  I"  en 
adopted.4    A  person  who  has  been  induced  by  fraud  to  subscribe  for 


is  a  statute,  under  which  the  court 
has  power,  on  the  application  of 
creditors,  to  direct  the  official  re- 
ceiver to  prosecute  criminally  a  di- 
rector for  alleged  offenses  as  director, 
such  prosecution  to  be  carried  on  at 
the  expense  of  the  assets  of  the  com- 
pany. Re  London,  etc.  Corp.  Ltd., 
[1903]  1  Ch.  728. 

i  Wright's  Case,  L.  R.  12  Eq.  331 
(1871);  s.  c,  L.  R.  7  Ch.  55  (1871); 
Blake's  Case,  34  Beav.  639  (1SG5) ; 
Reese  River,  etc.  Co.  v.  Smith,  L.  R.  4 
H.  L.  64  (1869),  affirming  Smith  v. 
Reese  River  Co.,  L.  R.  2  Eq.  264 
(1866);  Re  Etna  Ins.  Co.,  Ex  parte 
Shiels,  Ir.  R.  7  Eq.  264  (1873);  Bath's 
Case,  L.  R.  8  Ch.  D.  334  (1878).  See 
also  Fox's  Case,  L.  R.  5  Eq.  118 
(1868). 

2  In  England  mere  repudiation,  not 
followed  fay  anything  more,  is  insuf- 
ficient. Re  Scottish  Petroleum  Co.,  L. 
R.  23  Ch.  D.  413  (1883),  where  the  di- 
rectors refused  to  allow  the  rescis- 
sion. Re  Lennox,  etc.  Co.,  62  L.  T. 
Rep.    791     (1890).      See    also    Hare's 


Case,  L.  R.  4  Ch.  503   (1869);   Steel's 
Case,  49  L.  J.    (Ch.)    176    (1S79). 

3  It  is  not  necessary  for  a  subscrib- 
er who  has  been  induced  to  subscribe 
by  fraudulent  misrepresentations  to 
file  a  bill  to  have  his  subscription  re- 
scinded. A  notice  to  the  company  that 
he  rescinds  the  subscriptions,  giving 
the  reasons  therefor,  is  sufficient. 
Savage  v.  Bartlett,  78  Md.  561  (1894), 
pointing  out  the  fact  also  that  the 
English  decisions  on  this  subject  are 
controlled  by  the  English  statute. 

4  "It  is  a  good  answer  at  common 
law  to  an  action  for  calls  that  the 
defendant  was  induced  to  become  the 
holder  of  the  shares  by  the  fraud  of 
the  plaintiffs."  Bwlch-y-plwm  Lead  M. 
Co.  v.  Baynes,  36  L.  J.  (Ex.)  183 
(1867);  Deposit,  etc.  Co.  v.  Ayscough, 
6  El.  &  B.  761  (1856),  where  the  de- 
fense failed  because  it  did  not  state 
that  the  defendant  had  renounced 
any  benefits;  Sandford  v.  Handy,  23 
Wend.  260  (1S40).  Cf.  Upper  San 
Joaquin  Canal  Co.  v.  Roach,  78  Cal. 
552   (1889),  holding  that  this  defense 


422 


CH.  IX.  J 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[§  155. 


stock  may  defend  on  that  ground  as  against  corporate  creditors, 
where  his  name  never  appeared  in  the  list  of  stockholders,  and  no 
stock  was  ever  issued  to  him,  and  he  had  done  nothing  to  mislead 
creditors  or  estop  himself.1  An  incorporator  and  subscriber  for 
the  stock  may  defend  against  a  suit  by  the  corporation  to  collect  the 
subscription,  on  the  ground  that  it  was  fraudulently  represented  to 
him  that  the-  corporation  had  certain  valuable  property,  whereas  it 
never  had  any  property  and  no  part  of  its  capital  stock  had  been  paid 
in  by  any  one,  and  it  was  a  mere  paper  organization.2  A  subscriber 
sued  on  his  subscription  may  set  up  the  defense  of  false  representa- 
tions and  tender  back  the  stock,  and  even  though  he  has  sold  some  of 
the  stock  prior  to  discovering  the  fraud,  he  may  have  rescission.3 
A  tran- 1'.  pee  of  stock  cannot  set  up  the  defense  that  the  transferrer 
was  induced  by  fraud  to  subscribe.4 

§  155.  Remedy  by  bill  in  equity. — This  is  the  fairest,  safest  and 
most  complete  remedy  that  the  subscriber  has.  It  is  a  decisive  no- 
tice  to  the  corporation  and  all  third  parties  not  to  rely  upon  the 
subscription  in  question.5  It  avoids  the  risk  of  future  corporate 
insolvency.  It  is  the  customary,  and  it  seems  favorite,  remedy  in 
England,  and  has  been  clearly  upheld  in  this  country.6      It  ena- 


niust  be  set  up  by  way  of  counter- 
claim for  damages  on  account  of  mis- 
representations where  a  note  mid 
been  given  and  the  stock  not  re- 
turned. A  subscriber  may  defend 
against  notes  indorsed  by  him,  in  pay- 
ment of  his  subscription,  on  the 
ground  of  fraud  inducing  the  sub- 
scription. Turner  r.  Grobe,  44  S.  W. 
Rep.  898  (Tex.  1898).  See  s.  c,  24 
Tex.  Civ.  App.  551   (1900). 

i  Dieterle  v.  Ann  Arbor,  etc.  Co., 
143  Mich.  416  (190G).  Persons  in- 
duced to  subscribe  for  bonds  on  mis- 
representations are  not  liable  to  ad- 
vertisers, even  though  from  the  for- 
mer's subscriptions  the  advertising 
expense  was  to  be  paid.  Barron  v.  In- 
ternational T.  Co.,  1S4  Mass.  440 
(1903). 

2  Metropolitan,  etc.  Co.  v.  Webster, 
193  Mo.  351   (1906). 

3  American  Alkali  Co.  v.  Salom, 
131  Fed.  Rep.  46   (1904). 

4  Berryville,  etc.  Co.  v.  Lewis,  19 
S.  E.  Rep.  781   (Va.  1894). 

o  Quoted   and   approved   in   Cox  v. 


National,  etc.  Co.,  56  S.  E'.  Rep.  494, 
•504   (W.  Va.  1907). 

6  Where  a  person  is  induced  to 
subscribe  for  stock  on  the  fraudulent 
representations  of  the  president  that 
the  company  is  in  a  prosperous  condi- 
tion, the  person  may  file  a  bill  in 
equity  to  recover  back  the  money; 
and  equity  has  jurisdiction  on  the 
grounds  of  discovery,  account,  fraud, 
misrepresentation  and  concealment. 
Both  the  company  and  the  president 
individually  were  made  defendants 
and  held  liable.  Tyler  v.  Savage,  143 
U.  S.  79  (1892).  A  person  induced 
to  purchase  stock  and  bonds  from 
a  corporation,  by  fraudulent  state- 
ments in  a  prospectus'  as  to  the  value 
of  property  for  which  the  bonds  and 
stock  have  been  issued  by  a  Pennsyl- 
vania corporation  at  a  fraudulent 
overvaluation,  may  maintain  a  bill 
in  equity  to  cancel  a  note  given  in 
payment,  and  to  enjoin  a  suit  at  law 
on  such  note  in  the  hands  of  a  pur- 
chaser with  notice.  Manning  v.  Ber- 
dan,  135  Fed.  Rep.  159   (1905).     For 


423 


156.] 


DEFENSE  OF  PAROL  A.GM  KM  EXT,  ETC. 


[CH.  IX. 


bles  the  subscriber  to  set  aside  the  contract,  to  enjoin  actions  al  law 
for  calls,  and  to  recover  back  payments  made  before  discovery  of  the 
fraud.1 

§  15G.  The  complainant  in  a  liill  in  equity  to  se1  aside  a  aubscrip- 
tion  obtained  by  fraud  cannol  sue  in  behalf  of  himself  and  others 
who  may  wish  t*>  come  in.      Bui   several  subscril  lefrauded   in 

the  same  way,  may  join  in  the  bill  as  co-complainants.2     Fraudulent 


an  article  on  rescission  for  misrepre- 
sentation by  a  promoter  before  incor- 
poration, see  36  Am.  Law  Rev.  855. 
Equity  has  power  to  rescind  a  sub- 
scription to  stock  induced  by  misrep- 
resentation, even  if  a  remedy  exists 
at  law.  Hubbard  v.  International, 
etc.  68  N.  J.  Eq.  434  (1904).  A  court 
of  equity  has  jurisdiction  to  set  aside 
a  subscription  for  fraud  and  compel 
a  repayment  of  the  money.  Cox  v. 
National,  etc.  Co.,  56  S.  E.  Rep.  494 
(W.  Va.  1907).  A  person  induced  by 
fraud  to  sulbscribe  for  stock  may 
bring  an  equitable  action  to  procure 
a  rescission  of  the  contract,  a  cancel- 
lation of  her  subscription,  and  the 
removal  of  the  name  from  the  stock 
books.  The  statute  of  limitations 
does  not  begin  to  run  until  the  fraud 
is  discovered.  Bosley  v.  National  Ma- 
chine Co.,  123  N.  Y.  550  (1890) ;  s.  c, 
6  N.  Y.  Supp.  4  (1SS9);  Banque 
Franco-Egyptienne  v.  Brown,  34  Fed. 
Rep.  162,  198  (1888);  Waldo  v.  Chi- 
cago, etc.  R.  R.,  14  Wis.  575  (1S61); 
Henderson  v.  Railroad  Co.,  17  Tex. 
560  (1856);  Rawlins  v.  Wickham,  3 
De  G.  &  J.  304  (1S58).  A  court  of 
equity  has  jurisdiction  to  cancel  a 
subscription  of  stock  on  the  ground 
of  fraud,  and  it  is  not  necessary  that 
the  subscriber  resort  to  an  action  of 
deceit.  Negley  v.  Hagerstown,  etc. 
Co.,  86  Md.  692  (1898).  And  see  the 
various  English  cases  in  this  chapter. 
See  also  §  356,  infra.  In  the  case  of 
Krueger  v.  Armitage,  58  N.  J.  Eq.  357 
(1899),  the  court  of  chancery  held 
that  the  remedy  of  a  stockholder  for 
fraud  inducing  him  to  buy  stock  was 
at  law  alone,  where  the  vendee  after 
discovering   the    fraud    instituted    in- 


solvency proceedings  against  i!  cor- 
poration as  a  stockholder  and  also 
delayed  in  filing  his  bill  for  rescis- 
sion.    See  9S  L.  T.  Rep. 

i  But  the  injunction  to  restrain 
i  inn  ;n  law  will  not  be  grant  >i 
if  the  subscriber  delays  until  the  case 
is  about  to  be  tried.  Thorpe  v. 
Hughes,  3  Myl.  ft  C.  712  (  L838).  And 
where  the  stock  has  been  fully  paid, 
I  no  injury  can  come  from  the  de- 
lay, equity  will  not  sustain  the  sub- 
scriber's bill  to  compel  repayment, 
but  will  send  him  to  a  court  of  law. 
where  a  jury  may  pass  upon  the  ques- 
tion of  fraud.  Askew's  Case,  L.  R. 
9  Ch.  <;•;!  (1874).  Equity,  bowever, 
unquestionably  has  concurrent  juris- 
diction  if  it  cares  to  exercise  it.  Hill 
v.  Lane,  L.  R.  11  Eq.  21-5  I  1870),  crit- 
icising Ogilvie  r.  Carrie,  ;]~  L.  J. 
(Ch.)  541  (1S6S).  See  also  §356, 
infra.  And  will  enjoin  the  collection 
of  the  subscription  pending  the  suit. 
Walsh  v.  S  1  N.  Y.  St.  Rep.  189 

(1SS6),  holding,  however,  that  the 
equitable  action  will  not  be  enjoined 
merely  because  the  corporation  sub- 
sequently becomes  insolvent,  and  a 
receiver  is  appointed. 

2  Several  subscribers  who  have 
been  induced  by  the  same  misrepre- 
sentations contained  in  a  prospectus 
to  subscribe  for  stock  may  join  in  a 
suit  in  equity  for  the  benefit  of  them- 
selves and  others  similarly  deceived, 
to  set  aside  their  subscriptions.  Bosher 
v.  Richmond,  etc.  Co.,  89  Va.  455 
(1892).  Several  stockholders  may 
join  in  filing  a  bill  to  rescind  a  sub- 
scription for  stock  on  the  ground 
that  they  were  induced  to  subscribe 
by  false  representations  that  the  cor- 


424 


en.  ix.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[§  156. 


intent  need   not  be   proved.     Scienter   is   not   the    essence   of   the 
action.1     A  vendee  may  often  have  relief  in  equity  by  reason  of 
misrepresentation  based   upon  mistake   or  innocent  misstatements, 
where  the  common-law  action  of  deceit  would  require  much  more 
stringent  proof.2     A  person  induced  by  fraud  to  subscribe  for  stock 
may  have  the  subscription  canceled,  even  though  he  does  not  show 
that  he  has  been  damaged.3     The  corporation  is  to  be  a  defendant, 
and  if  merely  a  cancellation  of  the  subscription  and  an  injunction 
against  suits  at  law  are  sought,  the  corporation,  it  seems,  may  be 
the  sole  defendant.    A  court  of  equity  in  these  actions  will  give  com- 
plete relief  by  decreeing  that  the  directors  guilty  of  the  fraud  shall  re- 
fund to  the  subscriber  payments  made  by  him  before  discovering 
the  fraud.4    This  relief  dispenses  with  an  action  at  law  for  damages 

poration    had    a    certain    amount   of    Neb.  817  (1896).    Actual  intent  to  de- 
paid-up  capital,  was  out  of  debt  and    fraud  need  not  be  shown  in  a  suit  in 
doing  a  profitable  business,  and  that    equity  to  rescind.     As  to  whether  in 
the   subscribers   would   be  employed,    such  a  suit  similar  frauds  practiced 
The    corporation    may    be    enjoined    on  others  can  be  shown  in  evidence, 
from   transferring   its   assets   in  the    see  §   1 65,  infra.    It  has  been  held  by 
meantime,  and  may  be  compelled  to    the  United  States  court  that,  to  au- 
ra back  the  money  paid  by  complain-    thorize  rescission,  the  representations 
ants    Sherman  v.  American  Stove  Co.,    must  be  proven  to  have  been  false  and 
85  Mich    1G9  (1891).    A  plaintiff  may    made  with  a  fraudulent  intent,  and 
upon  the  trial  be  compelled  to  elect    that  the  same  were  relied  on •    Bartol 
whether  he  sues  to  hold  the  promot-    V.  Walton,  etc.  Co.,  92  Fed.  Rep.  13 
ers  liable  for  fraud,  or  whether  he     (1899).    Even  in  a  suit  in  equity   if 
sues  in  behalf  of  all  stockholders  and    the  plaintiff  alleges  that  the  directors 
for   the    benefit    of   the   corporation,    practiced   intentional   fraud   and   do- 
Brewster   v.    Hatch,    122    N.    Y.    349    ceit,  that  fact  must  be  proved,  or  the 
(1890)        Several    stockholders    may    suit  will  fail,  and  it  is  insufficient  to 
join  in  one  bill  to  rescind  their  sub-    prove      recklessness      which     might 
scriptions  for  fraud,  even  though  the    amount  to  fraud,  but  which  was  not 
fraud  practiced  on  one  differed  from    actual,      knowing      and      intentional 
that  on  others.     Carey  v.  Coffee,  etc.    fraud.    Lyon  v  James,  97  N.  Y.  App. 
Co.,  20  S.  E.  Rep.  778  (Va.  1894).    A    Div.  385  (1S04  V affd  1 81  NY   512^ 
transferee  of  the  shares  cannot  bring        3  Stern  v.  Kirby,  etc.  Co.,  134  Fed 
the   suit      The   fraud   is   personal   to    Rep.  509    (1904).     A  person  who  has 

CTse  ?X'£SZR  149,  suPra.  other  stock  may  have  -«-£*£ 

2  Kountze    V.    Kennedy,    147   N.   Y.  out  proving  da  m^%theJ™f  *^ 

124    (1895)-    Arkwright  v.   Newbold,  very  similar  to  one  for  specific  per- 

I     R    17  Ch    D    301    (1881).     A  suit  formance,   and  it  being  alleged  that 

m  equy  lies  to   rescind   a  sale   of  the  actual  value  of  the  stock  cannot 

stock  induced  by  fraudulent  represen-  be  shown     Jahn  "Reynolds.  115  N. 

tations      Intent  to  defraud  need  not  Y.  App.  Div.  647   (1906.). 

be  proved      Martin  V.  Hill,  41  Minn.  «Vreeland    *    New    Jersey    ffljme 

337    (1889)-    Freer  v.  Denton,  61  N.  Co.,  19  N.  J.  Eq.  188   (1878).    Where 

Y   490  (1875)     Johnson  v.  Gulick,  46  subscribers  bring  suit  to  set  aside  sub- 

425 


§   157.]                         DEFENSE  OF  PAROL  AGREEMENT,  ETC.  [OH.  IX. 

for  deceit,  and  when  sought  for  in  the  bill  in  equity  the  guilty  di- 
rectors must  be  made  parties.1  The  bill  is  not  multifarious  by  rea- 
son of  its  containing  prayers  for  these  various  kinds  of  relief.2 

§  157.    Remedy  by  an  action  at  law  for  deceit. — An  action  at  law 

for  damages  for  deceit  lies  a1  the  instance  of  a  subscriber  for  -luck, 
fraudulently  induced  to  subscribe,  against  the  persons  guilty  of  the 

scriptions  and  for  repayment  thereof,  scribe  for  stock  on  the  representation 
for  fraud,  and  join  the  directors  as  of  an  officer  that  the  company  had 
co-defendants,  the  directors  are  not  been  properly  organized,  may  rescind 
nominal  parties.  Seddon  v.  Virginia,  on  the  ground  that  it  was  not  prop- 
etc.  Co.,  36  Fed.  Rep.  6  (18SS).  If  the  crly  organized.  An  offer  to  surrender 
suit  is  in  equity  for  damages,  intent  the  stock  in  the  petition  is  sufficient, 
must  be  shown.  Hubbard  v.  Weare,  The  officer  is  not  personally  legally 
79  Iowa,  678  (1890).  As  Incidental  liable  if  he  made  the  representation 
to  the  cancellation  of  a  subscription,  in  good  faith.  Maine  r.  Midland  In 
the  subscriber  may  recover  assess-  vestment  Co.,  132  [owa  273  (1906). 
ments  already  paid  and  any  other  dis-  •  Quoted  and  approved  in  Mack  v. 
bursements  legally  made.  McClana-  Latta,  L78  N.  Y.  525,  531  (1904),  rcv'g 
han  v.  Ivanhoe,  etc.  Co.,  96  Va.  124  83  N.  Y.  App.  Div.  242. 
(1898).  A  person  induced  to  pur-  2  Quoted  and  approved  in  Cox  v. 
chase  stock  by  false  statements  pub-  National,  etc.  Co.,  56  S.  E.  Rep.  l'.'l, 
lished  by  the  directors  may  hold  the  503  (W.  Va.  1907).  Nor  is  it.  multi- 
directors  liable  either  at  law  or  in  farious  because  it  joins  such  a  visit 
equity.  In  the  suit  in  equity,  fraudu-  with  one  by  the  corporation  to  com- 
lent  intent  need  not  be  proved,  and  pel  the  directors  to  account  to  the 
the  damage  may  be  the  difference  corporation  for  the  same  fraud.  Ash- 
between  the  stock  as  represented  to  mead  v.  Colby,  26  Conn.  2S7  (1857). 
be  and  the  amount  realized  on  distri-  Subscribers  to  stock  may  rescind  the 
bution  by  the  receiver.  Squiers  v.  same  on  the  ground  that  promoters 
Thompson,  73  N.  Y.  App.  Div.  552  who  sold  property  to  the  company 
(1902);  aff'd,  172  N.  Y.  652.  The  de-  had  misrepresented  the  character  of 
cree  in  a  suit  in  equity  may  be  that  the  property.  This  suit  may  be  in 
the  guilty  party  repay  the  money  equity  and  is  not  multifarious,  al- 
which  the  plaintiff  paid  for  the  stock  though  the  relief  demanded  is  a  can- 
and  that  the  plaintiff  shall  then  as-  cellation  of  the  sale  of  the  property 
sign  the  stock  to  the  defendant.  Lyon  and  for  damages  against  the  vendors 
v  James,  97  N.  Y.  App.  Div.  385  and  co-conspirators,  and  also  for  re- 
(1904);  aff'd  181  N.  Y.  512.  Where  scission  of  the  subscription.  Such 
a  corporation  organized  to  do  a  jew-  a  suit  lies,  although  the  subscribers 
elry  business  is  really  a  scheme  to  paid  in  only  $150,000  of  cash  for 
carry  on  an  illegal  and  fraudulent  $450,000  of  stock.  Rule  94  of  the  fed- 
investment  business,  a  person  de-  eral  courts  does  not  apply  to  such  a 
frauded  may  file  a  bill  in  equity  to  case.  Barcus  v.  Gates,  89  Fed.  Rep. 
hold  the  corporation  and  its  officers  7S3  (1898).  A  bill  to  cancel  a  sub- 
and  stockholders  personally  liable  scription  for  fraud  and  also  to  have 
and  enjoin  them  from  disposing  of  a  receiver  appointed  on  the  ground 
the  assets  and  for  discovery.  Ed-  of  mismanagement  is  multifarious, 
wards  v.  Michigan,  etc.  Co.,  132  Mich.  Emmons  v.  National,  etc.  Ass'n,  135 
1   (1902).     A  person  induced  to  sub-  Fed.  Rep.  6S9  (1905). 

426 


CH.  IX.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[§  157. 


fraud.1  The  fraudulent  representation,  however,  which  must  be 
proved  to  sustain  this  action  must  be  a  more  intentional  fraud  than 
the  one  which  suffices  to  rescind  the  contract.  The  subscriber  must 
prove  that  a  material  false  representation  was  made  by  the  defend- 
ant; that  the  defendant  recklessly  made  it  or  knew  the  representa- 
tion to  be  false;  that  the  plaintiff  subscribed  by  reason,  partially  at 
least,  of  that  representation,  and  that  he  was  thereby  injured.2    The 

i  Clarke  v.  Dickson,  6  C.  B.  (N.  latter  to  extend  credit  to  the  com- 
S.)  453  (1S59);  Miller  v.  Barber,  66 
N.  Y.  558  (1876);  Paddock  v.  Fletch- 
er, 42  Vt.  389  (1869).  In  Eng- 
land the  liability  of  the  directors 
herein  is  enforced  generally  in  con- 
nection with  a  suit  in  equity,  and  as 
a  part  of  the  equitable  decree.  This 
is  under  a  statute.  Western  Bank  v. 
Addie,  L.  R.  1  Sc.  App.  Cas.  (H.  L.) 
145  (1S67).  A  false  affirmation,  made 
by  the  defendant  with  intent  to  de- 
fraud the  plaintiff,  whereby  the  plain- 
tiff receives  damage,  is  the  ground 
of  an  action  upon  the  case  in  the 
nature  of  deceit.  In  such  an  action 
it  is  not  necessary  that  the  defendant 
should  be  benefited  by  the  deceit,  or 
that  he  should  collude  with  the  per- 
son thus  benefited.  1  Smith,  Lead. 
Cas.  (9th  Am.  ed.),  pp.  320,  etc.,  as  ap- 
plicable to  misrepresentations  induc- 
ing subscriptions.  Brewster  v.  Hatch, 
10  Abb.  X.  Cas.  100  (is>l);  aff'd,  122 
N.  Y.  349  (1S90),  sustains  an  action 
by  subscribers  for  stock,  for  damages, 
for  false  representations  by  promot- 
ers as  to  the  real  cost  of  property 
purchased  by  the  latter  for  the  cor- 
poration. See  also  §  651,  infra. 
There  is  no  remedy  at  law  or  in  eq- 
uity against  the  estate  of  a  deceased 
director  herein  except  for  property 
received  by  him.  Peek  v.  Gurney, 
L.  R.  6  H.  L.  377  (1873).  Subscribers 
to  debentures  may  recover  back  the 
difference  between  the  actual  value  of 
the  debentures  and  the  price  paid. 
Arnison  v.  Smith,  riS89]  41  Ch.  D. 
348.  Where  the  president  misrepre- 
sents the  condition  of  the  company 
to  a  person  and  thereby  induces  the 


pany,  the  president  is  personally  lia- 
ble in  damages  to  him.  Shaw  v.  Gil- 
bert, 111  Wis.  165  (1901).  In  Eng- 
land recourse  against  directors  by  a 
stockholder  who  was  fraudulently  in- 
duced to  subscribe  is  given  by  stat- 
ute. Thomson  v.  Lord  Clanmorris, 
[1899]  2  Ch.  523,  aff'd,  [1900]  1  Ch. 
718. 

2  In  the  important  case  of  Derry  v. 
Peek,  L.  R.  14  App.  Cas.  337  (1SS9), 
the  House  of  Lords  decided  that  in 
order  to  sustain  an  action  of  deceit 
there  must  be  proof  of  fraud,  and 
nothing  short  of  that  will  suffice. 
Fraud  is  proved  when  it  is  shown 
that  a  false  statement  has  been  made 
(1)  knowingly;  (2)  without  belief  in 
its  truth;  (3)  recklessly.  But  if  a 
man  make  a  false  statement  honestly 
believing  it  to  be  true,  it  is  not  suffi- 
cient to  support  an  action  of  deceit 
to  show  that  he  had  no  reasonable 
grounds  for  his  belief.  The  directors 
of  a  tramway  company  issued  a  pro- 
spectus in  which  they  stated  that  they 
were  authorized  to  use  steam  power, 
and  that  by  this  means  a  great  sav- 
ing in  working  would  be  effected.  At 
the  time  of  making  this  statement 
they  had  not  in  fact  obtained  author- 
ity to  use  steam  power,  but  they  hon- 
estly believed  that  they  would  obtain 
it  as  a  matter  of  course.  Held  (re- 
versing the  judgment  of  the  court  be- 
low, Peek  v.  Derry,  L.  R.  37  Ch.  D. 
541 — 1888),  that  they  were  not  liable 
in  an  action  of  deceit  brought  by  a 
shareholder  who  had  been  induced  to 
apply  for  shares  by  the  statement  in 
the   prospectus.     Hence  it  was   held 


427    , 


§  157.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[CH.  IX. 


gist  of  the  action  is  fraudulent  intent.1  It  cannot  be  maintained 
against  the  corporation,  because  the  corporation,  though  liable  to 
refund  fraudulently  acquired  property,  is  not  enpnble  of  a  fraudu- 
lent intent.2    It  has  been  held,  however,  that  a  subscriber,  when  aued 


that  in  an  action  for  deceit  by  a 
misrepresentation  in  a  prospectus  as 
to  the  net  profit  on  the  capital  em- 
ployed, the  action  being  against  one 
who  was  a  promoter,  and  also  one  of 
the  vendors,  and  whose  name  ap- 
peared in  the  prospectus,  and  who  be- 
came a  director,  the  plaintiff  must 
prove  (1)  that  the  defendant's  state- 
ment was  untrue;  (2)  that  it  was  dis- 
honest; (3)  that  he  believed  it  to 
be  untrue.  See  also  Glasier  v.  Rolls, 
L.  R.  42  Ch.  D.  43G  (1SS9),  following 
the  House  of  Lords  in  Derry  v.  P« 
L.  R.  14  App.  Cas,  337  (1889).  See 
also  Ship  v.  Crosskill,  L.  R.  10  Eq. 
Cas.  73  (1870).  To  sustain  an  action 
for  deceit  the  plaintiff  must  show 
"that  the  defendants  intended  that 
people  should  act  on  the  statements, 
that  the  statements  are  untrue  in 
fact,  and  that  the  defendants  knew 
them  to  be  untrue,  or  made  them 
under  such  circumstances  that  the 
court  must  conclude  that  they  were 
careless  whether  they  were  true  or 
not;"  also  that  the  statements  were 
relied  upon,  acted  on,  and  damage 
sustained.  Edgington  v.  Fitzmaurice, 
L.  R.  29  Ch.  D.  459  (1SS5).  Reliance 
on  the  misrepresentations  must  be 
shown.  Priest  v.  White,  89  Mo.  G09 
(18S6). 

i  Scienter  is  fixed  on  the  directors, 
making  them  liable  in  damages  upon 
proof  of  incorrect  representations, 
known  to  them  to  be  incorrect,  know- 
ingly stated  by  them,  and  acted  on  by 
the  plaintiff  subscriber.  Henderson 
v.  Lacon,  L.  R.  5  Eq.  Cas.  249  (1867) ; 
Cargill  v.  Bower,  L.  R.  10  Ch.  D.  502 
(1878).  See  also  Bale  v.  Cleland,  4 
F.  &  F.  117  (1864) ;  and  see  p.  166,  n. 
5,,  supra.  There  must  be  an  allega- 
tion of  knowledge  and  intent  to  de- 
ceive on  their  part.  "Falsely  and 
fraudulently    represented"    does    not 


428 


properly  plead  the  scienter.  Mabey  v. 
Adams,  3  Bosw.  316   (1858).     In  case 
the    representations   are   not   fraudu- 
lent as  against  the  corporation,  they 
are  not  sufficient  to   entitle  the  sub- 
scriber to  recover  from  the  directors. 
Heymann   v.   European   Cent.   Ry.,   L. 
R.  7  Eq.  154  (186S).    A  subscriber  for 
stock   may    hold    the    president   liable 
for    false    representations    made    by 
the  latter  to   other  persons   with   an 
intent   that   the   plaintiff   be   induced 
to  act  upon   them.     The  false  repre- 
sentations of  the  president  that  a  div- 
idend    had     been    earned     bind     him, 
where  he  paid  close  attention  to   its 
affairs,  and  where  such  dividend  was 
made    on    an    improper    ami    untrue 
statement  of  assets  and  liabilities.    It 
must  be  proven  that   the   defendant 
president   knew   that  the   representa- 
tions   were    false,    but   this    may    be 
proven  by   inference.     A  stockholder 
who  is  induced  to  make  still  further 
subscriptions  by  reason  of  misrepre- 
sentations of  an  officer  may  hold  him 
liable.      Hubbard   v.   Weare,    79    Iowa 
678    (1S90).     The   directors   are  per- 
sonally liable  in  an  action  for  deceit 
where  a  prospectus  falsely  states  that 
guaranteed  dividends  were  secured  by 
a  deposit  of  certain  securities,  and  a 
person    subscribes    for   stock    relying 
upon  such  statements.     Knox  v.  Hay- 
man,  67  L.  T.  Rep.  137  (1892).  A  per- 
son induced  to  subscribe  for  stock  on 
the   representation  of  an   officer  that 
the   company   had   been   properly   or- 
ganized,  may  rescind   if  it  was  not 
properly  organized.     An  offer  to  sur- 
render the   stock   in    the    petition    is 
sufficient.    ,The  officer  is  not  person- 
ally legally  liable  if  he  made  the  rep- 
resentation in  good   faith.     Maine  v. 
Midland  Investment  Co.,  132  Iowa  273 
(1906). 
2  Mixer's   Case,   4    De   G.    &   J.    575 


CII.  IX.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC 


[§  158. 


upon  a  subscription,  may  set  off  damages  due  to  misrepresentations 
inducing  him  to  subscribe,  made  by  an  agent  of  the  corporation  in 
obtaining  the  subscription.1  A  statute  that  a  person  shall  not  be 
liable  for  representations  as  to  the  credit  of  another  person,  unless 
the  representations  are  written,  applies  to  representations  by  a  di- 
rector in  regard  to  the  corporation,  which  lead  to  a  person  subscrib- 
ing to  its  stock.2 

§  158.  The  directors  are  not  liable  to  an  action  for  deceit  by  rea- 
son of  the  frauds  of  their  agents,3  nor  is  an  innocent  director  liable 
for  the  fraudulent  representations  of  his  co-directors — not  even 
though  the  evidences  of  their  fraud  were  entered  on  the  corporate 
books,  there  being  no  ground  for  suspicion  on  his  part.4  The  direc- 
tors of  a  bank  arc  not  personally  liable  in  a  common-law  action  of 


(1S59);  Duranty's  Case,  26  Beav.  2CS 
(1858) ;  Western  Bank  v.  Addie,  L.  R. 
1  s.  c,  App.  Cas.  (H.  L.)  145 
(1867);  Abrath  v.  Northeastern  Ry., 
L.  R.  11  App.  Cas.  217  (18S6); 
Houldsworth  v.  City  of  Glasgow 
Bank,  L.  R.  5  App.  Cas.  317  (1880); 
Benjamin,  Sales  (Bennett's  ed.  1888), 
§  467a.  See  also  §  15G,  supra.  Contra, 
Peebles  v.  Patapsco  Guano  Co.,  77  N. 
C.  233  (1S77);  Barwick  v.  English 
Joint  Stock  Bank,  L.  R.  2  Exch.  259 
(  lsG7);  Mackay  r.  Commercial  Bank, 
L.  R.  5  P.  C.  394  (1S74),  not  stock 
cases,  but  distinctly  holding  that  a 
corporation  is  liable  to  an  action  for 
damages  for  deceit.  Where,  however, 
the  old  corporation  organizes  a  new 
corporation,  and  has  the  latter  build 
a  competing  road  on  a  new  line,  a 
stockholder  of  the  old  who  contrib- 
uted lands,  etc.  may  have  an  action 
for  damages  against  it.  Chapman  v. 
Mad  River,  etc.  R.  R.,  6  Ohio  St.  119 
(1856).  A  person  loaning  money  to 
an  individual  and  taking  bank  stock 
as  collateral  security  cannot  hold  the 
bank  liable  in  an  action  for  damages 
for  deceit  on  the  ground  that  its  pub- 
lished statements  were  false  and 
fraudulent,  and  that  he  relied  on 
those  statements.  Merchants'  Nat. 
Bank  v.  Armstrong,  65  Fed.  Rep.  932 
(1S95).  See  also  article  in  1  Ry.  & 
Corp.   L.   J.   122;    Buffalo,   etc.    Co.   v. 


Standard  Oil  Co.,  42  Hun,  153 
(188G);  also  §44,  supra.  Where  a 
subscriber  is  told  that  his  money  goes 
to  the  corporation  when  in  fact  it  is 
divided  among  the  promoters,  he  may 
sue  the  corporation  for  fraudulent 
representations,  even  though  he  has 
settled  with  the  promoters,  he  not 
being  aware  of  tbe  fraud  at  the  time 
of  such  settlement.  Hunter  v.  French, 
etc.  Co.,  96  Iowa,  573  (1896).  Even 
though  stock  is  issued  for  a  nominal 
consideration,  yet  if  it  is  donated 
back  to  the  corporation  and  sold,  tho 
corporation  cannot  set  up  that  its 
acts  were  ultra  vires,  and  it  may  be 
held  liable  for  fraud  in  misrepre- 
senting the  stock  to  the  purchaser. 
Krisch  v.  Interstate,  etc.  Co.,  39  Wash. 
381    (1905). 

i  Owens   v.   Boyd,   etc.   Co.,   95   Va. 
560    (1898). 

2  Getchell  v.  Dusenbury,  145  Mich. 
197    (1906). 

3  Weir  v.  Barnett,  L.  R.  3  Exch.  D. 
32  (1877) ;  Weir  v.  Bell,  L.  R.  3  Exch. 
D.  238  (1878);  Eaglesfield  v.  London- 
derry (H.  L.),  26  W.  R.  540  (1878). 
See  also  Cargill  v.  Bower,  L.  R.  10 
Ch.  D.  502  (1878);  Watson  v.  Earl 
Charlemont,  12  Q.  B.  856  (1848); 
Arthur  v.  Griswold,  55  N.  Y.  400 
(1874). 

4  Re  Denham,  L.  R.  25  Ch.  D.  752 
(1883). 


429 


§  158.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[CII.  IX. 


deceit  for  false  statements  as  to  the  condition  of  the  bank,  unless  it 
is  shown  that  they  knew  the  statements  to  be  false.  They  are  qoI 
liable  if  they  in  good  faith  relied  upon  details  furnished  by  clerks.1 
A  director  cannot  be  held  liable  for  false  r<  presentations  contained 
in  the  articles  of  association,  which  were  made  before  he  be- 
came a  director.2  But  a  director  who  stands  by  and  allows  a 
co-director  to  make  the  false  representations  is  equally  chargeable 
with  the  injury  done  thereby.3  The  false  representations  support- 
ing an  action  for  deceit  may  have  been  by  corporate  reports  or  pro- 
spectuses, or  by  personal  statements.4  .Promoters  who  make 
fraudulent,  representations  as  to  their  profits  may  be  held  person- 
ally responsible.5  Where  a  prospectus,  offering  for  sale  trustee' 
transferable  certificates,  states  that  such  certificates  represent  stock 
deposited  with  the  trustee,  the  stock  being  in  an  English  corpora- 
tion, the  trustee  is  personally  liable  if  it  turns  out  that  the  English 
corporation  had  a  prior  lien  on  the  stock  to  the  full  extent  of  its 
value.6  The  president  of  a  bank,  who  \i:;>  been  held  liable  in  dam- 
ages for  deceit  in  inducing  a  person  to  purchase  stock  from  the  bank, 
cannot  compel  the  bank  to  reimburse  him  on  the  ground  that  the 


lUtley  v.  Hill,  155  Mo.  232  (1900). 
Cf.  §  703,  infra.  Directors  under  the 
English  statute  are  not  liable  for  a 
prospectus  which  they  did  not  author- 
ize.  Hoole  v.  Speak,  [1904]  2  Ch.  732. 

2  Mabey  p.  Adams,  3  Bosw.  346 
(1858). 

3  Vreeland  v.  New  Jersey  Stone 
Co.,  29  N.  J.  Eq.  1S8  (1878). 

4  For  a  complaint  seeking  to  hold 
national -bank  directors  liable  for  the 
loss  of  money  deposited,  the  deposit 
being  induced  by  erroneous  and 
fraudulent  advertisements  and  re- 
ports as  to  the  condition  of  the  bank, 
see  Prescott  v.  Haughey,  65  Fed.  Rep. 
653  (1S95).  The  treasurer  may  be 
liable  in  an  action  for  fraud  and  de- 
ceit to  a  purchaser  of  stock  who 
bought  relying  on  false  statements 
made  by  him  to  the  public  as  to 
profits.  Keeler  v.  Seaman,  47  N.  Y. 
Misc.  Rep.  292  (1905). 

5  See  §  705,  infra.  In  Franey  v. 
Warner,  96  Wis.  222  (1897),  where 
promoters  purchased  land  for  $32,727 
and  sold  it  to  the  corporation  for 
$45,000  without  divulging  the  profit, 
the    court    held    that    a   stockholder 


could  not  rescind  his  subscription,  in- 
asmuch as  the  corporation  was  inno- 
cent, but  that  he  might  have  a  judg- 
ment against  the  promoters  for  his 
pro  rata  share  of  the  profit.  See  also 
Franey  v.  Wauwatosa  Park  Co.,  99 
Wis.  40  (1898). 

g  The  trustee  was  bound  to  take 
notice  of  the  lien  created  by  the  by- 
laws of  the  English  corporation.  The 
rule  of  caveat  emptor  has  been  re- 
laxed so  as  to  create  an  implied  war- 
ranty of  title  on  the  part  of  the  seller. 
Even  though  the  trustee  acted  as 
agent,  yet,  the  principal  not  being 
disclosed,  the  trustee  is  liable.  Mc- 
Clure  v.  Central  Trust  Co.,  165  N.  Y. 
108  (1900).  A  trust  company  which 
issues  a  prospectus  offering  for  sale 
stock  in  a  mining  corporation,  and 
making  in  the  prospectus  misstate- 
ments as  to  the  earnings,  is  liable  to 
purchasers  of  stock  for  the  difference 
between  its  actual  value  and  what  its 
value  would  have  been  if  the  repre- 
sentations had  been  true.  Benedict  v. 
Guardian  T.  Co.,  91  N.  Y.  App.  Div. 
103  (1904),  aff'd,  180  N.  Y.  558. 


430 


CH.  IX.  J  DEFENSE  OF  PAROL  AGREEMENT,  ETC.     [§§  159,  160. 

bank  had  obtained  the  benefit  of  the  act.1  By  statute  in  England  a 
director  who  is  held  liable  for  misrepresentations  in  the  prospectus 
may  have  contribution  from  other  directors  who  are  equally  liable.2 
Promoters  may  be  liable  for  misrepresentations  of  their  agent  in 
obtaining  subscriptions.3  The  vendors  of  a  mining  property  of  a 
corporation  are  not  liable  for  the  misstatements  of  such  corporation 
in  selling  its  stock,  in  order  to  pay  for  the  mine,  even  though  they 
knew  that  a  prospectus  had  been  issued  and  they  accepted  payment 
from  the  corporation.4  The  question  of  the  liability  of  promoters, 
generally,  is  considered  elsewhere.5  The  corporation  itself,  all  of 
whoso  stock  has  been  issued  in  payment  for  a  mine,  cannot  hold  a 
vendor  liable  for  misrepresentations  as  to  the  value  of  the  property.6 

§  159.  Remedy  by  action  for  money  had  and  received. — Where  a 
subscriber  pays  his  subscription  in  part  or  wholly,  and  afterwards 
discovers  that  the  representations  whereby  he  was  induced  to  sub- 
scribe were  fraudulent,  he  may  bring  an  action  at  law  for  money 
had  and  received,  and  recover  back  from  the  corporation  the  money 
so  received.7  ' 

§  1G0.  Ratification  as  a  bar  to  the  subscriber's  remedies.' — A  sub- 
scription contract  obtained  by  fraudulent  representations  may  cease 
to  be  voidable  and  may  become  absolutely  binding  by  acts  of  rati- 
fication. Any  ad  of  the  subscriber,  inconsistent  with  an  intention 
to  disaffirm  the  contract,  will  constitute  a  ratification  of  the  sub- 
scription and  a  waiver  of  the  right  to  avoid  it  by  reason  of  fraud, 
provided  the  subscriber  knew  of  the  fraud  at  the  time  of  such  rati- 
fying act.     Thus,  where  the  subscriber,  after  knowledge  of  the  fraud, 

1  Trimble  v.  Exchange  Bank,  62  Whitney,  30  Nova  Scotia  Rep.  104 
S.  W.  Rep.  1027  (Ky.  1901).  (1897). 

2  Gerson  v.  Simpson,  [1903]  2  K.  c  Stratton's,  etc.  v.  Dines,  126  Fed. 
B     9?  Rep.  968   (1904);  aff'd,  135  Fed.  Rep. 

449 

3  Milburn  v.  Wilson,  31  Can.   S.  C.         7  Grangers,   Ins    Co    ^   Ttirnei.    61 

Rep.  481  (1901).  Ga    561    (1878).    Hamilton  v.  Grang- 

4  Wiser  v.  Lawler,  1S9  U.  S.  260  ers»  In&  Co ;  67  Ga.  145  (ig81).  But 
(1903).  the  subscriber  cannot  retain  the  stock 

5  See  §  651,  infra.  In  Nova  Scotia,  and  also  sue.  Houldsworth  v.  City  of 
where  a  subscriber  sues  a  promoter  Glasgow  Bank,  L.  R.  5  App.  Cas.  317 
for  damages  for  fraud  in  obtaining  (1880).  See  Jarrett  v.  Kennedy,  6 
for  himself  stock  and  bonds  ille-  C.  B.  319  (1S48),  where  assumpsit 
gaily,  the  suit  must  be  by  the  corpo-  for  money  had  and  received,  brought 
ration,  or  by  the  stockholder  if  the  against  the  directors  to  compel  them 
corporation  refuses  to  sue.  Weath-  to  repay  money  paid  on  a  subscrip- 
erbe  r.  Whitney,  30  Nova  Scotia  Rep.  tion  obtained  by  fraud,  was  sustained, 
49  (1897).  Such  claim  cannot  be  without  involving  the  question  of  a 
joined  with  a  personal  claim  for  serv-  fraudulent  intent.  See  Bruce  v.  Nick- 
ices     rendered,     etc.      Weatherbe     v.  erson,    141    Mass.    403    (1886).      The 

431 


§  160.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[oh.  IX. 


dividends,  sells  port  of  the  stock,1  instructs  his  broker  to 
rticipates  in  the  meetings,8  pays  calls,4  or,  in  general,  ac- 


receives 

sell,2  participates 


action  for  money  had  and  received 
cannot  be  brought  against  other 
stockholders  for  the  fraud  of  a  pro- 
moter. Perry  v.  Hale,  143  Mass.  540 
(1887). 

i  But  a  sale  of  a  part  of  the  stock 
before  the  subscriber  discovers  the 
fraud  is  no  bar  to  a  rescission  as  to 
the  rest.  Ex  parte  West,  56  L.  T. 
Rep.  622  (1SS7).  A  subscriber  to 
stock  cannot  rescind  for  fraud,  when 
he  has  had  the  stock  transferred  to 
his  infant  children,  unless  their  right 
thereto  is  also  tendered  back.  Fran- 
cis v.  New  York,  etc.  R.  R.,  108 
N.  Y.  93  (1888) ;  aff'g,  17  Abb.  N.  C.  1. 
A  person  purchasing  treasury  stock 
may  have  the  purchase  rescinded  for 
fraudulent  representations.  The  fact 
that  he  dealt  in  other  shares  of  the 
same  stock  is  no  defense.  Mulholland 
v.  Washington,  etc.  Co.,  35  Wash.  315 
(1904). 

2  Ex  parte  Briggs,  L.  R.  1  Eq. 
483  (1866). 

3  Harrison  v.  Heathorn,  6  Man.  & 
G.  81  (1843);  Chaffin  v.  Cummings, 
37  Me.  76  (1853).  A  subscriber  who 
acts  as  director  and  manager,  and 
purchases  lots  from  the  company, 
cannot  rescind  his  subscription  on 
the  ground  that  certain  newspaper 
articles  prepared  by  himself  and  oth- 
ers contain  misrepresentations.  Ray- 
mond v.  San  Gabriel,  etc.  Co.,  53  Fed. 
Rep.  883  (1893).  Where  the  de- 
frauded party  to  whom  stock  has 
been  issued  for  land  does  not  rescind 
promptly,  but  acts  as  director  and  al- 
lows improvements  to  be  made  on  the 
land,  he  cannot  rescind  at  all.  Foley 
v.  Holtry,  41  Neb.  563  (1894).  This 
decision,  however,  was  reversed  on  a 
rehearing.  43  Neb.  133.  A  person 
may  defeat  notes  given  for  stock 
which  he  was  induced  fraudulently  to 
purchase  from  the  corporation,  even 
though  he  became  and  remained 
cashier  for  the  corporation  for  over 


a  year  after  the  sale  and  before  he 
set  up  the  defense,  and  was  a  direc- 
tor and  voted  the  stock.  He  did  not 
necessarily  learn  the  facts  from  oc- 
cupying these  positions,  nor  from  the 
fact  that  he  made  official  reports  of 
the  condition  of  the  company.  He 
was  not  bound  to  investigate.  He 
tendered  the  stock  back  as  soon  as 
he  discovered  the  facts.  Especially 
do  these  rules  apply  where  no  credi- 
tors or  other  stockholders'  rights 
have  intervened.  National  Bank  v. 
Taylor,  5  S.  D.  99  (1S94).  A  person 
cannot  rescind  for  fraud  a  purchase 
of  stock  from  the  corporation  itself, 
where,  subsequently  to  discovering 
the  fraud,  he  attended-  a  stockhold- 
ers' meeting  and  voted  to  assess  the 
stock,  and  afterwards  attended  an- 
other stockholders'  meeting  and  paid 
the  assessment.  Marten  v.  Paul,  etc. 
Co.,  99  Cal.  355  (1S93).  See  also 
§  356,  infra. 

4  Scholey  v.  Venezuela  Central  Ry., 
L.  R.  9  Eq.  266,  n.  (hS70).  But  not 
where  he  paid  under  compulsion. 
Ayre's  Case,  25  Beav.  513  (1«85S).  A 
payment  of  a  caH  on  a  subscription  is 
not  a  waiver  of  the  defense  that  the 
corporation  has  been  formed  for  dif- 
ferent purposes  than  were  repre- 
sented by  the  promoters  at  the  time 
of  the  subscription,  where  the  sub- 
scriber did  not  know  that  fact  when 
he  paid.  Strong  v.  Southwestern,  etc. 
Co.,  38  S.  W.  Rep.  546  (Tex.  1896) .  A 
partial  payment  with  full  knowledge 
is  a  waiver.  Re  Dunlop-Truffault,  etc. 
Co.,  75  L.  T.  Rep.  385  (1896).  Where 
a  subscriber,  with  knowledge  of  the 
facts,  pays  a  call  and  waits  a  year,  he 
is  bound.  Ascetelyn,  etc.  Co.  v.  Smith, 
10  Penn.  Sup.  Ct.  61  (1S99).  If  a 
subscriber  pays  an  instalment  on  his 
stock  or  participates  in  a  meeting 
after  incorporation,  he  cannot  after- 
wards set  up  that  the  charter  did  not 
correspond  with  the  prospectus.  West 


432 


CH.  IX.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[§  160. 


cepts  any  corporate  benefit  or  continues  to  act  as  a  stockholder,1  he 
will  be  held  to  have  waived  all  objections  to  the  fraud,  and  to  have 
ratified  tho  subscription  contract.  A  subscriber  who  for  three  years 
was  an  active  director  cannot  rescind  on  tho  ground  that  fraud- 
ulent representations  were  made  to  him,  nor  can  other  sub- 
scribers rescind  who  subscribed  through  him  as  agent.2  Where  the 
subscriber,  after  discovering  the  fraud,  serves  as  a  director  for  two 
months  and  sues  the  president  personally  for  the  fraud,  he  cannot 
rescind  as  to  the  purchase.3  But  mere  attendance  at  a  stockhold- 
ers' meeting  is  insufficient.4  And  a  provision  in  a  contract  of  sub- 
scription to  the  stock  of  the  company,  whereby  the  subscriber  waives 
notice  of  all  contracts  between  the  promoters  and  the  company,  is  not 
binding  on  the  stockholder,  if  such  waiver  is  tricky  and  fraudulent.5 


End,    etc.    Co.    v.    Claiborne,    97    Va. 
734  (1900). 

i  Ogilvie  v.  Knox  Ins.  Co.,  22  How. 
3S0  (1859);  Chubb  v.  Upton,  95  U.  S. 
CG5  (1S77);  Litchfield  Bank  v. 
Church,  29  Conn.  137  (I860);  Centre, 
etc.  Turnp.  Co.  v.  McConaby,  16  Serg. 
&  R.  (Pa.)  110  (1827);  Mixer's  Case, 
4  De  G.  &  J.  575  (1869).  Waiver  of 
one  misrepresentation  is  not  a  waiver 
of  others.  Ex  parte  Hale,  55  L.  T. 
Rep.  G70  (18S6).  The  question  of 
whether  the  subscriber  has  been 
guilty  of  laches  may  be  submitted  to 
the  jury-  Newton  Nat  Dank  v.  New- 
begin,  74  Fed.  Rep.  135  (1896).  Where 
a  party  is  induced  to  subscribe  by 
fraud  and  gives  a  note  in  payment, 
he  can   defend   against  the   note  on 


4  Stewart's  Case,  L.  R.  1  Ch.  App. 
574  (1866);  Wontner  v.  Shairp,  4  C. 
B.  404  (1847);  Re  Metropolitan,  etc. 
Assoc,  64  L.  T.  Rep.  561  (1891). 

5  Where  a  prospectus  contained  a 
material  misrepresentation  which  in- 
duced a  person  to  subscribe,  he  may 
maintain  a  suit  to  rescind  the  sub- 
scription, even  though  the  prospectus 
stated  that  there  were  certain  con- 
tracts not  mentioned  in  the  prospec- 
tus and  that  the  subscribers  would 
be  held  to  have  had  notice  of  the 
same,  and  even  though  the  subscrip- 
tion contract  contains  a  provision 
ttat  the  subscriber  has  notice  of  that 
which  in  fact  is  concealed  from  him. 
The  misrepresentation  in  this  in- 
stance was  a  misleading  and  ambigu- 


that  ground,  even  though  two  months    ous  statement,  and  also  the  non-dis- 


have  elapsed  since  he  discovered  the 
fraud.  He  does  not  waive  fraud  by 
the  fact  that  he  united  with  others  to 
buy  the  company's  property.  Zang 
v.  Adams,  23  Colo.  408  (1897).  The 
fraud  may  be  waived.  Wilson  v. 
Hundley,  96  Va.  96  (1S98).  Accept- 
ing stock  with  a  knowledge  that  the 
amount  of  stock  issued  as  paid  up 
was  not  as  represented  is  a  waiver  of 
that  defense.  French  i\  Northwest- 
ern Laundry,  132  Iowa  81   (1906). 

2  American,  etc.  Assoc,  v.  Rainbolt, 
48   Neb.   434    (1896). 

3  Lear  v.  Paige,  etc.  Co.,   42  S.  W. 
Rep.  808   (Tenn.  1897). 

(28)  433 


closure  of  an  agreement  to  which  the 
promoter  was  a  party,  such  agreement 
not  relating  to  the  formation  of  the 
company  or  his  subscription  to  its 
stock.  The  court  rescinded  the  sub- 
scription and  held  the  directors  per- 
sonally liable  for  loss  sustained  by 
the  subscriber.  Greenwood  v.  Leather, 
etc.  Co.  Ltd.,  [1900]  1  Ch.  421.  A 
"tricky"  form  of  waiver  of  mention 
of  outstanding  contracts  referred  to 
in  the  prospectus  does  not  bind  a 
subscriber  to  the  shares.  Tait  v. 
MacLeay,  [1904]  2  Ch.  631.  See  also 
p.  413,  note  2,  supra. 


§   1G1.]  DEFENSE  OF  PAROL  AGREEMENT,  ETC.  [CH.  IX. 

§  101.  Laches  as  a  bar  to  the  subscriber's  remedies. — Where  a 
subscriber  for  stock,  who  was  induced  to  subscribe  by  fraud,  neg- 
lects for  an  unreasonable  time  after  the  discovery  of  the  fraud  to 
have  his  subscription  canceled,  and,  in  the  meantime,  the  interests 
of  third  persons  become  involved,  and  would  be  injured  by  the  can- 
cellation of  such  subscription,  the  subscriber's  laches  is  a  bar  to 
relief,  and  a  court  of  equity  will  refuse  to  set  aside  the  subscrip- 
tion.1 Equity  does  not  allow  the  subscriber  to  say,  "I  will  abide 
by  the  company  if  successful,  and  I  will  leave  the  company  if  it 
fails.2  Immediately  upon  receiving  information  of  the  fraud,  it 
is  his  duty  to  decide  whether  he  will  rescind  the  contract  or  waive 
the  fraud.3  Nevertheless  delay  is  not  fatal,  unless  circumstances 
and  third  parties'  rights  have  so  changed  or  been  acquired  that  the 
rescission  would  be  inequitable.  Consequently,  the  decision  of  each 
case  depends  largely  on  the  facts  of  the  case.  Thus,  it  has  been 
held  that  a  delay  of  one,4  three,5  four,0  or  six  months,7  or  of 
two,8  three,9  or  six10  years,  was  fatal  under  the  circumstances  of 

i  City  Bank  v.  Bartlett,  71  Ga.  797  c  Ex    parte    Lawrence,     3G     L.     J. 

(18S3).     Such  delay  is  also  a  bar  in  (Ch.)   490    (1SG7);   s.  c,  L.  R.  2  Ch. 

an  action  at  law.    Schanck  v.  Morris,  App.  412. 

7  Rob.    (N.   Y.)    658    (1868).     But  it  7  Whitehouse's   Case,    L.   R.    3    Eq. 

is  no  bar  that  other  subscribers  may  790   (1S67). 

bave  been  induced  to  subscribe  by  8  Farrar  v.  Walker,  3  Dill.  506,  n. 
reason  of  this  subscription.  Western  (1875);  s.  a,  8  Fed.  Cas.  1076;  Ash- 
Bank  v.  Addie,  L.  R.  1  Sc.  App.  Cas.  ley's  Case,  L.  R.  9  Eq.  263  (1870); 
(H.  L.)  145  (1867).  Cf.  Parbury's  Peel's  Case,  L.  R.  2  Ch.  App.  674 
Case,  3  De  G.  &  Sm.  43   (1849).  (1867);   Kincaid's  Case,  L.  R.  2   Ch. 

2  Ashley's  Case,  L.  R.  9  Eq.  263  App.  420  (1867);  Wilkinson's  Case, 
(1870);   Re  London,  etc.  F.  Ins.  Co.,  L.  R.  2  C.  H.  App.  536  (1867). 

L.  R.  24  Ch.  D.  149  (1SS3).    See  also  o  State  v.   Jefferson   Turnp.    Co.,    3 

§356,  infra.  Humph.   (Tenn.)  305   (1842). 

3  Philadelphia,  etc.  R.  R.  v.  Cow-  io  Denton  v.  Macneil,  L.  R.  2  Eq. 
ell,  2S  Pa.  St.  329  (1857),  where  there  352  (1866).  Four  years'  delay  in  corn- 
was  a  delay  of  seven  years;  Hey-  plaining  of  the  fraud  inducing  the 
maun  v.  European  Central  Ry.,  L.  R.  purchase,  after  knowledge  thereof,  is 
7  Eq.  154  (1868) ;  Peek  v.  Gurney,  fatal.  Cedar  Rapids  Ins.  Co.  v.  But- 
L.  R.  6  H.  L.  377  (1S73).  The  last  ler,  83  Iowa  124  (1891).  Where  one 
case  overrules  Bagshaw  v.  Seymour,  stockholder  who  has  been  fraudu- 
18  C.  B.  903  (1856),  and  Bedford  v.  lently  induced  to  subscribe  for  stock 
Bagshaw,  4  H.  &  N.  538  (1859).  awaits   the    result    of   an    action   by 

4  Taite's  Case,  L.  R.  3  Eq.  795  another  stockholder  brought  to  re- 
(1867),  the  delay  evidently  being  to  scind  his  subscription  on  the  same 
see  which  course  would  be  most  prof-  ground,  the  delay  being  nearly  three 
itable.  years,  and  then  commences  suit  for 

5  Heymann  v.  European  Central  the  same  purpose  only  after  a  meet- 
Ry.,  L.  R.  7  Eq.  154  (1868).  ing  has   been   called  for   a   winding 

434 


CH.  IX.]  DEFENSE  OE  PAROL  AGREEMENT,  ETC.  [§  162. 

the  case,  while,  under  different  facts,  a  delay  of  two  montlis,1  or 
even  seven  years,2  was  held  not  to  be  a  bar.  A  suit  by  one  signer  of 
a  reorganization  agreement,  however,  to  enforce  it,  prevents  laches 
being  charged  against  other  signers,  who  do  not  commence  suit  until 
a  long  time  subsequently.3  Acquiescence  or  affirmance  does  not  bind 
the  stockholder  if  induced  by  a  reasonable  expectation  on  his  part 
that  the  fraud  would  be  remedied.4  In  the  remedies  by  actions  at 
law  the  statute  of  limitations  governs,  and,  by  analogy,  courts  of 
equity  are  inclined  to  follow  the  same  period,  unless  there  are  equi- 
table reasons  to  the  contrary.  In  a  suit  against  a  director  for  fraud 
in  inducing  subscription,  the  statute  of  limitations  begins  to  run  from 
the  time  of  subscription,  and  the  liability  is  not  a  penalty,  even 
though  the  liability  is  made  statutory.5 

§  1G2.  The  date  from  which  laches  begins  to  run  is  the  time  when 
the  subscriber  is  first  chargeable  with  notice  that  a  fraud  has  been 
perpetrated  upon  him.  Mere  suspicions  or  random  statements 
heard  in  public  or  in  stockholders'  meetings  do  not  necessarily  con- 
stitute notice.6  But  after  a  subscriber's  suspicions  are  reasonably 
aroused,  it  is  his  duty  to  investigate  at  once.7  The  corporation  has 
the  burden  of  proof  in  asserting  that  the  subscriber  had  notice  and 
was  guilty  of  laches.8  The  House  of  Lords  in  England  has  recently 
held  that  where  a  subscriber  sets  up  fraud  as  a  defense  to  an  action 
for  calls,  he  need  not  show  repudiation  since  he  discovered  the  fraud. 
On  the  contrary,  the  company  must  show  that  he  adhered  to  the 
contract  after  his  knowledge  of  the  fraud.9 

up,   he   is   guilty   of  laches,   and   his  2McClellan    v.    Scott,    24    Wis.    81 

remedy  is  barred.   Re  Snyder,  etc.  Co.,  (1869). 

68    L.    T.    Rep    210    (1893).      Several  3  Cox    v.    Stokes,     156    N.    Y.    491 

years'  delay  is>  a  bar  to  rescission  for  (189S). 

fraud.    Buker  v.  Leighton,  etc.  Assoc,  4  West  End,   etc.   Co.  v.   Claiborne, 

63  N.  Y.  App.  Div.  507  (1901).  Where  97  Va.  734  (1900). 

a   suit   to    set   aside   a   forfeiture   of  5  Thompson     v.    Lord     Clanmorris, 

stock    by    the    corporation,     on    the  [1900]   1  Ch.  718. 

ground  of  fraud,  is  compromised,  the  c  Venezuela   Central   Ry.   v.   Kisch, 

same  stockholder  cannot  eight  years  L.  R.  2  H.  L.  App.  99  (1867). 

thereafter    file    another    suit    to    set  7  Ogilvie  v.  Currie,  37  L.  J.   (Ch.) 

aside  the  assessment  on  the  ground  541    (1867);    Ashley's   Case,   L.  R.   9 

of  frauds  unknown  to  him  when  the  Eq.   263    (1870);    Bosley  v.   National 

first  suit  was  compromised.    Marks  v.  Machine  Co.,  123  N.  Y.  550  (1890). 

Evans,   62  Pac.  Rep.   76    (Cal.  1900).  8  Quoted  and  approved  in  Virginia 

Delay  for  seven  years  in  complaining  Land     Co.     v.     Haupt,     90     Va.     533 

of  a  fraud  is  a  bar.    Phelps  v.  Ameri-  (1894);  Re  London,  etc.  Ins.  Co.,  L. 

can,  etc.  Assoc,  121  Mich.  343  (1899).  R.  24  Ch.  D.  149   (1883). 

i  Venezuela   Central   Ry.   v.   Kisch,  9  Aaron's    Reefs    v.    Twiss,    [1896] 

L.  R.  2  H.  L.  App.  99   (1867).  A.  C.  273. 

435 


§  163.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[CII.  IX. 


§  1G3.  Corporate  insolvency  as  a  bar  to  the  subscriber's  rem- 
edies.— In  England  the  principle  has  become  well  established  that, 
after  the  statutory  proceedings  for  winding  up  a  corporation  by 
reason  of  corporate  insolvency  have  been  commenced,  a  subscriber 
cannot  rescind  his  subscription  on  account  of  fraud.1  lie  is  too 
late.  It  matters  not  that  ho  did  not  discover  the  fraud  until  after  the 
winding  up  has  commenced.  The  rights  of  corporate  creditors  pre- 
vail, then,  over  the  equities  of  the  subscriber.2  If,  however,  ho 
instituted  proceedings  to  rescind  the  contract  before  the  winding  up 
was  commenced,  he  may  be  released,  although  the  proceedings  are 
not  completed  until  after  such  winding  up.3  So,  also,  where 
there  are  several  similar  cases,  and  by  agreement  with  the  corporate 
solicitors  all  the  cases  are  to  follow  a  test  case,  this  agreement  pre- 
vails although  a  winding  up  is  commenced  before  the  test  case  is 
fully  decided.4 

i  Wright's  Case,  L.  R.   12  Eq.  331  company  is  commenced.     Re  General 

(1871)-    Kent   v.    Freehold,    etc.    Co.  Railway  Syndicate,  [1900]  1  Ch.  305; 

L.  R.   3  Ch.   App.  493    (18C8),  rev'g,  rev'g  (1899)  1  Ch.  770.     A  subscriber 

L    R    4  Eq.  588;  Henderson  v.  Royal  is  liable  on  a  winding  up  although  he 

British  Bank,  7  El.  &  Bl.  356  (1857);  had  repudiated  the  subscription  long 

Powis  v.  Harding,  1  C.  B.  (N.  S.)  533  before   on   the  ground   of  fraud,   and 

(1857);     Daniel     v.     Royal     British  understood   that  his  name  had  been 

Bank     1    Hurlst.    &    N.    681    (1857);  dropped.     Be  Lennox  Publishing  Co., 

Oakes  v.  Turquand,  L.  R.  2  H.  L.  App.  62  L.  T.  Rep.  791  (1S90).   If  the  party 

325   (1867);   Mixer's  Case,  4  De  G.  &  institutes  legal  proceedings  to  cancel 

J.  575   (1859);   Clarke  v.  Dickson,  27  his    subscription    on    the    ground    of 

L.  J.    (Q.  B.)    223    (1858).     So,  also,  fraud,  prior  to  the  commencement  of 

where  there  is  a  voluntary  winding  the   winding-up    proceedings,    the   in- 

up  by  reason  of  corporate  insolvency,  solvency   of  the   company   is   no  bar. 

Stone  v.  City,  etc.  Bank,  L.  R.  3   C.  Cocksedge  v.  Metropolitan,  etc.  Assoc., 

P   D    282  (1877);  Collins  v.  City,  etc.  64   L.   T.  Rep.   826    (1891);    aff'd,   65 

Bank,  L.  R.   3   C.   P.  D.  280    (1877).  L.  T.  Rep.  432    (1891).     The  highest 

But  not  if  the  proceedings  for  rescis-  court    in    England   in    one   case   inti- 

sion  were   commenced   in  good  faith  mated  that  corporate  insolvency  is  a 

and   in  ignorance   of  the  winding-up  bar  to  rescission  of  a  subscription  for 

proceedings.     Hall   v.   Old   Talargoch  fraud,  even  though  a  winding  up  has 

Min.  Co.,  L.  R.  3  Ch.  D.  749  (1876).  not     been     commenced.       Tennent  v. 

2  Turner  v.  Grangers',  etc.  Ins.  Co.,  City  of  Glasgow  Bank,  L.  R.  4  App. 
65  Ga.  649   (1880).  Cas.  615    (1879).     See  also  Burgess's 

3  Reese  River,  etc.  Co.  v.  Smith,  Case,  L.  R.  15  Ch.  D.  507  (1880).  But 
L.  R.  4  H.  L.  64  (1869)  aff'g  L.  R.  2  the  fact  that  the  company  is  unable 
Ch.  604;  L.  R.  2  Eq.  264;  rev'g  36  L.  to  meet  its  engagements  at  the  time 
J.  (Ch.)  385.  Where  a  subscriber  is  of  rescission  is  no  bar  if  the  sub- 
sued  on  the  subscription  and  he  inter-  scriber  is  ignorant  thereof.  Ex  parte 
poses  the  defense  of  misrepresenta-  Carling,  56  L.  T.  Rep.  115  (1887). 
tions,  the  defense,  if  proved,  is  good,  4  Pawle's  Case,  L.  R.  4  Ch.  A*pp. 
even  though  ten  days  after  interpos-  497  (1869);  McNiell's  Case,  L.  R.  10 
ing  his  defense  suit  to  wind  up  the  Eq.  503  (1870).    But  mere  attendance 

436 


CH.  IX.] 


DEFENSE  OP  PAROL  AGREEMENT,  ETC. 


[§  164. 


§  164.  In  this  country  the  effect  of  corporate  insolvency  upon  the 
right  of  a  subscriber  to  rescind  his  contract  for  fraud  has  not  been 
passed  upon  so  often  as  in  England.  The  decisions,  however,  clearly 
hold  that  corporate  insolvency  is,  as  a  rule,  a  bar  to  such  rescission.1 


at  the  meeting  where  such  stipulation 
is  made  is  sufficient.  The  subscriber 
must  plainly  indicate  an  intention  to 
abide  by  the  test  case.  Ashley's  Case, 
L.  R.  9  Eq.  263   (1870). 

i  Approved  in  Howard  v.  Turner, 
155  Pa.  St.  349  (1893),  holding  that 
after  the  corporation  has  become  in- 
solvent and  a  receiver  appointed,  it  is 
too  late  for  a  party  to  avoid  his  sub- 
scription on  the  ground  of  fraud. 
Fraud  on  the  part  of  the  officers  in 
inducing  the  purchase  is  no  defense 
to  the  statutory  liability  after  the 
company  becomes  insolvent  and 
passes  into  a  receiver's  hands.  Bissell 
v.  Heath,  98  Mich.  472  (1894).  After 
insolvency  it  is  too  late  to  rescind. 
Olson  v.  State  Bank,  67  Minn.  267 
(1S97);  Sheafe  v.  Larimer,  79  Fed. 
Rep.  921  (1S97).  Delay  in  rescinding 
for  a  year  and  a  half,  with  knowl- 
edge, is  fatal  where  the  corporation 
has  become  insolvent  in  the  mean- 
time. Hilliard  ».  Allegheny,  etc.  Co. 
173Pa.St.l(1896).  Seel60Fed.Rep.573. 

After  the  company  becomes  insolv- 
ent, and  two  and  a  half  years  have 
elapsed  since  the  subscription,  and 
during  this  time  the  means  of  discov- 
ering the  fraud  were  open  to  the  sub- 
scriber, the  subscriber  cannot  rescind 
for  fraud.  Martin  v.  South,  etc.  Co., 
94  Va.  28  (1896);  s.  c.  97  Va.  349; 
Ruggles  v.  Brock,  6  Hun,  164  (1875) ; 
Saffold  v.  Barnes,  39  Miss.  399  (1860). 
After  the  corporation  becomes  insolv- 
ent a  subscriber  cannot  repudiate  for 
fraud.  Duffield  v.  Barnum,  etc. 
Works,  64  Mich.  293  (1887).  After  a 
bank  has  become  insolvent  the  statu- 
tory liability  of  a  stockholder  cannot 
be  avoided  by  the  defense  of  fraud  in 
obtaining  his  subscription  four  years 
prior  thereto.  Foster  v.  Row,  120 
Mich.   1    (1899).     A  stockholder  who 


delays  two  and  one-half  years  in 
bringing  suit  to  cancel  a  subscription 
for  fraud,  and  in  the  meantime  has 
served  as  director  and  the  company's 
has  become  insolvent,  is  barred  from 
relief.  Moreover,  a  receiver  of  a  bank 
is  a  necessary  party  to  such  a  suit  by 
a  stockholder  to  cancel  his  subscrip- 
tion for  fraud,  and  a  suit  against 
him  for  that  purpose,  without  leave 
of  court,  will  be  dismissed.  Earle  v. 
Humphrey,  121  Mich.  518  (1S99).  A 
subscriber  who  for  three  years  after 
learning  of  the  facts  delays  in  bring- 
ing a  suit  for  rescission  cannot  then 
maintain  a  suit  against  the  receiver 
of  the  corporation.  Tierney  v.  Parker, 
58  N.  J.  Eq.  117  (1899).  A  parol 
agreement  that  the  stock  should  be 
paid  for  in  a  certain  way  is  no  de- 
fense after  the  corporation  becomes 
insolvent.  Roach  v.  Burgess,  62  S.  W. 
Rep.  803  (Tex.  1901).  Cf.  Litchfield 
Bank  v.  Peck,  29  Conn.  384  (I860). 
Fraud  is  no  defense  as  against  credi- 
tors. Mathis  v.  Pridham,  1  Tex.  Civ. 
App.  58  (1892);  McDowall  v.  Shee- 
han,  13  N.  Y.  Supp.  3S6  (1891);  rev'd 
on  another  point  in  129  N.  Y.  200'. 
Nor  after  insolvency.  Howard  v. 
Glenn,  85  Ga.  23S  (1890).  See  also 
§  261,  infra.  Cf.  §  356,  infra.  An  ac- 
tion to  rescind  the  purchase  of  stock 
lies  where  the  money  paid  therefor 
was  to  be  applied  to  a  certain  pur- 
pose, but  was  not  so  applied,  but  the 
receiver  will  not  be  directed  to  give 
up  the  money.  Moore  v.  Robertson, 
25  Abb.  N.  Cas.  173  (1890).  After 
insolvency  a  subscriber  for  stock  can- 
not defend  on  the  ground  of  fraud 
where  he  does  not  show  prompt  ac- 
tion after  discovering  the  facts.  Ma- 
rion Trust  Co.  v.  Blish,  79  N.  E.  Rep. 
415  (Ind.  1906).  As  against  a  re- 
ceiver it  is  no  defense  that  the  cor- 


437 


§  164.] 


DEFENSE  OP  PAROL  AGREEMENT,  ETC. 


[CH.  IX. 


The  supreme  court  of  the  United  States  has  held  that  a  subscriber 
to  the  stock  of  a  national  bank  cannot,  after  the  bank  has  become  in- 
solvent, avoid  his  statutory  liability  on  the  stock  by  the  defense  that 
he  was  induced,  by  fraudulent  representations  of  the  bank  and  its 
officers,  to  become  a  stockholder.1  Nevertheless,  there  are  strong 
American  cases  to  the  effect  that  the  insolvency  of  the  corporation 
and  the  appointment  of  a  receiver  do  not  always  bar  the  right  of  a 
subscriber  to  rescind  his  subscription  on  the  ground  of  fraudulent 


poration  agreed  that  the  subscriber  duced  to  subscribe  by  fraud,  unless 
need  pay  only  fifty  per  cent,  of  the  he  shows  that  there  are  no  creditors 
par  value  of  the  stock,  or  that  fraud-  who  became  such  while  he  was  a  reg- 
ulent  representations  induced  him  to  istered  stockholder;  neither  can  he 
subscribe,  or  that  the  full  capital  set  up  a  counter-claim  for  damages 
stock  was  not  subscribed,  or  that  the  due  to  the  fraud.  Lantry  v.  Wallace, 
company  was  defectively  organized,  97  Fed.  Rep.  865  (1899);  aff'd,  182 
or  that  the  name  of  the  company  U.  S.  536.  Although  a  subscriber  to 
was  different  from  the  one  contem-  national  bank  stock  may  have  the 
plated.  Cox  v.  Dickie,  93  Pac.  Rep.  subscription  rescinded  for  fraud,  even 
523  (Wash.  1908). See  61  S.E.  Rep.  628.  after  the  bank  has.  passed  into  a  re- 
in the  bankruptcy  courts,  under  ceiver's  hands,  yet  he  must  show  dili- 
the  former  bankruptcy  law,  it  was  gence  and  must  show  that  the  cred- 
held  that  insolvency  was  a  bar  to  the  itors  of  the  bank  did  not  become  such 
defense  of  fraud  inducing  a  subscrip-  while  he  held  the  stock.  Wallace  v. 
tion  to  stock.  Farrar  v.  Walker,  3  Bacon,  86  Fed.  Rep.  553  (1898).  It 
Dill.  506;  s.  c,  8  Fed.  Cas.  1076;  is  too  late  after  proceedings  to  wind 
Michener  v.  Payson,  13  Nat.  Bankr.  up  had  been  commenced,  the  court 
Reg.  49  (1875) ;  s.  c,  17  Fed.  Cas.  259.  holding,  however,  that  in  the  case  at 
l  Scott  v.  Deweese,  181  U.  S.  202  bar  the  defendant  might  easily  have 
(1901).  In  Chubb  v.  Upton,  95  U.  S.  discovered  the  fraud  prior  to  the  in- 
665,  667  (1S77),  the  court  says  it  has  solvency.  Ross,  etc.  Co.  v.  Southern, 
often  been  held  that  the  defense  of  etc.  Co.,  72  Fed.  Rep.  957  (1896).  A 
false  and  fraudulent  representations  purchaser  of  national  bank  stock  from 
will  not  prevail  against  a  receiver,  the  bank  itself  cannot,  after  the  bank 
especially  where  there  has  not  been  a  has  passed  into  the  hands  of  a  re- 
prompt  discovery  of  the  fraud,  fol-  ceiver,  defend  against  the  statutory 
lowed  by  a  repudiation;  citing  Upton  liability  on  the  ground  of  fraud  in- 
v.  Tribilcock,  91  U.  S.  45  (1875);  ducing  him  to  purchase  unless  he 
Webster  v.  Upton,  91  U.  S.  65  (1875);  proves  acts  of  diligence  which  nega- 
Sanger  v.  Upton,  91  U.  S.  56  (1875);  five  any  charge  of  negligence,  and  also 
Ogilvie  v.  Knox  Ins.  Co.,  22  How.  3S0  proves  that  no  debt  was  created  nor 
(1859).  After  a  national  bank  be-  credit  given  the  bank  after  he  became 
comes  insolvent  it  is  too  late  for  a  such  stockholder.  Wallace  v.  Hood,  89 
stockholder  to  rescind  a  subscription  Fed.  Rep.  11  (1898),  aff'd  182  U.'  S. 
on  the  ground  of  fraud  occurring  555.  A  person  seeking  to  rescind  after 
many  years  prior  thereto.  Scott  v.  the  corporation  becomes  insolvent 
Latimer,  89  Fed.  Rep.  843  (1898).  must  show  that  he  used  due  diligence 
After  the  insolvency  of  a  national  after  discovering  the  fraud.  Bartol  v. 
bank  a  stockholder  cannot  avoid  lia-  Walton,  etc.  Co.,  92  Fed.  Rep.  13 
bility  on  the  ground  that  he  was  in-  (1899).    See  85  N.  B.  Rep.  91. 

438 


CH.  IX.  J 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[§   164. 


representations.1     And  even  after  the  corporation  passes  into  an  as- 
signee's hands  a  stockholder  fraudulently  induced  by  the  president 


i  Newton  Nat.  Bank  v.  Newbegin, 
74  Fed.  Rep.  135  (1896),  aff'g  Newbe- 
gin v.  Newton  Nat.  Bank,  66  Fed.  Rep. 
701,  wbere  the  subscriber  subscribed 
in  May,  1S90,  and  the  bank  failed  in 
November,  and  the  subscriber  at  once 
instituted  proceedings  for  rescission, 
and  in  May,  1S91,  filed  a  bill  for  that 
purpose  and  then  withdrew  the  suit 
on  a  proposed  reorganization,  and  then 
in  November,  1891,  started  the  suit 
again,  and  in  December,  1S92,  the 
bank  failed  again.  The  court  held 
that  the  suit  might  succeed,  the  sub- 
scriber not  having  taken  any  part  in 
the  management  and  having  been  a 
non-resident,  and  no  large  corporate 
indebtedness  having  been  incurred  in 
the  meantime.  Even  though  four 
years  have  elapsed  since  a  subscrip- 
tion was  made,  and  for  three  years 
the  company  has  been  in  the  hands  of 
a  receiver,  yet  a  subscriber  may  re- 
scind, if  with  due  diligence  he  had 
not  discovered  the  falsity  of  represen- 
tations inducing  him  to  subscribe,  it 
appearing  that  no  other  creditor  will 
be  injured  if  his  money  is  repaid  to 
him.  Dunn  v.  Candee,  98  N.  Y.  App. 
Div.  317  (1904).  Under  the  Kentucky 
statute  a  subscriber  may  repudiate  for 
fraud,  even  after  the  corporation  has 
made  an  assignment  for  the  benefit 
of  creditors,  if  due  care  was  used  to 
discover  the  fraud.  Kentucky,  etc.  v. 
Schaefer,  120  Ky.  227  (1905),  the 
court  stating  that  the  decision  in  Dep- 
pen  v.  German  American,  etc.  Co.,.  70 
S.  W.  Rep.  S6S,  to  the  contrary  was 
modified  on  the  rehearing  in  72  S.  W. 
Rep.  768.  Even  after  insolvency  a 
subscriber  for  increased  stock  may 
defend  on  the  ground  that  the  presi- 
dent represented  that  he  had  taken  a 
certain  amount  of  the  new  stock  but 
had  not  done  so,  and  also  on  the 
ground  that  misrepresentations  were 
made  as  to  the  value  of  the  corporate 
assets.    Byers  Bros.  v.  Maxwell,  73  S. 


W.  Rep.  437  (Tex.  1903).  Where  pro- 
moters sell  a  mining  prospect  to  a 
corporation  for  its  entire  capital  stock 
and  donate  a  part  to  the  treasury  to 
be  sold  as  treasury  stock,  and  the 
property  turns  out  to  be  worthless,  a 
purchaser  of  the  treasury  stock  may 
rescind  and  recover  back  his  money, 
although  he  did  not  bring  suit  for 
nearly  two  years,  but  it  appeared  that 
he  had  not  known  of  the  fraud,  and 
his  suit  will  lie  even  though  the  com- 
pany is  insolvent,  it  appearing  that 
no  active  insolvency  has  occurred. 
Hinkley  v.  Sac  Oil,  etc.  Co.,  107  N. 
W.  Rep.  629  (Iowa  1906). 

Where  a  subscriber  subscribes  in 
August,  discovers  the  fraudulent  mis- 
representations in  November,  serves 
notice  on  the  company  in  January 
that  he  repudiates  the  subscription, 
an  action  in  behalf  of  corporate  cred- 
itors against  him  to  collect  fails,  the 
company  having  assigned  in  April. 
Savage  v.  Bartlett,  78  Md.  561  (1894) ; 
Ramsey  v.  Thompson  Mfg.  Co.,  118 
Mo.  313  (1893),  holding  that  even 
after  insolvency  the  subscription  may 
be  repudiated  for  fraud.  Where  a 
stockholder  in  an  insolvent  corpora- 
tion sets  up  fraud  as  a  defense,  it  is 
for  the  jury  to  say  whether  he  re- 
scinded within  a  reasonable  time 
after  the  discovery  of  the  fraud. 
Urner  v.  Sollenberger,  89  Md.  316 
(1899).   See  84  N.  E.  Rep.  814. 

Even  after  corporate  insolvency 
fraud  is  a  defense  to  an  action  on  a 
subscription,  where  there  is  no  proof 
that  any  debts  were  incurred  by  the 
corporation  after  such  subscription 
was  made.  Beal  v.  Dillon,  5  Kan. 
App.  27  (1896).  Even  after  a  receiver 
is  appointed  of  a  bank,  a  person  who 
was  induced  to  buy  stock  of  the  bank 
by  fraudulent  statements  that  the 
stock  was  worth  par  can  rescind  by 
suit.  Robinson  v.  Dickey,  14  Tex.  Civ. 
App.  70  (1896).    Even  though  the  cor- 


439 


§  165.] 


DEFENSE  OF  PAROL  AGREEMENT,  ETC. 


[CH.  IX. 


to  take  stock  by  misrepresentations  as  to  the  condition  of  the  com- 
pany may  sue  the  company  for  damages  and  join  the  assignee.1 

§  1 6  5.  Essential  allegations  in  legal  proceedings  to  remedy  a  fraud 
inducing  subscription— Contribution. — The  essential  allegations, 
especially  in  a  suit  in  equity,  necessarily  vary  according  to  the  pe- 
culiar facts  of  each  case.  Yet  there  are  certain  elements  common  to 
all  the  cases.  It  is  necessary  to  allege  that  a  material  misrepresenta- 
tion of  a  question  of  fact  was  made,  setting  out  fully  the  fact  misrep- 
resented; that  the  person  making  the  misrepresentation  thereby  bound 
the  corporation;  and  that,  upon  discovery  of  the  fraud,  he  immedi- 
ately disaffirmed  the  contract.2  The  bill  must  set  out  in  full  the  facts 
justifying  rescission.3  That  the  representation  was  false  cannot  bo 
proved  by  statements  made  by  the  directors  in  stockholders'  meet- 
ings.4 The  burden  of  proving  that  the  representation  was  false,  and 
that  the  subscriber  relied  thereon,  is  upon  the  subscriber.5  In  New 
York,  proof  of  other  similar  contemporaneous  frauds  is  admissible.6 
In  a  suit  at  law  brought  by  the  receiver  of  a  national  bank  against 
a  stockholder  on  his  statutory  liability,  he  cannot  set  up  fraud  on 


poration  has  become  insolvent,  yet  a 
subscriber  may  rescind  on  the  ground 
that  it  was  misrepresented  to  him 
that  the  company  was  solvent,  espe- 
cially where  only  two  months  have 
intervened  and  the  stockholder  has 
not  been  guilty  of  laches.  Park  v. 
Kribs,  24  Tex.  Civ.  App.  650  (1900). 
See  also  §  366  infra. 

1  Dorsey   Mach.    Co.   v.   McCaffrey, 
139  Ind.  545  (1894). 

2  Quoted  and  approved  in  Arm- 
strong v.  Karshner,  47  Ohio  St.  276 
(1S90);  Bwlch-y-plwm  L.  M.  Co.  v. 
Baynes,  36  L.  J.  (Ex.)  183  (1867); 
Deposit,  etc.  Co.  v.  Ayscough,  6  El.  & 
B.  761  (1856);  Upton  v.  Englehart,  3 
Dill.  496  (1874);  s.  c,  28  Fed.  Cas. 
835;  Hallows  v.  Fernie,  L.  R.  3  Ch. 
App.  467  (1868);  Selmia,  etc.  R.  R.  v. 
Anderson,  51  Miss.  829  (1876),— the 
last  case  holding  it  necessary  to  al- 
lege also  that  the-  act  misrepresented 
was  not  a  charter  matter.  Carey  v. 
Cincinnati,  etc.  R.  R.,  5  Iowa,  357 
(1857),  indicates  that  an  allegation 
that  the  certificates  are  brought  intc 
court  for  disposal  is  proper.  See  also 
Oregon  Cent.  R.  R.  v.  Scoggin,  3  Oreg. 


161    (1S69);    Gilfillan  v.  Mawhinney, 
149  Mass.  264   (18S9). 

3  Bartol  v.  Walton,  etc.  Co.,  92  Fed. 
Rep.  13   (1899). 

4  Re  Devala,  etc.  Co.,  L.  R.  22  Ch. 
D.  593  (18S3).  Cf.  Philadelphia,  etc. 
R.  R.  v.  Quigley,  21  How.  202  (1858). 
Contra,  Jarrett  v.  Kennedy,  6  C.  B. 
319   (1848). 

5  Jennings  v.  Broughton,  22  L.  J. 
(Ch.)  585  (1853).  A  subscription  will 
not  be  decreed  to  be  canceled  unless 
the  proof  of  fraudulent  representa- 
tions is  very  clear,  especially  where 
the  subscription  contained  special 
terms  in  writing.  Wenstrom,  etc.  Co. 
v.  Purnell,  75  Md.  113  (1891). 

6  Miller  v.  Barber,  66  N.  Y.  558 
(1876).  In  Alabama  it  is  not  admis- 
sible. Montgomery  Southern  Ry.  v. 
Matthews,  77  Ala.  357  (1884).  Fraud- 
ulent representations  to  others  made 
about  the  same  time  are  not  admis- 
sible as  evidence.  Roche  v.  Coleman, 
42  S.  W.  Rep.  739  (Ky.  1897);  John- 
son v.  Gulick,  46  Neb.  817  (1896). 
Proof  of  similar  frauds  on  others  is 
not  admissible  where  it  is  admitted 
that  the  representations  were  made 


440 


CH.  EX.]  DEFENSE  OP  PAROL  AGREEMENT,  ETC.  [§   165. 

the  part  of  the  bank  in  inducing  him  to  subscribe.  That  defense,  if 
good  at  all,  is  available  only  by  a  suit  in  equity.  Neither  can  the 
defendant  set  up  a  counter-claim  for  the  money  so  paid  by  him  for 
the  stock.1  As  a  rule  at  common  law,  there  can  be  no  contribution 
enforced  as  between  joint  tort  feasors.2 

but  denied  that  they  were  false.  An-  2  See  §  749,  infra.  As  to  contribu- 
derson  v.  Scott,  70  N.  H.  534  (1901).  tion  among  directors  under  the  Eng- 
See  also  note  1,  p.  1035.  lish  statute,  see  Shepheard  v.  Bray  95 

i  Lantry  v.  Wallace,  182  U.  S.  536     L.   T.  Rep.   414    (1906),  reversed 'by 
(1901)-  consent  in  97  L.  T.  Rep.  729  (1907). 

441 


CHAPTER  X. 

MISCELLANEOUS   DEFENSES  TO  SUBSCRIPTIONS  FOR  CAPITAL 

STOCK. 


§  1C6.  Defenses  to  subscriptions  not 
favored  by  the  courts. 

167-170.  Release,  withdrawal,  sur- 
render, cancellation,  rescis- 
sion, or  substitution — Sub- 
scription revocable  by  its 
terms — Payment  by  dividend. 

171.  Compromise. 

172-175.  Non-payment  of  percentage 
required  by  statute. 

176-181.  Full  capital  stock  not  sub- 
scribed. 

182.  Capital  stock  not  definitely  re- 
solved upon. 

183-186.  Irregular  incorporation. 

187.  Ultra  vires  acts. 


§  188.  Fraud  and   mismanagement  of 
directors. 

189.  Delay  and  abandonment  of  en- 

terprise. 

190.  Failure  of  corporate  enterprise. 

191.  Secret  agreement  as  to  liability 

— Other  subscribers  released. 

192.  No  certificates  of  stock  issued. 

193.  Set-off  and  counter-claim. 

194.  Modification    of    the    plan    and 

scope  of  the  enterprise  after 
subscription. 

195.  Statute  of  limitations. 

196.  Ignorance  or  mistake. 

197.  Miscellaneous  defenses. 

198.  Waiver  of  defenses. 


§  1G6.  Defenses  to  subscriptions  not  favored  by  the  courts. — In 
the  early  days  of  corporate  enterprises,  especially  of  railroads,  the 
subscribers  to  stock  rarely  realized  a  profit  from  their  investment, 
but,  on  the  contrary,  lost  the  whole  amount  of  the  subscription  which 
they  had  made.  These  subscriptions  were  generally  not  called  in 
until  after  corporate  insolvency  had  occurred.  Then  the  reluctance 
of  the  subscriber  to  pay  a  subscription  from  which  there  was  no  hope 
of  a  return  led  him  to  set  up  all  possible  defenses  to  defeat  any 
action  for  the  collection  of  the  amount  due  from  him.  Some  of  tin  36 
defenses  were  just,  and  have  been  sustained;  but  most  of  them  have 
not  been  allowed.  On  the  theory  that,  having  taken  the  chances  of 
large  gains,  the  subscriber  took  also  the  risk  of  total  loss,  and  that 
the  hardship  of  the  subscriber  was  not  equal  to  the  superior  equities 
and  rights  of  corporate  creditors,  the  courts  have  uniformly  dis- 
countenanced such  defenses,  and  have  rigidly  enforced  the  subscrib- 
er's liability. 

§  1 67.  Release,  withdrawal,  surrender,  cancellation,  rescission,  or 
substitution  —  Subscription  revocable  by  its  terms  —  Payment  by 
dividend. — These  terms  are  frequently  used  as  synonymous,  although 
technically  they  have  different  meanings.  The  term  release,  espe- 
cially, has  led  to  considerable  confusion.    Tt  has  beer  applied  to  ca  i  - 

where  the  subscriber  withdraws  his   subscription,   the  contract  not 

442 


en.  x.] 


MISCELLANEOUS   DEFENSES. 


[§  167. 


yet  having  been  closed ;  second,  to  cases  where  the  subscriber  retains 
his  stock,  but  is  not  required  to  pay  the  full  par  value  thereof;  third, 
to  cases  where  the  subscription  contract  is  dissolved  by  mutual  agree- 
ment. A  subscriber  may  withdraw  from  his  subscription  if  the 
withdrawal  is  prior  to  the  incorporation.  Notice  of  the  withdrawal 
may  be  verbal,  and  may  be  given  to  the  chief  party  in  the  enterprise, 
who  afterwards  is  made  president.1 

1  Hudson  Real  Estate  Co.  v.  Tower,  company    may    withdraw    therefrom 

161  Mass.  10   (1894);   s.  c,  156  Mass.  prior    to    the    incorporation    of    the 

82  (1892).    A  subscription  prior  to  or-  company  where  the  incorporation  was 

ganization  may  be  withdrawn  at  any  delayed    fifteen    months    and    it    was 

time  prior  to  organization  and  accept-  represented  to  the  subscriber  that  the 

ance.    Bryant's,  etc.  Co.  v.  Felt,  87  Me.  note    had    been    lost.       Raegener    v. 

234     (1S95).      The    agreement    of    a  Brockway,    5S    N.    Y.   App.    Div.    166 

creditor  of  a  corporation  to  take  stock  (1901),  aff'd  171  N.  Y.  629.    Prior  to 

in    a   proposed    reorganized    company  incorporation  a  subscriber  may  with- 

may   be    revoked   by   the  creditor  at  draw,    especially   if   his    subscription 

any  time  before  actual   performance,  was  informal  and  was  merely  to  see 

Providence,  etc.  Co.  v.  Kent,  etc.  Co.,  what  could  be  done.     Plank's  Tavern 

19  R.  I.  561  (1896).    Where  before  in-  Co.  v.  Burkhard,  S7  Mich.  1S2  (1S91). 

corporation   it   is   understood   by   all  In  Pennsylvania  a  subscriber  for  stock 

parties  that  a  certain   subscriber  to  may  withdraw  at  any  time  before  the 

stock  had  withdrawn,  and   he  never  charter  is   applied  for.      Muncy,  etc. 

acts  as  a  stockholder,  he  cannot  after-  Co.  v.  De  La  Green,  13  Atl.  Rep.  747 

wards  be  held  liable.     Elliott  v.  Ash-  (Pa.  1SSS).    See  also  Cook  v.  Chitten- 

by.  104  Va.  716  (1905).   A  person  may  den,  25  Fed.  Rep.  544   (1SS5),  allow- 

wi'thdraw  from  a  voluntary  subscrip-  ing   a    withdrawal    where    no    others 

tion    at    any    time    before    the    full  have   subscribed  in  reliance  thereon, 

amount  is  subscribed  or  liabilities  in-  nor   creditors'    debts   incurred;    Gulf, 

curred  or  the  organization  perfected,  etc.  Ry.  v.  Neely,  64  Tex.  344   (1S85), 

Lewis  v.  Hillsboro,  etc.  Co.,  23  S.  \V.  holding  that  there  can   be   no  with- 


Rep.  33S  (Tex.  1S93).  A  subscriber 
to  stock  may  withdraw  his  subscrip- 
tion before  the  organization  thereof, 
before  the  expenditure  of  any  money, 
and  with  the  consent  of  the  payee. 
Patty  v.  Hillsboro,  etc.  Co.,  4  Tex.  Civ. 
App.  224  (1S93).  An  underwriter 
cannot  withdraw  where  the  party  to 
whom  he  gave  the  power  to  under- 
write for  him  had  an  interest  in  the 


drawal  after  an  acceptance  by  the 
corporation.  Cf.  Tilsonburg,  etc.  Co. 
v.  Goodrich,  8  Ontario  (Q.  B.  D.),  565 
(1SS5);  Rose  v.  San  Antonio,  etc.  R. 
R,  31  Tex.  49  (1SGS) ;  Lake  Ontario, 
etc.  R.  R.  V.  Mason,  16  N.  Y.  451,  463 
(1857).  See  also  Gaff  v.  Flesher,  33 
Ohio  St.  107  (1S77) ;  and  §§  56,  72,  84, 
supra.  Where  a  subscription  is  con- 
ditional on  the  corporation  obtaining 


contract  being  carried  out.     Re  Han-    a  certain  amount  of  subscriptions,  a 


nan's,  etc.  Co.  [1S96]  2  Ch.  643.  A 
subscriber  may  withdraw  at  any  time 
prior  to  the  filing  of  the  articles  of 
incorporation.  Auburn,  etc.  Works  v. 
Shultz,  143  Pa.  St.  256  (1S91);  Gar- 
rett r.  Dillsburg,  etc.  R.  R..  7S  Pa.  St 


subscriber  may  withdraw  at  any  time 
before  such  amount  of  subscriptions 
has  been  obtained.  Allen  v.  Hastings, 
etc.  Co.,  5S  S.  E.  Rep.  504  (Ga.  1907). 
A  subscriber  before  incorporation 
cannot  withdraw  without  the  consent 


465  (1875).   A  person  giving  a  capital     of  the  other  subscribers  and  the  cor- 
etock   note   to   a   proposed    insurance     poration  may  bring  suit  on  the  sub- 

443 


$  168.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


The  term  rescission  is  more  properly  applied  to  a  case  of  fraudulent 
representations.1  Probably  the  term  cancellation  describes  most  ac- 
curately the  dissolution  of  a  subscription  contract  by  the  mutual  con- 
sent of  all  parties  concerned.2 

§  168.  A  subscription  contract,  like  any  other  contract,  may  be 
waived,  canceled,  or  dissolved  by  the  mutual  consent  of  all  the  parties 
interested.  The  interested  parties  are  the  subscriber  himself,  the 
other  stockholders,  and  the  corporate  creditors  existing  at  the  time  of 
the  cancellation.  Frequently  the  directors  of  the  corporation  at- 
tempt to  usurp  this  right  and  power  of  the  general  stockholders.  The 
well-established  rule,  however,  is  that  corporate  directors  have  no 
power  to  agree  with  a  subscriber  that  his  subscription  shall  be  can- 
celed, unless  such  power  is  given  to  them  by  charter  or  statute  or 
the  by-laws  of  the  corporation.3     The  cancellation  of  a  subscription 


scription.  Nebraska,  etc.  Co.  v.  Led- 
nicky,  113  N.  W.  Rep.  245  (Neb. 
1907). 

1  See  ch.   IX. 

2  For  a  definition  of  the  words  "sur- 
render" and  "cancellation,"  see 
Green's  Brice's  Ultra  Vires  (2d  ed.), 
181,  189;  Re  Dronfield,  etc.  Co.,  L.  R. 
17  Ch.  D.  76  (1880);  Colville's  Case, 
48  L.  J.  (Ch.)  63-3  (1879).  Cancella- 
tion cannot  be  objected  to  on  the 
ground  that  it  reduces  the  capital 
stock.  It  no  more  reduces  the  capital 
stock  than  a  forfeiture  does.  Re 
Dronfield,  etc.  Co.,  L.  R.  17  Ch.  D. 
76    (1SS0). 

3  The  directors  have  no  power  to  al- 
low a  subscriber  to  cancel  his  sub- 
scription. Hastings  Lumber  Co.  v. 
Edwards,  188  Mass.  587  (1905).  In 
the  case  of  Bedford  R.  R.  v.  Bowser, 
48  Pa.  St.  29  (1864),  where,  just  be- 
fore the  expiration  of  their  office,  the 
directors  fraudulently  released  part 
of  the  subscribers,  the  court  said:  "It 
is  an  abuse  of  their  trust,  wholly  un- 
authorized, and  at  war  with  the  de- 
sign of  the  charter,  to  single  out  some 
of  the  stock  subscribers  and  release 
them  from  their  liability.  No  such 
authority  in  them  has  ever  been 
recognized."  To  same  effect,  Brad- 
dock,  etc.  Ry.  v.  Bily,  11  Penn.  Sup. 
Ct.  144  (1899).  The  directors  have  no 


power  to  release  a  subscriber  nor  to 
allow  him  to  make  additional  condi- 
tions to  his  subscription.  La  Fayette, 
etc.  Corp.  v.  Ryland,  80  Wis.  29 
(1891).  To  the  same  effect,  Rider  v. 
Morrison,  54  Md.  42<9  (1880);  Hughes 
v.  Antietam  Mfg.  Co.,  34  Md.  316 
(1870);  Ryder  v.  Alton,  etc.  R.  R.,  13 
111.  516  (1S51);  Tuckerman  v.  Brown, 
33  N.  Y.  297  (1865);  Re  Esparto 
Trading  Co.,  L.  R.  12  Ch.  D.  191 
(1879);  Re  United  Service  Co.,  L.  R. 
5  Ch.  App.  707  (1870);  Re  London, 
etc.  Coal  Co.,  L.  R.  5  Ch.  D.  525 
(1877);  Re  Argyle,  etc.  Co.,  54  L.  T. 
Rep.  233  (1885);  Ex  parte  Fletcher, 
37  L.  J.  (Ch.)  49  (1867);  Addison's 
Case,  L.  R.  5  Ch.  294  (1870);  Spack- 
man  v.  Evans,  L.  R.  3  H.  L.  171 
(1868).  But  see  Thomas's  Case,  L.  R. 
13  Eq.  437  (1872),  where  the  direc- 
tors had  power  to  "enter  into,  alter, 
rescind,  or  abandon  contracts;"  Rich- 
mond's Case,  4  K.  &  J.  305  (1858), 
holding  that  power  to  forfeit  does  not 
give  power  to  cancel;  Adams's  Case, 
L.  R.  13  Eq.  474  (1872),  holding  that 
power  to  compromise  gives  no  power 
to  cancel,  the  vice-chancellor  saying: 
"It  would  be  putting  into  the  hands 
of  directors  an  almost  unlimited 
power.  ...  It  might  happen  in 
cases  where  it  would  be  impossible  to 
fix  fraud  on  them."    A  cancellation  of 


444 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  168. 


differs  little  from  a  purchase  by  the  corporation  of  shares  of  its  own 
stock.  The  rules  of  law  governing  such  a  transaction  are  stated 
elsewhere.1 


shares  is  void,  and  the  subscriber  is 
liable,  though  ten  years  have  elapsed. 
Re  Argyle,  etc.  Co.,  54  L.  T.  Rep.  233 
(1885).  Cf.  Plate  Glass  Univ.  Ins. 
Co.  v.  Sunley,  8  El.  &  Bl.  47  (1857); 
Kollman's,  etc.  Co.  v.  Beresford,  2 
Macn.  &  G.  197  (1S50);  Lord  Bel- 
haven's  Case,  34  L.  J.  (Ch.)  503 
(1865);  Ex  parte  Blake,  34  L.  J. 
(Ch.)  278'  (1865);  Fox's  Case,  L.  R.  5 
E'q.  118  (1868);  Dixon's  Case,  L.  R.  5 
Ch.  App.  79  (1869);  rev'd  on  another 
point,  L.  R.  5  H.  L.  606  (1872);  Burt 
v.  Farrar,  24  Barb.  518  (1S57);  Greg- 
ory v.  Lamb,  16  Neb.  205  (1884); 
Erskine  v.  Peck,  S3  Mo.  465  (1S84). 
See  also  §  153,  supra. 

The  directors  may  release  a  sub- 
scription payable  in  property,  part  of 
•which  has  been  delivered.  Nettles  v. 
Marco,  33  S.  C.  47  (1S90).  Before  or- 
ganization a  subscriber  probably  can 
be  released  by  the  promoters  and  his 
subscription  canceled,  but  after  organ- 
ization the  officers  have  no  power  to 
release  him  and  take  other  subscrip- 
tions in  his  stead.  Nothing  but  a 
transfer  is  then  available.  The  of- 
fiers  cannot  repay  to  him  the  amount 
paid  in  by  him.  He  is  and  remains 
liable.  Cartwright  v.  Dickinson,  88 
Tenn.  476  (1890).  A  subscription 
which  has  been  fraudulently  obtained 


may  be  canceled  by  the  directors,  and, 
after  four  years'  acquiescence  by  the 
corporation,  corporate  creditors  can- 
not attack  it.  McDermott  v.  Harrison, 
9  N.  Y.  Supp.  184  (1890).  The  express 
power  of  the  directors  to  do  all  things 
•  "conductive  to  the  attainment  of 
the  objects"  for  which  it  was  estab- 
lished does  not  enable  them  to  agree 
to  a  cancellation.  Re  Dronfield,  etc. 
Co.,  L.  R.  17  Ch.  D.  76  (1880).  As 
against  corporate  creditors  a  subscrip- 
tion cannot  be  canceled,  although  the 
work  in  which  the  subscription  is  due 
can  no  longer  be  done.  Wheatcroft's 
Case,  29  L.  T.  324  (1873).  Sometimes 
the  directors  agree  in  advance  to  re- 
lease or  cancel  a  part  or  all  of  the 
subscriber's  contract.  Such  agree- 
ments are  void,  not  only  as  ultra 
vires,  but  as  frauds  on  other  subscrib- 
ers. Melvin  v.  Lamar  Ins.  Co.,  80  111. 
446  (1875);  Robinson  v.  Pittsburgh, 
etc.  R.  R.,  32  Pa.  St.  334  (1858); 
Minor  v.  Mechanics'  Bank,  1  Pet.  46, 
65  U82S);  Jewett  v.  Valley  Ry.,  34 
Ohio  St.  601  (1878);  White  Moun- 
tains R.  R.  v.  Eastman,  34  N.  H.  124 
(1856).  See  also  Pickering  v.  Tem- 
pleton,  2  Mo.  App.  425  (1876); 
Downie  v.  White,  12  Wis.  176  (1860) ; 
Blodgett  v.  Morrill,  20  Vt.  509  (1848) ; 
Davidson's    Case,    3    De   G.    &    S.    21 


i  See  §§  251,  309,  310,  etc.,  infra.  A 
plan  whereby  the  corporation  takes 
back  the  stock  and  issues  certificates 
of  indebtedness  for  it  is  invalid  as 
against  creditors.  The  latter  are  en- 
titled to  the  assets  in  preference  to 
the  former.  Heggie  v.  People's  Build- 
ing, etc.  Assoc,  107  N.  C.  581  (1890). 
In  England  a  surrender  of  a  stock 
subscription  is  legal  only  when  a  for- 
feiture of  the  same  would  be  legal, 
and  is  the  same  as  a  purchase  by  the 
company  of  its  own  stock,  and  hence 


is  illegal,  and  the  subscriber  still  re- 
mains liable.  Bellerby  v.  Rowland, 
etc.  Co.,  [1902]  2  Ch.  14.  Even  though 
a  corporation  purchases  shares  of  its 
own  stock,  which  are  but  partially 
paid,  this  does  not  render  the  remain- 
ing stockholders  liable  for  the  bal- 
ance due  on  such  unpaid  shares  so 
purchased.  Crawford  v.  Roney,  126 
Ga.  763  (1906).  A  cancellation  and 
repayment  is  illegal.  Mayfield  v.  Al- 
ton Ry.,  100  111.  App.  614  (1901),  aff'd, 
198  111.  528. 


445 


§  168.] 


MISCELLANEOUS  DEFENSES. 


[Cll.  X. 


It  is  legal  for  a  corporation,  by  common  consent,  to  issue  to  its 
stockholders  full-paid  stock  to  the  amount  of  cash  actually  paid  in  on 
a  larger  subscription,  the  first  subscription  being  canceled,  provided 
the  arrangement  is  made  before  debts  arc  incurred.1    Where  a  person 


(1S49);  Bridger's  Case,  L.  R.  9  Eq. 
74  (1869),  aff'd  L.  R.  5  Ch.  App.  305; 
Litchfield  Bank  v.  Church,  29  Conn. 
137  (1SG0).  Where,  however,  the  is- 
sue itself  is  ultra  vires,  being  ficti- 
tious paid-up  stock,  the  directors  may 
agree  to  a  cancellation.  Barnett's 
Case,  L.  R.  18  Eq.  507  (1874).  Or  in 
the  case  of  an  ultra  vires  stock  divi- 
dend. Hollingshead  v.  Woodward,  35 
Hun,  410  (1885);  aff'd,  107  N.  Y.  96 
(1887).  They  may  cancel  it  for  mis- 
take in  registering  the  wrong  person. 
Ex  parte  Keightley,  9  Weekly  Notes, 
18,  47  (1874.)  See  Hartley's  Case,  L. 
R.  10  Ch.  157  (1S75).  The  agreement 
of  a  stockholder  to  surrender  his 
stock  in  liquidation  of  an  unpaid  as- 
sessment is  without  consideration 
and  does  not  bind  a  purchaser  of  the 
certificate.  Hill  v.  Atoka  Coal  Co.,  21 
S.  W.  Rep.  508  (Mo.  1893).  See  sub- 
sequent decision  in  124  Mo.  153.  The 
directors  have  no  power  to  cancel  a 
subscription,  or  any  part  of  it,  except 
upon  the  consent  of  all  the  stockhold- 
ers. Gathright  v.  Oil  City,  etc.  Co.,  56 
S.  W.  Rep.  163  (Ky.  1900).  The  presi- 
dent has  no  authority  to  release  a 
subscription,  and  moreover  any  re- 
lease must  have  a  sufficient  consider- 
ation. United  Growers  Co.  v.  Eisner, 
22  N.  Y.  App.  Div.  1  (1897).  The 
secretary  cannot  accept  a  surrender 
and  cancellation  of  the  subscription. 
Minnehaha,  etc.  Assoc,  v.  Legg,  50 
Minn.  33t3  (1892).  In  England  an  ex- 
press power  given  by  the  articles  of 
association  of  the  corporation  may 
authorize  cancellation  by  the  direc- 
tors. Colville's  Case,  48  L.  J.  (Ch.) 
633  (1879);  Snell's  Case,  L.  R.  5  Ch. 
22  (1869);  Wright's  Case,  L.  R.  12 
Eq.  331  (1871),  reversed  in  L.  R.  7  Ch. 
App.  55  (1871);  Teasdale's  Case, 
L.    R.    9    Ch.    54    (1873);    Whiteley's 


Case,  60  L.  T.  Rep.  807  (1889).  Healey, 
Companies'  Law  &  Pr.  (3d  Eng.  ed.), 
p.  110,  says:  "There  is  no  inherent 
power  in  directors  to  accept  a  sur- 
render of  shares,  nor  is  the  accept- 
ance of  a  surrender  a  matter  lying  be- 
tween the  majority  and  minority. 
Every  shareholder  must  expressly 
.  .  .  or  impliedly  join  in  the  re- 
lease; though  a  company  may  be  pre- 
cluded by  knowledge  and  acquies- 
cence from/  disputing  the  validity  of 
the  surrender."  Citing  many  cases, 
and  discussing  what  constitutes  notice 
and  acquiescence. 

i  Quoted  and  approved  in  Vrooman 
v.  Vansant,  etc.  Co.,  215  Pa.  St.  75 
(19TTG).  Hill  v.  Silvey,  81  Ga.  500 
(1889).  A  stockholder  objecting  to 
partially-paid  stock  being  called  in 
and  full-paid  stock  being  issued  to  the 
amount  already  paid  up  should  file  a 
bill  for  an  injunction.  It  is  no  de- 
fense to  the  collection  of  the  amount 
already  called  on  the  stock  first  is- 
sued. American  Alkali  Co.  v.  Camp- 
bell, 113  Fed.  Rep.  398  (1902).  Where 
a  corporation  has  allowed  a  sub- 
scriber to  cancel  his  subscription, 
neither  the  corporation  nor  its  as- 
signee can  afterwards  enforce  the 
subscription,  even  though  corporate 
creditors  might  do  so.  Hence,  where 
the  stockholders  had  paid  sixty  per 
cent,  of  their  subscription,  and  subse- 
quently full-paid  stock  for  the  sixty 
per  cent,  was  issued  and  the  remain- 
ing forty  per  cent,  canceled,  the  as- 
signee for  the  benefit  of  the  creditors 
of  the  corporation  cannot  collect  the 
remaining  forty  per  cent.  Lellyett  v. 
Brooks,  62  S.  W.  Rep.  596  (Tenn. 
1901).  Where  the  capital  stock  is  re- 
duced, and  subscribers  cancel  unpaid 
subscriptions,  and  take  paid-up  stock 
to  the  extent  of  their  payments  on  the 


446 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  109. 


owns  partly  paid-up  stock,  the  company  may  agree  that  the  amount 
already  paid  shall  be  applied  on  a  part  of  the  stock,  thereby  making 
that  part  fully  paid-up  stock.  A  transferee  of  such  paid-up  stock 
is  not  liable  thereon,  even  though  he  took  title  with  full  knowledge 
of  the  facts.1  The  payment  of  a  subscription  in  whole  or  in  part  by 
a  dividend  is  considered  elsewhere.2 

§  169.  A  subscriber  for  stock  in  a  corporation  cannot  obtain  a 
cancellation  of  his  subscription  except  by  the  unanimous  consent  of 
the  other  subscribers.3     Even  a  majority  of  the  stockholders  cannot 


old  stock,  old  corporate  creditors 
may  hold  them  liable  on  the  former. 
Re  State  Ins.  Co.,  14  Fed.  Rep.  28 
(1882). 

It  is  legal  for  the  corporation  to 
make  an  agreement  with  stockholders 
whereby  the  latter  surrender  their 
stock  upon  wbich  they  have  paid 
twenty  per  cent.,  and  receive  full-paid 
stock  to  the  amount  of  twenty  per 
cent,  of  the  stock  surrendered.  A  re- 
ceiver cannot  attack  this  agreement 
even  in  behalf  of  creditors.  Republic 
L.  Ins.  Co.  v.  Swigert,  135  111.  150 
(1890).  Although  the  directors  can- 
not, yet  the  stockholders,  by  unani- 
mous consent,  may  allow  subscrip- 
tions to  be  reduced  one-half  by  can- 
cellation of  one-half,  creditors'  rights 
not  intervening.  Glenn  v.  Hatchett, 
91  Ala.  316  (1890).  A  corporation 
cannot  collect  the  full  amount  of  a 
subscription  which  by  unanimous  con- 
sent of  the  stockholders  at  an  infor- 
mal meeting  has  been  cancelled  in 
part.  Sheldon  Canal  Co.  v.  Miller,  90 
S.  W.  Rep.  206  (Tex.  1905).  By 
unanimous  consent  of  the  stockhold- 
ers, there  being  no  creditors  at  the 
time,  a  corporation  may  release  the 
stockholders  from  the  payment  of  the 
unpaid  part  of  their  subscriptions,  the 
outstanding  certificates  being  can- 
celed and  new  certificates  for  the 
amount  fully  paid  being  issued,  the 
balance  remaining  in  the  treasury  as 
unissued  stock.  Vrooman  v.  Vansant, 
etc.  Co.,  215  Pa.  St.  75  (1906). 

i  Neelon    v.    Thorold,    22    S.    C.    of 
Canada,  390  (1893),  rev'g  18  App.  R. 


658,  and  aff'g  20  O.  R.  86.  Where  calls 
to  the  amount  of  fifty  per  cent,  have 
been  paid,  the  president  cannot  agree 
with  a  stockholder  that  he  should  be 
released  from  one-half  of  his  sub- 
scription and  take  full-paid  stock  for 
the  remainder.  Fuches  v.  Hamilton, 
etc.  Co.,  10  Ont.  (Can.)  497  (1886).  A 
subscriber  for  $1,000  of  stock  who 
pays  in  $200,  being  twenty  per  cent., 
and  then  transfers  $200  of  full-paid 
stock  to  another,  is  still  liable  for  the 
remaining  $800.  It  is  immaterial 
that  the  old  certificates,  showing  that 
twenty  per  cent,  had  been  paid,  were 
returned  to  the  corporation,  and  only 
$200  of  stock  re-issued.  This  does  not 
amount  to  a  reduction  of  the  stock  to 
twenty  per  cent.  Putnam  v.  Hutchi- 
son, 4  Kan.  App.  273   (1896). 

2  See  §  544,  infra.  A  bonus  paid  by 
citizens  may  be  used  by  subscribers 
for  stock  to  make  a  partial  payment 
on  their  stock,  unless  the  bonus  was 
made  directly  to  the  corporation.  Mc- 
Dermott  v.  Squier,  124  Mich.  523 
(1900). 

3  Kidwelly  Canal  Co.  v.  Raby,  2 
Price,  93  (1816);  Lake  Ontario,  etc. 
R.  R.  v.  Mason,  16  N.  Y.  451,  463 
(1857) ;  Hughes  v.  Antietam  Mfg.  Co., 
34  Md.  316  (1870);  Johnson  v.  Wa- 
bash, etc.  Co.,  16  Ind.  389  (1861); 
United  Soc.  v.  Eagle  Bank,  7  Conn. 
456  (1829);  Brshop's  Fund  v.  Eagle 
Bank,  7  Conn.  476  (1829) ;  Selma,  etc. 
R.  R.  v.  Tipton,  5  Ala.  (N.  S.)  787 
(1843);  Chicago,  etc.  Co.  v.  Summer- 
our,  101  Ga.  820  (1897).  Where  the 
president  of   an   insurance   company 


447 


§  169.] 


MISCELLANEOUS  DEFENSES. 


[cu.  X. 


withdraw  and  refuse  to  proceed.1  By  unanimous  consent,  however, 
of  the  stockholders  a  subscription  may  be  canceled,  and  a  subsequent 
creditor  of  the  corporation  cannot  complain.2     A  surrender  may 


subscribes  for  new  stock  in  order  to 
keep  the  company  going,  payment  to 
be  by  cancelling  the  note  of  the  com- 
pany which  he  holds,  he  cannot  after- 
wards withdraw  from  the  subscrip- 
tion, the  company  having  accepted  it 
even  though  no  certificate  was  issued 
to  him.  Betts  v.  Connecticut,  etc.  Co., 
76  Conn.  367  (1904).  A  subscription 
for  capital  stock  of  a  corporation  can- 
not be  canceled  without  the  consent 
of  all  the  stockholders,  except  for 
fraud  or  mistake.    Pacific  Fruit  Co.  v 


not  necessary.  Marshall  v.  Glamor- 
gan, etc.  Coal  Co.,  L.  R.  7  Eq.  129 
(1S68).  Where  property  is  sold  to  a 
corporation  for  stock,  and  other  stock- 
holders aro  dissatisfied,  the  bargain 
may  be  rescinded.  The  stockholder 
will  then  no  longer  be  liable.  Mor- 
gan v.  Lewis,  46  Ohio  St.  1  (18SS). 
Cancellation  is  a  question  of  fact.  If 
there  is  no  record  of  it,  and  the  stock- 
holder continues  to  act,  he  is  bound. 
Topeka  Mfg.  Co.  v.  Hale,  39  Kan.  23 
(1888).       An   offer   or    agreement   to 


Coon,  107  Cal.  447    (1895).     Where  a    subscribe  is  revoked  by  death,  where 


person  subscribes  for  stock,  and  then 
an  oral  arrangement  is  made  with  the 
other  stockholders,  by  which  the  for- 
mer is  to  be  released  and  the  latter 
are  to  carry  on  the  business,  and  the 
latter  then  sell  their  stock  after  as- 


it  has  not  yet  been  accepted  by  the 
corporation.  Wallace  v.  Townsend,  43 
Ohio  St.  537  (1885);  Sedalia,  etc.  Ry. 
v.  Wilkerson,  83  Mo.  235  (18S4).  The 
company  may  be  compelled  to  issue  a 
certificate  to  one  who  acquires  his  in- 


signing  to  one  of  their  number  cer-    terest   by   the   death   of  the   original 


tain  corporate  assets,  including  the 
subscription  above  named,  such  sub- 
scription cannot  be  enforced.  Cusick 
v.  Bartlett,  91  Me.  153  (1898).  Where 
there  are  only  five  stockholders  and 
no  creditors,  and  no  business  has  been 
done,  the  five  may  release  each  other 
from  their  subscriptions,  and  one  of 
them  who  subsequently  obtains  con- 
trol of  the  association  cannot  cause 
the  corporation  to  enforce  such  sub- 
scriptions. Non-Electric,  etc.  Co.  v. 
Peabody,  21  N.  Y.  App.  Div.  247 
(1897).  The  plea  in  defense  need 
not  allege  that  the  other  stockholders 
assented  to  the  cancellation.  Gelpcke 
v.  Blake,  19  Iowa,  263  (1865).  A  sub- 
scriber cannot  withdraw  except  with 
the  consent  of  all  the  persons  who 
have  subscribed.  Chicago,  etc.  Co.  v. 
Lyon,  10  Okl.  704  (1901).  Where, 
however,  by  the  articles  of  associa 


subscriber.       State   v.    Crescent   City, 
etc.  Co.,  24  La.  Ann.  318  (1872). 

i  Busey     v.     Hooper,     35     Md.     15 
(1871). 

2  Quoted  and  approved  in  Scottish, 
etc.  Co.'s  Receiver  v.  Starks,  117  Ky. 
609  (1904);  Shoemaker  v.  Washburn, 
etc.  Co.,  97  Wis.  585  (1897).  Cf.  §  42, 
supra.  By  the  unanimous  consent  of 
stockholders,  there  being  no  credit- 
ors, a  subscriber  may  be  released 
from  his  subscription.  Such  cancel- 
lation may  be  oral,  and  if  in  accord- 
ance with  the  laws  of  the  state  where 
the  company  transacts  all  its  busi- 
ness it  is  immaterial  that  it  is  not  in 
accordance  with  the  statutes  of  the 
state  where  the  company  was  incor- 
porated. Scottish,  etc.  Co.'s  Receiver 
v.  Starks,  117  Ky.  609  (1904).  In 
the  case  of  Skinner  v.  Smith,  134  N. 
Y.  240  (1892),  $40,000  of  stock  was  is- 


tion,  acts  of  the  directors  ratified  at  sued  for  letters  patent.  Afterwards, 
stockholders'  meetings  were  to  be  with  the  consent  of  all  the  stockhold- 
valid,  a  cancellation  so  ratified  is  ers,  the  transaction  was  rescinded, 
legal,  and  the  unanimous  consent  is    the  stock  being  returned  and  the  pat- 

448 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  169. 


mean  a  giving  up  of  partly  paid  stock  by  way  of  donation.1  The 
consent  of  all  the  other  stockholders  need  not  be  express.  If 
the  means  of  notice  are  sufficient,  so  as  to  raise  a  clear  presumption 
of  knowledge  and  acquiescence,  and  the  arrangement  is  left  unim- 
peached  by  any  one  for  many  years,  no  objection  can  be  made.  The 
stockholders  are  bound  by  the  cancellation.2  But  where  a  subscrip- 
tion has  been  canceled,  and  calls  already  paid  are  refunded  without 
the  consent  of  the  other  stockholders,  any  stockholder  may,  by  a 
bill  in  equity,  have  the  money  refunded  to  the  corporation,  and  the 
subscriber  made  liable  upon  his  canceled  subscription.3  Moreover, 
the  directors  are  personally  liable  to  the  corporation  for  loss  occa- 
sioned by  their  improper  cancellation  of  subscriptions.4  When, 
however,  a  subscriber  fails  to  pay  his  subscription  or  exercise  his 
rights,  it  has  been  held  that  the  corporation  may  take  his  subscrip- 
tion as  abandoned  and  allow  others  to  fill  it5  An  alteration,  how- 
ever, of  the  subscription  list  by  substitution  of  different  stockholders 


ents  re-transferred.  A  license  to  man- 
ufacture under  the  patents  was  then 
transferred  to  the  company  for  $350,- 
000  in  stock.  The  court  found  that  the 
transaction  was  in  good  faith  and 
with  no  intent  to  defraud  future 
stockholders,  and  that  the  license  was 
an  adequate  consideration  for  the 
stock.  The  court  held  that  there  was 
nothing  illegal  in  the  transaction. 

1  A  surrender  of  partly  paid  stock 
by  a  subscriber,  even  though  made 
without  repayment  to  him  of  the 
amount  he  has  already  paid,  is  illegal 
in  England,  inasmuch  as  it  amounts 
to  a  purchase  by  a  company  of  its 
own  stock.  Bellerby  v.  Rowland,  etc. 
Co.  .(1901),  2  Ch.  265,  aff'd  on  this 
point,  [1902]  2  Ch.  14. 

2  Evans  v.  Smallcombe,  L.  R.  3  H. 
L.  249  (1868),  aff'g  L.  R.  3  Eq.  7-69. 
So  also  where  the  corporation  retains 
the  benefits  of  a  cancellation,  no  ob- 
jection can  be  made.  Miller  v.  Second, 
etc.  Assoc,  50  Pa.  St.  32  (1865). 
Proof  of  cancellation  need  not  neces- 
sarily be  by  the  corporate  records;  it 
may  be  proved  by  evidence  that  the 
subscriber  "was  not  regarded  by  him- 
self or  by  the  company  as  a  stock- 
holder."    Stuart  v.  Valley  R.  R.,  32 


Gratt.  (Va.)  146  (1879).  The  cancel- 
lation or  release  of  a  subscription  may 
arise  by  the  acquiescence  of  the  stock- 
holders and  need  not  be  by  a  formal 
action.  Tulare,  etc.  Bank  v.  Talbot, 
131  Cal.  45  (1900). 

3  Melvin  v.  Lamar  Ins.  Co.,  80  111. 
446  (1875).  Where  an  agreement  was 
made  with  all  the  subscribers  except- 
ing one,  that  they  would  be  released 
from  their  subscriptions  if  they 
wished,  this  is  a  good  defense  to  his 
subscription.  Hall  v.  Grayson,  etc. 
Bank,  36  Tex.  Civ.  App.  317  (1904). 

4  Hodgkinson  v.  National,  etc.  Ins. 
Co.,  26  Beav.  473  (1859);  Bank  of  St. 
Mary's  v.St.  John,  25  Ala.  566  (1854). 
The  subscriber,  also,  may  set  up  this 
defense.  Southern  Hotel  Co.  v.  New- 
man, 30  Mo.  118  (1860). 

5  Perkins  v.  Union,  etc.  Co.,  94 
Mass.  273  (1866).  Cancellation  may 
be  by  the  substitution  of  another  per- 
son for  the  subscriber  at  the  latter's 
request.  This  occurs  where  regular 
transfer  is  not  yet  possible.  The  sig- 
nature of  the  first  subscriber  must  be 
erased  and  that  of  his  substitute  in- 
serted. Otherwise  the  substitution 
fails.  Ryder  v.  Alton,  etc.  R.  R.,  13 
111.  516  (1851).     And  see  §62,  supra. 


(29) 


449 


§  170.] 


JM ISCELLANEOUS  DEFENSES. 


[cu.  X. 


may  release  dissenting  stockholders.1  Frequently  there  is  a  substi 
tution  of  ono  subscriber  for  another,  either  by  way  of  a  subscriber 
directing  that  his  stock  be  issued  to  some  other  party,2  or  by  a 
subscriber  selling  and  transferring  his  interest  to  another  party.3 
Where  a  subscription  is  canceled  by  agreement  between  a  corporation 
and  the  subscriber  and  the  stock  is  then  issued  to  others  and  fully 
paid  for,  the  first  subscribers  are  no  longer  liable,  even  though  the 
statute  provides  that  stockholders  should  be  liable  until  the  stock  is 
fully  paid  for.4  Where  a  subscription  is  not  paid,  and  the  stock  is 
transferred  to  the  corporation  as  "treasury  stock"  and  then  sold  be- 
low par,  the  purchaser  is  liable  for  the  unpaid  par  value.5  Where 
a  subscription  for  stock  is  paid,  the  stockholder  is  entitled  to  his 
stock  and  past  dividends,  although  for  thirty  years  he  has  slept  on 
his  rights.6 

§  170.     A  cancellation  of  a  subscription,  to  the  detriment  of  cor- 
porate creditors,   may  be   impeached  by  the  latter  and  set  aside.7 


1  See  §§  53,  G2,  supra. 

2  See  §  50,  supra. 

3  See  §  62,  supra. 

4  First,  etc.  Bank  v.  Peoria  Watch 
Co.,  191  111.  128  (1901).  A  Nebraska 
receiver  of  a  Nebraska  corporation 
will  not  be  allowed  to  bring  suit  in 
the  Iowa  courts  to  enforce  the  sub- 
scription liability  of  citizens  of  Iowa 
to  the  stock  of  a  Nebraska  corpora- 
tion, where  there  is  no  equity  in  the 
claim),  the  fact  being  that  payment  for 
the  stock  had  been;  made  by  notes, 
and  afterwards  upon  a  transfer  of 
the  stock  these  notes  had  been  can- 
celed and  notes  of  the  transferee 
taken  in  exchange  therefor.  Wyman 
v.  Eaton,  107  Iowa,  214  (1899).  Where, 
after  a  subscription  for  stock  is  made, 
the  company  contracts  to  issue  all  its 
stock  to  a  contractor  in  payment  for 
work,  and  thereupon  the  subscriber 
gives  up  his  stock  to  the  company 
and  it  is  issued  to  the  contractor,  the 
subscriber  is  not  liable  on  such  stock, 
even  though  the  contractor  does  not 
fulfill,  and  even  though  the  sub- 
scriber caused  the  contract  with  the 
contractor  to  be  made.  Riverton  Wa- 
ter Co.  v.  Hummel,  175  Pa.  St.  575 
(1896). 


5  Ailing  v.  Wenzel,  133  111.  264 
(1890). 

c  Where,  in  1845,  an  Indian  chief 
disclosed  an  iron  mine  under  prom- 
ise of  being  compensated,  and  the  of- 
ficers of  the  unincorporated  company 
gave  him  a  paper  recognizing  his 
right  to  twelve  thirty-one  one-hun- 
dredths  interest,  and  after  incorpora- 
tion in  184S  eighteen  full-paid  shares 
of  stock  were  set  aside  for  the  In- 
dians, and  twelve  of  such  shares  cor- 
respond to  the  twelve  thirty-one  one- 
hundredths  interest,  the  descendants 
of  the  chief  are  entitled  to  the  stock, 
although  neither  he  nor  they  made 
any  claim  thereto  until  1S77.  Back 
profits  may  also  be  recovered.  The 
statute  of  limitations  is  no  bar.  A 
new  corporation  assuming  the  prop- 
erty and  liabilities  of  the  old  one  is 
liable.  Kobogum  v.  Jackson  Iron  Co., 
76  Mich.  498  (1889).  To  same  effect, 
Bedford  County  v.  Nashville,  etc.  R. 
R.,  14  Lea  (Tenn.),  525  (1884). 

7  One  who  is  a  corporate  creditor 
before  the  cancellation  is  made  may 
object  to  it.  Vick  v.  La  Rochelle,  57 
Miss.  602  (1880);  Miller's  Appeal,  1 
Pa.  Sup.  Ct.  120  (1881),  in  which 
stock  in  an  insurance  company  was 


450 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


J8  170. 


Especially  is  this  the  rule  when  the  cancellation  is  made  after  the 
corporation   has   become   insolvent.1      A  mortgage   given   to   stock- 
subscribed  for  in  order  to  enable  the    Ohio  St.  250    (1890).    Where  the  di- 
company  to  undergo  an  examination    rectors  rescind  a  subscription  at  the 
by     the     commissioner,     a     dividend    request  of  the  subscriber,  he  cannot 
bein-  paid  on  it  during  their  holding,    toe  made  liable  five  years  later.   White- 
and  the  notes  given  in  payment  being    ley's  Case,  60  L.  T.  Rep.  807   (1889). 
published  as  assets.     It  was  held  that    Subscribers  whose  stock  is  taken  back 
although     after    the    emergency    had    by    the    corporation    are    not    liable 
passed    the  stock  was  taken  back  by    thereon  either  at  common  law  or  by 
the  company  and  the  notes  canceled,    statute  relative  to  transfers.     Ailing 
the  subscribers  were  liable  to  its  cred-    v.   Wenzel,   133    111.   264    (1890).      A 
itors     the    transaction    being    looked    fraudulent   release   by   a   corporation 
upon  as  a  fraud  upon  them.     Cancel-    of  an  unpaid  subscription  to  an  m- 
lation  by  withdrawal  is  not  legal  as    crease  in  the  capital  stock  of  a  cor- 
against   corporate    creditors    existing    poration  is  void  even  against  a  debt 
at  the  time  of  the  withdrawal,  even    arising  before  the  increase.    Carter  r. 
though    all    the    stockholders    assent    Union    Printing    Co.,     o4    Ark.     5«b 
thereto.     Famsworth  v.  Robbins,   36     (1891).     This  case  holds  also  that  a 
Minn     369    (1887).     Where   a   corpo-    corporate  creditor  may  object  to  the 
ration    takes    land    in    payment    for    corporation    releasing    a    stockholder 
Btock      then     rescinds,     and     twelve    from  his  stock  and  repaying  to  him 


months  afterwards  becomes  insolvent 
and  no  complaint  is  made  for  sixteen 
months  after  the  rescission,  their 
action  is  binding.  Sanderson  v.  iEtna, 
etc.  Co.,  34  Ohio  St.  442   (1879). 


the  subscription  which  he  has  paid 
in.  The  "trust  fund"  theory  is  denied 
in  Hospes  v.  Northwestern  Mfg.  Co., 
48  Minn.  174  (1S92).  As  against  a 
corporate   creditor,    a   subscriber   for 


also,  if  The  debt  was  incurred 'after    stock     before     Corporation     cannot 


the  cancellation.  Johnson  v.  Lull- 
man,  15  Mo.  App.  5-5  (1884);  Erskine 
v  Peck,  13  Mo.  App.  280  (18S3),  aff'd, 


withdraw  incorporation,  even  with 
the  consent  of  other  stockholders. 
Balfour   v.   Baker   City   Gas   Co.,   27 


3^465     Winston.  Do-VrTpe;  Oreg.  300  (1895).   In  Harmon  ,.  Hunt, 

e  c   Co     1-9  111-  64  (1889).    The  plea  116  N.  C.  678   (1895),  corporate  cred- 

in  defense "it has  been  held,  need  not  itors     held     subscribers     liable      al- 

allege  thai     here   were   no  corporate  though  the  latter  had  been  allowed  to 

!f-?nr«  It  thP  time  of  the  cancel-  withdraw  soon  after  the  organization. 

laTon     Gelpc *    r  »  »a,  263  Where  a  person  subscribes  for  stock 

(1 III)      In  England  a  different  rule  payable  by   its  terms  in  wages,   and 

n,     <Tf  the   company  could  not  the  directors  pay  such  subscription  in 

prevails.      If  ^"^  Ccreditor .  fun   and  take  the  wages,  but  before 

?or  to  can  obtota Nothing  but  wha't  the  stock  is  fully  paid  for  by  him  the 

he  com  "ny  can  get  from  the  share-  corporation     becomes    ^^eX 

holders"    Re  Dronfield,  etc.  Co.,  L.  R.  cannot  recover  back  the  part  already 

D  7M18S0).    A .Konafiae  can-  paid  out  of  his   wages.      Lmcott  * 

Nation"  of   a  subscription   is  valul  ttgp-^   ^    H.J60 

TJZTV^ZlTi:^  ££" Articles  of   incorporation 


!  Choteau  ins.  Co.  *  Floyd,  74  Mo.    material    that    »°^^onB 
286   (1881);  Gill  v.  Balis,  72  Mo.  424    remain  to  pay  the  corporate  debts. 

(1880),  holding,  also,  that  it  is  im- 

451 


§  170.] 


MISCELLANEOUS  DEFENSES. 


[CII.  X. 


holders  for  money  paid  in  on  their  subscriptions  cannot  be  enfora  1 
as  against  creditors.1  Even  a  statute  releasing  stockholders  from 
paving  one-half  of  the  par  value  of  the  stock,  and  declaring  the  stork 
paid  up,  although  but  fifty  per  cent,  had  been  paid  thereon,  is  uncon- 
stitutional as  regards  creditors  existing  at  the  time  such  statute  was 
enacted.2  In  the  United  States  courts  it  is  established  thai  the 
governing  officers  of  a  corporation  cannot,  by  agreement  or  other 
transaction  with  the  stockholder,  release  the  latter  from  his  obligation 
to  pay,  to  the  prejudice  of  its  creditors,  except  by  fair  and  hon<  31 
dealing,  and  for  a  valuable  consideration.3  A  payment  in  full  for 
stock,  followed  by  an  immediate  loan  of  part  or  all  of  the  purchase 
price  by  the  corporal  ion  back  to  the  subscriber,  is  a  fraud  as  to 
creditors  and  will  be  set  aside.4     The  agreement  of  the  corporation 

as    incorporators   and   as   subscribers  which  a  subscriber  for  stock  paid  the 

of     stock,     on     condition     that     the  money    into    the    treasury,    and    this 

articles  would  not  be  used  unless  a  money  is  then  paid  out  for  property, 

certain  other  party  signed,  and  even  and  the  parties  receiving  the  money 

though  the  latter  party  did  not  sign,  then   return   it  to   the  subscriber,    is 

and   the  articles  were   filed   and   the  not  valid.    The  subscriber  is  liable  to 

stock  subsequently  tendered   to  such  pay  over  again.     Scales  v.  Irwin,  34 

signers,    which    they   refused,   yet    if  Q.  B.  Rep.  (Can.)  545  (1S74). 
they   took  no   steps  to   remove  their        4  Sawyer    v.    Hoag,    17    Wall.    CIO 

names  as  subscribers  from  the  books  (1873).     In  the  case  of  State  v.  New 

they  are  liable  as  stockholders  to  cor-  Orleans,    etc.    Co.    51    La.    Ann.    1827 

porate  creditors  on  a  statutory  liabil-  (1899),   the   subscribers  to  the  stock 

ity.     Rehbein  v.  Rahr,   109   Wis.  136  of  a  debenture  company  paid  ninety- 

(1901).      Even   though    a   subscriber  five  per  cent,  of  their  subscription  by 

for  stock  surrenders  it,  yet  he  is  lia-  borrowing  that  amiount  from  the  com- 

ble  thereon,  even  to  subsequent  cred-  pany   on   their  notes,   and   thereupon 

itors  of  the   corporation.     Chrisman,  full-paid  stock  was  issued  to  them,  al- 

etc.  Co.  v.  Independence,  etc.  Co.,  168  though  the  statute  prohibited  the  is- 

Mo.  6<34    (1902).    Cf.  §§42,  46,  supra,  sue  of  stock  until  paid  for.    The  state 

i  Reed  v.  Helois,  etc.  Co.,  64  N.  J.  brought  suit  to  set  aside  the  charter 

Eq.  231  (1903).  and    liquidate     the    company.       The 

2  Williams  v.  Waters,  97  Md.  113  court  held  that  under  the  constitution 
(1903).  of    Louisiana   the    incorporation    was 

3  "The  governing  officers  of  a  corpo-  illegal.  The  court  held  also  that  the 
ration  cannot,  by  agreement  or  other  charter  was  illegal,  in  that  the  debent- 
transaction  with  the  stockholder,  re-  ures  issued  were  forfeited  if  deferred 
lease  the  latter  from  his  obligation  to  payments  were  not  made,  and  that 
pay,  to  the  prejudice  of  its  creditors,  they  provided  for  cancellation  at  fifty 
except  by  fair  and  honest  dealing  and  per  cent,  on  the  amount  paid,  and 
for  a  valuable  consideration."  Potts  that  they  were  redeemable  in  numeri- 
v.  Wallace,  146  U.  S.  68.9  (1892);  cal  order  in  six  years,  and  that  it 
Burke  v.  Smith,  16  Wall.  390  (1872);  would  be  impossible  for  the  company 
New  ALbany  v.  Burke,  11  Wall.  96  to  pay  them.  The  same  conclusion 
(1870).  So,  also,  in  Illinois.  See  was  reached  in  State  v.  Louisiana, 
Zirkel  v.  Joliet  Opera  House  Co.,  79  etc.  Co.,  51  La.  Ann.  1796  (1899).  A 
111.  334   (1875).     An  arrangement  by  corporation   cannot  give  a  mortgage 

452 


en.  x.] 


MISCELLANEOUS   DEFENSES. 


[§  170. 


that  a  subscriber  for  its  stock  may  return  it  "after  six  months"  if  he 
wishes,  holds  good  for  a  reasonable  time  after  the  six  months  but 
not  for  several  years.1  But  a  subscription  to  be  paid  for  when  the 
directors  find  other  parties  who  will  agree  to  purchase  the  stock 
from  the  subscriber  is  illegal  as  an  attempt  to  release  a  subscriber.2 
Instead  of  subscribing  for  stock  a  party  may  make  a  contract  with  a 
corporation  to  take  the  stock  with  the  right  to  return  it  and  receive 
back  the  purchase  price  within  a  certain  time.  Such  a  contract  is 
legal,  and  the  stock  may  be  returned  and  the  money  recovered  if 
corporate  creditors'  rights  do  not  intervene.3     The  agreement  of  a 


to  a  subscriber  as  security  for  the 
amount  paid  in  by  the  latter  on  his 
subscription  for  stock.  Boney  v. 
Williams,  55  N.  J.  Eq.  691  (1S97).  A 
subscriber  cannot  defeat  his  sub- 
scription on  the  ground  that  the 
agent  of  the  company,  who  obtained 
it,  told  him  that  he  would  never  be 
called  upon  to  pay  anything.  Maries, 
etc.  Co.  v.  Stulb,  215  Pa.  St.  91  (190C). 

l  New  Haven  T.  Co.  v.  Gaffney,  73 
Conn.  480   (1901). 

2McNulta  v.  Corn  Belt  Bank,  164 
111.  427  (1S97).  Stockholders  cannot 
defeat  their  liability  on  stock  by  set- 
ting up  that  they  subscribed  in  behalf 
of  the  corporation  itself,  and  on  the 
secret  agreement  that  they  should  not 
be  held  liable.  Barto  v.  Nix,  15  Wash. 
563    (1S96). 

3  Vent  v.  Duluth,  etc.  Co.,  64  Minn. 
307  (1S96).  A  different  rule  exists, 
however,  where  such  agreement  is  se- 
cret and  gives  one  stockholder  an  un- 
fair advantage  over  others.  See  §  191, 
infra.  A  corporation  in  selling  its 
stock  may  agree  to  repurchase  it  at 
a  specified  time  if  the  vendee  so  de- 
sires and  if  the  president  also  makes 
such  agreement  he  also  may  be  held 
liable.  Ophir,  etc.  Co.  v.  Brynteson, 
143  Fed.  Rep.  829  (1906).  A  corpora- 
tion is  not  liable  on  the  agree- 
ment of  two  of  its  promoters  that  in 
case  a  certain  plant  was  not  built 
within  a  certain  time  a  subscription 
would  be  repaid,  even  though  the  pro- 
moters were  also  commissioners  to 
open   books   and    take   subscriptions. 


Russell  v.  Broadus,  etc.  Mills,  39  S. 
Rep.  712  (Ala.  1905).  An  agreement 
to  subscribe  for  stock  which  gives  to 
the  subscriber  the  right  to  cancel  the 
same  within  a  reasonable  time  is 
legal,  and  such  cancellation  may  be 
had.  Holliday  v.  Wright,  134  Mich. 
COS  (1903).  An  issue  of  stock  with 
an  agreement  of  the  corporation  to 
take  it  back  at  the  end  of  six  months, 
if  requested  so  to  do,  is  legal  and  the 
contract  enforceable,  inasmuch  as  if 
the  contract  was  illegal  the  corpora- 
tion must  rescind  and  return  the  con- 
sideration. A  private  corporation 
may  purchase  its  own  stock  if  the 
purchase  is  fair  and  free  from  fraud, 
if  the  corporation  is  not  insolvent  or 
being  dissolved  and  creditors  are  not 
affected.  Under  such  power  the  cor- 
poration may  issue  stock  and  agree 
to  take  it  back  in  six  months,  if  the 
purchaser  so  desires.  Porter  v.  Plym- 
outh, etc.  Co.,  29  Mont.  347  (1904).  A 
corporation  may  agree  with  a  sub- 
scriber to  its  stock  that  it  will  repur- 
chase the  same  in  case  it  sells  its 
franchises,  the  corporation  being 
solvent.  "Wisconsin  Lumber  Co.  v. 
Greene,  etc.  Co.,  127  Iowa,  350  (1904). 
In  the  case  of  Browne  v.  St.  Paul,  etc. 
Works,  62  Minn.  90  (1895),  an  agree- 
ment of  a  corporation  with  a  sub- 
scriber for  stock  to  take  back  the 
stock  at  a  certain  time  and  refund 
the  money  if  the  subscriber  so  wished 
was  upheld. 

A    corporation     is    bound     by    the 
agreement  of  its  agent  that  a  person 


453 


§  170.] 


CELLANEOUS  DEPEN! 


[CH.  X. 


corporation  to  take  back  its  stock  at  cost  at  the  expiration  of  two 
years  if  the  purchaser  wishes,  becomes  void  if  the  corporation  is  in- 
solvent at  that  time.1  A  by-law  allowing  a  stockholder  to  return  his 
stock  to  the  corporation  at  a  fixed  value  is  illegal.2 

An  oral  agreement  that  only  one-half  of  the  subscription  need  be 
taken  and  paid  for  is  aot  legal.3  I  hit  an  agreement  between  a  cor- 
poration and  subserilMTs  for  its  stock  that  only  a  certain  portion  of 
the  par  value  of  the  stock  shall  ho  collected  by  the  corporation  is 
binding  upon  the  corporation,  although  not  upon  the  corporate  credi- 
tors, unless  by  statute  such  agre<  ment  may  ho  made  a  part  of  the 
recorded  articles  of  incorporation.4  A  contract  between  a  corpora- 
tion ami  a  stockholder  by  which  the  stockholder  is  to  he  repaid  before 
creditors  of  the  corporation  are  paid  is  contrary  to  public  policy  and 
void.5  A  building  association  which  has  obtained  a  subscription  on 
an  ultra  vires  agreement  as  to  repayment  is  liable  in  a  suit,  at  law  for 
the  money  so  paid  to  it.6  A  provision  in  articles  of  incorporation 
tiled  under  a  general  incorporating  ad.  is  void,  where  such  provision 
attempts  to  exempt  the  stockholders  from  liability  to  corporate  credi- 
tors on  their  unpaid  subscriptions.7  A  creditor  of  a  company  who 
takes  its  stock  as  fully  paid  up  stock  in  payment  of  his  debt,   the 


taking  stock  in  the  corporation  and 
giving  his  note  in  payment  may  re- 
turn the  stock  at  any  time  and  be  re- 
leased from  payment.  Bank  of  Lyons 
r.  Demmon,  Hill  &  D.  Supp.  (N.  Y.) 
39S    (1844). 

Inasmuch  as  a  corporation  has 
power  to  buy  its  own  stock  it  may 
take  a  subscription  for  stock  at  par 
and  agree  to  repurchase  the  stock,  no 
creditors  or  stockholders  objecting 
thereto.  Freemont  Carriage,  etc.  Co. 
v.  Thomsen,  65  Neb.  370  (1902). 
Where  a  subscriber  pays  his  subscrip- 
tion and  immediately  the  money  is  re- 
paid to  him  by  the  corporation  in 
purchase  of  his  stock  the  transaction 
is  illegal  as  against  creditors.  Hen- 
derson v.  Hall,  134  Ala.  455  (1900). 

A  corporation  may  issue  its  stock 
in  payment  for  property  and  agree  to 
buy  the  stock  back  within  four 
months  at  its  par  value.  United 
States,  etc.  Co.  v.  Camden,  etc.,  56  S. 
E.  Rep.  561  (Va.  1907). 

A  corporation  has  no  power  to  sell 
stock  and  agree  to  take  it  back  with- 


in a  certain  time  at  the  same  price. 
Boley  r.  Sonora,  etc.  Co.,  103  S.  \V. 
Rep.  975  (Mo.  1907). 

i  Mclntyre  v.  Bement's  Sons,  116 
Mich.  74   (1906). 

2Vercoutere  v.  Golden  State  Land 
Co.,  116  Cal.  410  (1S97). 

3  Gathrlght  v.  Oil  City,  etc.  Co.,  56 
S.  W.  Rep.  163   (Ky.  1900). 

4  Bent  v.  Underdown,  156  Ind.  516 
(1901).  See  also  §38,  supra,  and 
§  191,  infra.  A  subscriber  of  money 
to  a  corporation,  for  which  the  sub- 
scriber is  to  receive  "stock,  bonds,  or 
other  security  as  may  be  determined" 
by  the  board  of  directors,  is  entitled 
to  bonds  if  the  board  of  directors 
have  so  ordered,  even  though  the  cor- 
poration afterwards  became  insolvent. 
Barrow  r.  Smith,  109  Ga.  767   (1900). 

5  Guaranty,  etc.  Co.  v.  Galveston, 
etc.  R.  R.,  107  Fed.  Rep.  311  (1901). 

6  Williamson  v.  Eastern,  etc.  Assoc, 
54  S.  C.  582  (1899). 

7  Van  Pelt  v.  Gardner,  54  Neb.  701 
(1S98). 


454 


CII.  X.]  MISCELLANEOUS    DEFENSES.  [§   171. 

debt,  however,  being  less  than  the  par  value  of  the  stock,  is  liable  for 
the  unpaid  par  value  of  such  stock  in  case  the  company  becomes 
insolvent.  But  on  the  other  hand,  the  company  not  having  fulfilled 
its  contract  in  giving  him  fully-paid  stock  he  may  off  set  the  same 
amount  as  the  amount  still  due  him  from  the  company.1  Where  a 
person  subscribes  for  stock  and  afterwards  payment  is  made  in  prop- 
erty at  a  gross  overvaluation,  the  court  may  hold  him  liable  for  the 
difference  between  the  actual  value  of  the  property  and  the  par 
value  of  the  stock,  even  though  the  company  went  through  the  form 
of  canceling  the  subscription  and  issuing  the  stock  as  an  original 
issue  for  property.2  A  secret  agreement  by  which  a  subscriber  may 
cancel  his  subscription  may  be  objected  to  by  other  subscribers  or  by 
corporate  creditors.3  A  scheme  by  which  a  corporation  purchases 
its  own  stock  from  the  subscribers  therefor  may  upon  corporate  in- 
solvency be  attacked  by  existing  creditors  or  subsequent  creditors 
who  had  no  knowledge  of  the  scheme.4  As  to  existing  corporate 
creditors  the  stockholders  cannot  avoid  liability  on  a  part  of  their  sub- 
scriptions by  reducing  the  par  value  of  the  stock,  but  the  purchaser 
of  such  reduced  stock  is  not  liable  for  the  old  par  value.5 

§  171.  Compromise. — A  compromise  differs  from  a  cancellation 
in  that  the  subscriber  pays  to  the  corporation  a  part  of  the  subscrip- 
tion price  in  order  to  be  released  from  the  balance.  The  stock  is  de- 
livered back  to  the  corporation.  The  corporate  authorities — gener- 
ally the  directors — have  power  to  compromise  any  corporate  debt; 
and  if,  in  the  collection  of  subscriptions,  there  is  reasonable  doubt  as 

i  Re  Railway,  etc.  Co.,  [1899]  1  Ch.  Hebberd  v.  Southwestern,  etc.  Co.,  55 
108.      In    the   case    of   Sicgel    v.   An-  N.  J.  Eq.  18   (1896). 
drews    &    Co.,    1S1    111.    330     (1S99),  2  Hebberd     v.    Southwestern,     etc. 
where    the    purchasers    of    a    patent  Co.,  55  N.  J.  Eq.  18  (1896). 
right  for  $15,000  organized  a  corpora-  3  See  §  191,  infra. 
tion    and    personally    subscribed    for  4  Alabama,  etc.   Co.   v.  Hall,   44   S. 
$100,000  of  its  stock,  and  subsequent-  Rep.  592  (Ala.  1907).    See  also  §  311, 
ly.   paid   therefor   by   turning   in  the  infra.  "Where  the  incorporators  organ- 
patent  right,  the  court  held  that  each  ize  before  the  minimum  capital  is  sub- 
stockholder    was    liable    for   the   par  scribed,  they  are  liable  to  corporate 
value   of    his   stock   less   fifteen    per  creditors   under  the   Georgia  statute 
cent.,   and   that  a  judgment  creditor  up  to  the  amount  of  such  minimum 
might   sue   any  one  or  more  of   the  capital,  and  it  is  no  defense  that  be- 
stockholders.      See   ch.    Ill    on    this  fore   debts   were   incurred   they  sold 
subject  of  payment  by  property.  their  stock  back  to  the  corporation. 

In  a  suit  to  enforce  the  liability  on  Walters  v.  Porter,  59  S.  E.  Rep.  452 

watered  stock,   there  may  be  set  off  (Ga.  1907). 

the  amount  coming  to  the  stockhold-  5  Cammack  v.  Levy,  45  S.  Rep.  925 

er  on  bonds  of  the  company,  especial-  (La.   1908). 
ly  where  the  stockholder  is  insolvent. 

455 


§  172.] 


MISCELLANEOUS  DEFENSES. 


[cn.  \. 


to  the  liability  of  the  subscriber,1  or  if  the  subscriber  is  insolvent,  the 
corporation  may  compromise  the  liability  and  release  a  part  for  the 
purpose  of  securing  the  residue.  All  that  is  required  is  good  faith.2 
It  has  been  held  that  a  receiver  cannol  compromise  a  subscription; 
nor  can  a  court  of  equity  give  him  power  so  to  do,  unless  all  the 
stockholders  are  parties  to  the  equitable  suit  in  connection  with 
which  the  receiver  is  appointed.8  A  compromise  where  there  is  no 
controversy  is  a  misnomer.  The  case  is  then  one  of  release  and  de- 
pends on  the  power  of  the  directors  or  stockholders  to  make  it.' 

§  172.  Non-payment  of  a  percentage  required  by  statute. — The 
charter  or  statute  governing  a  corporation  often  prescribes  that  cadi 
subscriber  to  the  capital  stock  shall,  at  the  time  of  subscribing,  pay 
to  the  corporation  a  fixed  sum  or  a  specified  proportion  of  the  sub- 
scription. These  statutes  vary  somewhal  in  their  provisions,  some 
declaring  the  subscription  to  be  void  unless  the  percentage  is  paid, 
others  merely  prescribing  that  it  shall  be  paid. 

In  the  actual  taking  of  the  subscriptions  it  frequently  happens 
that  the  subscriber  has  not  the  ready  money  requisite,  and  is  allowed 

i  Bath's  Case,  L.  R.  8  Ch.  D.  334  subscription.  Livingstone  v.  Tem- 
(187S);  Belhaven's  Case,  3  De  G.,  J.  perance,  etc.  Soc,  17  App.  Rep. 
&  S.  41  (1865);  s.  c,  12  L.  T.  N.  S.  (Can.)  379  (1890).  A  stockholder 
595.  Where  a  stockholder  denies  who  settles  with  a  corporation  for  a 
that  anything  is  due  to  the  company  less  sum  than  the  amount  due,  just 
on  his  stock  and  the  matter  is  com-  before  garnishee  process  is  com- 
promised in  good  faith,  a  receiver  of  menced  against  him,  cannot  defeat 
the  corporation  cannot  collect  any-  the  process  in  this  manner.  World's 
thing  further  on  the  stock.  New  Fair,  etc.,  Co.  v.  Gasch,  1G2  111.  402 
Haven  T.  Co.  v.  Nelson,  73  Conn.  477  (1S9G). 

(1901).     An  unaccepted  offer  of  com-  3  Chandler    v.    Brown,    77    111.    333 

promise   is  no   defense,   and   compro-  (1875).       The    fact    that    the    court 

mises  with  other  stockholders  are  no  authorized    the    receiver   to    compro- 

defense.    Howard  v.  Glenn,  85  Ga.  238  mise  with  some  of  the  stockholders 

(1890).  is  no  defense  to  others.     Hambleton 

2  Philadelphia,  etc.   R.  R.  v.  Hick-  v.  Glenn,  72  Md.  331  (1S90).  See  also 

man,  28  Pa.  St.  318    (1857).     Power  ch.  LI,  infra. 

may  be  given  by  statute.    Pearson's  4  Phosphate,     etc.     Co.     v.     Green, 

Case,  L.  R.  7  Ch.  309  (1872),  holding  L.  R.  7  C.   P.  43    (1871);    Spackman 

that,  under  the  English  statute,  the  v.  Evans,  L.  R.  3  H.    L.  171,  188,  231 

court  may  allow,  but  cannot  compel,  (1868).     In  Dixon  v.  Evans,  L.  R.  5 

a  receiver  to  compromise.     Where  a  H.    L.    606    (1872),    the   subscription 

stockholder  denies  his   liability,  and  was   made   upon   a  condition,    which 

the    directors  compromise   with   him  remaining  unfulfilled,  a  compromise 

by  reducing  the  amount   of  his  sub-  was  made  permitting  the  withdrawal 

scription,  the  compromise  is  binding  of   the   subscriber.     Held,   after    two 

on    all   parties.     Whitaker   v.    Grum-  appeals,  that  directors  had  power  to 

mond,  68  Mich.  249  (1888).   The  com-  enter   into   such    a   compromise,    and 

pany  may  compromise,  but  cannot  do  the  subscriber  was   not  held   in   the 

so  by  canceling  a  part  only  of  the  winding  up. 

456 


en.  x.] 


MISCELLANEOUS   DEFENSES. 


[§  173. 


to  subscribe  without  paying  the  same.  When  an  attempt  is  made 
to  collect  such  a  subscription,  the  subscriber,  if  the  enterprise  has 
resulted  disastrously,  sets  up  the  defense  that  he  did  not  pay  the 
statutory  percentage,  and  that  the  subscription  is  void  and  not  en- 
forceable. A  long  list  of  cases,  dating  from  the  early  litigation 
over  railroads,  has  turned  upon  this  defense.  In  some  of  the  states 
the  defense  has  been  held  insufficient;  in  others  a  contrary  rule 
prevails;  and  in  still  others,  first  one  rule  and  then  the  other  has 
been  adopted. 

§  173.  The  decided  weight  of  authority  and  the  most  carefully 
considered  cases  hold  that  a  subscriber  for  stock  cannot  escape  the 
responsibilities  of  a  stockholder  by  showing  that  he  never  paid  the 
percentage  or  fixed  amount  required  by  the  charter  or  statute  to  be 
paid  at  the  time  of  subscribing.1     He  will  not  thus  be  permitted  to 

i  Quoted    and    approved    in    Union    R.  R.,  32  Miss  370  (1856),  where  pay- 
Water  Co.  v.  Kean,  52  N.  J.  Eq.  Ill     ment  was  made  before  the  subscrip- 
(1S93);    Webb   v.   Baltimore,   etc.   R.     tion.     See  also  Vicksburg,  etc.  R.  R. 
R     77  Md    92    (1893);    Illinois  River    v.  McKean,  12  La.   Ann.  638    (1857); 
K.'r.  v.  Zimmer,  20  111.  654    (1S58),     Bibb  v.  Hall,  101  Ala.  79   (1893);  Al- 
holding  that  the  commissioners  may     bright  v.   Texas,    etc.   R.   R.,   8   New 
waive    payment.      The    court    said:     Mex.   110    (1895);    see   s.   c,   8   New 
"This    indulgence    is   a   most   ungra-    Mex.    422    (1896);    Wight   v.    Shelby 
cious  defense,  which  should  not  be  al-    R.  R.,  16   B.  Mon.    (Ky.),  4    (1855); 
lowed  unless  it  is  strictly  required  by     Smith    v.    Tallassee    Plank-road    Co., 
some   inflexible   rule   of    law;"    Hay-    30  Ala.  650  (1857) ;  Mitchell  v.  Rome 
wood,  etc.  Co.  v.  Bryan,  6  Jones,   L.     R.  R-,  17  Ga.  574    (1855);    Henry*. 
IX    C)   82   (1S5S),  the  court  saying:     Vermillion,   etc.   R.  R.,   17  Ohio,   187 
"It   would   be   a  strange   rule  which     (1848);    Chamberlain   v.   Painesville, 
would  allow   him  to  take  advantage     etc.  R.  R.,  15  Ohio   St.   225    (1864); 
of  the  other  stockholders' forbearance    Napier  v.    Poe,    12    Ga.    170    (18o2) ; 
and    his    own    neglect;"    Pittsburgh,     Fiser   v.   Mississippi,    etc.    R.   R,   32 
etc    R    R.   v.   Applegate,   21   W.   Va.     Miss.  359  (1S56) ;  Ryder  v.  Alton,  etc. 
172    (1882),   declaring  that  the  stat-    R.  R.,  13  111.  516    (1851)    where  the 
ute  is  "to  ensure  good  faith,  and  to    subscriber   was   one   of   the   cominis- 
avoid    shams   in  enterprises  that  so    sioners;  Klein  v.  Alton,  etc.  R.  R.,  13 
"tally  affect  the  public,"  but  not  to     111.  514    (1851),  where  payment  was 
change  the   liability   of  stockholders     made   before  the   suteenptaon  books 
to  colorations-  Minneapolis,  etc.  Ry.    were  closed;    Stuart  v.  Valley  R    R, 
rSTiinn.  535  (1874),  where     32  Graft.  (Va.)  146  (1879) ;  Southern 
the  court  said  of  the  statute:  "While     L.    Ins.    Co.    v.    Lanier^    5    Fla     110 
R  confers  upon  plaintiff  the  right  to     (1853) ;  Selma  et.  R ^  Rountre 
insist  upon  the  payment,  it  does  not    7  Ala.     N.  S.)   670   (184     ,   Spartan 
make  the  successful  exercise  of  this     burg,   etc.   R.   R.   v.   Ezell,    14    S     L. 
ri  hi ^dispensable  to  the  validity  of     281   (1880),  where ,a£w  — 
the      subscription;"      Water     Valley     paid  in  more  tta?  *^u   fe™^' 
MfK     Co     v     Seaman,    53    Miss.    655    and  enough  to  make  up  for  those  not 
n876)     where  the   requirement  was     paying;   Oler  v.  Baltimore   etc.  R.  R 

'/fnr    in    the   subscription   it-     41  Md.  583  (1874),  where  the  percent- 
seTf?  Ban^gton  ?£SE*  Cent,    age  was  "payable,"  the  court  saying 

457 


173.] 


MISCELLANEOUS  DEFENSES. 


[<U.  X. 


take  advantage  of  his  own  wrong  and  default  to  fchie  prejudice  of 
others.  In  some  instances  the  percentage  was  paid  in  notes1  or 
clucks2  instead  of  cash;  in  others,  payment  in  cash  was  made  at 
some  period  subsequent  to  the  act  of  subscribing;3  in  still  oth<  r  . 

that  this  merely  made  it  "due  and  collectible,  as  it  would  be  if  given  to 
collectible,"  like  a  call.  To  tho  same  carry  out  a  parol  contract  for  the 
effect,  Ashtabula,  etc.  R.  R.  v.  Smith,  sale  of  land  void  by  the  statute  of 
15  Ohio  St.  328  (1864).  Payment  by  frauds.  McRac  v.  Russell,  12  I 
the  subscriber's  agent  is  sufficient.  (N.  C.)  224  (1851),  the  court  say- 
Litchfield  Bank  v.  Church,  29  Conn,  ing  that  the  statute  was  meant  "to 
137  (18G0).  The  following  cases  hold  protect  real  stockholders  from  .  .  . 
tnat  non-payment  of  the  required  per-  men  of  straw.  It  was,  moreover, 
centage  is  a  good  defense:  Charlotte,  meant  to  protect  men  from  the  ci  u 
etc.  R.  R.  v.  Blakely,  3  Strobh.  L.  sequences  of  making  such  subscrip- 
(S.  C.)  245  (1848);  State  Ins.  Co.  v.  lions,  under  the  influence  of  mo- 
Redmond,  1  McCrary,  30S  (1X80) .  Tho  mentary  excitements,  which  1 1 1  <  ■  \- 
requirement  herein  was  by  by-law.  could  not  fulfill."  The  statute 
People  v.  Chambers,  42  Cal.  201  made  the  subscription  void.  In 
(1871),  holding  a  check  to  be  insuf-  the  case  of  Home  Stock  Ins.  Co. 
ficient;  Farmers',  etc.  Bank  v.  Nel-  v.  Sherwood,  72  Mo.  401  (1880),  pay- 
son,  12  Md.  35  (1857);  Taggart  r.  ment  by  nolo  and  mortgage  was  sus- 
Western  Md.  R.  R.,  24  Md.  563,  588  tainted.  Hayne  v.  Beauchamp,  13 
(I860);  Wood  v.  Coosa,  etc.  R.  R.,  32  Miss.  515  (1S46),  holds  that  the  pay- 
Ga.  273  (1SG1),  the  statute  prescrib-  ment  by  note  amounted  to  an  infor- 
ing  that  the  subscription  should  be  mal  subscription,  the  statutory  sub- 
"void."  A  provision  that  only  ten  scription  being  void.  Pine  River 
per  cent,  of  the  stock  shall  be  paid  Bank  v.  Hodsdon,  46  N.  H.  114 
up  until  certain  contingencies  arise  (1865).  In  Alabama  it  is  held  that 
is  strictly  construed  by  the  courts,  a  subscriber  may  set  up  that  the 
Burlington  v.  Burlington  Water  Co.,  company  was  not  legally  organized, 
86  Iowa,  266  (1892).  It  is  no  defense  in  that  twenty  per  cent.,  which  the 
that  the  corporation  commenced  busi-  statute  required  to  be  paid  before  in- 
ness  before  twenty  five  per  cent,  of  corporation,  had  been  paid  in  checks 
its  capital  stock  had  been  paid  in  as  which  were  not  to  be  presented  for 
required  by  the  charter.  Naugatuck  payment  and  had  not  been  presented. 
Water  Co.  v.  Nichols,  58  Conn.  403  Haas  v.  Hall,  111  Ala.  442  (1895). 
(1890).  It  is  no  defense  that  the  2  People  v.  Stockton,  etc.  R.  R.,  45 
corporation  commenced  business  be-  Cal.  306  (1873),  there  being  funds 
fore  one-half  of  its  capital  stock  had  in  the  bank  to  meet  it. 
been  paid  in  according  to  the  charter.  3  Payment  of  a  judgment,  in  an 
Maine,  etc.  Co.  v.  Southern  etc.  action  for  one  call,  estops  the  sub- 
Co.,  92  Me.  444  (1899).  A  purchaser  scriber  from  setting  up  this  defense. 
of  land  from  a  corporation  may  ob-  Hall  v.  Selma,  etc.  R.  R.,  6  Ala. 
ject  to  the  title  on  the  ground  that  (N.  S.)  741  (1844).  Although  the 
the  corporation  took  title  before  a  statute  requires  that  a  certain  per- 
certain  amount  of  its  capital  stock  centage  of  subscriptions  shall  be  paid 
had  been  obtained,  as  required  by  upon  incorporation,  yet  one  sub- 
statute.  Globe  Realty  Co.  v.  Whit-  scriber  may  pay  the  proportion  of 
ney,  106  La.  257  (1901).  others.  Beattys  v.  Town  of  Solon,  64 
i  Vermont  Cent.  R.  R.  v.  Clayes,  Hun,  120  (1892);  aff'd,  136  N.  Y. 
21  Vt.  30  (1848).    A  bond  so  given  is  662. 

458 


en.  x.] 


MISCELLANEOUS    DEFENSES. 


[§  174. 


no  payment  at  all  was  made  on  the  subscription,  and  suit  was 
brought  for  the  whole  amount.1  A  statutory  provision  that  a  cer- 
tain percentage  of  the  capital  stock  must  be  paid  in  before  business 
is  commenced  is  satisfied  by  turning  in  property.2  Where  the 
directors  commence  business  before  ten  per  cent,  of  the  capital  is  paid 
in  as  required  by  statute,  the  directors  are  personally  liable  as 
agents  transacting  business  without  authority  from  the  principal.3 
In  England  a  failure  to  pay  such  a  percentage  is  held  not  to  affect 
the  liability  of  the  subscriber,  but  to  restrict  his  right  of  transferring 
his  stock.4 

§  174.  In  New  York  there  has  been  doubt  and  a  strong  tendency 
to  change  the  rule  laid  down  at  an  early  day  by  the  court,  The 
case  of  Jenkins  v.  The  Onion  Turnpike  Company,  in  1804,5  decided 
that  a  failure  by  the  subscriber  to  pay  a  required  percentage  at  the 
time  of  subscribing  was  a  good  defense  to  an  action  on  the  subscrip- 
tion. This  decision  has  beeD  distinguished,  questioned,  and  doubted 
by  the  courts.6     The  New  York  court  of  appeals,  however,  has  held 


i  Quoted  and  approved  in  West 
End.  etc.  Co.  v.  Claiborne,  97  Va.  734 
(1900).  In  Piscataqua  Ferry  Co.  v. 
Jones,  39  N.  H.  491  (1S59),  the  re- 
quirement was  by  by-law,  not  by 
charter.  The  subscription  was  to  be 
void  for  non-payment.  The  court 
thought  otherwise.  The  effect  of  non- 
payment is  that  "it  is  due  and  liable 
to  be  called  for  at  any  time — payable 
on  demand,  whenever  needed  by  the 
corporation."  Greenville,  etc.  R.  R. 
r.  WoodBldes,  5  Rich.  L.  (S.  C.)  145 
(1S51),  where  the  subscriber  also 
voted  the  stock. 

2  Fargason  p.  Oxford,  etc.  Co.,  78 
Miss.  65  (1900);  Beach  v.  Smith,  30 
N.  Y.  116  (1864),  aff'g,  28  Barb.  254. 
Where  ten  per  cent,  of  the  capital 
stock  must  be  paid  in  before  business 
is  commenced,  payment  may  be  in 
property.  McCandless  v.  Inland,  etc. 
Co.    115  Ga.  968   (1902). 

3  Trust,  etc  Co.  v.  Floyd,  47  Ohio 
St.  525   (1890).     See  also  §243,  infra. 

4  East  Gloucestershire  Ry.  v.  Bar- 
tholomew, L.  R.  3  Exch.  15  (1867); 
Purdey's  Case,  16  W.  R.  660  (1S6S); 
McEuen  v.  West  London,  etc.  Co.,  L. 
R.  6  Ch.  App.  655  (1871)— the  statute 
stating    that    the    stock    should    not 


"issue"  or  "vest"  until  one-fifth  should 
be  paid.  See  also  Morton's  Case,  L. 
R.  16  Eq.  104   (1873). 

5  1  Caines's  Cas.  86,  reversing  Un- 
ion Turnp.  Co.  v.  Jenkins,  1  Caines's 
Rep.  381.  Even  though  an  original 
certificate  of  incorporation  is  void  by 
reason  of  an  uncertified  check  having 
been  given  in  payment  of  the  amount 
required  by  statute,  yet,  if  after  the 
check  is  cashed  a  so-called  amended 
certificate  is  filed,  the  latter  stands  as 
an  original  certificate  of  incorpora- 
tion. People  v.  Comrs.,  81  N.  Y.  App. 
Div.,  242  (1903);  affd,  175  N.  Y. 
516. 

c  Highland  Turnp.  Co.  v.  McKean, 
11  Johns.  9S  (1S14),  the  court  say- 
ing: "It  is  a  little  difiicult  to  ascer- 
tain the  point  upon  which  the  court 
of  errors  grounded  their  decision." 
A  subscriber,  who  is  also  the  commis- 
sioner, need  not  pay  the  required  per- 
centage to  himself.  In  Crocker  v. 
Crane,  21  Wend.  211  (1839),  payment 
in  checks  was  held  not  to  be  good, 
they  evidently  not  having  been  given 
in  good  faith.  The  court  said:  "Re- 
ceiving an  occasional  check  might 
have  been  a  fair  substitute."  Thorp 
v.  Woodhull,  1  Sandf.  Ch.  411  (1844), 


459 


§  174.] 


MISCELLANEOUS  DEFENSES. 


[cn.  x. 


that  if  tho  subscriber  merely  signs  the  subscription  contract  and 
does  not  pay  the  percentage,  lie  may  thereby  defeat  his  liability  on 
such  subscription.1  The  lower  court  in  New  York  has  held  that 
it  is  no  defense  that  an  amount  specified  by  statute  was  not  paid  in 


sustains  the  validity  of  a  bond  and 
mortgage  in  payment  of  a  subscrip- 
tion in  which  the  percentage  had 
been  paid  by  a  worthless  check.  East- 
ern Plank  Road  Co.  v.  Vaughan,  14 
N.  Y.  546  (1856),  holds  it  not  to  be 
necessary  "that  each  subscriber 
should  pay  five  per  cent,  upon  his 
subscription  but  only  that  five  per 
cent,  on  the  amount  of  the  stock  sub- 
scribed should  be  actually  paid"  by 
some  one.  To  the  same  effect,  Lake 
Ontario,  etc.  R.  R.  v.  Mason,  16  N.  Y. 
451  (1857),  the  court  saying  that  the 
object  was  "to  ensure  the  organiza- 
tion of  real  substantial  companies 
in  good  faith,  animated  by  an  honest 
purpose,  and  having  some  degree  of 
ability  at  least  to  undertake  the  pro- 
posed improvement."  In  the  case  of 
Rensselaer,  etc.  Co.  v.  Barton,  16  N. 
Y.  457,  n.  (1854),  the  court,  in  speak- 
ing of  the  decision  in  Jenkins  v. 
Union  T.  Co.,  say:  "It  may  well  be 
doubted  whether  the  reasoning  upon 
which  it  was  based  is  sound,  and 
whether,  were  the  question  to  be 
again  directly  presented,  this  court 
would  feel  bound 'to  follow  it."  Black 
River,  etc.  R.  R.  v.  Clarke,  25  N.  Y. 
208  (1862),  holds  that  "the  subscrip- 
tion one  day,  with  payment  the  next, 
would  satisfy  the  statute,  and  so 
would  actual  payment  at  any  period 
after  subscription  with  intent  to  ef- 
fectuate and  complete  the  subscrip- 
tion." See  also  Beach  v.  Smith,  as 
stated  in  30  N.  Y.  119  (1864);  Og- 
densburg,  etc.  R.  R.  v.  Wooley,  3  Abb. 
App.  Dec.  398  (1864).  Beach  v. 
Smith,  30  N.  Y.  116  (1864),  affirming 
s.  c,  28  Barb.  254,  holds  that  payment 
in  services  performed  under  a  con- 
tract with  the  company  suffices.  Ex- 
celsior, etc.  Co.  v.  Stayner,  25  Hun, 


91    (1881),    holds    that    payment    by 
check,  on  which  payment  is  stopped, 
is   insufficient.     Syracuse,   etc.   R.   R. 
v.  Gere,  4  Hun,  392    (1875),  sustains 
a  suit  by  the   corporation   to   collect 
such  a  check.     See  also  Ogdensburg, 
etc.  R.  R.  v.  Frost,  21  Barb.  541  (1856). 
A  certified  check  is  good  payment.  Re 
Staten  Island,  etc.  R.  R.,  37  Hun,  422 
(1885);  Re  Staten  Island,  etc.  R.  R., 
3S  Hun,  3S1   (18S5).    Even  though  an 
original    certificate   of    incorporation 
is  """oid   by  reason  of  an   uncertified 
check  having  been  given  in  payment 
of   the    amount   required    by   statute, 
yet    if    after   the   check    is   cashed    a 
so-called   amended   certicate   is   filed, 
the  latter  stands  as  an  original  certif- 
icate   of    incorporation.       People    v. 
Comrs.,  81  N.  Y.  App.  Div.  242  (1903). 
i  Now    York,    etc.    R.    R.    v.    Van 
Horn,    57   N.    Y.   473    (1874),   holding 
also  that  a  subsequent  statute  cannot 
cure  such  omission  to  pay,  and  there- 
by render  the  subscriber  liable.  Even 
though  a  corporation  accepts  a  note 
instead  of  cash  in  payment  for  a  sub- 
scription, in  violation  of  the  statute, 
which  provides  that  only  money,  la- 
bor   done    or    property    actually    re- 
ceived shall  be  accepted  in  payment 
for    stocks    and    bonds,    yet    a    bank 
which  discounted  such  note  for  a  cor- 
poration  may    hold    the   corporation 
liable   thereon.     First   Nat.    Bank   v. 
Cornell,  8  N.  Y.  App.  Div.  427  (1896). 
In   a  suit   in   equity   by  a  corporate 
creditor  against  stockholders  for  un- 
paid   subscriptions,    subscribers    who 
did  not  pay  the  ten  per  cent,  required 
by  statute  to  make  them  stockholders 
need  not  be  joined  as  parties  defend- 
ant   nor    subscribers    whose    shares 
have  been   forfeited.     Ford  v.  Chase, 
118  N.  Y.  App.  Div.  605  (1907). 


460 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§§  175,  176. 


before  commencing  business,1  but  the  latest  decision  is  to  the  con- 
trary.2 

§  175.  In  Pennsylvania  a  similar  state  of  doubt  has  existed.  The 
case  of  Hibernia  Turnpike  Co.  v.  Henderson,3  in  1822,  decided  that 
a  failure  by  the  commissioners  taking  subscriptions  to  stock  to  re- 
quire payment  of  the  statutory  percentage  made  the  subscription  void 
and  not  enforceable.  Later  decisions  do  not  overthrow  the  rigid  rule, 
but  distinguish  and  practically  destroy  it  by  holding  that  this  de- 
fense  is  barred  by  a  subsequent  statute  curing  the  defect;4  or  by  a 
waiver  in  attending  corporate  meetings  and  voting;5  or  by  trans- 
ferring the  shares;6  or  that  the  provision  applies  only  to  subscrip- 
tions taken  by  the  commissioners;7  or,  under  the  act  of  1868,  that 
the  percentage  must  be  paid  on  subscriptions  after,  but  not  on  those 
before,  incorporation;8  or  that  the  requirement  does  not  apply  to  a 
conditional  subscription  ;y  or  that  it  is  waived  by  any  acts  indicat- 
ing an  intent  to  be  bound  as  a  stockholder.10 

§  176.  Failure  of  the  corporation  to  obtain  subscriptions  to  the  ex- 
tent of  the  full  capital  stock.- — It  is  an  implied  part  of  a  contract  of 
subscription  that  the  contract  is  to  be  binding  and  enforceable  against 


i  Raegener  v.  McDougall,  33  N.  Y. 
App.  Div.  231  (1898).  Where  sub- 
scriptions are  with  the  consent  of  the 
subscribers  pledged  to  secure  a  debt 
of  the  corporation,  the  pledgee  may 
enforce  the  subscriptions,  although 
the  ten  per  cent,  required  by  the 
statute  to  be  paid  at  the  time  of  the 
subscription  was  not  paid.  Knicker- 
bocker T.  Co.  v.  Hard,  67  N.  Y.  App. 
Div.  463   (1902). 

2  A  note  given  in  payment  for  the 
subscription  price  of  stock  is  illegal 
under  the  New  York  statute  which  re- 
quires ten  per  cent,  to  be  paid  in 
cash,  where  the  subscription  is  a  cash 
subscription,  and  hence  in  such  a 
case  the  entire  subscription  is  void, 
even  though  it  provided  for  the  em- 
ployment of  the  subscriber  and  for 
giving  him  a  bonus  of  stock.  Hap- 
goods  v.  Lusch,  123  N.  Y.  App.  Div. 
23    (1907). 

3  8  Serg.  &.  R.  219.  See  also 
Leighty  v.  Susquehanna,  etc.  Tump. 
Co.,  14  Serg.  &  R.   434   (1826). 

4  Clark  v.  Monongahela  Nav.  Co., 
10  Watts  (Pa.),  364   (1840). 


5  Erie,  etc.  Ry.  v.  Brown,  25  Pa. 
St.  156  (1855),  the  court  saying: 
"There  is  no  merit  in  such  a  defense. 
.  .  .  The  subscriber  himself  is 
under  the  highest  moral  obligation 
faithfully  to  perform  the  promise  he 
has  distinctly  made."  In  Common- 
wealth v.  West  Chester  R.  R.,  3 
Grant's  Cas.  (Pa.)  200  (1855),  the 
court  held  that  failure  to  pay  the  per- 
centage did  not  render  the  charter 
forfeitable. 

c  Everhart  v.  West  Chester,  etc.  R. 
R.,  28  Pa.  St.  339  (1857). 

7  Philadelphia,  etc.  R.  R.  v.  Hick- 
man, 28  Pa.  St.  318  (1857).  Contra, 
under  the  act  of  1868.  See  Bucher  v. 
Dillsburg,  etc.  R.  R.,  76  Pa.  St.  306 
(1874). 

8  Garrett  v.  Dillsburg,  etc.  R.  R., 
78   Pa.  St.  465    (1875). 

o  Hanover,  etc.  R.  R.  v.  Haldeman, 
82  Pa.  St.  36  (1876). 

io  Boyd  v.  Peach  Bottom  Ry.,  90 
Pa.  St.  169  (1879),  holding,  however, 
that  payment  cannot  be  by  promis- 
sory note  although  a  demand  note. 


461 


176.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


the  subscriber  only  after  the  full  capital  stock  of  the  corporation  has 
been  subscribed.  This  condition  precedent  to  the  liability  of  the  sub- 
scriber need  not  be  expressed  in  the  corporate  charter  nor  the  sub- 
scription itself.  It  arises  by  implication  from  the  just  and  reasonable 
understanding  of  a  subscriber  that  he  is  to  be  aided  by  other  subscrip- 
tions. This  rule  is  supported  also  by  public  policy,  in  that  corporate 
creditors  have  a  right  to  rely  upon  a  belief  that  the  full  capital  stock 
of  the  corporation  has  been  subscribed.1     If  the  corporation  com- 


l  The  leading  case  on  this  defense 
is  Salem  Mill-dam  Corp.  v.  Ropes, 
23  Mass.  23  (1827),  and  26  Mass.  187 
(1829).  In  Livesey  v.  Omaha  Hotel, 
5  Neb.  50  (187G),  Judge  Redfield  in 
the  brief  says:  "This  rule  has  been 
held  inflexible  in  all  cases  both  for 
the  security  of  the  public  and  also  of 
the  subscribers;"  Shurtz  v.  School- 
craft, etc.  R.  R.,  9  Mich.  269  (1861); 
Anvil  Min.  Co.  v.  Sherman,  74  Wis. 
226  (1889);  New  York,  etc.  R.  R.  v. 
Hunt,  39  Conn.  75  (1872);  Hale  v. 
Sanborn,  16  Neb.  1  (1884);  Haskell 
v.  Worthington,  94  Mo.  560  (1888); 
Halsey  Fire  Engine  Co.  v.  Donovan, 
57  Mich,  318  (1885);  Peoria,  etc.  R. 
R.  v.  Preston,  35  Iowa,  115  (1872), 
the  court  saying  that  this  is  the  rule, 
"unless  a  contrary  intention  appears, 
expressly  or  by  implication,  either  in 
the  charter  or  the  contract  of  sub- 
scriptions;" Stoneham  Branch  R.  R. 
v.  Gould,  68  Mass.  277  (1854),  the 
court  saying:  "This  is  no  arbitrary 
rule;  it  is  founded  on  a  plain  dictate 
of  justice,  and  the  strict  principles 
regulating  the  obligation  of  con- 
tracts;" Bray  v.  Farwell,  81  N.  Y. 
600,  608  (1880),  where  the  court  said 
that  the  directors  "had  no  authority 
to  go  on  with  insufficient  means,  and 
thus  wreck  the  company;"  Selma, 
etc.  R.  R.  v.  Anderson,  51  Miss.  829 
(1S76);  Hughes  v.  Antietam  Mfg. 
Co.,  34  Md.  316,  332  (1870);  Topeka 
Bridge  Co.  v.  Cummings,  3  Kan.  55 
(1S64);  Allman  v.  Havana,  etc.  R. 
R.,  88  111.  521  (1878);  Temple  v. 
Lemon,  112  111.  51  (1884);  Littleton 
Mfg.  Co.  v.  Parker,  14  N.  H.  543 
(1844) ;      Hendrix     v.     Academy     of 


Music,  73  Ga.  437  (1884);  Stearns  v. 
Sopris,  4  Colo.  App.  191  (1894);  Nor- 
wich Lock  Mfg.  Co.  v.  Hockaday,  89 
Va.  557  (1893);  Contoocook  Valley 
R.  R.  v.  Barker,  32  N.  H.  363  (1855)  ; 
Newburyport  Bridge  v.  Story,  23  Mass. 
45,  note  (1827);  Belfast,  etc.  R.  R. 
v.  Cottrell,  66  Me.  185  (1876);  Rock- 
land, etc.  Co.  v.  Sewall,  80  Me.  400 
(1SSS);  Memphis  Branch  R.  R.  v. 
Sullivan,  57  Ga.  240  (1876);  Fox  v. 
Allensville,  etc.  Turnp.  Co.,  46  Ind. 
31  (1874);  Hain  v.  Northwestern,  etc. 
Co.,  41  Ind.  196  (1872),  holding  also 
that  the  corporation  in  suing  must 
aver  that  the  full  capital  stock  has 
been  subscribed;  Central  Turnp.  Corp. 
v.  Valentine,  27  Mass.  142  (1830), 
holding  also  that  the  corporation  has 
the  burden  of  proving  subscriptions 
for  the  full  capital  stock;  Warwick 
R.  R.  v.  Cady,  11  R.  I.  131  (1875), 
where  the  charter  said  that  the  capi- 
tal stock  should  not  exceed  a  speci- 
fied sum;  Fry  v.  Lexington,  etc.  R. 
R.,  2  Met.  (Ky.)  314  (1859),  holding 
also  that  the  corporation  must  aver 
full  subscription;  Lewey's  Island  R. 
R.  v.  Bolton,  48  Me.  451  (I860);  Lail 
v.  Mt.  Sterling  C.  R.  Co.,  13  Bush. 
(Ky.),  32  (1877),  holds  that  the  cor- 
poration need  not  aver  full  subscrip- 
tions. To  the  same  effect,  McKay  v. 
Elwood,  12  Wash.  579  (1895).  Cf. 
Monroe  v.  Fort  Wayne,  etc.  R.  R.,  28 
Mich.  272  (1873). 

Where,  also,  the  corporation  is  in- 
corporated with  a  less  capital  stock 
than  was  proposed  when  the  defend- 
ant subscribed,  he  is  not  bound  by 
the  subscription.  Santa  Cruz  R.  R. 
v.  Schwartz,  53  Cal.  106  (1878).     Sub- 


462 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  176. 


mences  business  before  the  full  capital  stock  is  subscribed,  the  state 
may  bring  an  action  for  the  forfeiture  of  its  charter.1  A  subscriber 
is  liable  for  his  proportion  of  the  necessary  expenses,  preliminary  to 


scribers  are  not  liable  until  the  whole     Schram,  6  Wash.  St.  134   (1893).     A 


amount  is  subscribed.  They  may  re- 
cover back  what  they  have  paid. 
Winters  v.  Armstrong,  37  Fed.  Rep. 
508  (1889).  A  full  subscription  is 
not  necessary  if  the  subscriptions  are 
payable  to  an  agent  and  nothing  is 
said  about  full  subscription.  West  v. 
Crawford,  80  Cal.  19  (1889).  A  stock- 
holder may  defend  on  the  ground 
that  the  amount  required  by  the  sub- 
scription list  to  be  subscribed  shall 
be  subscribed  before  he  is  held  lia- 
ble, especially  where  misrepresenta- 
tions are  made  as  to  the  amount 
which  has  been  subscribed  when  the 
defendant  subscribed.  The  question 
is  one  for  the  jury.  Spellier,  etc. 
Co.  v.  Leedom,  149  Pa.  St.  185  (1892). 
When  the  capital  is  increased  after 
the  defendant  subscribed  he  cannot 
insist  on  the  subscription  of  the  capi- 
tal stock  as  increased.  Port  Edwards, 
etc.  Ry.  v.  Arpin,  80  Wis.  214  (1S91). 
See  §  2S8,  infra.  Subscription  of  the 
full  capital  was  held  necessary  in 
Exposition,  etc.  Co.  v.  Canal,  etc.  Ry., 
42  La.  Ann.  370  (1S90).  The  ques- 
tion must  be  clearly  raised  by  the 
findings,  otherwise  it  will  not  be  con- 
sidered on  appeal.  Arthur  v.  Clarke, 
46  Minn.  491  (1891).  Where  stock- 
holders proceed  to  business  before  the 
minimum  capital  prescribed  by  stat- 
utes is  subscribed  and  before  the  req- 
uisite amount  is  paid  in,  they  are 
liable  to  corporate  creditors  for  such 
minimum  capital.  The  creditors  may 
sue  them  and  the  corporation  in  the 
same  action.  Burns  v.  Beck,  etc.  Co., 
83  Ga.  471  (18S9).  The  defense  of 
non-full  subscriptions  is  available 
against  creditors  of  the  corporation. 
Exposition,  etc.  Co.  v.  Canal,  etc.  Ry., 
42  La.  Ann.  370  (1890).  The  text 
above  was  approved  in  Portland,  etc. 
R.  R.  v.  Spillman,  23  Oreg.  587 
(1893),     and     Denny     Hotel     Co.     v. 


few  cases  seem  to  hold  a  contrary 
doctrine.  Newcastle,  etc.  Turnp.  Co. 
v.  Bell,  8  Blackf.  (Ind.)  584  (1847); 
Oregon  Cent.  R.  R.  v.  Scoggin,  3 
Oreg.  161  (1869);  York,  etc.  R.  R. 
v.  Pratt,  40  Me.  447  (1855);  Cheraw, 
etc.  R.  R.  v.  White,  10  S.  C.  155 
(1878).  See  also  Chubb  v.  Upton, 
95  U.  S.  665,  668  (1S77),  probably  a 
dictum.  In  the  case  of  Skowhegan, 
etc.  R.  R.  v.  Kinsman,  77  Me.  370 
(1S85),  the  court  seems  to  hold  that, 
where  there  is  in  the  subscription 
an  express  promise  to  pay,  it  is  en- 
forceable even  though  the  whole  capi- 
tal stock  is  not  subscribed.  If  such 
a  condition  is  expected,  the  court 
says  it  must  be  inserted  in  the  sub- 
scription. It  has  been  held  that, 
where  a  subscription  is  made  before 
incorporation,  on  a  paper  not  fixing 
the  capital  stock,  a  failure  to  secure 
full  subscription  to  the  capital  stock 
as  fixed  in  the  charter  is  no  defense. 
Belton  Compress  Co.  v.  Saunders,  70 
Tex.  699  (1887).  That  the  full  capi- 
tal stock  was  not  subscribed  consti- 
tutes no  defense  where  a  creditor  sues, 
see  Hamilton  v.  Clarion,  etc.  R.  R., 
144  Pa.  St.  34  (1891).  A  subscriber 
to  a  dairy  project  is  bound  to  pay, 
even  though  the  entire  capital  stock 
of  a  corporation  to  which  the  dairy  is 
to  be  transferred  is  not  subscribed, 
the  subscription  being  not  to  the  pro- 
posed corporation  but  to  the  builders 
of  the  dairy.  Ada,  etc.  Assoc,  v. 
Mears,  123  Mich.  470  (1900).  An 
underwriter  may  be  held  liable,  even 
though  the  entire  amount  is  not  un- 
derwritten, there  being  nothing  in 
the  agreement  requiring  that.  Knick- 
erbocker T.  Co.  v.  Davis,  143  Fed. 
Rep.  587    (1906). 

i  People  v.  National  Sav.  Bank,  11 
N.  E.  Rep.  170  (111.  1889);  aff'd,  129 
111.   618    (1889). 


463 


§  177.] 


MISCELLANEOUS  DEFENSES. 


[CII.  X. 


the  incorporation  and  organization  of  the  company.1  It  is  no  defense 
that  increased  capital  stock  was  not  fully  subscribed  for.2  Where  a 
corporation  is  authorized  to  commence  business  only  when  a  speci- 
fied amount  of  stock  has  been  subscribed,  and  it  does  commence  busi- 
ness prior  to  such  subscription  being  made,  the  state  may  file  a  bill 
to  forfeit  its  charter.3  But,  even  though  a  company  has  commenced 
business  before  its  capital  stock  is  subscribed  in  good  faith,  as  re- 
quired by  statute,  yet  its  contracts  cannot  be  attacked  on  that 
ground.4 

§  177.  The  act  of  incorporation  may,  of  course,  vary  the  above 
rules.  Thus,  it  is  well  established  that,  where  the.  charter  authorizes 
the  organization  of  the  company,  and  the  commencement  of  corporate 
work  after  a  certain  amount  of  capital  stock  has  been  subscribed, 
such  a  charter  provision  is  equivalent  to  an  express  authority  to  the 
corporation  to  call  in  the  subscriptions  as  soon  as  this  organization  is 
effected  and  the  specified  subscriptions  obtained.5     Subscriptions  to 

i  Salem    Mill-dam    Corp.    v.   Ropes,  Abell,  17  Mo.  App.  G45    (1SS5);   Lin- 

23  Mass.  23   (1S27).     Cf.  §63,  supra,  coin,    etc.    Co.    v.    Sheldon,    44    Neb. 

Even  though  the  full  capital  stock  is  279    (1S95);    Perkins   v.   Sanders,   5G 

not  subscribed,  and  even  though  the  Miss.    733    (1S79);    Hunt   v.    Kansas, 

statue    prohibits    doing   business    be-  etc.  Bridge  Co.,  11  Kan.  412    (1873), 

fere  the  entire  capital  stock   is  sub-  the  court  saying  that  otherwise  there 

scribed,    subscribers    are    liable    for  would  be  no  propriety  in  allowing  the 

debts  incurred  in  beginning  business,  organization    before   the   full    capital 

Myers  v.  Sturgis,  123  N.  Y.  App.  Div.  was  subscribed;   Hoagland  v.  Cincin- 

470   (190S).  nati,  etc.  R.  R.,  18  Ind.  452   (1862); 

2  McCoy  v.  World's,  etc.  Exposition,  Hanover,  etc.  R.  R.  v.  Haldeman,  82 
1S6  111.  356  (1900).  Where,  by  the  Pa.  St.  36  (1876);  Penobscot,  etc.  R. 
charter,  there  are  two  hundred  shares  R.  v.  Bartlett,  78  Mass.  244  (1858), 
and  only  eleven  are  subscribed,  and  holding  so,  even  though  no  contracts 
then  the  charter  is  amended,  increas-  for  building  the  road  were  to  be 
ing  the  shares  to  two  hundred  and  made  until  a  larger  subscription  was 
fifty  thousand  and  decreasing  the  par  obtained;  Boston,  etc.  R.  R.  v.  Well- 
value  thereof,  this  it  not  an  increase  ington,  113  Mass.  79  (1873);  Minor 
of  the  capital  stock  within  the  rule  v.  Mechanics'  Bank,  1  Pet.  46  (1828); 
that  such  increase  need  not  be  wholly  New  Haven,  etc.  R.  R.  v.  Chapman,  38 
subscribed  in  order  to  hold  the  sub-  Conn.  56  (1S71);  Illinois  River  R.  R. 
scribers  liable.  Gettysburg,  etc.  v.  Zirnmer,  20  111.  654  (1S58)  ;  Lex- 
Bank  r.  Brown,  95  Md.  367   (1902).  ington,    etc.    R.    R.    v.    Chandler,    54 

3  State  v.  Debenture,  etc.  Co.,  51  Mass.  311  (1847) ;  Willamette  Freight- 
La.  Ann.   1874    (1899).  ing    Co.    v.     Stannus,    4     Oreg.     261 

4  City  of  Spokane  v.  Amsterdamsch  (1872) ;  Jewett  v.  Valley  Ry.,  34  Ohio 
Trustees,  22  Wash.  172   (1900).  St.   601    (1878).     A  vigorous  case  to 

5  Schenectady,  etc.  Co.  v.  Thatcher,  the  contrary  is  Galveston  Hotel  Co. 
11  N.  Y.  102  (1854);  Rensselaer,  etc.  v.  Bolton,  46  Tex.  633  (1877).  The 
Co.  v.  Wetsel,  21  Barb.  56  (1855);  court  said:  "There  were  good  reasons 
Hamilton,  etc.  Co.  v.  Rice,  7  Barb,  for  organizing  the  company  to  be 
157    166    (1849);    Sedalia,  etc.  Ry.  v.  found    in    the    increased    facility    of 

464 


en.  x.] 


MISCELLANEOUS    DEFENSES. 


[§  178. 


the  full  amount  of  the  capital  stuck  are  bold  not  to  be  necessary. 
Tbe  defense  is  not  good. 

§  178.  Where  a  subscription  specifies  bow  much  of  tbe  capital 
stock  must  be  subscribed  before  payment  may  be  enforced,  such 
specifications  are  legal  and  effective,  and  until  they  are  fully  complied 
with  the  subscriber  is  not  liable.1  A  subscription  of  this  kind  is  a 
conditional  subscription.2  A  condition  that  the  subscription  shall 
be  payable  only  when  sufficient  subscriptions  for  tbe  corporate  pur- 
pose have  been  secured  has  been  held  to  require  funds  sufficient  to  put 
the  enterprise  in  full  operation.3     On  the  other  band,  a  subscription 


thereby  raising  the  subscription  to 
the  amount  fixed  for  the  capital  stock, 
and  of  other  preliminary  preparations 
for  the  execution  of  the  work,  when 
the  subscription  should  reach  that 
amount."  A  contrary  rule  "would 
render  nugatory  the  most  important 
provision  of  the  charter,  which  is 
the  amount  of  its  capital  stock." 
When  the  capital  stock  is  to  be  fixed 
by  the  corporation  between  two 
limits,  the  subscription  of  the  full 
amount  as  fixed  is  a  subscription  of 
the  full  capital  stock.  Kennebec,  etc. 
R.  R,  v.  Jarvis,  34  Me.  360  (1852). 
There  need  not  be  a  full  subscrip- 
tion where  the  statutes  authorize  an 
organization  as  soon  as  one-half  is 
subscribed.  Astoria,  etc.  R.  R.  v. 
Hill,  20  Oreg.  177  (1890).  The  stat- 
utes may  allow  the  corporation  to 
proceed  with  business  and  collect  sub- 
scriptions before  the  full  capital  stock 
is  subscribed.  Schloss  v.  Montgomery 
Trade  Co.,  87  Ala.  411  (1S89).  Where 
calls  may  be  made  after  one-quarter 
of  the  stock  has  been  subscribed,  the 
complaint  must  allege  subscriptions 
to  that  amount.  San  Bernardino  Inv. 
Co.  v.  Merrill,  108  Cal.  490  (1895). 
Where  the  statute  allows  a  call  after 
twenty-five  per  cent,  has  been  sub- 
scribed, the  full  subscription  of  this 
twenty-five  per  cent,  is  necessary. 
Ventura,  etc.  Ry.  v.  Hartman,  116 
Cal.  260  (1897).  Full  subscription  is 
unnecessary  where  the  charter  al- 
lows the  commencement  of  business 


"as  soon  as  the  directors  think  fit." 
Mandel  v.  Swan,  etc.  Co.,  154  111.  177 
(1895). 

1  Where,  by  its  terms,  it  is  not  to 
be  binding  until  a  certain  amount 
is  subscribed,  it  is  enforceable  when 
that  amount  is  secured,  although  less 
than  the  full  capital  stock.  Bucks- 
port,  etc.  R.  R.  v.  Buck,  65  Me.  536 
(1876);  s.  c,  68  Me.  81.  See  also 
Iowa,  etc.  R.  R.  v.  Perkins,  28  Iowa, 
281  (1869).  Where  the  by-laws  pro- 
vide that  the  first  issue  of  stock  shall 
be  one-half  of  the  authorized  capital 
stock,  a  subscriber  who  has  agreed 
to  such  by-laws  cannot  defend  on  the 
ground  that  the  entire  capital  stock 
has  not  been  subscribed.  Anglo- 
American,  etc.  Co.  v.  Dyer,  181  Mass. 
593  (1902).  Organization  authorized 
where  "$200  to  any  one  mile"  has 
been  subscribed  is  satisfied  by  a  $200 
subscription  in  general.  Fitch  v.  Pop- 
lar Flat,  etc.  Co.,  13  S.  W.  Rep.  791 
(Ky.  1890).  Where  the  subscription 
list  or  articles  of  association  signed 
by  defendant  expressly  provide  for 
the  commencement  of  business  before 
the  full  capital  is  subscribed,  the  de- 
fense is  waived.  Arkadelphia  Cotton 
Mills  v.  Trimble,  54  Ark.  316   (1891). 

2  See  ch.  V,  supra. 

3  People's  Ferry  Co.  v.  Balch,  74 
Mass.  303  (1857),  the  court  holding 
that  funds  for  the  land,  structures 
and  boats  must  be  in  hand  before  the 
defendant  becomes  liable. 


(30) 


465 


§  179.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


to  pay  "when  required"  renders  tlie  subscribers  liable  before  the  full 
capital  stock  is  subscribed.1 

§  171).  In  England  statutory  provisions  have  almost  entirely  dis- 
placed the  common-law  rule.  The  principle  that  a  subscriber  is 
not  liable  until  the  full  capital  stock  has  been  subscribed  is  recognized 
as  having  been  the  original  rule  at  law.  An  eminent  English  author- 
ity says  that,  in  all  the  cases  in  which  the  subscribers  were  held 
bound,  they  "had  entered  into  a  contract  which  precluded  them  from 
maintaining  that  the  subscription  of  the  whole  of  the  originally  pro- 
posed  capital  was  an  express  or  implied  condition  to  their  becoming 
shareholders."  The  English  courts  seem  to  have  no  clearly  defined 
rule  in  this  matter,  but  allow  each  case  to  turn  largely  on  its  own 
facts;  releasing  the  subscriber  if  the  discrepancy  in  the  subscriptions 
is  very  large,  and  holding  him  liable  if  it  is  small,  or  if  he  in  any 
way  has  aided  the  company  in  beginning  business.2 


i  Cheraw,  etc.  R.  R.  v.  Garland,  14 
S.    C.    G3    (18S0). 

2  Norwich,  etc.  Navigation  v.  Theo- 
bald, 1  Moody  &  M.  151  (1828),  re- 
quired full  subscription  in  accordance 
with  a  statute.  Fox  v.  Clifton,  6 
Bing.   776    (1830),    (a   new  trial   was 


Contra,  Lyon's  Case,  35  Beav.  64G 
(1866).  Johnston  v.  Goslett,  3  C.  B. 
(N.  S.)  569  (1857),  makes  the  di- 
rectors liable  to  the  subscriber  for 
his  deposit  when  they  so  proceed. 
London,  etc.  Ins.  Co.  v.  Redgrave,  4 
C.  B.    (N.  S.)    524    (185S),  holds  the 


granted  in  9   Bing.  115)    the  earliest    subscriber  liable,  he  having  aided  in 


common-law  English  case  on  this  sub- 
ject holds  that  the  subscriber  is  not 
liable  to  corporate  creditors  unless 
the  full  capital  stock  has  been  sub- 
scribed. Pitchford  v.  Davis,  5  Mees. 
&  W.  2  (1839),  also  fully  agrees 
with  the  rule  that  prevails  in  this 
country.  Wontner  v.  Shairp,  4  C.  B. 
4U4  (1S47),  sustained  a  recovery  of 
amounts  paid  on  a  subscription, 
under  misrepresentations  that  the 
whole  stock  had  been  subscribed. 
Waterford,  etc.  Ry.  v.  Dalbiac,  4  Eng. 
L.     &    Eq.    455     (1851),     refused     to 


the  incorporation.  Ornamental,  etc. 
Woodwork  Co.  v.  Brown,  2  Hurl.  & 
C.  63  (1863),  holds  the  subscriber 
liable  under  the  statute  of  19  and 
20  Vict.,  ch.  47,  similar  to  the  Amer- 
ican statutes.  See  also  McDougall  v. 
Jersey,  etc.  Co.,  10  Jur.  (N.  S.)  1043 
(1S64).  Peirce  v.  Jersey  Water- 
works Co.,  L.  R.  5  Exch.  209  (1870), 
required  a  certain  amount  to  be  sub- 
scribed, the  charter  itself  so  prescrib- 
ing. Elder  v.  New  Zealand,  etc.  Co., 
30  L.  T.  Rep.  285  (1874),  the  most 
important  case  on  this  subject,  holds 


allow  the  defense,  since  the  charter    that,   where  the  directors   are  about 


allowed  the  corporation  to  purchase 
land  before  the  full  capital  stock  was 
subscribed.  Watts  v.  Salter,  10  C.  B. 
477   (1S50),  holds  the  same,  the  sub- 


to  proceed  with  only  one-fourteenth  of 
the  capital  stock  subscribed,  a  sub- 
scriber may  apply  to  the  court  and 
have  his  name  removed  from  the  sub- 


scriber having  aided  in  the  incorpora-    scribers'  list.    The  court  said  that  the 


tion,  and  given  the  directors  power 
to  proceed.  Galvanized  Iron  Co.  v. 
Westoby,  21  L.  J.  Exch.  302  (1852), 
per  B.  Parke,  says  that  at  common 
law  the  subscriber  is  not  liable  unless 
the  full  capital  stock  is  subscribed. 


case  of  McDougall  v.  Jersey,  etc.  Co., 
2  Hem.  &  M.  528  (1864),  would  have 
been  decided  otherwise  had  not  two- 
thirds  of  the  stock  in  that  case  been 
subscribed.  See  also  Howbeach  Coal 
Co.    v.    Teague,    5    Hurlst.    &   N.    151 


466 


CH.  X.] 


MISCELLANEOUS   DEFENSES. 


[§  180. 


§  180.  Some  difficulty  has  been  experienced  in  determining  what 
subscriptions  shall  be  counted  in  ascertaining  whether  the  full  capital 
stock  has  been  subscribed.  Conditional  subscriptions,  the  condition 
to  which  has  not  yet  been  performed  by  the  corporation,  are  clearly 
not  to  be  counted  among  the  rest,  since  such  subscriptions  may  never 
become  enforceable.1 

The  subscriptions  of  married  women,  infants,  or  persons  of  un- 
sound mind  are  to  be  excluded  from  the  count.2  So,  also,  the  sub- 
scriptions of  insolvents  are  excluded,  unless  at  the  time  of  subscrib- 
ing they  were  apparently  able  to  pay  the  subscription.3     The  decision 


(1S60);  dictum  in  Re  Jennings,  1  Ir. 
Ch.  654   (1851). 

l  Troy,  etc.  R.  R.  v.  Newton,  74 
Mass.  596  (1857),  the  condition  being 
that  the  subscriber  be  allowed  to  pay 
in  construction  work;  Oskaloosa  Ag- 
ricultural Works  v.  Parkhurst,  54 
Iowa,  357  (1880) ;  Brand  v.  Lawrence- 
ville,  etc.  R.  R.,  77  Ga.  506  (1S87); 
New  York,  etc.  R.  R.  v.  Hunt,  39 
Conn.  75  (1872);  Cabot,  etc.  Bridge 
v.  Chapin,  60  Mass.  50  (1S50),  where 
a  subscription  payable  in  other  stock 
at  par,  when  the  market  value  was 
less,  was  not  counted;  Ticonic,  etc. 
Co.  v.  Lang,  63  Me.  480  (1874).  Sub- 
scriptions payable  in  property  are 
not  to  be  counted  in  ascertaining 
whether  the  full  capital  stock  is  sub- 
scribed. California,  etc.  Co.  v.  Rus- 
sell, 88  Cal.  277  (1891),  holding,  also, 
that  an  agent's  unauthorized  sub- 
scription is  not  to  be  counted,  even 
though  subsequently  ratified  by  the 
principal.  Conditional  subscriptions, 
the  condition  of  which  cannot  be  ful- 
filled until  after  incorporation,  are 
not  to  be  counted  in  ascertaining 
whether  the  requisite  capital  stock 
has  been  subscribed.  Portland,  etc. 
R.  R.  v.  Spillman,  23  Oreg.  5S7 
(1S93).  A  subscription  on  condition 
that  interest  shall  be  paid  is  counted. 
Rutland,  etc.  R.  R.  v.  Thrall,  35  Vt. 
536  (1S63).  Cf.  Greenville,  etc  R.  R. 
v.  Coleman,  5  Rich.  Law  (S.  C),  118 
(1851).  Invalid  subscriptions  are  not 
counted.  Belfast,  etc.  R.  R.  v.  Cot- 
trell,  66  Me.  185  (1876).  Cf.  Swart- 
wout  v.   Michigan    Air   Line   R.   R., 


24  Mich.  3S9  (1S72);  §79,  supra,  and 
note  3,  p.  468,  infra. 

2  Phillips  v.  Covington,  etc.  Bridge 
Co.,  2  Mete.  (Ky.)  219  (1859),  hold- 
ing that  subscriptions  of  infants,  mar- 
ried women,  or  insolvents  are  not  to 
be  counted  unless  already  paid  in. 
Fictitiously  paid-up  stock,  and  stock 
convertible  into  corporate  bonds, 
were  counted.  See  also  Hahn's  Ap- 
peal, 7  Atl.  Rep.  4S2  (Pa.  1886),  ex- 
cluding subscriptions  of  married 
women.  Cf.  Litchfield  Bank  v. 
Church,  29  Conn.  137  (I860).  Pay- 
ment of  part  with  knowledge  that  a 
married  woman's  subscription  was 
counted  is1  a  waiver.  Cornell's  Ap- 
peal, 114  Pa.  St.  153  (1886).  It  is 
held  in  Mississippi,  however,  that 
even  though  by  the  terms  of  a  sub- 
scription agreement  it  is  to  be  bind- 
ing only  upon  so  much  money  being 
subscribed,  and  some  of  the  money 
subscribed  is  by  minors,  this  is  no 
defense  to  the  adult  subscribers,  since 
the  minors  subscribing  are  bound 
after  their  majority,  unless  they 
plead  infancy  as  a  defense.  Chicago, 
etc.  Co.  v.  Higginbotham,  29  S.  Rep. 
79   (Miss.  1901). 

3  Lewey's  Island  R.  R.  v.  Bolton, 
48  Me.  451  (I860);  Belfast,  etc.  R. 
R.  v.  Brooks,  60  Me.  568  (1872); 
Denny  Hotel  Co.  v.  Schram,  6  Wash. 
St.  134  (1S93).  The  subsequent  fail- 
ure of  some  of  the  subscribers  is 
immaterial.  Salem  Mill-dam  Corp.  v. 
Ropes,  26  Mass.  187  (1829).  Where 
the  subscriber  is  worth  only  $5,400 
and  subscribes  for  $64,000  of  stock, 


467 


§  180.] 


MISCELLANEOUS  DEFENSES. 


[CII.  X. 


of  the  proper  corporate  authorities  that  the  capital  stock  has  been 
fully  subscribed  is  conclusive  in  the  absence  of  proof  of  fraud  or 
bad  faith.1  It  is  no  defense  to  an  action  on  a  subscription  that  a 
part  of  the  subscriptions  were  made  by  corporations  and  were  not 
enforceable.  Only  the  state  can  raise  that  objection.2  Considerable 
difference  of  opinion  exists  as  to  whether  subscriptions  payable  by 
their  terms  in  labor  or  materials  or  contract  work  are  to  be  included 
in  the  count.3  It  has  been  held  that  the  necessity  of  employing  this 
method  of  carrying  out  many  modern  corporate  enterprises  requires 
that  such  subscriptions  should  be  counted  if  the  contract  is  made  in 
good  faith  and  the  contractors  are  reasonably  responsible  men.4  The 
records  of  the  corporation  are  sufficient  and  competent  evidence  that 
the  full  capital  stock  has  been  subscribed.5 

he     is     apparently     unable    to     pay.  scribed   for  some  of  the  stock  ultra 

Denny  Hotel  Co.  v.  Schram,  6  Wash,  vires.     McCoy  v.  World's  Exposition, 

134    (1893).     A  corporation  need  not  87   111.   App.   605    (1899).     Aff'd,   186 

allege  that  the  subscriptions  making  111.    356. 

up  the  capital  stock  were  all  by  solv-  3  They  certainly  are  not  counted 
ent  people.  Shick  v.  Citizens'  En-  where  the  contractor  failed  to  com- 
terprise  Co.,  15  Ind.  App.  329  (1896).  plete  the  work.  New  York,  etc.  R. 
The  fact  that  the  company  is  un-  R.  v.  Hunt,  39  Conn.  75  (1872) ;  Troy, 
able  to  collect  the  minimum  subscrip-  etc.  R.  R.  v.  Newton,  74  Mass.  596 
tion  required  by  the  charter  is  no  (1857),  the  court  saying:  "The  re- 
defense  unless  bad  faith  in  taking  ceipt  of  the  stock  by  them  depended 
the  subscription  is  shown.  West  entirely  upon  a  contingency,  as  the 
End,  etc.  Co.  v.  Claiborne,  97  Va.  contractors  might  fail  to  do  the  work, 
734  (1900).  Where  a  prospectus  and  so  no  stock  be  earned;"  Old- 
states  that  an  allotment  will  be  made  town,  etc.  R.  R.  v.  Veazie,  39  Me. 
only  after  a  certain  amount  has  been  571  (1855),  where  the  contract  work 
subscribed,  and  it  turns  out  that  some  was  not  completed.  Stock  taken  by 
of  the  subscriptions  were  not  good,  a  construction  company  for  con- 
the  other  subscribers  have  a  right  struction  work  is  to  be  counted. 
to  withdraw.  Finance  &  Issue  Ltd.  Sweeney  v.  Tennessee  etc.  R.  R.,  100 
v.  Canadian,  etc.  Corporation,  Ltd.,  S.  W.  Rep.  732  (Tenn.  1907).  In  the 
[1905]  1  Ch.  37.  case  of  Ridgefield,  etc.  R.  R.  v.  Brush, 

i  Louisiana,    etc.    Co.    v.    Kuenzel,  43    Conn.    86    (1875),   such    subscrip- 

108  Mo.  App.  105  (1904).        .  tions  were  counted,  the  contract  for 

2  U.    S.    Vinegar    Co.    v.    Foehren-  payment  in  work  being  parol,  and  not 

bach,  148  N.  Y.  58    (1895).     Contra,  allowed   to   vary   the   apparently   ab- 

Berry  v.  Yates,  24  Barb.  199    (1857).  solute  subscription.     See  also  note  1, 

The    defense    that   part    of    the    sub-  p.  467,  supra. 

scriptions  were   by   another   corpora-  4  Phillips  v.  Covington,  etc.  Bridge 

tion  and  illegal,  and  hence  that  the  Co.,  2  Mete.   (Ky.)   219   (1859). 

full  capital  stock  was  not  subscribed,  5  Quoted    and   approved    in    McCoy 

is    not   good   as   to   subscribers   who  v.    World's    Exposition,    186    111.    356 

have  paid  part  with  knowledge.    Cole  (1900).     Penobscot  R.  R.  v.  Dummer, 

v.  Satsop  R.  R.,  9  Wash.  487   (1894).  40  Me.  172    (1855);   Penobscot  R.  R. 

A   subscriber   cannot   defend    on    the  v.  White,  41  Me.  512   (1856).     Unless 

ground  that  a  corporation  had  sub-  proof  be  introduced  to  destroy  their 

468 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  181. 


The  directors  and  stockholders  are  not  liable  for  corporate  debts 
merely  because  they  commenced  business  before  the  capital  stock 
was  subscribed  unless  fraud  or  a  violation  of  the  statutes  is  in- 
volved.1 

§  181.  A  subscriber  may  waive  the  defense  that  the  full  capital 
stock  of  the  corporation  has  not  been  subscribed.  This  waiver  may 
be  either  express  or  implied  from  the  acts  or  declarations  of  the 
subscriber.2  Many  different  facts  have  been  passed  upon  by  the 
courts,  and  held  either  to  constitute  or  not  to  constitute  a  waiver,^ 
of  this  defense.  Thus,  it  has  been  held  to  amount  to  a  waiver  for  the 
subscriber  to  act  as  a  director,  attend  meetings,  and  contract  corporate 
debts  ;3  or  to  pay  assessments  for  several  years,  with  full  knowledge 
of  all  the  facts  ;4  or  to  write  to  the  directors,  requiring  them  to  call 
a  meeting  ;5  or  to  participate  as  a  stockholder  and  committeeman  for 


effect.  A  call  is  notice  that  the  full 
amount  has  been  subscribed.  Har- 
laem  Canal  Co.  v.  Seixas,  2  Hall  (N. 
Y.),  504  (1829);  Harlsem  Canal  Co. 
v.  Spear,  2  Hall  (N.  Y.),  510  (1829); 
Litchfield  Bank  v.  Church,  29  Conn. 
13 1  (1860),  holding  that  the  certificate 
of  the  commissioners  that  the  full 
stock  had  been  subscribed  would  not 
be  questioned,  even  though  they  had 
counted  married  women's  subscrip- 
tions. To  same  effect,  see  Lane  v. 
Brainard,  30  Conn.  5G5  (1862);  Marl- 
borough Branch  R.  R.  v.  Arnold,  75 
Mass.  159  (1857).  If  the  corporate 
records  are  destroyed  or  lost  there 
should  be  other  clear  evidence.  Cen- 
tral Turnp.  Corp.  v.  Valentine,  27 
Mass.  142    (1830). 

i  See  §  243,  infra. 

2  Macfarland  v.  "West  Side  Imp. 
Assoc,  56  Neb.  277  (1898);  Emmitt 
v.  Springfield,  etc.  R.  R.,  31  Ohio  St. 
23  (1876);  Hager  v.  Cleveland,  36 
Md.  476  (1872);  Masonic  Temple 
Assoc,  v.  Channell,  43  Minn.  353 
(1890).  In  Anderson  v.  Middle,  etc. 
R.  R.,  91  Tenn.  44  (1891),  a  special 
agreement  was  held  to  be  a  waiver 
of  the  full  capital  being  subscribed, 
but  not  as  to  those  who  had  not 
signed  the  agreement.  A  subscriber 
by  paying  calls  may  waive  objections 
to  the  full  capital  stock  being  sub- 
scribed.    California,  etc.  Hotel  Co.  v. 


Callender,  94  Cal.  120  (1892).  The 
whole  capital  stock  must  be  sub- 
scribed before  the  subscriptions  are 
enforced,  unless  the  subscription  con- 
tract provides  otherwise.  A  subscrib- 
er may  waive  this,  and  the  question 
of  waiver  is  for  the  jury.  Hards  v. 
Platte  Valley,  etc.  Co.,  35  Neb.  263 
(1892),  s.  c,  46  Neb.  709.  Where  the 
subscribers  have  induced  a  contractor 
to  proceed  on  the  theory  that  the  full 
capital  has  been  subscribed,  it  is  no 
defense  that  one  subscription  was  in- 
valid. Gibbons  v.  Ellis,  83  Wis.  434 
(1892). 

3  Hager  v.  Cleveland,  36  Md.  476 
(1872).  A  defendant  waives  the  de- 
fense that  the  full  capital  stock  was 
not  subscribed  where  he  serves  as  a 
director,  is  present  when  calls  are 
made,  votes  in  favor  of  buying  a 
building  lot,  serves  on  committees, 
prepares  plans,  etc.  Auburn,  etc. 
Assoc,  v.  Hill,  32  Pac.  Rep.  587  (Cal. 
1893);  aff'd  in  113  Cal.  382  (1896). 

4  Morrison  v.  Dorsey,  48  Md.  461 
(1877).  This  defense  is  not  waived 
by  payment  of  calls  in  ignorance  of 
the  facts,  where  the  statute  requires 
a  full  subscription  before  business 
is  commenced.  Birge  v.  Browning, 
11  Wash.  249  (1895). 

5  Tredwen  v.  Bourne,  6  M.  &  W. 
461  (1840),  holding  it  to  be  evidence 
of  waiver. 


469 


181.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


several  months;1  or  to  act  as  president  of  the  corporation.2  The 
fact  that  certain  other  corporations  subscribed  for  stock  of  an  ex- 
position company,  without  charter  authority  so  to  do,  is  no  defense  to 
another  stockholder  who  stood  by  without  objecting  and  who  does 
not  prove  that  such  subscriptions  were  not  paid.3  But  a  subscriber 
does  not  waive  this  defense  by  paying  a  deposit;4  or  by  attending  a 
meeting;5  or  by  participating  in  preliminary  work  and  paying  a 
statutory  percentage  required  to  be  paid  at  the  time  of  subscribing  ;c 
or  by  paying  assessments  for  surveys.7     The  presumption  is  that  the 


1  Sharpley  v.  Louth,  etc.  Ry.,  L. 
R.  2  Ch.  D.  663  (1876).  A  stockhold- 
er who  receives  and  retains  a  cer- 
tificate for  increased  stock  cannot, 
after  corporate  insolvency,  set  up  that 
the  full  increased  capital  was  not 
subscribed.  Butler  v.  Aspinwall,  33 
Fed.  Rep.  217  (1887);  aff'd,  133  U. 
S.  599.  See  also  §  288,  infra.  By  or- 
ganizing and  proceeding,  stockhold- 
ers waive  the  defense  that  the  full 
capital  stock  was  not  subscribed. 
Dallemand  v.  Odd  Fellows'  Sav.  Bank, 
7  4  Cal.  598  (1888). 

2Corwith  v.  Culver,  69  111.  502 
(1873). 

3  McCoy  v.  World's,  etc.  Exposition, 
186  111.  356  (1900).  A  subscriber  to 
stock  in  an  unincorporated  associa- 
tion is  not  relieved  from  liability, 
even  though  some  of  the  subscriptions 
necessary  to  make  up  the  amount  re- 
quired by  the  subscription  paper  were 
forgeries  and  others  obtained  by  false 
representations,  if  it  be  shown  that 
the  association  accepted  the  building 
to  construct  which  it  was  formed. 
Haney,  etc.  Co.  v.  Adaza,  etc.  Co., 
108  Iowa,  313  (1899).  A  subscriber 
who,  when  shown  the  list  of  sub- 
scribers, does  not  object  that  one  of 
the  other  subscribers  is  a  corporation, 
cannot  afterwards  raise  that  objec- 
tion. Pacific  Mill  Co.  v.  Inman,  46 
Ore.  352    (1905). 

4  Pitchford  v.  Davis,  5  M.  &  W. 
2  (1839). 

5Wontner  v.  Shairp,  4  C.  B.  404 
(1847);  New  Hampshire  R.  R.  v. 
Johnson,  30  N.  H.  390  (1855);  Oryn- 
Bki  v.  Loustaunan,  15  S.  W.  Rep.  674 


(Tex.  1890),  holding  that  this  defense 
is  not  waived  by  attending  a  corpor- 
ate meeting,  the  subscriber  not  know- 
ing all  the  facts;  nor  is  it  waived  by 
paying  part  of  the  subscription.  Pow- 
er in  the  directors  to  make  calls 
when  they  see  fit  does  not  destroy 
this  defense.  A  subscriber  who  at- 
tends meetings  and  participates  in 
the  organization  waives  the  defense 
that  the  full  capital  stock  has  not 
been  subscribed;  but  if  he  does  so 
without  knowledge  of  the  fact  that 
the  full  capital  stock  has  not  been 
subscribed,  he  does  not  waive  such 
defense.  Portland,  etc.  R.  R.  v.  Spill- 
man,  23  Oreg.  587  (1893);  Interna- 
tional, etc.  Assoc,  v.  Walker,  88  Mich. 
62  (1891),  s.  c,  97  Mich.  159,  holding 
that  attendance  at  a  meeting  and 
voting  are  not  necessarily  a  waiver. 
A  person  who  acts  as  a  stockholder 
cannot  raise  the  defense  that  the  full 
capital  stock  was  not  subscribed. 
Doak  ».  Stahlman,  58  S.  W.  Rep.  741 
(Tenn.  1899). 

6  Livesey  v.  Omaha  Hotel  Co.,  5 
Neb.  50  (1876);  Oldtown,  etc.  R.  R. 
v.  Veazie,  39  Me.  571  (1855),  where  as 
an  officer  the  subscriber  aided  in  pre- 
liminary work.  This  case  goes  fur- 
ther, and  holds  that  there  can  be  no 
waiver  under  any  state  of  facts,  but 
that  the  full  capital  stock  is  neces- 
sary. Acts  and  facts  prior  to  the 
signing  of  the  subscription  do  not 
constitute  a  waiver.  Curry  Hotel  Co. 
v.  Mullins,  93  Mich.  318  (1892). 

7  Memphis  Branch  R.  R.  v.  Sullivan, 
57  Ga.  240  (1876).  Atlantic  Cotton 
Mills  v.  Abbott,  63  Mass,  423  (1852), 


470 


CH.  X.]  MISCELLANEOUS   DEFENSES.  [§    182. 

amount  required  by  statute  to  be  subscribed  before  any  call  can  be 
made  has  been  subscribed,  where  suit  is  brought  on  a  subscription.1 
This  defense  may  not  be  good  as  against  a  receiver.2  A  receiver  of 
an  insolvent  corporation  in  suing  on  a  subscription  need  not  allege 
that  the  full  capital  stock  was  subscribed.3 

§  1S2.  Failure  to  fix  definitely  the  capital  stock,  where  the  amount 
is  left  in  the  discretion  of  the  corporation. — Sometimes  corporate 
charters,  especially  in  the  New  England  states,  are  granted  without 
specifying  the  exact  amount  of  the  capital  stock,  but  either  fixing  the 
outside  limit  or  allowing  the  corporate  authorities  to  fix  it  between 
certain  specified  limits.  Where  the  charter  leaves  the  amount  of 
the  capital  stock  indefinite,  it  is  the  duty  of  the  proper  corporate 
authorities  to  determine  what  it  shall  be ;  and  no  subscriber  can  be 
held  liable  on  his  subscription  until  such  determination  is  made.4 
After  the  capital  stock  is  once  fixed,  there  seems  to  be  no  rule  pre- 
venting its  being  varied  subsequently,  provided  the  specified  char- 
ter limits  are  observed.5  It  has  been  held  that  even  subscriptions  to 
the  amount  of  the  lowest  limit  allowed  by  the  charter  are  insufficient, 
unless  that  limit  has  been  designated  by  the  corporate  authorities  as 
the  amount  of  the  capital  stock.0  After  the  capital  stock  is  so 
determined,  the  full  amount  thereof  must  be  subscribed  before  any 

holds    that    paying   assessments    and  R.  R.  v.  Cady,  11  R.  I.   131    (1875); 

attempting  to  transfer  is  not  a  waiver.  City  Hotel  v.  Dickinson,  72  Mass.  586 

May   v.   Memphis   Branch    R.    R.,    48  (1856).     In   the   case   of   Kirksey   v. 

Ga.  109   (1873),  holds  that  paying  an  Florida,  etc.  Co.,  7  Fla.  23   (1857),  it 

assessment    with    notice   of    this    de-  was  held   that  the  corporate  charter 

fense  is  a  waiver  of  it.  need  not  mention   any   capital  stock 

i  Milwaukee,  etc.  Co.  v.  Schoknecht,  or  shares  of  stock,  and  yet  subscrip- 

108  Wis.  457   (1901).  tions  may  be  taken  and  enforced.    In 

2  "Where  the  incorporators  organize  the  case  of  Ward  v.  Griswoldville  Mfg. 
before  the  minimum  capital  is  sub-  Co.,  16  Conn.  593  (1844),  where  the 
scribed,  they  are  liable  to  corporate  charter  allowed  the  capital  stock  to 
creditors  under  the  Georgia  statute  vary  from  $5,000  to  $50,000,  it  was 
up  to  the  amount  of  such  minimum  assumed  that  the  subscriptions  were 
capital,  and  it  is  no  defense  that  be-  enforceable,  although  no  fixed  capital 
fore  debts  were  incurred  they  sold  stock  had  been  settled  upon.  In 
their  stock  back  to  the  corporation.  White  Mountains  R.  R.  v.  Eastman, 
Walters  v.  Porter,  59  S.  E.  Rep.  452  34  N.  H.  124  (1856),  the  charter  al- 
(Ga.  1907).  lowed    assessments    when    the    lower 

3  Myers  r.  Sturgis,  123  N.  Y.  App.  limit  of  the  capital  stock  was  reached. 
Div.  470   (190S).  5  Somerset,   etc.  R.   R.  v.   Cushing, 

4  Worcester,  etc.  R.  R.  v.  Hinds,  62  45  Me.  524  (1858);  Troy,  etc.  R.  R. 
Mass.  110  (1851);  Troy  R.  R.  v.  v.  Newton,  74  Mass.  596  (1857)—  dicta, 
Newton,    74   Mass.   596    (1857);    Pike  however,  in  both  of  these  cases. 

v.    Bangor,    etc.    R.    R.,    68    Me.    445        6  Pike  v.  Bangor,  etc.  R.  R.,  68  Me. 
(1878);  Somerset  R.  R.  v.  Clarke,  61     445   (1878). 
Me.    379    (1S73).      Contra,    Warwick 

471 


§§183,184.]  MISCELLANEOUS  DEFENSES.  [en.  X. 

subscriber  is  liable.1  It  is  not  necessary  that  the  amount  of  the 
capital  stock  be  fixed  by  formal  declaration  of  the  corporate  authori- 
ties. It  may  be  done  by  acts  equivalent  thereto.  Thus,  a  resolution 
to  close  the  books  on  a  given  day,2  or  limiting  the  time  of  subscrip- 
tion and  then  closing  the  subscription  books,3  or  voting  that  a  certain 
amount  of  stock  in  addition  to  existing  subscriptions  shall  be  issued,1 
are  the  same  as,  and  are  equivalent  to,  an  express  resolution  that  the 
capital  stock  shall  be  the  amount  of  subscriptions  thus  taken. 

§  183.  Irregular  incorporation  oj  the  company. — Under  the  laws 
of  most  of  the  states,  charters  of  incorporation  are  obtained  by  com- 
plying with  the  provisions  of  what  are  called  general  incorporating 
acts.  Usually  these  acts  provide  that  a  specified  number  of  persons, 
by  filing  at  a  public  registry  a  certificate  setting  out  certain  facts, 
may  thereby  form  a  corporation  for  the  purposes  named  in  such  cer- 
tificate. The  various  steps  to  be  taken,  and  the  contents  of  each 
certificate,  are  prescribed  by  the  statute.  It  frequently  happens, 
however,  that  in  the  formation  of  a  corporation  under  the  statute 
some  part  of  the  proceeding,  through  inadvertence  or  mistake,  is  not 
strictly  complied  with.  The  same  thing  happens,  also,  under  a  spe- 
cial act  incorporating  a  certain  company,  and  requiring  it  to  perform 
specified  things  in  order  to  render  the  incorporation  complete.  These 
defects  may  render  the  corporate  charter  forfeitable  at  the  instance 
of  the  state.  Accordingly  the  question  has  arisen  whether  such  de- 
fects in  the  process  of  becoming  incorporated  are  a  good  and  suffi- 
cient defense  to  an  action  by  the  corporation  to  collect  subscriptions 
to  its  stock. 

§  184.  When  an  action  is  brought  to  collect  a  subscription,  either 
directly  or  indirectly  for  the  benefit  of  corporate  creditors,  it  is  well 
established  that  the  subscribers  cannot  defeat  such  action  by  the  de- 
fense that  the  corporation  was  not  an  incorporation,  by  reason  of  its 
not  having  fully  complied  with  the  terms  of  the  statute  providing  for 
such  an  incorporation.5      Not  only  is  the  subscriber  estopped,  by 

i  Somerset,  etc.  R.  R.   v.   Cushing,  417  (1873);  s.  c,  28  Fed.  Cas.  839,  the 

45  Me.  524  (1858).    Cf.  Kennebec,  etc.  court  saying:   "I  understand  the  rule 

R.  R.  v.  Jarvis,  34  Me.  360  (1852).  to  be  well  settled  that,  where  papers 

2  Lexington,  etc.  R.  R.  v.  Chandler,  having  color  of  compliance  with  the 

54  Mass.  311   (1847).  statutes  have  been  filed  with  the  prop- 

3Bucksport,  etc.  R.  R.  v.  Buck,  65  er   state    officers   and   meet  their   ap- 

Me.  536  (1876);  s.  c,  68  Me.  81.  proval,   but  are   in  fact  so   defective 

4  Penobscot,   etc  R.  R.  v.   Bartlett,  as  to  be  incapable  of  supporting  the 

78  Mass.  244  (1858).  corporation  as  against  the  state,  they 

5Hickling    v.    Wilson,    104    111.    54  are,   as   against   a   subscriber   to    its 

'(1882);  Wheelock  v.  Kost,  77  111.  296  capital,    held    sufficient   to   constitute 

(1875) ;   Casey  v.  Galli,  94  U.   S.  673  a  corporation   de  facto,   if  supported 

1(1876);  Upton  v.  Hansbrough,  3  Biss.  by  proof  of  user;"  Clarke  v.  Thomas, 

472 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  184 


the  act  of  subscribing,  from  setting  up  this  defense,  but  he  is  bound 
also  by  the  rule  that  the  existence  of  a  corporation  cannot  be  in- 
quired into  except  by  a  direct  proceeding  in  behalf  of  the  state.1  It 
is  sufficient  that  the  corporation  exists  de  facto.2  If,  however,  there 
is  no  authority  of  law,  whatsoever,  for  such  a  corporation,  the  mem- 
bers are  liable  as  partners.3  It  is  no  defense  to  a  foreclosure  suit  on 
a  mortgage  given  by  the  company  that  the  company  was  fraudulently 
organized.4  A  subscription  liability  cannot  be  enforced,  however, 
by  one  of  the  promoters,  as  a  corporate  creditor,  where  the  corpora- 
tion was  organized  to  sell  the  product  of  various  competing  plants  in 
violation  of  the  anti-trust  act.5 


34  Ohio  St.  46  (1874);  Voorhees  v. 
Receiver  of  Bank,  19  Ohio,  463 
(1850)  ;  Ossipee  Hosiery,  etc.  Co.  v. 
Canney,  54  N.  H.  295  (1874);  Mc- 
Cune  Min.  Co.  v.  Adams,  35  Kan.  193 
(1886);  Hamilton  v.  Clarion,  etc.  R. 
R.,  144  Pa.  St.  34  (1891);  Hause  v. 
Mannheimer,  67  Minn.  194  (1897); 
State  Bank  Bldg.  Co.  v.  Peirce,  92 
Iowa,  668  (1S94);  American  Home- 
stead Co.  v.  Linigan,  46  La.  Ann. 
1118  (1893);  Ogden  Clay  Co.  v.  Har- 
vey, 9  Utah,  497  (1894).  Directors 
cannot  escape  liability  on  their  un- 
paid subscriptions  on  the  ground  that 
the  company  was  not  legally  organ- 
ized. Tanner  v.  Nichols,  80  S.  W. 
Rep.  225  (Ky.  1904).  It  is  no  defense 
that  the  corporation  has  not  paid  a 
statutory  incorporation  fee  to  the 
state.  Murphy  v.  Wheatley,  102  Md. 
501  (1906).  It  is  no  defense  that  the 
company  was  not  legally  organized. 
McCarter  v.  Ketcham,  72  N.  J.  L.  247 
(1905).  If  the  corporation  is  de  facto, 
a  stockholder  cannot  defend  on  the 
ground  that  it  is  not  de  jure.  Stan- 
wood  v.  Sterling  Metal  Co.,  107  111. 
App.  Rep.  569  (1903).  An  incorporator 
and  subscriber  cannot  set  up  irregular 
incorporation  as  a  defense.  Wades- 
boro,  etc.  Co.  v.  Burns,  114  N.  C.  353 
(1894).  Thompson  v.  Reno  Sav.  Bank, 
19  Nev.  103,  171,  242,  291,  293  (1885), 
says:  "The  certificate  is  made  for 
the  benefit  of  the  public,  not  for  the 
corporation  or  its  stockholders.  Those 
who  participated  in  the  incorporation 


of  this  bank,  and,  by  a  certificate 
made  in  pursuance  of  the  statute,  an- 
nounced the  amount  of  its  capital 
stock,  cannot,  as  against  the  creditors 
of  the  corporation,  contradict  their 
own  certificate."  The  creditors  of  a 
consolidated  company  may  enforce 
subscriptions  to  the  stock  of  the  con- 
stituent companies,  and  the  irregu- 
larity of  the  incorporation  of  the  con- 
solidated company  is  no  defense. 
Hamilton  v.  Clarion,  etc.  R.  R.,  144 
Pa.  St.  34  (1891).     See  also  ch.  XIII. 

A  subscriber  who  is  sued  by  a  re- 
ceiver of  the  corporation  on  a  sub- 
scription cannot  set  up  the  defense 
that  the  purpose  of  the  corporation 
was  illegal,  in  that  it  involved  a 
drawing  for  distribution  among  the 
stockholders  of  lots  of  unequal  value. 
Card  well  v.  Kelly,  95  Va.  570  (1898). 
As  against  its  mortgage  the  corpora- 
tion cannot  set  up  the  defense  that 
it  was  not  legally  organized,  in  that 
no  stock  was  ever  subscribed  for. 
Jones  v.  Hale,   32   Oreg.   465    (1898). 

i  Quoted  and  approved  in  Planters', 
etc.  Co.  v.  Webb,  144  Ala.  666  (1905). 

2  Quoted  and  approved  in  Dickason 
v.  Grafton,  etc.  Co.,  Ohio  Circuits 
(1905),  p.  357. 

3  See  ch.  XIII. 

4  Gunderson  v.  Illinois  Trust  & 
Savings  Bank,  100  111.  App.  Rep.  461 
(1902);    aff'd,  199   111.  422. 

5  Euston  v.  Edgar,  105  S.  W.  Rep. 
773    (Mo.  1907). 


473 


§  185.] 


MISCELLANEOUS  DEFENSES. 


[CII.  X. 


§  185.  As  between  the  corporation  itself  and  the  subscribers  there 
is  more  difficulty  and  doubt  in  determining  the  rule.  The  great 
weight  of  authority  lays  down  the  broad  rule  that  "where  there  is 
a  corporation  de  facto,  with  no  want  of  legislative  power  to  its  due 
and  legal  existence;  where  it  is  proceeding  in  the  performance  of 
corporate  functions,  and  the  public  arc  dealing  with  it  on  the  supposi- 
tion that  it  is  what  it  professes  to  be ;  and  the  questions  suggested  are 
only  whether  there  has  been  exact  regularity  and  strict  compliance 
with  the  provisions  of  the  law  relating  to  incorporation, — it  is  plainly 
a  dictate  alike  of  justice  and  of  public  policy,  that,  in  controversies 
between  the  de  facto  corporation  and  those  who  have  entered  into 
contract  relations  with  it,  as  corporators  or  otherwise,  such  questions 
should  not  be  suffered  to  be  raised."  1     This,  doubtless,  is  the  com- 


i  Cooley,  J.,  in  Swartwout  v.  Mich- 
igan Air  Line  R.  R.,  24  Mich.  389 
(1872) ;  American  Alkali  Co.  v.  Camp- 
bell, 113  Fed.  Rep.  398  (1902)  ;  Torras 
v.  Raeburn,  108  Ga.  345  (1899);  Fish 
v.  Smith,  73  Conn.  377  (1900);  Harris 
v.  Gateway,  etc.  Co.,  128  Ala.  652 
(1901).  An  important  case  on  this 
subject  is  Tar  River  Nav.  Co.  v.  Neal, 
3  Hawks  (N.  C),  520  (1S25),  where 
the  court  say  that  "even  where  it  is 
shown  that  such  charter  has  been 
granted  upon  a  precedent  condition, 
and  persons  are  found  in  the  quiet 
possession  and  exercise  of  those  cor- 
porate rights,  as  against  all  but  the 
sovereign  the  precedent  condition 
shall  be  taken  as  performed."  In  this 
case  the  subscriber  had  participated 
in  corporate  meetings.  Wilmington, 
etc.  R.  R.  v.  Thompson,  7  Jones,  L. 
(N.  C.)  387  (1860);  Brookville,  etc. 
Co.  v.  McCarty,  8  Ind.  392  (1856), 
holding  also  that  the  subscriber  can- 
not set  up  that  the  corporation  had 
forfeited  its  charter  for  misuser  and 
non-user;  Central,  etc.  Assoc,  v.  Ala- 
bama, etc.  Ins.  Co.,  70  Ala.  120  (1881), 
where  the  court  say:  "Whoever  con- 
tracts with  a  corporation  having  a 
de  facto  existence,  the  reputation  of 
a  legal  corporation,  in  the  actual  ex- 
ercise of  corporate  powers  and  fran- 
chises, is  estopped  from  denying  the 
legality  of  the  existence  of  the  cor- 
poration, or  inquiring  into  irregulari- 


ties attending  its  formation,  to  defeat 
the  contract,  or  to  avodd  the  liability 
he  has  voluntarily  and  deliberately 
incurred."  It  also  holds  that  a  sub- 
sequent statute  curing  the  defect  is 
constitutional  and  effective;  Appleton 
Mut.  F.  Ins.  Co.  v.  Jesser,  87  Mass. 
446  (1862),  the  court  saying  that 
where  "persons  were  found,  with  the 
consent  and  under  the  authority  of 
the  designated  corporators,  and  with- 
out objection  on  the  part  of  the  sov- 
ereign power,  actually  exercising  the 
corporate  powers  and  claiming  and 
using  the  franchise,  they  constituted 
a  corporation  de  facto;  and  the  law- 
fulness of  their  organization  cannot 
be  impeached  collaterally  in  an  action 
to  recover  an  assessment;"  McCarthy 
v.  Lavasche,  89  111.  270  (1878),  hold- 
ing that  the  defense  is  not  allowable, 
even  though  the  statute  creating  the 
corporation  was  unconstitutional.  See 
St.  Louis,  etc.  Assoc,  v.  Hennessy,  11 
Mo.  App.  555  (1882);  Slocum  v.  Prov- 
idence Steam,  etc.  Co.,  10  R.  I.  112 
(1871);  McHose  v.  Wheeler,  45  Pa. 
St.  32  (1863);  Tarbell  v.  Page,  24 
111..  46  (1860),  where  no  certificate 
was  filed;  Walworth  v.  Brackett,  98 
Mass.  98  (1867);  Hanover,  etc.  R.  R. 
v.  Haldeman,  82  Pa.  St.  36  (1876), 
holding  that  non-user  rendering  the 
charter  forfeitable  is  no  defense; 
Rowland  v.  Meader  Furniture  Co.,  38 
Ohio  St.  269  (1882),  holding  that  etc 


474 


CH.  X.j 


MISCELLANEOUS    DEFENSES. 


[§  185. 


mon  law,  although  a  carefully  considered  case  in  Missouri  held  to 
the  contrary,  and  allowed  a  subscriber  who  had  not  done  more  than 
merely  subscribe  to  set  up  this  defense  against  the  corporation,  no 

tual  judgment  of  forfeiture  is  no  de-    their  statutory  liability,   cannot   im- 


fense;  South  Bay,  etc.  v.  Gray,  30 
Me.  547  (1849);  Danbury,  etc.  R.  R. 
v.  Wilson,  22  Conn.  435  (1853); 
United  Growers  Co.  v.  Eisner,  22  N. 
Y.  App.  Div.  1  (1897),  where  the  sub- 
scriber acted  as  a  director;  Central 
Plank  Road  Co.  v.  Clemens,  16  Mo. 
359  (1852);  Maltby  v.  Northwestern 
Va.  R.  R.  16  Md.  422  (1860),  where 
the  subscriber  had  already  paid  calls; 
Cromford,  etc.  Ry.  v.  Lacey,  3  Y.  & 
J.  80  (1829),  where  incorporation  was 
obtained  by  a  false  representation  to 
parliament;  Rockville,  etc.  Co.  v.  Van 
Ness,  2  Cranch,  C.  C.  449  (1824); 
s.  c,  20  Fed.  Cas.  1080,  where  the 
subscriber  had  taken  part  in  an  elec- 
tion; Monroe  v.  Fort  Wayne,  etc.  R. 
R.,  28  Mich.  272  (1873),  where  only 
three  instead  of  five  signed  the  cer- 
tificate; Rice  v.  Rock  Island,  etc.  R. 
R.,  21  111.  93  (1859);  Hunt  v.  Kan- 
sas, etc.  Bridge  Co.,  11  Kan.  412 
(1873),  where  the  subscriber  acted 
as  director;  Home  Stock  Ins.  Co.  v. 
Sherwood,  72  Mo.  461  (1880);  Evans- 
ville,  etc.  R.  R.  v.  Evansville,  15  Ind. 
395  (1860);  Stoops  v.  Greensburgh, 
etc.  Co.,  10  Ind.  47  (1S57);  Centre, 
etc.  Turnp.  Co.  v.  McConaby,  16  Serg. 
&  R.  (Pa.)  140  (1S27),  and  cases  in 
ch.  XXXVIII  on  this  subject;  Gill  v. 
Kentucky,  etc.  Min.  Co.,  7  Bush 
(Ky.),  635  (1871);  Wood  v.  Coosa, 
etc.  R.  R.,  32  Ga.  273  (1861) ;  Hager  v. 
Cleveland,  36  Md.  476  (1872);  East 
Pascagoula  Hotel  Co.  v.  West,  13  La. 
Ann.  545  (1858).  See  also  Oregon 
Cent.  R.  R.  v.  Scoggin,  3  Oreg.  161 
(1869),  holding,  under  a  statute,  that 
the  subscription  may  be  sued  on  be- 
fore the  organization  is  completed.  It 
is  no  defense  that  the  corporation  was 
organized  on  a  fourteen-day  notice 
instead  of  fifteen  days.  Ossipee  Ho- 
siery, etc.  Co.  v.  Canney,  54  N.  H.  295 
(1874).     Stockholders,  when  sued  on 


peach  the  organization  of  the  com- 
pany. Aultman  v.  Waddle,  40  Kan. 
195  (18S8).  The  subscriber  cannot 
set  up  that  the  charter  was  unconsti- 
tutional. Dows  v.  Naper,  91  111.  44 
(1878).  Illegal  incorporation  is  no 
defense.  Farmers  Mut.  Tel.  Co.  v. 
Howell,  132  Iowa  22  (1906).  A 
person  induced  to  subscribe  for  stock 
on  the  representation  of  an  officer 
that  the  company  had  been  prop- 
erly organized,  may  rescind  if  it  was 
not  properly  organized.  An  offer  to 
surrender  the  stock  in  the  petition  is 
sufficient.  The  officer  is  not  personally 
legally  liable  if  he  made  the  represen- 
tation in  good  faith.  Maine  v.  Mid- 
land Investment  Co.,  132  Iowa,  273 
(1906). 

In  New  York  the  first  case  is 
Dutchess  Cotton  Manufactory  v.  Da- 
vis, 14  Johns.  238  (1817);  then  came 
Schenectady,  etc.  Co.  v.  Thatcher,  11 
N.  Y.  102  (1S54);  Eaton  v.  Aspin- 
wall,  19  N.  Y.  119  (1859);  Methodist, 
etc.  Church  v.  Pickett,  19  N.  Y.  482 
(1859),  where  the  court  said  it  is 
sufficient  for  the  corporation  to  be 
de  facto.  "Two  things  are  necessary 
...  in  order  to  establish  the  exist- 
ence of  a  corporation  de  facto,  viz.: 
(1)  The  existence  of  a  charter,  or 
some  law  under  which  a  corporation 
with  the  powers  assumed  might  law- 
fully be  created;  and  (2)  a  user,  by 
the  party  to  the  suit,  of  the  rights 
claimed  to  be  conferred  by  such  char- 
ter or  law.  .  .  .  The  rule  estab- 
lished by  law  as  well  as  by  reason  is, 
that  parties  recognizing  the  existence 
of  corporations  by  dealing  with  them 
have  no  right  to  object  to  any  irregu- 
larity in  their  organization."  Black 
River,  etc.  R.  R.  v.  Clarke,  25  N.  Y. 
208  (1862);  Leonardsville  Bank  v. 
Willard,  25  N.  Y.  574  (1862) ;  Buffalo, 
etc.  R.  R.  v.  Cary,  26  N.  Y.  75  (1862) ; 


475 


§  185.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


creditor's  rights  being  involved;   and   the  court  declared   that   all 
the  cases  denying  the  defense  were  cases  where  the  subscriber  had 


Aspinwall  v.  Sacchi,  57  N.  Y.  331 
(1874);  Dorris  v.  French,  4  Hun,  292 
(1875).  Not,  however,  where,  at  the 
time  of  signing  the  articles,  the 
names  of  the  directors,  required  to 
be  inserted,  were  not  inserted.  Dutch- 
ess, etc.  R.  R.  v.  Mabbett,  58  N.  Y. 
397  (1874);  Cayuga  Lake  R.  R.  v. 
Kyle,  64  N.  Y.  185  (1876);  Phoenix 
Warehousing  Co.  v.  Badger,  67  N.  Y. 
294  (1876);  De  Witt  v.  Hastings,  69 
N.  Y.  518  (1877),  admitting  the  de- 
fense on  the  ground  that  there  was  no 


road  runs.  Anderson  v.  Middle,  etc. 
R.  R.,  91  Tertn.  44  (1891).  Concern- 
ing the  question  of  who  can  complain 
of  mistakes,  irregularities,  and  illegal- 
ities in  the  corporation,  see  §  5,  supra. 
Where  the  general  railroad  act  pro- 
vides that  unless  work  is  commenced 
within  two  years  the  charter  shall  be 
void,  a  subscriber  for  stock  prior  to 
incorporation  may  set  up  the  defense 
that  two  years  have  elapsed  and  the 
charter  is  void.  Bywaters  v.  Paris, 
etc.  Ry.,  73  Tex.  624   (1889).     A  sub- 


user  of  a  corporate  franchise;    Rug-    scriber  cannot  deny  the  incorporation 


gles  v.  Brock,  6  Hun,  164  (1875); 
Mead  v.  Keeler,  24  Barb.  20  (1857); 
Abbott  v.  Aspinwall,  26  Barb.  202 
(1857);  Childs  v.  Smith,  55  Barb.  45 
(1869);  and  see  Childs  v.  Smith,  46 
N.  Y.  34  (1871);  McFarlan  v.  Triton 
Ins.  Co.,  4  Denio,  392   (1847). 

This  is  also  the  rule  in  the  federal 
courts.  Webster  v.  Upton,  91  U.  S. 
65  (1875);  Chubb  v.  Upton,  95  U.  S. 
665  (1S77).  Contra,  Thompson  v. 
Guion,     5     Jones,    Eq.     (N.     C.)     113 


of  the  company  when  sued  on  a  note 
given  for  his  subscription.  Columbia 
Electric  Co.  v.  Dixon,  46  Minn.  463 
(1891).  A  note  given  to  be  applied  in 
payment  of  a  subscription  in  a  com- 
pany to  be  formed  has  been  held  to  be 
good,  even  though  the  corporation  was 
not  legally  formed,  an  attempt  at  in- 
corporation having  been  made.  Smith 
v.  Gillen,  52  Ark.  442  (1890).  The  va- 
lidity of  the  incorporation  of  an  in- 
surance company  cannot  be  questioned 


(1859).    Cf.  Katama  Land  Co.  v.  Hoi-     by  a  person  who  has  given  to  it  a  cap- 


ley,  129  Mass.  540    (1880). 

The  lapse  of  the  charter,  by  limita- 
tion of  time  within  which  work  must 
be  commenced,  is  a  good  defense.  Mc- 
Cully  v.  Pittsburgh,  etc.  R.  R.,  32  Pa. 
St.  25  (1858).  Subscribers  to  in- 
creased capital  stock  cannot  escape 
liability  therefor  by  setting  up  that 
the  notice  of  increase  was  not  pub- 
lished as  required  by  statute.  Hand- 
ley  v.  Stutz,  139  U.  S.  417  (1891).  See 
also  §  288,  infra.  A  subscriber  to  stock 
in  a  West  Virginia  corporation  doing 
all  its  business  in  Minnesota  cannot 
set  up  in  defense  that  the  company 
was  not  legally  incorporated,  or  that 
the  plaintiff  is  not  a  corporation,  he 
having  participated  in  its  incorpora- 
tion. Minnesota,  etc.  Co.  v.  Denslow, 
46  Minn.  171  (1891).    It  is  no  defense 


ital  stock  note.  Raegener  v.  Hubbard, 
167  N.  Y.  301  (1901).  A  constitutional 
provision  that  "dues  from  corpora- 
tions, other  than  banking,  shall  be  se- 
cured by  such  individual  liability  of 
the  corporators,  or  other  means,  as 
may  be  prescribed  by  law,"  does  not 
render  unconstitutional  a  general  stat- 
ute for  incorporation  which  does  not 
prescribe  any  statutory  liability  of 
stockholders,  and  hence  that  defense 
is  not  available  to  a  subscriber  who 
is  sued  on  his  subscription.  Williams 
v.  Citizens',  etc.  Co.,  153  Ind.  496 
(1899).  The  question  of  who  may 
question  the  legality  or  regularity  of 
the  incorporation  has  given  rise  to 
much  litigation  and  is  fully  consid- 
ered elsewhere.  See  §  637,  infra.  So 
also  is  the  question  of  whether  stock- 


that  the  charter  was  not  registered  in     holders  may  be  held  liable  as  partners 
all   the   counties   through   which    the     by    creditors    of   the   corporation    by 

476 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  186. 


acquiesced,  "either  by  the  payment  of  part  of  the  subscription  or  by 
becoming  a  director,  or  by  attending  meetings  of  stockholders,  or  by 
any  other  act  indicating  an  acquiescence  in  the  validity  of  his  sub- 
scription."1 

§  186.  There  is  a  different  class  of  cases,  however,  in  which  a 
subscriber  for  stock  is  allowed  to  make  the  defense  that  the  corpora- 
tion has  not  been  regularly  and  legally  incorporated.  Where  the 
subscriber  made  his  contract  of  subscription  previous  to  and  in  antici- 
pation of  the  incorporation,  and  does  not,  by  his  subsequent  acts, 
acquiesce  in  the  mode  of  incorporation,  he  may  set  up  that  the  cor- 
poration has  not  been  incorporated,  and  that  he  is  not  liable.  The 
rule  that  a  person  contracting  with  a  corporation  recognizes  thereby 
its  capacity  to  contract,  and  cannot  afterwards  deny  it  in  that  trans- 
action, does  not  apply  to  one  who  subscribes  before  incorporation.  He 
may  insist  upon  the  organization  of  a  regular  and  legal  corporation.2 


reason  of  defective  or  unauthorized 
incorporation.     See   §§  231-236,  infra. 

i  Kansas  City  Hotel  Co.  v.  Hunt, 
57  Mo.  126  (1874).  A  subscription  to 
a  company  that  has  not  paid  the  in- 
corporation fee  is  not  binding,  where 
the  statutes  provide  that  the  com- 
pany shall  not  exercise  any  powers 
until  such  fee  is  paid,  and  even  the 
subsequent  payment  of  the  fee  does 
not  render  enforceable  a  subscription 
made  prior  thereto.  Cleveland  v.  Mul- 
lin,  96  Md.  598    (1903). 

2Dorris  v.  Sweeney,  60  N.  Y.  463 
(1875);  Rikhoff  v.  Brown's,  etc.  Co., 
68  Ind.  388  (1879);  Indianapolis  Fur- 
nace, etc.  Co.  v.  Herkimer,  46  Ind.  142 
(1874);  Nelson  v.  Blakey,  47  Ind.  38 
(1874);  Mclntyre  v.  McLain  Ditch- 
ing Assoc,  40  Ind.  104  (1872);  Rich- 
mond Factory  Assoc,  v.  Clarke,  61  Me. 
351  (1873);  Reed  v.  Richmond  Street 
R.  R.,  50  Ind.  342  (1875);  Taggart 
v.  Western  Md.  R.  R.,  24  Md.  563 
(1866),  the  court  saying:  "The  pre- 
ponderance of  authority  in  favor  of  a 
strict  compliance  with  the  provisions 
of  the  charter,  in  cases  of  subscrip- 
tion prior  to  the  organization  of  the 
company,  is  such  as  is  not  to  be  dis- 
regarded." Cf.  Buffalo,  etc.  R.  R.  v. 
Hatch,  20  N.  Y.  157  (1859).  A  sub- 
scriber for  stock  prior  to  incorpora- 


tion may  defeat  the  subscription  by 
the  defense  that  the  company  has  not 
been  legally  incorporated.  Capps  v. 
Hastings,  etc.  Co.,  40  Neb.  470  (1894). 
A  note  given  to  pay  for  stock  in  a 
corporation  to  be  organized  cannot  be 
enforced  by  the  payee  where  the  cor- 
poration has  not  been  formed.  North- 
western, etc.  Co.  v.  Lanning,  83  Minn. 
19  (1901).  See  also  §63,  supra.  Un- 
der the  Indiana  statute  authorizing  a 
corporation  for  manufacturing  or  va- 
rious other  purposes,  a  corporation 
cannot  be  formed  for  several  of  these 
purposes,  and  hence  a  subscription 
made  before  incorporation  cannot  be 
enforced  by  a  company  organized  for 
several  objects.  Williams  v.  Citizens', 
etc.  Co.,  25  Ind.  App.  351  (1900).  In 
suing  on  a  subscription  made  prior  to 
incorporation  the  corporation  must  al- 
lege in  detail  that  it  complied  with 
the  statutory  steps  to  become  a  cor- 
poration. Brooksville  R.  R.  v.  Byron, 
50  S.  W.  Rep.  530  (Ky.  1899).  A  fail- 
ure to  acknowledge  the  articles  of 
incorporation  is  a  good  defense  to  a 
subscriber  to  them  who  is  sued  upon 
bis  subscription.  Greenbrier  Ind.  Ex- 
position v.  Rodes,  37  W.  Va.  738 
(1893).  The  "records,  books,  and 
minutes"  of  a  corporation  are  suffi- 
cient  evidence   of   its    incorporation. 


477 


§  187.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


§  187.  Ultra  vires  acts  of  the  directors  of  the  corporation.  — A 
subscriber  for  stock  in  a  coloration  cannot  defeat  an  action  to 
collect  such  subscription  by  the  defense  that  the  directors  or  the 
corporation  itself  have  done  corporate  acts  which  are  beyond  the  cor- 
porate powers.1  There  are  other  remedies  open  to  the  subscriber.  Ho 
may  either  enjoin  such  ultra  vires  acts,  or  may  have  them  set  aside  if 
already  accomplished.2  This  defense  is  clearly  distinguishable  from 
the  common  defense  of  amendments  to  the  charter,  by  the  fact  that 
the  acts  here  complained  of  have  no  sanction  from  the  legislative 
authorities.3     Thus,  it  has  been  held  that  a  subscriber  cannot  defeat 


Glenn  v.  Orr,  96  N.  C.  413  (1887).  A 
subscriber  may  deny  that  a  consoli- 
dated company  which  succeeds  his 
own  was  legally  incorporated.  Mans- 
field, etc.  R.  R.  v.  Stout,  26  Ohio  St. 
241  (1875) ;  Brown  v.  Dibble,  65  Mich. 
520  (1887).  In  suing  on  an  original 
subscription  the  corporation  must  al- 
lege that  it  has  been  duly  incorpo- 
rated. The  payment  of  part  of  the 
subscription  is  no  waiver  of  the  de- 
fense. Schloss  v.  Montgomery  Trade 
Co.,  87  Ala.  411  (18S9).  Indefinite- 
ness  in  the  statement  of  the  objects 
of  incorporation  is  no  defense.  Owen- 
ton,  etc.  Co.  v.  Smith,  13  S.  W.  Rep. 
426   (Ky.  1890). 

i  Cravens  v.  Eagle  Cotton  Mills  Co., 
120  Ind.  6  (1889);  First  Municipality 
of  New  Orleans  v.  Orleans  Theatre 
Co.,  2  Rob.  (La.)  209  (1S42);  Hanni- 
bal, etc.  Co.  v.  Menefee,  25  Mo.  547 
(1857);  Vicksburg,  etc.  R.  R.  v.  Mc- 
Kean,  12  La.  Ann.  638  (1857) ;  Smith 
v  Tallassee,  etc.  R  R.  Co.,  30  Ala. 
650  (1857);  City  Hotel  v.  Dickinson, 
72  Mass.  5S6  (1856);  Courtright  v. 
Deeds,  37  Iowa,  503  (1873);  Hammett 
v.  Little  Rock,  etc.  R.  R.,  20  Ark.  204 
(1859).  In  Macedon,  etc.  Co.  v.  Lap- 
ham,  18  Barb.  812  (1854),  however, 
an  ultra  vires  extension  of  the  line 
was  held  to  be  a  good  defense.  A  sub- 
scriber cannot  set  up  that  the  corpora- 
tion has  not  complied  with  the  provi- 
sions of  its  charter.  Toledo,  etc.  R.  R. 
v.  Johnson,  49  Mich.  148  (1882).  Ultra 
vires  acts  and  no  notice  of  meetings 
are  not  good  defenses.    Cartwright  v. 


Dickinson,  88  Tenn.  476  (1890).  If  a 
manufacturing  corporation  does  not 
locate  its  works  in  the  place  pre- 
scribed by  its  articles  of  incorpora- 
tion, a  subscriber  to  stock  may  with- 
draw his  subscription.  Auburn,  etc. 
Works  v.  Schultz,  143  Pa.  St.  256 
(1891). 

2  "The  stockholder  has  his  remedy 
by  injunction;  not  to  enjoin  the  col- 
lection of  calls  due  upon  his  stock, 
but  to  restrain  the  corporation  from 
the  particular  violation  or  abuse  of 
its  charter  complained  of."  Missis- 
sippi, etc.  R.  R.  v.  Cross,  20  Ark.  443 
(1859).  See  also  Illinois,  etc.  R.  R. 
v.  Cook,  29  111.  237  (1862).  In  Ex 
parte  Booker,  18  Ark.  338  (1857),  an 
application  for  an  injunction  to  re- 
strain the  corporation  from  enforc- 
ing the  payment  of  a  subscription, 
on  the  ground  that  the  corporation 
had  committed  ultra  vires  acts,  was 
refused.  And  see  also  ch.  XXVIII, 
infra.  An  assessment  on  irrigation 
stock  to  be  used  for  a  purpose  outside 
of  the  charter  powers,  cannot  be  col- 
lected, and  a  forfeiture  and  sale  of 
the  stock  for  failure  to  pay  is  void. 
Seeley  v.  Huntington,  etc.  Ass'n,  27 
Utah  179    (1904). 

3  Caley  v.  Philadelphia  R.  R.,  80 
Pa.  St.  363  (1876).  A  change  in  the 
law  between  the  time  of  making  a 
subscription  and  the  obtaining  of 
the  charter  may  release  or  render  il- 
legal the  subscriptions.  Knox  v.  Child- 
ersburg  Land  Co.,  86  Ala.  180  (1889). 
Where  the  statutes  under  which  the 


478 


CH.  X.]  MISCELLANEOUS    DEFENSES.  [§    187. 

an  action  to  collect  his  subscription  by  showing  that  the  corporation 
has,  without  authority  of  law,  and  in  excess  of  its  powers,  executed  a 
lease  or  sale  of  the  road  j1  or  illegally  issued  its  bonds  ;2  or  purchased 
shares  of  its  own  stock 3  or  the  stock  of  another  corporation,4  or 
changed  the  location  or  route  of  the  road.5  The  last  instance,  espe- 
cially, has  been  a  frequent  defense,  but  it  has  been  uniformly  dis- 
countenanced by  the  courts  where  the  change  in  the  route  was 
made,  not  by  an  amendment  to  the  charter,  but  by  the  arbitrary,  un- 
authorized act  of  the  corporate  authorities.  Where  an  insurance  com- 
pany, having  authority  to  sell  its  property,  proceeds  to  sell  to  another 
company  which  has  no  authority  to  buy,  the  transaction  is  illegal,  and 
a  stockholder  in  the  former  who  agrees  to  take  stock  in  the  latter  in 
exchange  for  his  old  stock  is  not  bound  to  carry  out  the  transaction.6 
It  is  no  defense  to  an  action  to  enforce  a  subscription  that  after  in- 
corporation the  company  proceeded  to  form  an  illegal  combination  of 
competitors  in  trade.7  The  New  York  courts,  however,  have  re- 
fused to  hold  a  New  York  stockholder  in  an  English  corporation 
liable  for  his  unpaid  subscription,  where  under  a  plan  of  reorganiza- 
tion, sanctioned  by  the  English  courts,  in  accordance  with  English 
law,  the  amount  collected  is  to  go  to  a  reorganized  company,  while 
other  stockholders  need  not  pay  their  subscriptions  if  they  take  part 
in  the  reorganized  company  and  pay  a  small  sum;  especially  where, 

company  is  organized   allow  the  ob-  3  Re  Republic  Ins.  Co.,  3  Biss.  452 

jects  of  the  company  to  be  changed  (1873);  s.  c,  20  Fed.  Cas.  544. 

on  a  vote  of  the  stockholders,  a  dis-  4  Chetlain  v.  Republic  Life  Ins.  Co., 

senting    stockholder    is    not    released  86  111.  220  (1877). 

from  his  subscription  by  such  change.  5  Central   P.  R.  Co.  v.  Clemens,  16 

Mercantile    Statement   Co.    v.    Kneal,  Mo.   359    (1852);    Mississippi,  etc.  R. 

51  Minn.  263  (1892).     For  the  princi-  R.  v.  Cross,  20  Ark.  443    (1859).     Cf. 

pies  of  law  herein  relative  to  amend-  Rives  v.  Montgomery,  etc.  Co.,  30  Ala. 

ments  to  the  charter,  see  §502,  etc.,  92   (1857).     Where,  however,  the  ter- 

infra.  minus  was  made  two  thousand  feet 

i  Hays  v.  Ottawa,  etc.  R.  R.,  61  III.  away  from  the  location  designated  by 
422  (1871);  Ottawa,  etc.  R.  R.  v.  charter,  this  fact  was  held  to  consti- 
Black,  79  111.  262  (1875);  Illinois  tute  prima  facie  a  good  defense.  Char- 
Midland  Ry.  v.  Barnett,  85  111.  313  tiers  R.  R.  v.  Hodgens,  77  Pa.  St.  187 
(1877).  See  also  Tuttle  v.  Michigan,  (1874).  Cf.  s.  c,  85  Pa.  St.  501.  See 
etc.  R.  R.,  35  Mich.  247  (1877);  Troy,  also  §82,  supra.  A  change  in  the 
etc.  R.  R.  v.  Kerr,  17  Barb.  581  (1854).  route  under  statutes  existing  before 
Or  the  whole  of  a  business.  Plate  the  incorporation  does  not  release 
Glass  Univ.  Ins.  Co.  v.  Sunley,  8  El.  subscribers.  Armstrong  v.  Karshner, 
&  Bl.  47  (1857).  But  see  South  Geor-  47  Ohio  St.  276  (1890). 
gia,  etc.  R.  R.  v.  Ayres,  56  Ga.  230  o  Dougan's  Case,  28  L.  T.  Rep.  60 
(1876).  (1873);  aff'd,  8  Ch.  App.  540   (1873). 

2  Merrill   v.   Reaver,    50    Iowa,    404  7  U.  S.  Vinegar  Co.  v.  Foehrenbach, 

(1879).  148  N.  Y.  58   (1895). 

479 


§  188.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


if  all  the  stockholders  paid  in  full,  the  amount  would  be  more  than 
necessary  to  pay  the  debts.1 

§  1S8.  Frauds  and  mismanagement  of  directors.— This  defense 
is  very  similar  to  the  preceding  one,  and  is  governed  by  the  same  rules 
of  law.  A  stockholder  cannot  defeat  an  action  to  collect  his  sub- 
scription by  the  defense  that  the  corporate  affairs  have  been  man- 
aged fraudulently  or  recklessly  or  negligently.2  The  stockholder's 
remedies  for  such  evils  are  of  a  different  nature.  For  fraud  he  may 
bring  the  guilty  parties  to  an  accounting ;  3  for  mismanagement  his 
only  remedy  is  the  corporate  elections.  In  no  case  has  he  been  al- 
lowed to  escape  liability  on  his  subscription  by  reason  thereof.  Thus, 
it  is  no  defense  that  the  corporate  authorities  fraudulently  placed  an 
overvaluation  on  property  purchased  by  them  for  the  corporation;4 
nor  that  they  have  made  a  fraudulent  contract  with  a  construction 
company,5  or  that  the  insolvency  of  the  company  is  due  to  debts  in- 
curred in  buying  land  from  the  directors,  such  contract  being  void- 
able instead  of  void,  and  being  subject  to  the  ratification  of  the 
majority  of  the  stockholders.6 


i  Bank  of  China  v.  Morse,  168  N. 
Y.  458   (1901). 

2  People  v.  Barnett,  91  111.  422 
(1879);  Chetlain  v.  Republic  L.  Ins. 
Co.,  86  111.  220  (1877);  Glenn  v.  Ros- 
borough,  48  S.  C.  272  (1896);  Merrill 
v.  Reaver,  50  Iowa,  404  (1879).  De- 
preciation of  the  stock  by  reason  of 
mismanagement  is  no  defense.  Peo- 
ple v.  Barnett,  91  111.  422  (1879).  It 
is  no  defense  that  the  funds  of  the 
company  have  been  wasted.  Cook  v. 
Hopkinsville,  etc.  Co.,  32  S.  W.  Rep. 
748  (Ky.  1895).  Mere  mismanage- 
ment is  no  defense.  Hards  v.  Platte, 
etc.  Co.,  46  Neb.  709  (1896);  Oldham 
v.  Mt.  Sterling  Imp.  Co.,  45  S.  W. 
Rep.  779  (Ky.  1898).  Fraud  and  mis- 
management on  the  part  of  the  di- 
rectors and  corporate  officers  is  not  a 
valid  defense  herein.  Re  Republic 
Ins.  Co.,  3  Biss.  452  (1873);  s.  c, 
20  Fed.  Cas.   544. 

3  See  ch.  XXXIX.  In  Hodgkinson 
v.  National,  etc.  Ins.  Co.,  26  Beav.  473 
(1859),  equity  restrained  the  enforce- 
ment of  calls  already  made,  by  reason 
of  the  fraud  of  the  directors;  but  it 
was  conceded   in  this  case  that  the 


subscriber  was  still  liable  on  his  sub- 
scription. 

4  Hornaday  v.  Indiana,  etc.  R.  R., 
9  Ind.  263  (1857);  Dorris  v.  French, 
4  Hun,  292  (1875),  where  a  patent- 
right  was  purchased  by  the  directors 
from  themselves,  for  the  corporation, 
at  an  exorbitant  price. 

5  People  v.  Logan  County,  63  111. 
374,  387  (1872). 

6  Urner  v.  Sollenberger,  89  Md.  316 
(1899).  But  where  the  chief  pro- 
moter of  a  proposed  manufacturing 
corporation  obtains  donations  from 
property  owners  to  the  proposed  cor- 
poration on  his  agreement  that  $75,- 
000  of  stock  should  be  subscribed  for 
within  a  certain  time,  and  then  pro- 
ceeds to  organize  the  company,  he 
himself  subscribing  for  $25,000  of  the 
stock,  and  the  corporation  then  pur- 
chases certain  worthless  patents  and 
agency  contracts,  and  issues  therefor 
$63,250  of  full-paid  stock,  including 
the  $25,000  subscribed  for  by  him,  and 
afterwards  the  corporation  collects 
$4,000  of  such  donations,  and  borrows 
money  from  such  promoter  and  gives 
him  a  mortgage  therefor,  his  mort- 


480 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  189. 


§189.'  Delay  and  abandonment  of  the  enterprise.— As  &  general 
rule,  it  is  no  defense  to  an  action  on  a  subscription  to  allege  that 
the  enterprise  has  been  unduly  delayed.1  The  defense  frequently 
is  that  there  has  been  a  non-user  of  the  corporate  franchises.2  It  is, 
however,  a  well-established  principle  that  non-user  of  corporate  fran- 
chises can  be  complained  of  only  by  the  state  or  in  the  name  of  the 
state.3  Hence,  a  subscriber  has  been  held  not  to  be  discharged  by 
the  fact  that  the  corporation  was  engaged  thirteen  years  in  com- 
pleting the  enterprise — a  turnpike.4  Xor  does  a  temporary  aban- 
donment of  the  work  release  the  subscriber.5  Cut  when  the  corpo- 
rate work  was  not  commenced  for  nine  years,  and  in  the  meantime  the 
subscriber  had  acted  on  the  supposition  of  an  abandonment  and  had 
sold  property  which  the  road  was  expected  to  benefit,  he  was  held  not 
liable  on  the  subscription.6  AYhere  a  person  signs  an  agreement  to 
subscribe,  but  for  three  years  after  incorporation  the  agreement  is 
never  acted  upon  and  no  stock  is  ever  issued  to  him  or  assessment 
made  upon  him,  he  is  not  liable  on  such  subscription  to  creditors.7 


gage  is  not  good  as  against  the  par- 
ties who  donated  the  $4,000.  Moore 
v.  Universal,  etc.  Co.,  122  Mich.  48 
(1899). 

i  Pickering  v.  Tenipleton,  2  Mo. 
App.  424  (1876) ;  Miller  v.  Pittsburgh, 
etc.  R.  R.,  40  Pa.  St.  237  (1861), 
where  there  was  a  delay  of  two  and 
a  half  years,  the  court  saying:  "Un- 
til it  can  he  shown  how  railroads  can 
be  built  without  money,  no  such  de- 
fense as  is  here  set  up  can  prevail;" 
First  Nat.  Bank  v.  Hurford,  29  Iowa, 
579  (1870),  where  there  was  a  delay 
in  the  performance  of  a  condition 
subsequent  to  the  subscription.  See 
also  Union  Hotel  Co.  v.  Hersee,  79 
N.  Y.  454  (18S0);  reversing  15  Hun, 
371.  Boyle's  Case,  54  L.  J.  (Ch.) 
550  (1885),  holds  that  after  a  wind- 
ing-up has  commenced  there  can  be 
no  withdrawal;  but  the  court  in  a 
dictum  clearly  says  that  an  unrea- 
sonable delay  in  organizing  will  au- 
thorize a  withdrawal  by  the  sub- 
scriber. But  where  the  charter  has 
lapsed  by  reason  of  not  complying 
with  its  terms,  the  stockholder  is  not 
liable.  Sodus  Bay,  etc.  R.  R.  v.  Lap- 
ham,  43  Hun,  314  (1887). 

2  Mississippi,  etc.  R.  R.  v.  Cross,  20 


Ark.  443    (1S55);    Hammett  v.  Little 
Rock,  etc.  R.  R.,  20  Ark.  204  (1859). 

3  See  §  637,  infra. 

4  Gibson  v.  Columbia,  etc.  Co.,  18 
Ohio  St.   396    (1868). 

5  McMillan  v.  Maysville,  etc.  R.  R., 
15  B.  Mon.   (Ky.)    218   (1854). 

c  Fountain  Ferry  Turnp.  Co.  v. 
Jewell,  8  B.  Mon.  (Ky.)  140  (1S48). 
A  note  in  payment  of  a  subscription, 
payable  by  its  terms  aftei  the  road 
had  been  partially  completed,  is  not 
enforceable  where  the  enterprise  was 
abandoned  and  fourteen  years  after- 
wards was  revived  and  the  road  built. 
Blake  v.  Brown,  80  Iowa,  277  (1890). 

7  United  States,  etc.  Co.  v.  Davies, 
2  Kan.  App.  611  (1895).  Where  a 
person  signs  an  agreement  in  October, 
1S92,  "to  take"  certain  preferred  stock 
in  a  proposed  corporation,  but  the  cor- 
poration is  not  fully  organized  until 
June,  1894,  the  delay  in  accepting  the 
contract  is  unreasonable  and  the  cor- 
poration cannot  enforce  the  subscrip- 
tion. Carter,  etc.  Co.  v.  Hazzard,  65 
Minn.  432  (1896).  An  indefinite 
agreement  of  a  person  to  take  stock 
in  a  water  company  to  be  organized 
cannot  be  enforced  by  a  corporation 
which  has  obtained  a  charter  but  has 


(31) 


481 


§  190.] 


MISCELLANEOUS  DEFENSES. 


[CII.  X. 


An  abandonment  of  part  of  the  enterprise,  however,  is  no  defense.1 
A  subscriber  cannot  defeat  the  subscription  by  the  fact  that  the  cor- 
poration has  not  completed,  and  has  no  intention  of  completing,  the 
road  in  its  entirety;2  nor  by  the  fact  that  the  road  has  been  sold 
under  foreclosure.3  In  Pennsylvania  a  failure  on  the  part  of  the 
corporation  to  make  a  call  for  the  subscription  within  six  years,  the 
statutory  time  of  limitations  on  the  collection  of  parol  debts,  is  held 
to  constitute  an  abandonment  of  the  subscription,  and  to  be  a  good 
defense.4  If  the  corporation  is  insolvent,  and  the  subscription  is 
needed  to  pay  corporate  creditors,  abandonment  cannot  be  set  up.5 
§  190.  Failure  of  the  corporate  enterprise. — The  entire  failure  of 
the  enterprise  and  the  insolvency  of  the  corporation  constitute  no  de- 
fense to  an  action  on  calls.0     This  defense  would  seem  on  the  face  of 


never  held  an  organization  meeting 
nor  taken  subscriptions  to  stock. 
Nemaha,  etc.  Co.  v.  Settle,  54  Kan. 
424  (1894).  In  Harrison  Nat.  Bank 
v.  Votaw,  51  Kan.  362  (1893),  the 
creditors  of  a  corporation  failed  to 
enforce  subscriptions  made  prior  to 
the  incorporation,  there  being  evi- 
dence of  an  intent  to  abandon  the 
original  subscriptions  and  to  obtain 
others. 

1  Dorman  v.  Jacksonville,  etc.  Co., 
7  Fla.  265  (1857).  It  is  no  defense 
that  the  company  had  abandoned  a 
part  of  its  business  nor  that  the  com- 
pany was  organized  for  the  sole  bene- 
fit of  the  charter  members.  Dallas, 
etc.  Mills  v.  Clancey,  15  S.  W.  Rep. 
194  (Tex.  1891).  Where  a  company 
is  organized  to  work  gold  mines  in  a 
specified  place,  as  well  as  elsewhere, 
and  the  company  actually  works 
mines  elsewhere,  but  not  in  the  speci- 
fied place,  the  main  purpose  of  the 
company  is  not  carried  out  and  a  dis- 
solution may  be  had.  Re  Coolgardie, 
etc.  Mines,  76  L.  T.  269  (1897). 

2  Buffalo,  etc.  R.  R.  v.  Gifford,  87 
N.  Y.  294  (1S82),  aff'g  22  Hun,  359. 
It  is  no  defense  that  the  road  has 
not  been  fully  completed.  Armstrong 
v.  Karshner,  47  Ohio  St.  276  (1890); 
Lesher  v.  Karshner,  47  Ohio  St.  302 
(1890). 

3  Buffalo,   etc.  R.  R.  v.   Gifford,   87 
N.  Y.  294  (1882),  aff'g  22  Hun,  359. 


4  Pittsburgh,  etc.  R.  R.  v.  Byers, 
32  Pa.  St.  22  (1858).  The  same  rule 
is  stated  less  broadly  in  McCully  v. 
Pittsburgh,  etc.  R.  R.,  32  Pa.  St.  25 
(1S5S),  where  the  court  says:  "If 
the  delay  was  not  satisfactorily  ac- 
counted for,  subscribers  would  be  at 
liberty,  after  that  lapse  of  time,  to 
consider  the  enterprise  abandoned." 
In  this  case  an  actual  abandonment 
and  return  of  subscription  money  to 
other  subscribers  was  held  to  release 
all  the  subscribers.  In  Delaware,  etc. 
R.  R.  v.  Rowland,  9  Atl.  Rep.  929  (Pa. 
18S7),  it  was  submitted  to  the  jury 
whether  the  subscriber  had  been  re- 
leased by  an  abandonment  of  the  en- 
terprise. See  also  §  195,  infra.  Cf. 
§  638,  infra,  where  the  charter  lapsed. 

5  Phoenix  Warehousing  Co.  v.  Bad- 
ger, 67  N.  Y.  294  (1876);  Smith  v. 
Gower,  2  Duv.  (Ky.)  17  (1865); 
Hardy  v.  Merriweather,  14  Ind.  203 
(1860) ;  and  see  the  defense  in  §  190, 
infra. 

c  Bish  v.  Bradford,  17  Ind.  490 
(1S61);  Morgan  County  v.  Thomas, 
76  111.  120,  141  (1875);  Four-Mile 
Valley  R.  R.  v.  Bailey,  18  Ohio  St. 
208  (1868).  Assessments  are  collecti- 
ble though  the  work  is  not  completed. 
Red  Wing  Hotel  Co.  v.  Friedrich,  26 
Minn.  112  (1S79).  See  Buffalo,  etc. 
R.  R.  v.  Gifford,  87  N.  Y.  294  (18S2), 
aff'g  22  Hun,  359. 


482 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  191. 


it  to  be  frivolous,  and  yet  is  occasionally  set  up.  Under  the  American 
doctrine  a  subscription  is  enforceable  most  of  all  when  it  is  needed 
to  pay  corporate  creditors.  This  defense  is  closely  allied  to  those 
that  precede,  and  differs  little  from  the  defense  of  abandonment  of 

the  enterprise. 

§  191.     Secret  agreement  as  to  liability— Subscriptions  oj  other 
subscribers  released  or  canceled,  or  on  special  terms.— It  is  no  de- 
fense for  one  subscriber,  when  sued  upon  his  subscription,  to  allege 
that  the  subscriptions  of  others  have  been  canceled,  or  that  secret  and 
more  favorable  terms  were  given  to  them  than  to  him.     If  there  has 
been  a  legal  cancellation  of  other  subscriptions  the  defendant  cannot 
complain.1     If  he  has  the  same  right  to  a  cancellation  he  may  obtain 
it  by  a  suit  for  that  purpose.2     A  secret  agreement  of  the  corpora- 
tion with  certain  subscribers  to  stock,  whereby  they  are  to  be  re- 
leased from  payment,  or  to  have  some  other  advantage  not  common  to 
all  the  subscribers,  is  no  defense  to  a  subscriber  who  was  not  prom- 
ised the  same  advantages.3     In  fact  secret  agreements  to  release  are 
void,  and  the  subscribers  receiving  them  are  liable  on  their  subscrip- 
tions absolutely,  as  though  no  special  advantages  had  been  prom- 


1  Rensselaer,  etc.  Co.  v.  Wetsel,  21 
Barb.  56  (1855).  If,  however,  the 
cancellation  is  on  account  of  an  aban- 
donment of  the  enterprise,  any  other 
subscriber,  when  sued  subsequently  on 
his  subscription,  may  set  up  such 
abandonment  and  cancellation  and 
thereby  defeat  the  action.  McCully  v. 
Pittsburgh,  etc.  R.  R.,  32  Pa.  St.  25 
(1S58). 

2  Crawford    County    v.    Pittsburgh, 
etc.  R.  R.,  32  Pa.  St.  141  (1S58). 

3  Anderson  v.  Newcastle,  etc.  R.  R., 
12  Ind.  376   (1859);   Jewett  v.  Valley 
Ry.,    34    Ohio    St.    601    (1878);    Agri- 
Cultural,   etc.    Ins.    Co.    v.   Fitzgerald, 
15  Jur.  4S9   (1850);  Memphis  Branch 
R.  R.  v.  Sullivan,  57  Ga.  240    (1876); 
Hall  v.  Selma,  etc.  R.  R.,  6  Ala.   (N. 
S.)    74    (1844);    Connecticut,   etc.   R. 
R.  v.  Bailey,  24  Vt.  465  (1852) ;  Jewell 
v.  Rock  River  Paper  Co.,  101  111.  57 
(1881);  Berry  v.  Yates,  24  Barb.  199 
(1857);    Nickerson    v.    English,    142 
Mass.  267  (1886).    A  secret  agreement 
that  a  subscriber  for  stock  prior  to 
incorporation  shall  not  be  required  to 
take    the    stock    is    no    defense    as 
against  the  corporation.    Greater,  etc. 


Co.  v.  Riley,  210  Pa.  St.  283   (1904), 
In   Galena,  etc.  R.  R.  v.  Ennor,  116 
111.  55  (1886),  the  court  said:     "Such 
secret  agreement  was  fraudulent  as  to 
the  other  subscribers,   and  was  void 
and  of  no  avail,  and  the  subscription 
is  to  be  regarded  as  a  valid  one  for 
the   amount    subscribed."       See    also 
Thompson  v.  Reno  Sav.  Bank,  19  Nev. 
103,   171,   242,   291,   293    (1885).     The 
subscriber   has   the   burden   of  proof 
that  other  subscriptons  are  colorable 
and    fictitious.      Hayden    v.    Atlanta 
Cotton   Factory,    61    Ga.    233    (1878). 
The  case  of  Rutz  v.  Esler,  etc.  Mfg. 
Co.,  3  111.  App.  83  (1878),  is  contrary 
to  the  general  rule.    The  case  of  New 
York   Exchange   Co.   v.   De  Wolf,   31 
N.  Y.  273    (1865),  reversing  5  Bosw. 
593,  holds  that  a  subscriber  may  de- 
feat an  action  on  his  subscription  by 
showing  that  other  subscriptions  were 
unauthorized  and  not  enforceable.    It 
is  fraudulent  to  represent  that  a  sub- 
scription  is  bona  fide   when   in   fact 
there  was  an  agreement  that  the  sub- 
scriber should  pay  only  half  as  much 
as  other  subscribers.     State  Bank  v. 
Cook,  125  Iowa  111  (1904). 


483 


§  191.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


ised.1  Being  so,  a  subscriber,  though  he  did  not  participate  therein, 
cannot  complain.  It  is  no  defense  that  the  subscription  of  another 
person  has  been  marked  "canceled,"  where  there  is  no  proof  that 
defendant  subscribed  on  the  faith  of  such  other  subscription.2  The 
fact  that  the  corporation  has  forfeited  the  stock  of  other  subscribers, 
and  has  compromised    with   still   others,   is  no   defense   to   a   sub- 


l  Quoted  and  approved  in  Arm- 
strong v.  Danahy,  75  Hun,  405  (1894). 
It  is  no  defense  that  some  other 
stockholder  has  not  been  similarly- 
called  on  his  subscription,  inasmuch 
as  this  does  not  release  him.  Hast- 
ings Lumber  Co.  v.  Edwards,  188 
Mass.  587  (1905).  A  note  given  in 
payment  of  the  subscription  price  of 
stock  in  a  national  bank  may  be 
enforced  by  the  receiver,  and  it  is 
no  defense  that  the  president  had 
agreed  that  the  stock  might  be  re- 
turned and  the  note  canceled.  At- 
water  v.  Stromberg,  75  Minn.  277 
(1899).  A  director  cannot  defeat  a 
note  given  in  payment  of  a  subscrip- 
tion by  the  defense  that  there  was 
a  secret  agreement  that  he  should 
not  pay.  Shuey  v.  Holmes,  22  Wash. 
193  (1900).  A  secret  agreement  to 
release  a  subscriber  does  not  release 
others,  inasmuch  as  the  agreement 
is  invalid.  "Wilson  v.  Hundley,  96  Va. 
96  (1S98).  A  person  who  subscribes 
for  stock  in  a  bank  and  gives  his 
note  in  payment  therefor  cannot  de- 
feat the  note  on  the  ground  that  the 
president  agreed  that  it  need  not  be 
paid.  Mead  v.  Pettigrew,  11  S.  Dak. 
529  (1899).  A  secret  agreement  be- 
tween the  subscriber  and  the  di- 
rectors that  he  shall  not  be  called 
upon  to  pay  is  illegal.  Jackson,  etc. 
Co.  v.  Walle,  105  La.  89  (1900).  As 
against  corporate  creditors  a  sub- 
scriber cannot  evade  his  liability  by 
showing  a  separate  agreement  be- 
tween himself  and  the  corporation 
to  the  effect  that  the  stock  was  to 
be  delivered  to  him  at  a  future  time 
and  that  in  the  meantime  he  was  to 
advance  money  to  the  corporation  to 
the  amount  of  the  par  value  of  the 
stock  to  be  repaid  to  him  out  of  con- 


tracts. Beals  v.  Buffalo,  etc.  Co.,  49 
N.  Y.  App.  Div.  589  (1900).  Any 
secret  agreement  limiting  the  liability 
of  a  stockholder  to  his  unpaid  sub- 
scription is  void  as  against  corporate 
creditors.  Such  agreement,  however, 
is  binding  on  such  corporate  credi- 
tors as  are  chargeable  with  notice 
thereof.  Carnahan  v.  Campbell,  158 
Ind.  226  (1902).  Cf.  previous  de- 
cision in  59  N.  E.  Rep.  1054.  A 
secret  written  agreement  whereby  a 
subscriber  is  to  pay  when  so  disposed 
is  fraudulent  and  void.  Yonkers,  etc. 
Co.  v.  Jones,  30  N.  Y.  App.  Div.  316 
(1898).  Even  though  it  is  legal 
under  the  statutes  of  England  to  pro- 
vide that  no  calls  shall  be  made  on 
certain  shares,  except  upon  a  winding 
up,  yet  where  the  directors  are  the 
subscribers  for  such  shares  and  do 
not  fully  inform  other  subscribers  of 
the  situation,  they  may  be  compelled 
at  the  instance  of  a  stockholder  to 
pay  at  the  same  time  that  the  others 
pay,  even  though  there  was  no  actual 
fraud,  the  parties  having  acted  in 
good  faith.  Alexander  v.  Automatic, 
etc.  Co.,  [1900]  2  Ch.  56,  rev'g  [1899] 
2  Ch.  302.  A  secret  agreement  of  a 
corporation  to  a  stockholder  that  it 
will  take  back  his  stock  at  the  end 
of  two  years  at  a  ten  per  cent,  ad- 
vance is  void  as  to  creditors.  Olm- 
stead  v.  Vance,  etc.  Co.,  196  111.  236 
(1902);  Vance,  etc.  Co.  v.  Bentley,  92 
111.  App.  287  (1900).  See  also  §137 
and   §  170,  supra. 

2  Whittlesey  v.  Frantz,  74  N.  Y. 
456  (1878).  It  is  no  defense  that  the 
subscriptions  of  other  parties  were 
erased  and  that  such  parties  were  re- 
leased by  the  board  of  directors. 
Bristol,  etc.  Co.  v.  Selliez,  175  Pa. 
St.   18    (1896). 


484 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  192. 


scriber  sued  for  calls.1  So,  also,  the  failure  of  another  subscriber  to 
pay  the  percentage  required  by  statute  is  not  a  defense.2  Where  sev- 
eral subscribers  refused  to  take  their  stock,  and  finally,  to  induce 
them  to  do  so,  a  party  agrees  secretly  with  one  of  them  to  purchase 
his  holdings,  such  an  agreement  may  be  enforced.3 

§  192.  Failure  of  the  corporation  to  tender  a  certificate. — It  is 
no  defense  to  an  action  on  a  subscription  to  allege  that  the  corpora- 
tion has  not  delivered  or  tendered  to  the  defendant  the  certificate  of 
stock  to  which  he  is  entitled.4     The  certificate  is  merely  the  stock- 

i  Dorman  v.  Jacksonville,  etc.  Co.,  ough,  48  S.  C.  272  (1896);  Miller  v. 
7  Fla.  265  (1857).  It  is  no  defense  Wild  Cat,  etc.  Co.,  52  Ind.  51  (1875); 
that  other  unpaid  subscriptions  have  New  Albany,  etc.  R.  R.  v.  McCormick, 
been  compromised,  where  it  appears  10  Ind.  499  (185S);  Slipher  v.  Ear- 
that  even  if  no  compromise  had  been  hart,  83  Ind.  173  (1882);  Paducah, 
made  the  entire  subscriptions  would  etc.  R.  R.  v.  Parks,  86  Tenn.  554 
have  been  insufficient  to  pay  all  the  (1888);  Heaston  v.  Cincinnati,  etc.  R. 
debts.  Bennett  v.  Glenn,  55  Fed.  Rep.  R.,  16  Ind.  275  (1861);  Kennebec, 
956   (1893).  etc    R.    R.    v.    Jarvis,    34    Me.    360 

2Swartwout  v.  Michigan  Air  Line  (1852);  Chaffin  v.  Cummings,  37  Me. 

R.  R.,  24  Mich.  389  (1872).  76    (1853).      In    behalf    of    corporate 

3  Traphagen  v.  Sagar,  63  Minn.  317  creditors,  where  the  corporation  is  in- 
(1895).  A  contract  whereby  a  party  solvent,  a  person  is  often  held  to  be  a 
who  is  about  to  sell  his  business  to  a  stockholder  although  no  certificate 
corporation  to  be  organized  agrees  has  been  issued  to  him,  and  the  or- 
secretly  to  give  $5,000  of  stock  to  a  dinary  indicia  of  stockholdership  do 
party  who  agrees  to  subscribe  openly  not  indicate  that  he  is  a  stockholder. 
for  $5,000  of  the  stock  is  not  enforci-  Sanger  v.  Upton,  91  U.  S.  56  (1875); 
ble,  it  appearing  that  the  party  who  Upton  v.  Tribilcock,  91  U.  S.  45 
was  thus  to  get  the  extra  stock  ob-  (1875);  Slee  v.  Bloom,  19  Johns.  456 
jected  to  the  amount  of  stock  to  be  (1822);  Dorris  v.  French,  4  Hun,  292 
issued  to  the  vendor  and  withdrew  (1875);  Hamilton,  etc.  Co.  v.  Rice.  7 
his  objection  only  upon  this  agree-  Barb.  157,  167  (1849);  Clark  v.  Far- 
ment,  and  it  appearing  also  that  he  rington,  11  Wis.  306,  327  (1860) ; 
afterwards  became  a  director  and  Haynes  v.  Brown,  36  N.  H.  545,  563 
voted  to  purchase  the  property  at  the  (1858) ;  Chaffin  v.  Cummings,  37  Me. 
price  demanded  by  the  vendor.  76,  83  (1853);  Griswold  v.  Seligman, 
Koster  v.  Pain,  41  N.  Y.  App.  Div.  72  Mo.  110  (1880);  Boggs  v.  Olcott, 
443    (1899).  40   I1L   303    (1866);    Re   South  Moun- 

4  Burr  v.  Wilcox,  22  N.  Y.  551  tain,  etc.  Co.,  7  Sawy.  30  (1881);  Up- 
(1860)  aff'g  6  Bosw.  198;  Chandler  ton  v.  Burnham,  3  Biss.  431  (1873); 
v  Northern  Cross  R.  R.,  18  111.  190  s.  c,  28  Fed.  Cas.  831;  Payne  v.  El- 
(1856);  Webb  v.  Baltimore,  etc.  R.  Hot,  54  Cal.  339  (1880).  The  sub- 
R.,  77  Md.  92  (1893) ;  Holland  v.  Du-  scriber  may  stipulate  otherwise  in  his 
luth  etc.  Co.,  65  Minn.  324  (1896);  subscription.  Summers  v.  Sleeth,  45 
Walter,  etc.  Co.  v.  Robbins,  56  Minn.  Ind.  598  (1874).  No  certificate  need 
48  (1893);  San  Joaquin,  etc.  Co.  v.  be  tendered  by  the  corporation  to  sus- 
Beecher  101  Cal.  70  (1894);  Ne-  tain  its  suit  to  collect  the  subscrip- 
braska  Exp.  Assoc,  v.  Townley,  46  tion.  Farmers  Mut.  Tel.  Co.  v.  How- 
Neb  893  (1896);  Barron  v.  Burrill,  ell,  132  Iowa  22  (1906).  In  general, 
86  Me    66    (1893) ;    Glenn  v.  Rosbor-  see  also  Schaeffer  v.  Missouri  Home 

4S5 


192.] 


MISCELLANEOUS  DEFENSES. 


[cu.  X. 


holder's  evidence  of  title  to  his  stock.  It  is  not  the  stock  itself,  but. 
only  a  convenient  representative  of  it.  He  would  be  a  full  stock- 
holder, with  all  the  rights  of  one,  even  if  the  certificates  were  never 
issued  at  all.1  Consequently,  since  it  is  for  him  to  demand  the  cer- 
tificate when  he  wishes  it,  and  not  for  the  corporation  to  tender  it, 
it  is  no  defense  for  him  to  allege  that  he  has  never  received  the  paper 
representative  of  his  stock.     The  corporation  must,  however,  be  in  a 


Ins.  Co.,  46  Mo.  248  (1870);  South  Cal.  120  (1892);  Columbia  Electric 
Georgia,  etc.  R.  R.  v.  Ayres,  56  Ga.  Co.  v.  Dixon,  46  Minn.  463  (1S91); 
230  (1876) ;  Vawter  v.  Ohio,  etc.  R.  R.,  Dallas,  etc.  Mills  v.  Clancey,  15  S.  W. 
14  Ind.  174  (1860);  Spear  v.  Craw-  Rep.  194  (Tex.  1891);  Marson  v. 
ford,  14  Wend.  20  (1835);  Chester  Deither,  49  Minn.  423  (1892).  A  sub- 
Glass  Co.  v.  Dewey,  16  Mass.  94  scriber  to  the  increased  capital  stock 
(1819);  Fulgam  v.  Macon,  etc.  R.  R.f  who  has  actually  paid  part  of  the 
44  Ga.  597  (1S72);  Minneapolis  Har-  price  cannot  recover  back  the  money 
vester  Works  v.  Libby,  24  Minn.  327  upon  the  corporate  insolvency  on  the 
(1877);  Blyth's  Case,  L.  R.  4  Ch.  D.  ground  that  no  certicate  was  issued. 
140  (1876);  Agricultural  Bank  v.  Pacific  Nat.  Bank  v.  Eaton,  141  U.  S. 
Burr,  24  Me.  256  (1844);  Hawley  v.  227  (1S91);  Thayer  v.  Butler,  141  U. 
Upton,  102  U.  S.  314  (1880);  Wheeler  S.  234  (1891);  Butler  v.  Eaton,  141 
v.  Millar,  90  N.  Y.  353  (1882),  affg  U.  S.  240  (1891).  A  consolidated  com- 
24  Hun,  541;  Wemple  v.  St.  Louis,  pany  claiming  a  subscription  made  to 
etc.  R.  R.,  120  111.  196  (1887).  A  one  of  the  constituent  companies 
tender  of  a  certificate  of  stock  is  un-  must  prove  a  tender  of  the  stock, 
necessary,  except  where  the  stock  is  Pope  v.  Lake  County,  51  Fed.  Rep. 
sold  on  an  executory  contract,  in-  769  (1892).  A  corporation  cannot  be 
stead  of  being  subscribed  for.  Kohl-  compelled  by  the  subscriber  for  stock 
metz  v.  Calkins,  16  N.  Y.  App.  Div.  to  issue  a  certificate  therefor  before 
518  (1897).  The  case  of  Clark  v.  it  has  been  fully  paid  up,  the  stock 
Continental  Imp.  Co.,  57  Ind.  135  being  a  part  of  the  increased  capital 
(1877),  holds  that,  where  the  action  stock.  Baltimore,  etc.  Ry.  v.  Hamble- 
is  for  the  whole  subscription  or  the  ton,  77  Md.  341  (1893).  The  issue 
last  instalments,  a  tender  of  the  cer-  of  certificates  of  stock  is  not  neces- 
tificate,  on  condition  of  payment,  is  sary  to  render  the  subscriber  liable, 
necessary.  St.  Paul,  etc.  R.  R.  v.  Rob-  Mathis  v.  Pridham,  1  Tex.  Civ.  App. 
bins,  23  Minn.  439  (1877),  holds  that  58  (1892).  In  suing  on  a  subscription 
a  tender  is  necessary  where  the  issue  a  corporation  need  not  prove  that  it 
is  of  preferred  stock,  after  the  whole  had  authority  to  issue  stock.  Atlan- 
original  capital  stock  has  been  issued,  tic,  etc.  Co.  v.  Kreusler,  40  N.  Y. 
Where  a  subscriber  has  tendered  his  App.  Div.  268  (1899).  It  is  no  de- 
subscription  and  demanded  a  certifi-  fense  that  a  certificate  has  not  been 
cate  and  is  refused,  a  receiver  can-  issued  to  the  subscriber.  Beals  v. 
not,  upon  insolvency  of  the  company,  Buffalo,  etc.  Co.,  49  N.  Y.  App.  Div. 
hold  him  liable.  Potts  v.  Wallace,  32  589  (1900).  Cf.  §  61,  supra,  and  §  373, 
Fed.  Rep.   272    (1887).     A  certificate  infra. 

of  stock  need  not  be  tendered  before  i  Fulgam  v.  Macon,  etc.  R.  R.,  44 
suit  is  brought.  Webb  v.  Baltimore,  Ga.  597  (1872).  The  issuing  of  a  cer- 
ctc.  R.  R.,  77  Md.  92  (1893)  ;  Astoria,  tificate  is  not  necessary  to  constitute 
etc.  R.  R.  v.  Hill,  20  Oreg.  177  (1890) ;  stockholdership,  Cartwright  v.  Dick- 
California,   etc.    Co.   v.   Callender,   94  inson,  88  Tenn.  476  (1890). 

486 


en.  x.] 


MISCELLANEOUS    DEFENSES. 


[§  192. 


position  to  issue  such  certificate.1  If  certificates  for  the  whole  capi- 
tal stock  have  already  been  issued,  the  defendant  subscriber,  by  this 
fact,  may  defeat  the  action  to  collect  his  subscription.2  It  has  also 
been  held  that  the  plaintiff  corporation  must  aver  a  readiness  and 
willingness  to  deliver  the  certificate  of  stock.3  The  duty  of  a  cor- 
poration to  issue  certificates  of  stock  is  considered  elsewhere.4    Where 


i  McCord  v.  Ohio,  etc.  R.  R.,  13 
Ind.  220  (1859).  A  pledgee  of  an 
underwriter's  agreement  may  have 
difficulty  in  tendering  performance  to 
the  underwriters.  Litchfield,  etc.  So- 
ciety v.  Dibble,  67  Atl.  Rep.  476 
(Conn.  1907). 

2  Quoted  and  approved  in  Knox- 
ville,  etc.  R.  R.  v.  Mayor,  98  Tenn. 
1  (1S9G)  ;  Burrows  v.  Smith,  10  N.  Y. 
550  (1853).  See  also  §  58,  supra. 
The  stockholder  may  set  up  that  the 
corporation  had  no  stock  to  offer  him. 
Lathrop  v.  Kneeland,  46  Barb.  432 
(1866).  Cf.  Mackley's  Case,  L.  R.  1 
Ch.  D.  247  (1875).  Even  though  a 
corporation  has  contracted  to  sell  all 
its  stock  to  another  party,  yet  a 
subscriber  is  liable  if  the  corporation 
has  arranged  to  issue  the  stock  to 
him  upon  payment.  Leigh  v.  Chat- 
tanooga, etc.  R.  R.,  104  Ga.  13  (1S98). 

3  James  v.  Cincinnati,  etc.  R.  R.,  2 
Disney  (Ohio),  261  (185S).  The  cor- 
poration, in  suing  for  the  subscrip- 
tion, should  allege  a  readiness  and 
willingness  to  deliver  the  certificates 
of  stock  upon  payment.  Walter,  etc. 
Co.  v.  Jefferson,  57  Minn.  456  (1894). 
A  tender  of  the  stock  is  not  necessary 
where  the  corporation  alleges  that  it 
is  ready  and  willing  to  issue  the 
stock.  Seymour  v.  Jefferson,  74  N. 
W.  Rep.  149  (Minn.  1898). 

4  See  §  61,  supra.  An  incorporator 
who  subscribes  for  eleven  shares  of 
stock,  but  does  not  pay  for  them  nor 
claim  them  for  ten  years,  and  in  the 
meantime  they  have  been  issued  to 
the  real  parties  in  interest,  cannot 
then  claim  them.  Taylor  v.  Johnson, 
99  S.  W.  Rep.  320  (Ky.  1907).  In  a 
suit  to  compel  the  issue  of  certifi- 
cates of  stock  to  a  transferee  it  must 


be  alleged  that  a  transfer  has  been 
made  on  the  books  or  that  the  com- 
pany should  have  made  such  trans- 
fer. Lacaff  v.  Dutch,  etc.  Co.,  31 
Wash.  566  (1903).  A  subscriber  can- 
not rescind  his  subscription  on  the 
ground  that  the  certicates  had  never 
been  issued  to  him.  Cotter  v.  Butte, 
etc.  Co.,  31  Mont.  129  (1904).  It 
has  been  held  in  Maryland  that  a  sub- 
scriber to  the  increased  capital  stock 
of  a  company  is  not  entitled  to  a 
certificate  until  he  has  paid  for  the 
stock  in  full,  and  such  subscriber  is 
not  entitled  to  the  rights  of  a  stock- 
holder until  he  has  paid  in  full.  The 
court  stated  that  such  stockholders 
are  not  entitled  to  dividends  equally 
with  other  stockholders.  The  basis 
of  the  decision  was  the  difference 
between  original  stock  and  increased 
stock.  The  court  refused  to  compel 
the  corporation  to  issue  a  certificate. 
Baltimore,  etc.  Ry.  v.  Hambleton,  77 
Md.  341  (1893).  A  subscriber  for 
stock  who  has  given  his  note  in 
payment  may  file  a  bill  in  equity  to 
compel  the  corporation  to  recognize 
him  as  a  stockholder,  where  the  cor- 
poration denies  that  he  is  a  stock- 
holder, and  has  issued  all  its  stock 
to  other  parties  who  took  with 
notice.  It  is  unnecessary  to  bring 
into  the  suit  the  other  parties  who 
actually  have  the  stock,  the  stock  hav- 
ing been  held  by  the  company  as 
collateral  security.  Morey  v.  Fish, 
etc.  Co.,  108  Wis.  520  (1901).  Man- 
damus will  not  issue  to  compel  a 
corporation  to  issue  to  a  purchaser 
treasury  stock  which  he  has  pur- 
chased, even  though  he  has  paid  for 
the  same,  unless  the  stock  has  some 
peculiar   and   special   value   different 


487 


§  193.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


a  corporation  receives  money  in  payment  for  increased  capital  stock 
to  be  issued  and  never  increases  its  stock,  and  the  money  has  been 
used  in  the  business  and  the  corporation  becomes  insolvent,  the  sub- 
scriber is  not  entitled  to  repayment  in  preference  to  other  creditors.1 
§  193.  Set-off  and  counter-claim.— -It  seems  to  be  well  established 
that,  when  a  corporation  has  become  insolvent,  and  the  subscriptions 
for  stock  are  being  enforced  for  the  benefit  of  corporate  creditors,  a 
subscriber  cannot,  in  the  suit  brought  to  collect  his  subscription,  set 
up  a  counter-claim  or  set-off.2     This  rule  is  founded  in  equity  and 


from  other  similar  stock  in.  that  com- 
pany, or  unless  the  control  of  the 
corporation  is  at  issue.  The  legal 
right  to  the  stock  must  also  be  clear. 
State  v.  Jumbo,  etc.  Min.  Co.,  94  Fac. 
Rep.  74  (Neb.  1908).  See  also  §58, 
supra,  and  §  766c,  infra.  Even  though 
a  person  subscribes  for  stock  in  a 
turnpike  company  in  1857  and  does 
not  claim  the  stock  or  dividends, 
and  after  seven  years  does  not  attend 
meetings  or  pay  any  attention  to  his 
interest,  and  dies  in  1868,  neverthe- 
less his  representatives  may  collect 
the  dividends  due  on  the  stock  and 
may  claim  the  stock.  The  statute  of 
limitations  is  no  bar  if  the  com- 
pany has  never  notified  him  that  his 
right  to  the  stock  is  disputed.  Ow- 
ingsville,  etc.  Co.  v.  Bondurant's 
Adm'r,   107   Ky.   505    (1900). 

l  Bircher  v.  Walther,  163  Mo.  461 
(1901).  The  fact  that  no  certificate 
of  stock  was  issued  does  not  make  a 
payment  thereon  a  debt  of  the  com- 
pany. Cooper  v.  Jennings,  etc.  Co., 
42  S.  Rep.  766   (La.  1907). 

2Handley  v.  Stutz,  139  U.  S.  417 
(1891);  Welch  v.  Sargent,  127  Cal.  72 
(1899) ;  Killen  v.  Barnes,  106  Wis.  546 
(1900) ;  Richardson  v.  Merritt,  74 
Minn.  354  (1899) ;  Efird  v.  Piedmont, 
etc.  Co.,  55  S.  C.  78  (1899);  Wilkin- 
son v.  Bertock,  111  Ga.  187  (1900); 
Colorado,  etc.  Co.  v.  Sedalia,  etc.  Co., 
13  Colo.  App.  474  (1899);  Sawyer  v. 
Hoag,  17  Wall.  610  (1873);  Shickle 
v.  Watts,  94  Mo.  410  (1888);  Govern- 
ment, etc.  Co.  v.  Dempsey,  50  L.  J. 
(Q.  B.)  199  (1881).  Quoted  and  ap- 
proved in  Indiana,  etc.  Co.  v.  McGill, 


15  Ind.  App.  1  (1896),  holding,  how- 
ever, that  money  due  to  a  subscriber 
by  the  contract  under  which  the  stock 
was  issued  may  be  offset.  The  lead- 
ing case  in  England  on  this  subject 
is  Grissell's  Case,  L.  R.  1  Ch.  App. 
528  (1866),  where  the  court  said:  "If 
a  set-off  were  allowed  against  a  call, 
it  would  have  the  effect  of  withdraw- 
ing altogether  from  the  creditors  part 
of  the  funds  applicable  to  the  pay- 
ment of  their  debts."  See  also  Black's 
Case,  L.  R.  S  Ch.  App.  254  (1872); 
Gill's  Case,  L.  R.  12  Ch.  D.  755 
(1879);  Calisher's  Case,  L.  R.  5  Eq. 
214  (1868);  Barnett's  Case,  L.  R.  19 
Eq.  449  (1875) ;  Re  Whitehouse,  L.  R. 
9  Ch.  D.  595  (1878),  disapproving 
Brighton  Arcade  Co.  v.  Dowling,  L. 
R.  3  C.  P.  175  (1S6S).  See  also  Mat- 
thews v.  Albert,  24  Md.  527  (1866). 
Garnet,  etc.  Min.  Co.  v.  Sutton,  3  B. 
&  S.  321  (1862),  allowing  set-off,  was 
based  on  a  statute  repealed  by  Com- 
panies Act,  1862.  See  Hillier  v.  Alle- 
gheny Mut.  Ins.  Co.,  3  Pa.  St.  470 
(1846);  Long  v.  Penn.  Ins.  Co.,  6  Pa. 
St.  421  (1847).  Cf.  Scammon  v.  Kim- 
ball, 92  U.  S.  362  (1875);  Osgood  v. 
Ogden,  4  Keyes,  70  (1868);  Lawrence 
v.  Nelson,  21  N.  Y.  158  (1860).  Shields 
v.  Hobart,  172  Mo.  491  (1903).  Set-off 
for  services  rendered  was  allowed  in 
Turner  v.  Fidelity  etc.,  2  Cal.  App.  122 
(1905).  Money  paid  by  a  stockholder 
to  the  attorney  of  the  company  at  the 
request  of  the  directors  may  be  set 
off  by  him.  Graebner  v.  Post,  119  Wis. 
392    (1903). 

A  subscriber  cannot  set  off  against 
his  unpaid  subscription  a  judgment 


488 


CH.  X.] 


MISCELLANEOUS   DEFENSES. 


[§  193. 


public  policy.     The  stockholder  is  not  deprived  of  his  remedy  for 
the  debt  due  him  from  the  corporation,  but  he  is  obliged  to  proceed  in 


lien  where  there  are  prior  liens  which 
would  take  the  money  due  on  his  sub- 
scription if  he  should  first  pay  it  in. 
Nor,  on  the  other  hand,  if  there  are 
other  debts  of  the  company,  will  the 
obligation  of  the  company  to  the 
stockholders  be  canceled  by  the  com- 
pany's offsetting  the  subscription 
against  the  debt,  unless  the  subscriber 
is  insolvent.  Gilchrist  v.  Helena,  etc. 
R.  R.,  49  Fed.  Rep.  519  (1892);  Boul- 
ton  Carbon  Co.  v.  Mills,  78  Iowa,  4G0 
(1889).  In  this  case  the  learned  court 
refers  to  §  221d  (1st  ed.)  of  this  work, 
and  dissents  from  the  statement  of 
law  there  laid  down.  It  will  be  no- 
ticed, however,  that  §  221d  stated  the 
law  as  to  set-off  in  cases  of  statutory 
liability  of  stockholders.  The  right 
of  set-off  in  cases  of  subscription  lia- 
bility of  stockholders  is  stated  in  this 
work  in  §  193,  supra,  and  the  law  as 
there  laid  down  agrees  with  the  de- 
cision in  the  above  case — a  case  of 
subscription  liability.  Where  set-off 
is  a  good  defense  to  the  action  of  a 
creditor  who  is  also  a  stockholder  and 
is  liable,  it  is  a  good  defense  as 
against  the  assignee  of  his  claim.  Cal- 
lanan  v.  Windsor,  78  Iowa,  193  (1889). 
Unpaid  salaries  voted  to  its  officers 
by  an  insolvent  corporation  which  has 
never  made  any  profits  cannot  be  off- 
set as  against  the  stockholders'  lia- 
bility to  creditors.  Burns  v.  Beck,  etc. 
.Co.,  S3  Ga.  471  (1889).  A  set-off  is 
not  allowed.  Hoby  v.  Birch,  62  L.  T. 
Rep.  404  (1890),  reviewing  the  vari- 
ous contradictory  decisions.  No  set- 
off is  allowed  as  regards  subscription 
liability.  Tama  Water-Power  Co.  v. 
Hopkins,  79  Iowa,  653  (1890).  In  a 
suit  in  equity  by  a  receiver  against  all 
the  stockholders,  individual  stock- 
holders cannot  plead  in  set-off  debts 
due  from  the  corporation.  Bausman 
v.  Kinnear,  79  Fed.  Rep.  172  (1897); 
Mathis  v.  Pridbam,  1  Tex.  Civ.  App. 
58  (1892).    In  Scoville  v.  Thayer,  105 


U.  S.  143,  152  (1881),  the  court  said: 
"It  is  a  general  rule  that  a  holder  of 
claims  against  an  insolvent  corpora- 
tion cannot  set  them  off  against  his 
liability  for  an  assessment  on  his 
stock  in  the  corporation  in  a  suit 
by  an  assignee  in  bankruptcy."  To 
same  effect,  Thebus  v.  Smiley,  110  111. 
316  (1884);  Williams  v.  Traphagen, 
38  N.  J.  E'q.  57  (1884).  Payment  of 
subscriptions  in  advance  of  calls,  by 
turning  in  a  debt  thereon,  is  not  pay- 
ment upon  corporate  insolvency  and 
winding-up.  Kent's  Case,  L.  R.  37 
Ch.  D.  508;  s.  c,  L.  R.  39.  Ch.  D.  259 
(1888).  Cf.  Healey,  Law  &  Pr.  of 
Companies  (3ded.),129,  130,  611,  834- 
836.  Creditors  who  are  stockholders 
cannot  claim  any  part  of  the  assets 
until  their  unpaid  subscription  is 
paid,  but  may  claim  their  part  before 
it  is  certain  that  any  of  the  statutory 
liability  will  be  required.  Schlaudeck- 
er's  Appeal,  14  Atl.  Rep.  229  (Pa. 
1888).  A  counter-claim  which  the 
company  had  against  a  creditor,  but 
which  has  been  adjudicated  against 
it,  cannot  be  set  up  by  stockholders 
when  they  are  sued  on  their  sub- 
scriptions. Stutz  v.  Handley,  41  Fed. 
Rep.  531  (1890);  reversed  on  other 
grounds,  139  U.  S.  417.  A  subscriber 
sued  on  his  subscription  may  set  off 
a  debt  due  from  the  company  to  him. 
Appleton  v.  Turnbull,  84  Me.  72 
(1891).  Set-off  of  a  debt  by  defend- 
ant against  the  corporate  creditor  is 
good,  even  in  an  equitable  suit,  if 
only  one  creditor  has  come  into  the 
suit.  Washington  Sav.  Bank  v.  Butch- 
ers', etc.  Bank,  130  Mo.  155  (1895). 
An  insolvent  corporation  cannot  give 
a  preference  to  a  director  by  off- 
setting against  his  subscription  a  debt 
due  to  him.  Wyman  v.  Williams,  53 
Neb.  670  (1898).  The  court  in  Wy- 
man v.  Bowman,  127  Fed.  Rep.  257 
(1904)  declined  to  follow  the  decis- 
ion of  the  Supreme  Court  of  Nebraska 


489 


§    194.]  MISCELLANEOUS  DEFENSES.  [CH.  X. 

the  same  manner,  and  is  allowed  to  participate  in  the  final  corporate 
assets  to  the  same  extent  and  at  the  same  time  as  other  creditors.1 

Where,  however,  payment  of  a  subscription  is  demanded  or  en- 
forced for  the  benefit  of  the  corporation  itself,  and  not  for  corporate 
creditors,  it  is  competent  for  the  subscriber  to  set  up,  in  defense  of  the 
action,  a  set-off  or  counter-claim.2 

In  New  York  it  has  been  established  that,  where  a  corporate  cred- 
itor brings  an  action  at  law  to  enforce  an  unpaid  subscription,  the 
subscriber  may  set  up,  in  defense  to  the  action,  a  set-off  or  counter- 
claim consisting  of  a  debt  due  from  the  corporation  to  him,  but  that 
such  a  defense  is  not  allowable  in  a  suit  in  equity.3  The  distinction 
is  based  on  the  fact  that  a  general  accounting  of  all  corporate  debts 
and  assets  is  possible  by  the  latter  remedy,  but  is  impossible  in  the 
action  at  law.4 

§  194.  Modification  of  the  plan  and  scope  of  the  enterprise  after 
subscription.- — A  material  modification  of  the  plan  of  a  proposed 
corporation,  so  that  the  actual  charter  differs  essentially  from  the  cor- 
poration as  contemplated  by  the  subscription  contract  signed  before 
incorporation,  releases  such  of  the  subscribers  as  object  thereto.  Such 
also  is  the  rule  where  the  charter  materially  varies  the  plan  as  laid 
down  in  the  prospectus.  Various  illustrations  of  these  principles  of 
law  are  given  in  the  notes  below.5    The  reduction  of  the  capital  stock 

in  Wyman  v.  Williams,  52  Neb.  833.  4  Tallmadge  v.  Fishkill  Iron  Co., 
Concerning  set-off  as  against  the  4  Barb.  382  (1848).  In  Wheeler  v. 
statutory  liability  of  stockholders,  Millar,  90  N.  Y.  353  (1882),  the  stock- 
see  §225,  infra.  holder's    subscription    and    statutory 

i  Grissell's  Case,  L.  R.  1  Ch.  App.  liability  combined   were  sufficient  to 

528    (1866).     Cf.  Long  v.  Penn.   Ins.  pay  his  own  and  the  other  debts  in- 

Co.,  6  Pa.  St.  421   (1847).  volved  in  the  case.    See  Sackett's  Har- 

2Barnetfs  Case,  L.  R.  19  Eq.  449  bor  Bank  v.  Blake,  3  Rich.  Eq.  (S.  C.) 
(1875);  Bausman  v.  Denny,  72  Fed.  225  (1851);  Grose  v.  Hilt,  36  Me. 
Rep.  69  (1896).  Where  a  corporate  22  (1853);  Whitman  v.  Porter,  107 
creditor  is  suing  the  corporation,  a  Mass.  522  (1871),  a  joint-stock  corn- 
stockholder  cannot  intervene  in  a  pany  case;  Poole's  Case,  L.  R.  9  Ch. 
suit  and  set  up  a  counter-claim  or  D.  322  (1878).  Cf.  Eastman  v.  Cros- 
set-off  due  from  such  corporate  cred-  by,  90  Mass.  206  (1864). 
itor  to  such  intervening  stockholder.  5  A  subscription  prior  to  incor- 
Gallagher  v.  Germania  Brewing  Co.,  poration,  the  object  of  the  incor- 
53  Minn.  214    (1893).  poration  having  been  stated  to  be  to 

3  Richards     v.     Kinsley,     14     Daly  acquire    certain    patents,    is    not    en- 

(N.  Y.),  334   (1887),  where  the  rule  forceable    where    the    corporation    is 

is  clearly  laid  down;   also,  Christen-  actually  organized   for  that  purpose, 

sen  v.  Colby,  43  Hun,  362  (1887).    In  and  also  to  do  a  manufacturing  busi- 

both  of  these  cases  the  rule  is  based  ness.    Stern  v.  McKee,  70  N.  Y.  App. 

on  analogous   decisions   in  regard  to  Div.  142  (1902).    Where,  prior  to  in- 

the  stockholder's  statutory  liabilities,  corporation,  a  person  agrees  to  take 

See  §  225,  infra.  stock  in  a  corporation  to  furnish  in- 

490 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  194. 


does  not  release  the  subscriber.1     A  person  does  not  waive  his  right 
to  refuse  payment  of  his  subscription  and  to  recover  back  anything 


candescent  electric  lighting,  a  cor- 
poration to  furnish  electricity  and 
power  cannot  enforce  his  subscrip- 
tion. Marysville,  etc.  Co.  v.  Johnson, 
109  Cal.  192  (1895).  Where  the 
charter  varies  from  the  subscription 
paper  in  that  the  capital  stock  is 
doubled  and  the  objects  changed,  a 
subscriber  is  not  bound,  even  though 
he  delay  several  months  in  repudiat- 
ing the  contract.  Baker  v.  Fort 
Worth  Board  of  Trade,  8  Tex.  Civ. 
App.  560  (1894).  A  subscription  to 
a  joint-stock  association  or  partner- 
ship cannot  be  enforced  by  a  corpora- 
tion subsequently  organized.  Knotts- 
ville,  etc.  Co.  v.  Mattingly,  35  S.  W 
Rep.  1114  (Ky.  1896).  The  omission 
from  the  charter  of  minor  details 
contained  in  the  subscription  prior  to 
incorporation  does  not  release  the 
subscriber.  Petrie  v.  Coulter,  10  Okl. 
257  (1900).  A  change  in  the  name  is 
immaterial.  Yonkers,  etc.  Co.  v.  Tay- 
lor, 30  N.  Y.  App.  Div.  334  (1898). 
Where  a  subscription  contract  before 
incorporation  provides  for  a  capital 
of  $30,000,  the  subscription  cannot  be 
enforced  if  the  company  is  actually 
incorporated  for  $35,000.  Newport, 
etc.  Co.  v.  Mims,  103  Tenn.  465 
(1899).  The  fact  that  the  subscription 
paper  provided  that  the  corporation 
should  expire  in  1910,  whereas  by  the 
charter  it  was  to  expire  in  1919,  is 
no*  defense.  Greenbrier,  etc.  Expo- 
sition v.  Ocheltree,  44  W.  Va.  626 
(1898).  Where  the  corporation  is  in- 
corporated with  a  less  capital  stock 
than  was  proposed  when  the  defend- 
ant subscribed,  he  is  not  bound  by 
the  subscription.  Santa  Cruz  R.  R. 
v.  Schwartz,  53  Cal.  106  (1878).  After 
six  years  and  after  the  corporation 
has  become  insolvent  it  it  too  late 
for  a  subscriber  to  claim  that  the 
charter  differed  from  the  subscription 


agreement.  Walter  v.  Merced,  etc. 
Assoc,  126  Cal.  582  (1899).  If  the 
statute  requires  the  profile  and  esti- 
mates to  be  made  before  municipal 
aid  is  given,  a  subsequent  variation 
releases  the  subscription.  State  v. 
Monistown,  93  Tenn.  239  (1893). 
After  a  winding-up  has  commenced 
there  can  be  no  release  herein.  Oakes 
v.  Turquand,  L.  R.  2  H.  L.  325  (1867). 
A  subscription  to  stock  is  enforceable 
severally  although  signed  by  several. 
A  change  in  it  by  several  of  the  sub- 
scribers does  not  release  the  others. 
An  increase  in  the  capital  upon  incor- 
poration does  not  release.  Gibbons 
V.  Grinsel,  79  Wis.  365  (1891).  A 
subscription  to  a  company  to  be  or- 
ganized to  construct  and  operate  a 
cotton  oil  mill  is  binding,  even  though 
the  charter  when  obtained  gives  it 
power  also  to  construct  and  operate 
cotton  gins  as  feeders  for  the  mill. 
Comanche,  etc.  Co.  v.  Browne,  92  S. 
W.  Rep.  450  (Tex.  1906).  Where  sub- 
scribers to  the  stock  of  a  proposed 
telephone  corporation  authorize  a 
committee  of  nine  to  purchase  mate- 
rial and  incorporate,  and  five  of  the 
committee  in  opposition  to  four  do 
purchase  and  incorporate,  the  minor- 
ity are  not  bound  by  their  action. 
Mt.  Carmel,  etc.  Co.  v.  Mt.  Carmel,  etc. 
Co.,  119  Ky.  461  (1905). 

In  England  cases  arise  releasing 
the  subscriber  when  the  memoranda 
of  association  vary  from  the  prospect- 
us. Stewart's  Case,  L.  R.  1  Ch.  App. 
574  (1866);  Webster's  Case,  L.  R.  2 
Eq.  741  (1866);  Ship's  Case,  2  De  G., 
J.  &.  S.  544  (1865);  Downes  v.  Ship, 
L.  R.  3  H.  L.  343  (1868).  Cf.  Nixon 
v.  Brownlow,  3  H.  &  N.  686  (1858); 
Norman  r.  Mitchell,  5  De  G.,  M.  &  G. 
648  (1854).  See  also  Dorris  v. 
Sweeney,  60  N.  Y.  463  (1875).  If  a 
subscriber  pays  an  instalment  on  his 


l  Myers  v.  Sturgis,  123  N.  Y.  App.  Div.  470   (1908). 

491 


§  195.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


already  paid,  on  the  ground  that  the  charter  varied  from  the  original 
agreement,  even  though  he  took  part  in  the  organization  meeting 
when  a  motion  to  adopt  the  charter  was  passed,  it  appearing  that  he 
did  not  know  of  the  change.1 

§  195.  Statute  of  limitations. — After  a  call  has  been  made,  and 
the  subscription  or  a  part  of  the  subscription  is  thereby  rendered 
due  and  payable,  the  statute  of  limitations  begins  to  run.  Difficulty, 
however,  arises  in  determining  whether  the  statute  begins  to  run  be- 
fore the  call  is  made.  In  Pennsylvania  the  courts  hold  that  the  call 
must  be  made  before  six  years  have  elapsed  after  the  call  is  possible ; 
otherwise  the  right  of  collection  is  barred.2     But  the  better  rule, 


stock  or  participates  in  a  meeting 
after  incorporation,  he  cannot  after- 
wards set  up  that  the  charter  did  not 
correspond  with  the  prospectus.  West 
End,  etc.  Co.  v.  Claiborne,  97  Va.  734 
(1900).  It  is  no  defense  that  a  greater 
capital  stock  is  provided  for  in  the 
charter  than  in  the  preliminary  agree- 
ment, nor  that  the  subscriptions  have 
not  all  been  paid  in,  where  the  defend- 
ant acquiesced  in  all  this  by  attending 
meetings  and  voting.  International, 
etc.  Assoc,  v.  Walker,  83  Mich.  386 
,(1890). 

As   to   the    alteration   of   the   sub- 
scription list  itself,  see  §  62,  supra. 

A  subscription  to  a  corporation  to 
be  organized  to  purchase,  improve, 
and  sell  land  in  a  certain  city  is  not 
enforceable  where  the  corporation 
was  afterwards  actually  formed  to 
purchase  and  sell  land  anywhere  and 
also  to  do  many  other  things.  West 
End,  etc.  Co.  v.  Nash,  51  W.  Va.  341 
(1902).  Where  the  statute  author- 
izes incorporation  for  producing  and 
selling  electricity,  and  the  certificate 
of  incorporation  includes  this  as  well 
as  manufacturing  and  selling  electri- 
cal appliances,  apparatus  and  sup- 
plies, the  corporation  is  not  a  cle  jure 
corporation,  and  hence  insufficient  to 
support  an  action  by  one  promoter 
against  another  on  a  contract  of  the 
latter  to  convey  land  to  a  corporation 
to  be  formed  and  to  take  stock  in  pay- 
ment, especially  where  the  full  capital 
stock   of    such    corporation    had    not 


been  subscribed  for.     Burk  v.  Mead, 
159  Ind.  252  (1902). 

1  Smith     v.     Burns,     etc.     Co.,    Ill 
N.  W.  Rep.  1123    (Wis.  1907). 

2  McCully  v.  Pittsburgh,  etc.  R.  R., 
32  Pa.  St.  25  (1S5S);  Pittsburgh,  etc. 
R.  R.  v.  Byers,  32  Pa.  St.  22  (1858); 
Pittsburgh,  etc.  R.  R.  v.  Graham,  36 
Pa.  St.  77  (1859) ;  Shackamaxon  Bank 
v.  Disston,  2  Ry.  &  Corp.  L.  J.  62  (Pa. 
18S7).  Cf.  Pittsburgh,  etc.  R.  R.  v. 
Plummer,  37  Pa.  St.  413  (1S60).  A 
contrary  rule  seems  to  have  been  fol- 
lowed in  Mack's  Appeal,  7  Atl.  Rep. 
481  (1886).  The  statute  runs  against 
tbe  liability  of  subscribers  from  the 
time  of  the  subscription,  where  no 
call  is  made  before  the  statute  be- 
comes a  bar.  Hamilton  v.  Clarion, 
etc.  R.  R.,  144  Pa.  St.  34  (1891).  And 
it  is  now  held  in  Pennsylvania  that 
the  statute  of  limitations  runs  against 
an  unpaid  subscription  from  the  date 
of  the  assignment  by  the  corporation 
for  the  benefit  of  creditors,  and  not 
from  the  time  of  a  call.  Franklin 
Sav.  Bank  v.  Bridges,  8  Atl.  Rep.  611 
(Pa.  18S7).  Cf.  Allibone  v.  Hagar, 
46  Pa.  St.  48  (1863),  where  a  plea  of 
the  statute  of  limitations  in  a  suit 
for  unpaid  subscriptions  was  not  al- 
lowed, because  by  statute  the  liability 
of  stockholders  continued  until  the 
whole  capital  was  paid  in.  The  statute 
of  limitations  begins  to  run  against 
unpaid  subscriptions  upon  the  com- 
pany making  an  assignment  for  the 
benefit  of  creditors,   even  though  no 


492 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  195. 


and  the  one  supported  by  the  weight  of  authority,  is  that  the  statute 
of  limitations  begins  to  run  on  a  subscription  for  stock  only  after  a 
call  has  been  made  and  is  due.1     Where  the  contract  for  subscription 


call  was  made.  Swearingen  v.  Sewick- 
ley,  etc.  Co.,  198  Pa.  St.  68  (1901). 
In  Shackamaxon  Bank  v.  Dougherty, 
20  W.  N.  Cas.  297  (1887),  it  was  held 
that  a  mere  delay  of  six  years  in  mak- 
ing calls  barred  all  recovery,  and  ob- 
viously the  bar  of  the  statute  was 
applied  when  no  action  was  brought 
for  six  years  after  assessment  made, 
or  six  years  after  the  corporation  as- 
signed for  the  benefit  of  its  creditors. 
Where  by  the  terms  of  a  subscription 
it  is  to  become  due  only  upon  call, 
the  statute  of  limitations  does  not  be- 
gin to  run  until  the  call  is  made,  even 
though  such  call  is  not  made  within 
six  years  thereafter.  Cook  v.  Carpen- 
ter, 212  Pa.  St.  165  (1905).  The  stat- 
ute of  limitations  begins  to  run  when 
the  subscription  is  made,  even  though 
a  call  is  not  made  until  long  after- 
wards. Great  Western  Tel.  Co.  v. 
Purdy,  83  Iowa,  430  (1891).  A  deci- 
sion of  a  state  court  that  the  statute 
of  limitations  runs  against  a  sub- 
scription from  the  time  the  subscrip- 
tion is  made  does  not  involve  any 
federal  question.  Great  Western  Tel. 
Co.  v.  Purdy,  162  U.  S.  329  (1S96), 
applying  the  Iowa  statute  of  limita- 
tions.   See  also  §  1S9,  supra. 

i  Glenn  v.  Marbury,  145  U.  S.  499 
(1892) ;  Hawkins  v.  Glenn,  131  U.  S. 
319  (1889);  Glenn  v.  Liggett,  135  U. 
S.  533  (1S90);  Semple  v.  Glenn,  91 
Ala.  245  (1891);  Lehman  v.  Glenn, 
87  Ala.  61S  (18S9);  Glenn  v.  Priest, 
48  Fed.  Rep.  19  (1S91) ;  Priest  v. 
Glenn,  51  Fed.  Rep.  405  (1892);  Fitz- 
gerald's Estate  v.  Union  Sav.  Bank, 
65  Neb.  97  (1902).  The  statute  of  lim- 
itations does  not  run  against  an  un- 
paid subscription  untfl  a  call  and  as- 
sessment has  been  made.  McCarter  v. 
Ketcham,  72  N.  J.  L.  247  (1905).  The 
statute  of  limitations  begins  to  run 
from  the  time  of  the  call  only,  and 
where  a  Kentucky  stockholder  in   a 


Virginia  corporation  is  sued,  the  Vir- 
ginia statute  of  limitations  is  no  de- 
fense unless  pleaded.  Otter  View,  etc. 
v.  Boiling's  Ex'x,  70  S.  W.  Rep.  834 
(Ky.  1902).  The  statute  of  limita- 
tions does  not  begin  to  run  until  the 
call  is  made,  and  if  the  call  is  re- 
scinded the  statute  does  not  begin  to 
run  until  the  call  is  renewed.  Union, 
etc.  Bank  v.  Leiter,  145  Cal.  696 
(1905).  Where  the  directors  made  a 
call  and  the  statute  of  limitations  has 
run  against  such  call,  this  is  a  good 
defense  against  a  call  by  a  court.  Gold 
v.  Paynter,  101  Va.  714  (1903).  The 
four  years'  statute  of  limitations  in 
Nebraska  begins  to  run  against  an  as- 
sessment of  the  comptroller  on  na- 
tional-bank stock  from  the  time  the 
assessment  is  due,  and  the  same 
length  of  time  will  be  a  bar  to  a  suit 
in  equity  even  as  against  the  party 
who  transferred  the  stock  to  an  irre- 
sponsible person  in  order  to  avoid  lia- 
bility. Thompson  v.  German  Ins.  Co., 
77  Fed.  Rep.  258  (1896).  Where  by 
statute  the  assignor  is  liable,  the  stat- 
ute of  limitations  does  not  commence 
to  run  until  there  has  been  a  call. 
Priest  v.  Glenn,  51  Fed.  Rep.  400 
(1892);  Taggart  v.  Western  Md.  R. 
R.,  24  Md.  563  (1S66) ;  Western  R.  R. 
V.  Avery,  64  N.  C.  491  (1870);  Glenn 
v.  Williams,  60  Md.  93  (1882);  Balti- 
more, etc.  Turnp.  Co.  v.  Barnes,  6  H. 
&  J.  (Md.)  57  (1823);  Salisbury  v. 
Black's  Adm'r,  6  H.  &  J.  (Md.)  293 
(1825),  where,  however,  no  call  was 
necessary;  Curry  v.  Woodward,  53 
Ala.  371  (1875);  Glenn  v.  Soule,  22 
Fed.  Rep.  417  (1884) ;  Glenn  v.  Foote, 
36  Fed.  Rep.  824  (1888);  Great  West- 
ern Tel.  Co.  v.  Gray,  122  111.  630 
(1887).  Cf.  §225,  infra;  Glenn  v. 
Howard,  81  Ga.  383  (1889).  If  a  sub- 
scription is  conditional,  the  statute  of 
limitations  runs  only  from  the  time 
of  performance.  Cornell's  Appeal,  114 


493 


195.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


fixes  the  date  of  payment,  the  statute  of  limitations  begins  to  run 
from  that  date  and  is  not  stopped  by  the  appointment  of  a  receiver 
unless  he  actually  commenced  his  suit  against  the  stockholder.1  It 
has  been  held  that  where  the  statute  is  a  bar  against  the  corporation 
it  is  a  bar  against  corporate  creditors.2     In  New  York  it  has  been 


Pa.   St.   153    (1886).     Where  a  stock 
subscription  is  payable  when  the  road 
is  finished,  the  statute  of  limitations 
does  not  begin  to  run  until  such  road 
is  actually  finished,  and  the  transfer 
of  its  cars  by  a  ferry,  pending  the  con- 
struction of  a  bridge,  is  not  a  comple- 
tion of  the  road,  even  though  the  di- 
rectors have  declared  it  finished  be- 
fore    such     bridge     was     completed. 
Garner  v.  Hall,  122  Ala.  221    (1899). 
Where  the  only  proof  of  subscription 
is  the  charter,  which  states  the  names 
of  the  stockholders  and  the  number 
of  shares   held   by   each,  the  statute 
of  limitations  begins  to  run  from  the 
time  of  signing  the  charter.     Harris 
v.    Gateway,    etc.    Co.,    128    Ala.    652 
(1901).  Merely  authorizing  a  receiver 
to   collect   subscriptions,    held    not   a 
call  sufficient  to  set  the  statute  of  lim- 
itations   running.      Glenn   v.    Macon, 
32   Fed.   Rep.    7    (1887).     Where   the 
statute   prescribes    that   the   receiver 
shall  collect  subscriptions  at  once,  the 
statute  of  limitations  begins  to  run  as 
soon  as  he  is  appointed.     Webber  v. 
Hovey,    108    Mich.    49    (1895).      The 
statute   of  limitations   begins  to  run 
on  unpaid  subscriptions  from  the  dis- 
solution of  the  corporation.  Garesche 
v  Lewis,  93  Mo.  197  (1S87).   The  stat- 
ute  of    limitations   runs   against   un- 
paid subscriptions  only  from  the  time 
of  a  call  by  the  court,  not  from  the 
time  of  an  assignment  to  a  trustee. 
Vanderwerken    v.    Glenn,    85    Va.    9 
(1888);    Lewis  v.   Glenn,   84  Va.   947 
(1888).     The  state  statute  of  limita- 
tions as  to  executors  and  estates  will 
be  applied  by  the  federal   courts  to 
suits   by  a  receiver  for  the  enforce- 
ment of  a  stockholder's  liability  in  a 
national    bank.      Butler   v.    Poole,    44 
Fed.  Rep.  586    (1890).     Although  the 
statute  of  limitations  bars  the  action 


by  the  creditor  against  the  corpora- 
tion, yet  if  a  lien  exists  by  trust  deed, 
the  debt  may  be  enforced  against  un- 
paid subscriptions.  Hambleton  v. 
Glenn,  9  S.  E.  Rep.  129  (Va.  1889). 
If  the  stockholder  is  a  non-resident 
the  statute  of  limitations  does  not 
run.  Tama,  etc.  Co.  v.  Hopkins,  79 
Iowa,  653  (1890).  The  statute  of  lim- 
itations is  no  bar.  Lehman  v.  Glenn, 
87  Ala.  618  (1889).  The  statute  of 
limitations  does  not  begin  to  run  as 
against  creditors  until  they  have  ex- 
hausted their  remedy  against  the 
company,  and  have  established  the 
amount  due  from  the  stockholders' 
and  necessary  to  pay  the  debt.  Mathis 
v.  Pridham,  1  Tex.  Civ.  App.  58 
(1892).  The  statute  of  limitations 
begins  to  run  only  from  the  date  of 
a  call,  even  though  long  prior  thereto 
the  defendant  said  he  would  not  take 
his  stock.  Re  Haggart,  etc.  Co.,  19 
App.  Rep.   (Can.)    582   (1892). 

1  Williams  v.  Taylor,  99  Md.  306 
(1904).  Even  though  by  the  subscrip- 
tion calls  are  to  be  made  "if  needed," 
yet  if  the  prospectus  states  that  the 
payments  are  to  be  at  specified  times, 
the  statute  of  limitations  begins  to 
run  from  those  times.  Williams  v. 
Matthews,    103   Va.    ISO    (1904). 

2  Stilphen  v.  Ware,  45  Cal.  110 
(1872);  Davidson  v.  Rankin,  34  Cal. 
503  (1868),  in  probate  matters;  Ham- 
ilton v.  Clarion,  etc.  R.  R.,  144  Pa. 
St.  34  (1891);  Thompson  v.  Reno 
Sav.  Bank,  19  Nev.  103,  171,  242,  291, 
293  (1885);  South  Carolina  Mfg.  Co. 
v.  Bank  of  South  Carolina,  6  Rich. 
Eq.  (S.  C.)  227  (1854);  First  Na- 
tional Bank  v.  Greene,  64  Iowa,  445 
(1884).  Where  the  statute  of  limita- 
tions is  a  bar  to  the  corporation  col- 
lecting unpaid  subscriptions  it  ia 
equally    a   bar   as   against    corporate 


494 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  195. 


held  that,  inasmuch  as  the  corporate  creditor's  right  to  enforce  the 
unpaid  subscription  accrues  only  after  judgment  against  the  corpora- 
tion is  obtained,  the  statute  of  limitations  runs  only  from  the  date 
of  such  judgment.1  In  Virginia  it  is  held  that  the  statute  of  limita- 
tions begins  to  run  from  the  time  the  decree  is  entered  that  the  sub- 
scriptions be  paid  to  a  receiver.2  Courts  of  equity  will  generally 
apply  the  same  period  of  limitation  as  at  law,  unless  there  are  special 
and   equitable   reasons   for   doing  otherwise.3     After  one  creditor 


creditors.  Hawkins  v.  Donnerberg, 
40  Oreg.  97  (1901).  The  statute  ap- 
plicable to  written  contracts  applies, 
although  the  subscription  is  partly  in 
writing.  Falmouth,  etc.  Co.  v.  Shaw- 
han,  107  Ind.  47  (1886).  It  is  well  to 
suggest  here  that  the  creditor,  before 
enforcing  this  liability,  must  first  ob- 
tain judgment  against  the  corpora- 
tion. See  §  200,  infra.  The  corpora- 
tion can  defeat  the  action  against  it 
by  setting  up  the  statute  of  limita- 
tions, if  sufficient  time  has  elapsed. 
If  the  corporation  fails  to  set  up  that 
defense,  the  stockholder  may  set  it  up 
in  behalf  of  the  corporation  when  he 
is  sued.  Such,  at  least,  is  the  rule  in 
some  jurisdictions.  See  §  209,  infra. 
The  statute  of  limitations,  by  com- 
mencing to  run  against  one  call,  does 
not  thereby  commence  to  run  against 
the  whole  subscription.  Dorsheimer 
v.  Glenn,  51  Fed.  Rep.  404  (1892); 
Priest  v.  Glenn,  51  Fed.  Rep.  405 
(1S92). 

i  Christensen  v.  Colby,  43  Hun, 
362  (1887).  Christensen  v.  Quintard, 
36  Hun,  334  (1885).  Overruled  on 
another  point  in  s.  c,  8  N.  Y.  Supp. 
400.  See  also  §  225,  infra,  notes.  Cf. 
Williams  v.  Taylor,  120  N.  Y.  244 
(1S90),  rev'g  Williams  v.  Meyer,  41 
Hun,  545,  involving  a  sale  of  treasury 
stock.  The  statute  of  limitations  be- 
gins to  run  upon  the  return  of  exe- 
cution unsatisfied.  Van  Pelt  v.  Gard- 
ner, 54  Neb.  701  (1898).  Where  a  de- 
mand note  is  given  in  payment  of  a 
subscription  the  statute  of  limitations 
does  not  begin  to  run  until  demand 
of  payment  is  made  or  the  corpora- 
tion   becomes    insolvent.      Crofoot   v. 


Thatcher,  19  Utah,  212  (1899).  The 
statute  of  limitations  begins  to  run 
from  the  time  that  execution  is  re- 
turned unsatisfied  on  a  creditor's 
claim.  Lester,  etc.  v.  Bemis,  etc.  Co., 
71  Ark.  379  (1903).  The  statute  of 
limitations  does  not  commence  to  run 
until  default  is  made  or  the  com- 
pany has  become  insolvent  and  ceased 
business.  Such  default  may  be  by 
non-payment  when  the  subscription 
becomes  due  by  statutory  enactment. 
West  v.  Topeka  Sav.  Bank,  66  Kan. 
524  (1903).  In  Montana  the  statute 
of  limitations  does  not  commence  to 
run  until  execution  has  been  returned 
unsatisfied  against  the  corporation,  so 
far  as  creditors  are  concerned.  King 
v.  Pony,  etc.  Co.,  28  Mont.  74  (1903). 

2  Liberty,  etc.  Bank  v.  Otter  View, 
etc.  Co.,  96  Va.  352  (1898). 

3  Bank  of  United  States  v.  Dallam, 
4  Dana  (Ky.),  574  (1836).  In  Payne 
v.  Bullard,  23  Miss.  88  (1851),  and 
Hightower  v.  Thornton,  8  Ga.  486 
(1S50),  however,  it  was  held  that  the 
statute  of  limitations  has  no  applica- 
tion by  analogy  to  the  equitable  ac- 
tions to  collect  subscriptions.  In  Terry 
r.  Bank  of  Cape  Fear,  20  Fed. Rep.  777 
(1884),  the  court  said,  in  a  similar 
case:  "In  adjusting  equitable  rights, 
courts  of  equity  will  never  allow  the 
statute  of  limitations  to  have  a  mani- 
festly inequitable  and  unjust  opera- 
tion." In  Scovill  v.  Thayer,  105  U.  S. 
143,  155  (1881),  a  case  in  equity,  the 
court  said:  "Before  there  is  any  ob- 
ligation upon  the  stockholder  to  pay 
without  an  assessment  and  call  by 
the  company,  there  must  be  some 
order  of  a  court  of  competent  juris- 


495 


§  196.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


has  filed  a  bill  for  a  receiver  and  to  collect  unpaid  subscriptions,  tbe 
statute  of  limitations  ceases  to  run  from  that  date  as  against  other 
creditors  who  subsequently  come  into  the  suit.1  Where  a  subscriber 
defeats  even  a  part  of  the  action  on  his  subscription  by  setting  up 
the  statute  of  limitations,  he  cannot  claim  the  stock,  at  least  unless  he 
pays  the  part  which  was  barred  by  the  statute.2  Liability  on  stock 
issued  for  property  at  an  overvaluation  commences  only  upon  in- 
solvency of  the  corporation.  Hence  the  statute  of  limitations  runs 
from  that  date.3  Questions  relative  to  the  right  of  a  stockholder  to 
set  up  the  defense  that  the  creditor's  claim  against  the  corporation  is 
barred  by  the  statute  of  limitation  are  considered  elsewhere,4 

§  196.  Ignorance  or  mistake. — It  is  no  defense  to  an  action  for  a 
subscription  that  the  subscriber  at  the  time  of  subscribing-  was  iff- 
norant  of  the  actual  condition  of  the  corporation.5  JSTor  is  it  a  de- 
fense that  he  was  ignorant  of  the  legal  effect  of  the  subscription 
contract  which  he  signed.6 


diction,  or,  at  the  very  least,  some 
authorized  demand  upon  him  for  pay- 
ment. And  it  is  clear  the  statute  of 
limitations  does  not  begin  to  run  in 
his  favor  until  such  order  or  de- 
mand;" citing  cases.  A  decree  of  a 
court  of  equity  that  the  subscription 
be  paid  is  equivalent  to  a  call,  and 
the  statute  commences  to  run.  Glenn 
v.  Saxton,  68  Cal.  353  (1S86).  An 
assignment  by  the  corporation  for  the 
benefit  of  creditors  starts  the  statute 
within  a  reasonable  time  thereafter. 
Glenn  v.  Dorsheimer,  24  Fed.  Rep. 
536  (18S5);  Glenn  v.  Priest,  28  Fed. 
Rep.  907  (18S6).  For  an  explanation 
of  the  origin  of  the  Glenn  cases,  see 
Baltimore,  etc.  R.  R.  v.  Glenn,  28 
Md.  2S7  (1S67).  Where  a  decree  is 
made  assessing  the  stockholders  on 
their  subscriptions,  the  statute  of 
limitations  begins  to  run  from  the 
entry  of  the  decree.  Glenn  v.  McAl- 
lister,  46   Fed.  Rep.   883    (1891). 

l  Dunne  v.  Portland,  etc.  Ry.,  40 
Oreg.  295  (1901).  As  regards  the  en- 
forcement of  the  stockholder's  sub- 
scription liability,  the  statute  of  limi- 
tations does  not  run  against  the  cred- 
itors' claims  after  such  creditors  have 
intervened  in  a  suit  brought  by  one 
creditor  to  sequestrate  the  property 


of  the  corporation  and  enforce  the 
subscription  liabilities.  London,  etc. 
Co.  v.  St.  Paul,  etc.  Go.,  84  Minn.  144 
(1901).     See  also  §§46,  225. 

2  Johnson  v.  Albany,  etc.  R.  R., 
54  N.  Y.  416,  426  (1873),  where  the' 
court  said:  "The  claim  of  the  plain- 
tiff is  not  supported  by  any  principle 
that  should  give  it  any  consideration 
in  either  a  court  of  law  or  equity.  The 
statute  of  limitations  never  paid  a 
debt,  although  it  barred  a  remedy." 

3  Jones  v.  Whitworth,  94  Tenn. 
602  (1895),  holding  also  that  the  time 
may  be  shorter  as  to  deceased  stock- 
holders. The  statute  of  limitations 
does  not  begin  to  run  against  the  lia- 
bility of  a  stockholder  on  stock  fraud- 
ulently issued  for  property  at  an  over- 
valuation until  the  corporate  credi- 
tor has  reduced  his  claim  to  a  judg- 
ment. Kelly  v.  Clark,  21  Mont.  291 
(1898).     See  also  §§46,  47,  supra. 

4  See  §§  209,  224,  750,  infra. 

5  Payson  v.  "Withers,  5  Biss.  269 
(1873);  s.  c,  19  Fed.  Cas.  29.  See 
also  §  350,  infra. 

6  New  Albany,  etc.  R.  R.  v.  Fields, 
10  Ind.  187  (1858);  Clem  v.  Newcas- 
tle, etc.  R.  R.,  9  Ind.  488  (1857).  See 
also  cases  in  §§  53,  147,  supra. 


496 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  197. 


r  §197.  Miscellaneous  defenses. — A  subscriber  cannot  defeat  an  ac- 
tion for  the  collection  of  his  subscription  by  alleging  that  the  charter 
was  obtained  in  bad  faith  j1  or  that,  where  a  corporate  creditor  is  en- 
forcing payment,  such  creditor  is  also  a  director  of  the  corporation  ;2 
or  that  other  subscribers  have  paid  their  subscriptions  in  Confederate 
money  ;3  or  that  he  has  paid  the  subscription  by  note  instead  of  by 
cash,  as  required  by  the  charter;4  or  that  the  promoters  sold  to  the 
corporation  a  patent-right  at  an  overvaluation;5  or  that  the  officers 
were  illegally  elected;0  or  that  an  illegal  by-law  prevents  his  vot- 
ing until  calls  art'  paid;7  or  that,  by  the  charter,  the  whole  capital 
stock  should  have  been  paid  in  before  the  commencement  of  business, 
which  was  not  done  ;8  or  that  the  corporation  has  been  ousted  from 
its  franchises;9  or  that  the  plaintiff  is  only  an  assignee  of  the  com- 
pany's rights.10  A  material  alteration,  however,  in  a  subscription 
contract  is  a  good  defense  unless  the  corporation  proves  it  to  have 
been  made  without  its  knowledge  or  procurement.11  He  may  also  de- 
fend on  the  ground  that  the  call  is  for  the  purpose  of  an  unfair  and 
illegal  reorganization.12  It  is  no  defense  that  the  corporation  was  to 

i  Garrett   v.   Dillsburg,   etc.   R.   R.,     Co.  v.  Southern,  etc.  Co.   92  Me.  444 
78  Pa.  St.  465   (1S75) ;  Smith  v.  Hei-     (1899). 


decker,  39  Mo.  157  (1SGG).  Or  il- 
legally changed.  Peychaud  v.  Lane, 
24  La.  Ann.  404    (1872). 

2  Chouteau  Ins.  Co.  v.  Floyd,  74 
Mo.  28G  (1881). 

3  Macon,  etc.  R.  R.  r.  Vason,  57  Ga. 
314    (1876). 

i  Little  v.  O'Brien,  9  Mass.  423 
(1S12). 

5  Dorris  v.  French,  4  Hun,  292 
(1875).    See  also  ch.  Ill  and  notes. 

e  Vernon  Soc.  v.  Hills,  6  Cow.  23 
(1S26).  See  also  §110,  supra.  It  is 
no  defense  that  the  trustees  were  not 
stockholders,  as  required  by  statute. 
Ross  v.  Bank  of  Gold  Hill,  20  Nev. 
191  (1SS8). 

i  Chandler  v.  Northern  Cross  R. 
R.,  18  111.  190  (1S56). 

s  McDermott  v.  Donegan,  44  Mo. 
85    (1869). 

9  Gaff  v.  Flesher,  33  Ohio  St.  107 
(1877)  ;  Rowland  v.  Meader  Furni- 
ture Co.,  3S  Ohio  St.  269  (1882).  It 
is  no  defense  that  the  corporation 
commenced  business  before  one-half 
of  its  capital  stock  had  been  paid  in 
according  to  the  charter.    Maine,  etc. 


10  See  §  111,  supra. 

it  Bery  v.  Marietta,  etc.  Ry.,  26 
Ohio  St.  673  (1875).  Cf.  Ellison  v. 
Mobile,  etc.  R.  R.,  36  Miss.  572  (1S58). 
See  also  §  62,  supra. 

12  In  the  case  of  Bank  of  China  v. 
Morse,  44  N.  Y.  App.  Div.  435  (1899), 
where  a  New  York  subscriber  to  stock 
in  an  English  corporation  was  sued 
by  the  company  for  the  amount  of 
such  subscription,  such  company  hav- 
ing been  reorganized  under  the  pe- 
culiar English  statutes,  the  court  re- 
fused to  enforce  the  liability  on  the 
ground  that  the  funds  were  not  for 
the  purpose  of  paying  debts  of  the  old 
corporation,  but  were  partially  for 
the  purposes  of  the  new  corporation, 
which  the  New  York  subscriber  did 
not  become  interested  in  and  had  no 
notice  thereof,  and  on  the  further 
ground  that  the  reorganization 
scheme  was  practically  a  sale  by  the 
old  company  to  the  new  company. 
Aff'd,  168  N.  Y.  458.  A  stockholder 
sued  on  a  call  cannot  defend  on  the 
ground  that  the  call'  was  invalid.  His 
remedy  is  a  suit  to  set  aside  the  call. 


(32) 


497 


198.] 


MISCELLANEOUS  DEFENSES. 


[CH.  X. 


distribute  lots  by  a  drawing.1  A  person  who  has  been  discharged 
under  the  bankrupt  act  is  not  liable  on  subscriptions  made  previous 
to  his  application  in  bankruptcy.2  The  defenses  that  the  corporate 
charter  has  been  amended  by  the  legislature  without  the  consent  of 
the  defendant  subscriber  ;3  that  an  assignee  of  a  corporation  has  the 
sole  right,  as  a  general  rule,  to  collect  subscriptions  ;4  that  the  stock- 
holder did  not  know  the  legal  effect  of  his  subscription;5  and  that 
the  charter  differs  from  the  terms  of  the  subscription  contract, — are 
considered  elsewhere.6  The  reduction  of  the  capital  stock  does  not 
release  the  subscriber.7  Various  other  defenses  are  referred  to  in  the 
note  below.8 

§  19S.  Waiver  of  defenses. — A  subscriber  to  stock  in  a  corpora- 
tion may  waive  any  defense  he  may  have  to  the  subscription.  The 
waiver  may  be  express,  or  it  may  arise  by  implication  from  the  acts 


Campbell  v.  American,  etc.  Co.,  125 
Fed.  Rep.  207  (1903).  See  also  §  113, 
supra. 

iReed  v.  Gold,  102  Va.  37   (1903). 

2  Glenn  v.  Abell,  39  Fed.  Rep.  10 
(1889);  but  see  Sayre  v.  Glenn,  87 
Ala.  631  (1889).  A  discharge  in  bank- 
ruptcy of  a  subscriber  for  stock  is  a 
bar  to  a  suit  to  enforce  the  subscrip- 
tion where  the  company  became  in- 
solvent before  such  bankruptcy.  Carey 
v.  Mayer,  79  Fed.  Rep.  926  (1897). 
The  bankruptcy  act  does  not  release 
an  applicant  thereunder  from  liabil- 
ity for  calls  made  after  his  release 
in  bankruptcy.  Glenn  v.  Howard,  65 
Md.  40  (1886).  A  bankrupt  is  re- 
leased on  the  statutory  liability  on 
stock  in  another  state  where  such  lia- 
bility has  been  adjudicated,  even 
though  he  was  not  a  party  thereto. 
Dight  v.  Chapman,  44  Ore.  265  (1904). 

3  See  ch.  XXVIII,  infra. 

4  See  §  111,  supra,  and  §  852,  infra. 

5  See  §  147,  supra. 

6  See  §  194,  supra,  §  502,  note,  in- 
fra, and  ch.  IX. 

7  Myers  v.  Sturgis,  123  N.  Y.  App. 
Div.  470  (190S).  An  increase  of  the 
capital  stock  as  allowed  by  the  char- 
ter does  not  release  subscribers.  Port 
Edwards,  etc.  Ry.  v.  Arpin,  80  Wis. 
214   (1891). 

8  Change   of   name    is   no    defense. 


Howard  v.  Glenn,  85  Ga.  238  (1890). 
A  change  of  name  during  organiza- 
tion is  no*  defense.  Priest  v.  Glenn, 
51  Fed.  Rep.  400  (1892).  A  slight 
change  in  the  name  as  incorporated 
is  no  defense.  Joseph  v.  Davis,  10 
S.  Rep.  830  (Ala.  1892).  A  slight 
change  in  the  name  is  no  defense 
where  the  subscriber  has  already  paid 
assessments.  McCormick  v.  Great 
Bend,  etc.  Co.,  48  Kan.  614  (1892). 
It  is  no  defense  to  a  subscription 
that  the  subscriber  did  not  read  the 
paper.  Stutz  v.  Handley,  41  Fed.  Rep. 
531  (1890);  reversed  on  other 
grounds,  139  U.  S.  417.  Although  a 
corporation  has  taken  more  subscript 
tions  than  its  capital  stock  and  has 
issued  certificates  therefor,  yet  this 
does  not  release  subscribers  up  to  the 
correct  amount.  Cartwright  v.  Dick- 
inson, 88  Tenn.  476  (1890).  It  is  no 
defense  to  a  railroad  stock  subscrip- 
tion that  defendant  was  to  receive 
stock  in  a  construction  company,  or 
that  the  control  would  not  change 
hands,  or  that  the  company  has  sold 
all  its  property.  Russell  v.  Alabama 
Midland  Ry.,  94  Ga.  510  (1894).  A 
sale  under  statutes  existing  at  the 
time  of  subscription  is  valid  and  does 
not  release  the  subscriber.  Arm- 
strong v.  Karshner,  47  Ohio  St.  276 
(1890).     See  also  §225,  infra. 


498 


CH.  X.] 


MISCELLANEOUS    DEFENSES. 


[§  198. 


and  declarations  of  the  subscriber.  Thus,  taking  part  in  corporate 
meetings,1  or  the  payment  of  a  call,  with  full  knowledge  of  the  de- 
fense, are  held  to  be  a  waiver;2  and  any  act  indicating  a  clear 
intent  to  abide  by  or  accept  or  pass  over  an  objection  which  the  sub- 
scriber might  make  will  be  held  to  be  a  waiver.3  Subscriptions  paid 
in  and  partly  consumed  by  losses  before  the  incorporation  was  com- 
pleted, are  not  to  be  credited  on  the  subscription  itself  as  against 
corporate  creditors.4 


i  Kampmann  v.  Tarver,  29  S.  W. 
Rep.  1144  (Tex.  1S95).  The  court  may 
submit  to  the  jury  whether  the  de- 
fendant knew  that  the  whole  capital 
stock  was  not  subscribed  when  he  at- 
tended meetings  and  voted.  Interna- 
tional, etc.  Assoc,  v.  Walker,  97  Mich. 
159  (1893).  A  subscriber  who  takes 
part  in  the  business  of  the  company 
cannot  defend  on  the  ground  that  a 
statute  had  not  been  complied  with 
in  paying  in  twenty  per  cent,  in  cash. 
Canfield  v.  Gregory,  GG  Conn.  9 
(1895). 

2  Mississippi,  etc.  R.  R.  v.  Harris, 
36  Miss.  17  (1858);  Inter-Mountain 
Pub.  Co.  v.  Jack,  5  Mont.  5GS  (1885); 
Hamilton  v.  Grangers',  etc.  Ins.  Co., 
67  Ga.  145  (1SS1).  A  subscriber  by 
taking  part  in  the  organization  and 
paying  part  of  the  subscription 
waives  objections  to  the  irregular  in- 
corporation of  the  company.  Green- 
brier, etc.  Exp.  v.  Squires,  40  W.  Va. 
307  (1895).  A  payment  of  a  call  on  a 
subscription  is  not  a  waiver  of  the 
defense  that  the  corporation  has  been 
formed  for  different  purposes  than 
were  represented  by  the  promoters  at 
the  time  of  the  subscription,  where 
the  subscriber  did  not  know  that  fact 
when  he  paid.  Strong  v.  Southwest- 
ern, etc.  Co.,  38  S.  W.  Rep.  546  (Tex. 
1896).  Partial  payment  of  the  sub- 
scription in  ignorance  of  the  fact  that 
one  of  the  other  subscribers  was  in- 
competent to  subscribe  is  not  a  waiv- 


er of  the  defense.  Denny  Hotel  Co. 
v.  Gilmore,  6  Wash.  152  (1893).  The 
complaint  need  not  allege  that  tho 
full  capital  stock  has  been  subscribed, 
where  it  alleges  that  the  subscriber 
had  paid  several  instalments  and 
had  received  a  dividend.  Duluth  Inv. 
Co.  v.  De  Witt,  63  Minn.  538  (1896). 
A  stockholder  who  pays  assessments 
cannot  defend  against  other  assess- 
ments on  the  ground  that  the  capital 
stock  had  not  been  fully  subscribed. 
Callahan  v.  Chilcott,  etc.  Co.,  86  Pac. 
Rep.  123  (Col.  1906).  By  paying  as- 
sessments, the  subscriber  waives  the 
objection  that  the  full  capital  stock 
was  not  subscribed.  Myers  v.  Sturgis, 
123   N.  Y.  App.  Div.  470    (190S). 

a  See  May  v.  Memphis  Branch  R. 
R.,  48  Ga.  109  (1S73);  Middlesex 
Turnp.  Corp.  v.  Swan,  10  Mass.  384 
(1S13);  McCully  v.  Pittsburgh,  etc. 
R.  R.,  32  Pa.  St.  25  (1858).  Partici- 
pating in  benefits  with  knowledge  is 
a  waiver.  Detroit,  etc.  Club  v.  Fitz- 
gerald, 109  Mich.  670  (1896).  The 
defense  that  the  full  capital  stock 
has  not  been  subscribed  may  be 
waived,  and  where  the  treasurer  col- 
lects from  others  he  cannot  set  up 
such  defense  himself.  Macfarland  v. 
West  Side  Imp.  Assoc,  53  Neb.  417 
(1898).  See  also  §§  1G0,  161,  supra, 
and  ch.  XLIV. 

4  Bank  of  De  Soto  v.  Reed,  109   S. 
W.  Rep.  256  (Tex.  1908). 


499 


CHAPTER  XI. 


THE  STOCKHOLDERS'  LIABILITY  TO  CORPORATE  CREDITORS  UPON 

UNPAID  SUBSCRIPTIONS. 


§199. 


200. 


201. 


202. 
203. 
204. 


Unpaid  subscriptions  a  fund  for 
the  benefit  of  creditors — Con- 
struction of  the  liability. 

Can  be  reached  only  after  judg- 
ment against  the  corporation, 
and  execution  returned  un- 
satisfied. 

The  remedy  by  garnishment  or 
attachment,  or  by  notice  to 
the  stockholder. 

The  remedy  by  mandamus. 

The  remedy  by  action  at  law. 

The  remedy  by  bill  in  equity 


205,  206.  Parties  to  the  bill  in  equity. 


§  207.  A  court  of  equity  may  make  a 
call. 

208.  Receivers  and  assignees  for  the 

benefit  of  creditors  —  Their 
duties,  powers,  and  liabilities 
as  to  shares  not  paid  up. 

209.  The  judgment  against  the  cor- 

poration impeachable  only  for 
fraud  or  want  of  jurisdiction. 

210.  Defenses  available  against  cor- 

porate creditors  in  actions  to 
compel  payment  of  balances 
of  subscriptions. 

211.  Contribution. 


§199.     Unpaid  subscriptions  a  fund  for  the  benefit  of  creditors- 
Construction  of  the  liability. — The  capital  or  capital  stock  of  a  cor- 
poration is  the  aggregate  of  the  par  value  of  all  the  shares  into  which 
the  capital  is  divided  upon  the  incorporation;  it  is  the  fund  or  re- 
source with  which  the  corporation  is  enabled  to  act  and  transact  its 
business,  and  upon  the  faith  of  which  persons  give  credit  to  the  cor- 
poration and  become  corporate  creditors.     The  public,  in  dealing  with 
a  corporation,  assumes  that  its  actual  capital,  in  money  or  money's 
worth,  is  equal  to  the  capital  stock  which  it  purports  to  have,  unless  it 
has  been  impaired  by  business  losses.     The  public  has  a  right  to  as- 
sume that  the  capital  stock  has  been  or  will  be  fully  paid  up,  if  it  be 
necessary  in  order  to  meet  corporate  liabilities.     Accordingly,   the 
American  courts  go  very  far  to  protect  corporate  creditors,  and  in 
this  country  it  is  a  well-settled  doctrine  that  unpaid  subscriptions  to 
the  capital  stock  constitute,  upon  the  insolvency  of  the  corporation,  a 
fund  for  the  benefit  of  the  creditors  of  the  corporation.     The  United 
States  courts  formerly  looked  upon  the  capital  stock  as  a  trust  fund 
for  the  benefit  of  corporate  creditors,1  but  the  more  recent  decisions 


l  "Though  it  be  a  doctrine  of  mod- 
ern date,"  says  Mr.  Justice  Miller  in 
Sawyer  v.  Hoag,  17  Wall.  610,  620 
(1873),  "we  think  it  now  well  estab- 
lished that  the  capital  stock  of  a  cor- 
poration, especially  its  unpaid  sub- 
scriptions, is  a  trust  fund  for  the  bene- 


fit of  the  general  creditors  of  the  cor- 
poration. And  when  we  consider  the 
rapid  development  of  corporations  as 
instrumentalities  of  the  commercial 
and  business  world  in  the  last  few 
years,  with  the  corresponding  neces- 
sity of  adapting  legal   principles  to 


500 


CH.  XI.] 


SUBSCRIPTIONS   AND   CORPORATE    CREDITORS. 


[§  199. 


eliminate  any  trust  feature  from  the  capital  stock.1  There  are  three 
methods  by  which  stockholders  seek  to  avoid  their  liability  to  corpo- 
rate creditors :  First,  by  a  cancellation  or  withdrawal  from  the  con- 
tract;2 second,  by  a  release  from  their  obligation  to  pay  the  full  par 
value  of  the  stock;3  third,  by  a  transfer  of  the  stock.4  In  each  of 
these  cases,  however,  a  court  of  equity  does  its  utmost  to  protect  the 
corporate  creditors,  and  a  rigid  scrutiny  will  be  made  in  the  interest 
of  creditors  into  every  transaction  of  such  a  nature.5    A  subscription 


S 


the  new  and  varying  exigencies  of 
this  business,  it  is  no  solid  objection 
to  such  a  principle  that  it  is  modern, 
for  the  occasion  for  it  could  not 
sooner  have  arisen."  This  seems  to 
be  a  distinctively  American  doctrine. 
It  is  not  known  to  the  English  law, 
and  was  first  clearly  announced  by 
Mr.  Justice  Story  in  Wood  v.  Dum- 
mer,  3  Mason,  308  (1824);  s.  c,  30 
Fed.  Cas.  435.  See  also  the  cases  of 
Hightower  v.  Thornton,  8  Ga.  486 
(1850);  Germantown  Pass.  Ry.  v.  Fit- 
ler,  60  Pa.  St.  124  (1S69);  Crawford 
v.  Rohrer,  59  Md.  599  (1882);  Lewis 
v.  Robertson,  21  Miss.  558  (1850) ; 
Bunn's  Appeal,  105  Pa.  St.  49  (1884) ; 
Curran  v.  Arkansas,  15  How.  304 
(1853);  Mumma  v.  Potomac  Co.,  8 
Pet.  281  (1834);  Sanger  v.  Upton, 
91  U.  S.  56  (1875);  Morgan  County 
v.  Allen,  103  U.  S.  498  (18S0)  ; 
Osgood  v.  Laytin,  3  Keyes  (N.  Y.), 
521  (1867);  s.  c,  5  Abb.  Pr.  (N.  S.) 
1.  Cf.  Vose  v.  Grant,  15  Mass.  505 
(1819);  Spear  v.  Grant,  16  Mass.  9 
(1819);  Baker  v.  Atlas  Bank,  50 
Mass.  .182  (1845);  Osgood  v.  King, 
42  Iowa,  478  (1876);  Chisholm  v. 
Forny,  65  Iowa,  333  (1884);  Jackson 
v.  Traer,  64  Iowa,  469  (1884);  Mills 
v.  Stewart,  41  N.  Y.  3S4,  389  (1869); 
Morgan  v.  New  York,  etc.  R.  R.,  10 
Paige,  Ch.  290  (1843);  Salmon  p. 
Hamborough  Co.,  1  Cas.  in  Ch.  204 
(1671);  Nevitt  v.  Bank  of  Port  Gib- 
son, 14  Miss.  513  (1846).  As  to  the 
trust-fund  theory,  however,  see  §  9, 
supra. 
i  "When   a   corporation    is   solvent, 


the  payment  of  its  debts  has  in  fact 
very  little  foundation.  No  general 
creditor  has  any  lien  upon  the  fund 
under  such  circumstances,  and  the 
right  of  the  corporation  to  deal  with 
its  property  is  absolute,  so  long  as  it 
does  not  violate  its  charter  or  the 
law  applicable  to  such  corporation." 
McDonald  v.  Williams,  174  U.  S.  397, 
401  (1899). 

2  See  §§  167-170,  supra. 

3  See  §§  167-170,  and  oh.  Ill,  supra. 

4  See  ch.  XV,  supra. 

5  Sawyer  v.  Hoag,  17  Wall.  610 
(1873);  Morgan  County  v.  Allen,  103 
U.  S.  498  (1880);  Chouteau  v.  Dean, 
7  Mo.  App.  210  (1S79);  Gill  v.  Balis, 
72  Mo.  424  (1880);  Putnam  v.  New 
Albany,  4  Biss.  365  (Ind.  1869);  s.  c, 
20  Fed.  Cas.  79;  Re  South  Mountain, 
etc.  Co.,  7  Sawyer,  30  (1SS1);  s.  c, 
5  Fed.  Rep.  403;  Union  Mut.  L.  Ins. 
Co.  v.  Frear  Stone  Mfg.  Co.,  97  111. 
537  (1881);  Singer  v.  Given,  61  Iowa, 
93  (1883) ;  Jackson  v.  Traer,  64  Iowa, 
469  (1884);  Mathis  v.  Pridham,  1 
Tex.  Civ.  App.  58  (1892);  Chisholm 
r.  Forny,  65  Iowa,  333  (1884).  In  one 
case  it  is  said  that  it  is  not  within 
the  ingenuity  of  man  to  devise  a 
scheme  to  prevent  courts  of  equity 
from  enforcing  the  payment  of  un- 
paid subscriptions  to  capital  stock 
for  the  benefit  of  corporate  creditors. 
Upton  i'.  Hansbrough,  3  Biss.  417, 
425  (1873);  s.  c,  28  Fed.  Cas.  839. 
A  fraudulent  device  by  which  a  stock- 
holder pays  his  subscription  by  a 
note,  and  subsequently  obtains  the 
note  at  a  large  discount,  may  be  valid 


the  theory  that  its  capital  is  a  trust    as  against  the  company,  but  will  be 
fund  upon  which  there  is  any  lien  for     set  aside  as   regards  corporate  cred- 

501 


199.] 


SUBSCRIPTIONS    AND    CORPORATE    CREDITORS. 


[CH.  XI. 


liability  may  be  enforced  in  another  state  and  in  construing  the  lia- 
bility of  stockholders  on  an  unpaid  subscription,  the  court  will  fol- 
low the  decisions  of  the  state  which  created  the  corporation.1  An  alien 
corporation  may  sue  a  stockholder  in  the  courts  of  the  state  where 
ho  resides  on  a  foreign  unpaid  subscription.2  A  statute  releasing 
stockholders  from  paying  one-half  of  the  par  value  of  the  stock  and 
declaring  the  stock  paid  up,  although  but  fifty  per  cent,  had  been 


itors.     Bouton  v.  Dement,  123  111.  142 
(1887).    A  subscriber  cannot  pay  for 
his    stock    by    purchasing    full-paid 
stock  and  having  this  substituted  for 
his    subscription.    Marshall    Foundry 
Co.  v.   Killian,   99   N.   C.   501    (1888). 
The  stockholder's  liability  in  this  re- 
spect is   not   confined   in   general   to 
the  original  capital  stock,  but  it  at- 
taches,  upon   an   authorized   increase 
of  the  capital,  to  such  increase.  Chubb 
v.  Upton,  95  U.  S.  665  (1877).  See  also 
Delano  v.  Butler   (Pacific  Nat.  Bank 
Cases),    118   U.    S.   634    (1886).     The 
filing  of  the  statutory  certificate  de- 
claring that  the  whole  amount  of  the 
capital  stock  has  been  paid  in  is  not 
conclusive  of  the  fact,  and  will  not 
prevent  proof  to  the  contrary.    Barre 
Nat.  Bank  v.  Hingham  Mfg.  Co.,  127 
Mass.  563   (1879);  Wheeler  v.  Millar, 
90  N.  Y.  353    (1882)  ;  Veeder  v.  Mud- 
gett,  95  N.  Y.  295   (1884)  ;   Thompson 
v.  Reno  Sav.  Bank,  19  Nev.  103,  171, 
242,  291,  293  (18S5).    A  creditor  of  a 
dissolved    Missouri    corporation    may 
maintain  a  suit  in  equity  in  Connecti- 
cut   against    citizens    of    Connecticut 
who   were   stockholders   in  such   cor- 
poration,  to  collect  unpaid  subscrip- 
tions, it  being  alleged  that  the  direc- 
tors refused  to  collect  the  same;  and 
where   $100,000  capital  stock  was  is- 
sued for  land  worth  only  $10,000  the 
stockholders  are  liable  for  the  differ- 
ence under  the  laws  of  Missouri,  and 
hence  may  be  held  liable  in  Connecti- 
cut.    Lewisohn  v.  Stoddard,  78  Conn. 
575    (1906).     The  liability  of  a  sub- 
scriber for  stock  in  an  Arizona  cor- 
poration   may    be    enforced    in    Ken- 
tucky.     Williams*    Ex'r   v.    Chamber- 


lain, 94  S.  W.  Rep.  29  (Ky.  1906).  See 
also  §§  46,  47,  infra.  The  subscrip- 
tion liability  may  be  enforced  in  an- 
other state.  Latimer  v.  Citizens'  State 
Bank,  102  Iowa,  162  (1897);  Sigua 
Iron  Co.  v.  Brown,  19  N.  Y.  App. 
Div.  143  (1897).  See  also  §§208, 
223,  infra.  The  question  whether  a 
stockholder  may  limit  or  entirely  do 
away  with  his  liability,  by  an  express 
contract  to  that  effeci  with  corporate 
creditors,  is  considered  elsewhere.  See 
§  216,  infra. 

1  Glenn  v.  Liggett,  135  U.  S.  533 
(1890) ;  Penobscot,  etc.  Co.  v.  Bart- 
lett,  78  Mass.  244  (1858).  Cf.  Bank 
of  China  v.  Morse,  168  N.  Y.  458 
(1901).  See  also  §223,  infra.  The 
supreme  court  of  the  United  States 
will  not  reverse  a  judgment  of  the 
court  of  appeals  of  New  York,  al- 
though the  court  of  appeals,  in  pass- 
ing upon  the  liability  of  stockholders, 
refused  to  follow  the  law  of  Virginia, 
where  the  corporation  had  been  in- 
corporated, the  stockholders  against 
whom  suit  was  brought  being  resi- 
dents of  New  York.  Glenn  v.  Garth, 
147  U.  S.  360  (1S93).  Subscribers  to 
stock  are  liable  according  to  the  law 
of  the  state  incorporating  the  com- 
pany, and  not  according  to  the  law  of 
the  state  where  the  subscribers  re- 
side. A  subscriber  to  stock  in  a  Vir- 
ginia corporation  is  liable  by  statute 
although  he  has  transferred  his  stock. 
Morris  v.  Glenn,  87  Ala.  628    (1888). 

2  Anglo-American,  etc.  Co.  v.  Dyer, 
181  Mass.  593  (1902).  The  subscrip- 
tion liability  of  an  Illinois  stock- 
holder in  a  Scottish  corporation  may 
be  enforced  in  Illinois,  and  the  extent 


502 


CH.  XI.]  SUBSCRIPTIONS   AND    CORPORATE    CREDITORS.  [§  200. 

paid  thereon,  is  unconstitutional  as  regards  creditors  existing  at  the 
time  such  statute  was  enacted.1 

§  200.  Can  be  reached  only  after  judgment  against  the  corpora- 
tion and  execution  returned  unsatisfied.- — Unpaid  subscriptions  to 
the  capital  stock  are  not  the  primary  or  regular  fund  for  the  pay- 
ment of  corporate  debts.  Persons  transacting  business  with  the  cor- 
poration look  to  the  corporation  itself  for  the  payment  of  their 
debts.  Credit  is  given  to  the  corporation,  not  to  the  stockholders,  and 
it  is  the  natural  order  of  business  that  the  creditors  of  the  corpora- 
tion are  to  be  paid  by  the  corporation  from  funds  in  the  corporate 
treasury.  Ordinarily,  corporate  creditors  have  no  knowledge  or  con- 
cern  about  the  subscription  list,  and  as  to  whether  subscriptions  are 
unpaid  or  partially  paid.  So  long  as  the  corporation  meets  its  obliga- 
tions in  the  ordinary  course  of  business,  corporate  creditors  have  no 
need  to  concern  themselves  about  unpaid  subscriptions  to  the  stock. 
But  when  the  corporation  is  in  default  and  embarrassed,  or  for  any 
reason  fails  to  pay  its  debts,  then  its  creditors  have  rights  with  refer- 
ence to  such  unpaid  subscriptions.  They  then  have  the  right  to  know 
whether  all  the  subscriptions  for  stock  have  been  fully  paid  in,  and,  if 
not,  they  have  the  right  to  compel  such  payment.2 

It  accordingly  becomes  important  to  know  at  what  point,  in  their 
efforts  to  collect  what  is  due  them,  corporate  creditors  may  cease  to 
pursue  the  corporation  and  proceed  directly  against  its  delinquent 
stockholders.  The  well-established  rule  upon  this  point  is  that  a  cor- 
porate creditor's  suit  to  enforce  payment  of  unpaid  subscriptions  can 
be  properly  brought  only  after  a  judgment  at  law  has  been  obtained 
against   the   corporation,    and    an    execution    returned    unsatisfied.3 

of  the  liability  will  be  determined  by  40  Iowa,  648    (1875).     The  suit  is  to 

the    laws    of    Scotland.      Mandel    v.  be  brought  for   this   purpose   in   the 

Swan,  etc.  Co.,  154  111.  177   (1895).  courts  of  the  state  where  the  corpora- 

i  Williams   v.  Watters,  97   Md.    113  tion    exists.      Barclay   v.    Talman,    4 

(1903).     See  also  §497,  infra.  Edw.  Ch.  123  (1842);  Murray  v.  Van- 

"  2  Quoted    and    approved    in    Tiche-  derbilt,    39    Barb.    140,    147     (1863); 

nor  v.  Williams,  etc.  Co.,  116  Ga.  303  Bank  of  Virginia  v.  Adams,  1   Pars. 

(1902).  Eq.  534    (1850);    Patterson  v.  Lynde, 

3  Bank  of  United  States  v.  Dallam,  112   111.   196    (1884);    Harris  v.   Pull- 

4  Dana  (Ky.),  574  (1836);  Walser  v.  man,  84  111.  20,  25    (1876).     See  also 

Seligman,   13   Fed.  Rep.  415    (1882);  §  219,  infra.   Cf.  Claflin  v.  McDermott, 

Wetherbee  v.  Baker,  35  N.  J.  Eq.  501  12  Fed.  Rep.  375  (1882). 
(1882);    Cutright  v.   Stanford,  81  111.         Simple  contract  creditors  of  a  cor- 

240    (1876)  ;    Baxter  v.  Moses,  77  Me.  poration,  whose  claims  have  not  been 

465  (1885);  Terry  v.  Anderson,  95  U.  reduced  to  judgment,  and  who  have 

S.     628,     636     (1877);     Cleveland     v.  no  express  lien  on  its  property,  have 

Burnham,  55  Wis.  598    (1882);    s.  c,  no    standing    in    a    federal    court    of 

64  Wis.  347;  Freeland  v.  McCullough,  equity  to  collect  unpaid  subscriptions 

1  Denio,  414  (1845);  Bayliss  v.  Swift,  and  apply  the  «ynfi  **>  the  payment 

503 


200.] 


SUBSCRIPTIONS   AND   CORPORATE    CREDITORS. 


[cn.  XI. 


This  rule  is  of  such  importance  that  by  statute,  in  many  of  the  states, 
a  creditor's  right  to  proceed  against  a  stockholder  on  his  unpaid  sub- 
scription is  allowed  only  after  the  remedy  against  the  corporation 
itself  has  been  exhausted.1  By  this  is  meant  that  judgment  shall 
havo  been  duly  recovered  against  the  corporation,  and  execution  is- 
sued and  regularly  returned  unsatisfied.  Nothing  short  of  that  ex- 
hausts the  remedy  against  the  corporation.2  Of  course  a  contrary 
rule  may  be  established  by  statute.3  It  has  been  held  that  a  court 
of  equity  may  enforce  the  liability  of  stockholders  who  have  turned 
in  property  in  payment  for  their  stock  at  a  fraudulent  overvaluation, 


of  their  debts,  even  though  they  al- 
lege that  an  existing  mortgage  on  the 
property  is  fraudulent,  and  that  the 
company  is  insolvent,  and  a  bill  of 
foreclosure  of  the  mortgage  is  going 
on.  They  might  under  certain  condi- 
tions intervene.  Hollins  v.  Brierfield 
Coal,  etc.  Co.,  150  U.  S.  371  (1893). 
The  federal  courts  will  not  even  fol- 
low a  state  statute  authorizing  such 
a  suit,  nor  does  the  fact  that  the  fore- 
closure suit  is  in  the  federal  court 
give  jurisdiction  of  the  creditor's 
suit.  Hollins  v.  Brierfield  Coal,  etc. 
Co.,  150  U.  S.  371  (1893).  The  return 
of  execution  unsatisfied  is  necessary. 
Albright  v.  Texas,  8  New  Mex.  422 
(1896). 

i  Thornton  v.  Lane,  11  Ga.  459 
(1852);  Lane  v.  Harris,  16  Ga.  217 
(1854);  McClaren  v.  Franciscus,  43 
Mo.  452  (1869);  New  England  Com. 
Bank  v.  Newport  Steam  Factory,  6 
R.  I.  154  (1859) ;  Priest  v.  Essex  Mfg. 
Co.,  115  Mass.  380  (1874);  Cambridge 
Waterworks  v.  Somerville  Dyeing, 
etc.  Co.,  86  Mass.  239  (1862);  Linds- 
ley  v.  Simonds,  2  Abb.  Pr.  (N.  S.) 
69  (1866) ;  Blake  v.  Hinkle,  10  Yerg. 
(Tenn.)  218  (1836);  Shellington  v. 
Howland,  53  N.  Y.  371  (1873);  Wehr- 
man  v.  Reakirt,  1  Cin.  Super.  Ct. 
(Ohio),  230  (1871);  Dauchy  v. 
Brown,  24  Vt.  197  (1852);  Drink- 
water  v.  Portland  Marine  Ry.,  18  Me. 
35  (1841) ;  Handy  v.  Draper,  89  N.  Y. 
334  (1882) ;  Burch  v.  Taylor,  1  Wash. 
St.  245  (1890) ;  Baines  v.  Babcock,  95 


Cal.     581     (1891).      Cf.     Perkins    v. 
Church,  31  Barb.  84   (1859). 

2  Quoted  and  approved  in  King  v. 
Pony,  etc.  Co.,  28  Mont.  74  (1903). 
Rocky  Mountain  Nat.  Bank  v.  Bliss, 
89  N.  Y.     338   (1882). 

In  England  a  scire  facias  is  a  nec- 
essary preliminary,  unless  there  is 
some  statutory  enactment  to  the  con- 
trary. Bartlett  v.  Pentland,  1  B.  & 
Ad.  704  (1831);  Clowes  v.  Brettell, 
10  M.  &  W.  506  (1842);  s.  c,  11 
M.  &  W.  461;  Wingfield  v  Barton,  2 
Dowl.  (N.  S.)  355  (1842);  Winfield 
v.  Peel,  12  L.  J.  (N.  S.,  Q.  B.)  102 
(1842).  In  a  suit  by  a  corporate  cred- 
itor against  a  corporation  to  obtain 
judgment  before  suing  stockholders 
on  their  liability,  the  stockholders 
are  not  allowed  to  come  in  as  parties. 
Hambleton  v.  Glenn,  9  S.  E.  Rep.  129 
(Va.  1889).  Proof  that  a  creditor  has 
exhausted  his  legal  remedy  against 
the  corporation  is  shown  by  the  judg- 
ment and  an  execution  theron  re- 
turned unsatisfied.  Evidence  that  the 
company  owns  a  large  amount  of  per- 
sonal property  besides  its  road  and 
franchise  is  inadmissible.  Baines  v. 
Babcock,    95    Cal.    581    (1891). 

3  Under  the  Illinois  statute  no 
judgment  need  be  first  obtained 
against  the  corporation.  The  suit 
may  be  against  the  corporation  and 
the  stockholders  simultaneously.  Par- 
melee  v.  Price,  208  111.  544  (1904). 
No  execution  need  be  returned  unsat- 
isfied   under    the    Arkansas    statute. 


504 


CH.  XI.] 


SUBSCRIPTIONS   AND    CORPORATE   CREDITORS. 


[§   200. 


even  though  the  creditor  did  not  obtain  judgments  and  have  execu- 
tions returned  unsatisfied.1 

The  corporate  funds  are  the  corporate  creditors'  primary  resource, 
even  where  the  liability  of  the  individual  stockholder  is  declared  to 
be  primary,  like  that  of  an  original  contractor  or  partner.2  Where, 
however,  the  corporation  has  been  adjudged  a  bankrupt,  the  remedy 
against  the  corporation  need  not  first  be  exhausted.3  Such,  also, 
has  been  held  to  be  the  rule  where  the  corporation  is  notoriously  in- 
solvent,4 or  has  been  formally  dissolved.5 


Lester,  etc.  v.  Bemis,  etc.  Co.,  71  Ark. 
379  (1903). 

i  See  v.  Heppenheimer,  69  N.  J. 
Eq.  36  (1905). 

2  Stone  v.  Wiggin,  46  Mass.  316 
(1842);  Stedman  v.  Eveleth,  47  Mass. 
114  (1843). 

3  State  Savings  Assoc,  v.  Kellogg, 
52  Mo.  583  (1873);  Dryden  v.  Kel- 
logg, 2  Mo.  Ap.  87  (1876)  ;  Shelling- 
ton  v.  Howland,  53  N.  Y.  371  (1873). 
Cf.  Ansonia  Brass,  etc.  Co.  v.  New 
Lamp  Chimney  Co.,  53  N.  Y.  123 
(1873);  s.  c,  aff'd,  New  Lamp  Chim- 
ney Co.  v.  Ansonia  Brass,  etc.  Co.,  91 
U.  S.  656  (1875) ;  Walser  v.  Seligman, 
13  Fed.  Rep.  415  (1882).  Contra, 
Birmingham  Nat.  Bank  v.  Mosser,  14 
Hun,  605  (1878);  Fourth  Nat.  Bank 
v.  Francklyn,  120  U.  S.  747  (1887). 
See  §  219,  infra. 

4  Hodges  v.  Silver  Hill  Min.  Co.,  9 
Oreg.  200  (1881);  Terry  v.  Tubman, 
92  U.  S.  156  (1875) ;  Camden  v.  Dore- 
mus,  3  How.  515,  533  (1845) ;  Stutz  v. 
Handley,  41  Fed.  Rep.  531  (1890) ;  re- 
versed on  other  grounds,  139  U.  S. 
417;  Salt  Lake  Hardware  Co.  v.  Tin- 
tic  Milling  Co.,  13  Utah,  423  (1896). 
See  also  Hollingshead  v.  "Woodward, 
107  N.  Y.  96  (1887).  It  has  been  held 
that  the  right  of  action  accrues  to  the 
creditor  whenever  it  is  clear  that  the 
corporation  has  no  property  from 
which  the  claim  can  be  paid.  A  judg- 
ment is  not  necessary  for  the  begin- 
ning of  an  action  against  the  stock- 
holder, though  it  may  be  necessary  as 
evidence  in  such  an  action  to  deter- 
mine the  measure  of  damages.  First 
Nat.   Bank  v.  Greene,   64   Iowa,   445 


(1884).  Cf.  Cleveland  v.  Marine  Bank, 
17  Wis.  545  (1863).  A  creditor  of  an 
insolvent  corporation  may  bring  a 
creditor's  bill  against  the  assignee  for 
the  benefit  of  creditors  of  a  subscriber, 
even  though  no  judgment  against  the 
corporation  had  been  obtained  and  no 
other  stockholders  are  made  co-de- 
fendants. Samainego  v.  Stiles,  20  Pac. 
Rep.  607  (Ariz.  1889).  A  creditor 
must  first  exhaust  his  remedy  against 
the  corporation  unless  he  proves  it 
insolvent.  Fletcher  v.  Bank  of  Lo- 
noke, 71  Ark.  1  (1902).  No  judgment 
against  the  corporation  is  necessary 
if  the  company  is  insolvent  and  is  In 
the  hands  of  a  receiver.  Williams' 
Ex'r  v.  Chamberlain,  94  S.  W.  Rep. 
29  (Ky.  1906).  A  creditor  may  file  a 
bill  to  collect  unpaid  subscriptions 
without  a  call  being  first  made  by 
the  directors,  where  the  company  has 
disposed  of  all  its  property  and  is  in- 
solvent. Chilberg  v.  Siebenbaum,  41 
Wash.  663  (1906).  Judgment  against 
the  corporation  is  not  first  necessary. 
Chilberg  v.  Siebenbaum,  41  Wash.  663 
(1906).  In  North  Dakota  a  simple 
creditor  in  an  insolvent  corporation 
may  file  a  bill  in  equity  to  enforce 
the  stockholders'  subscription  liability. 
Marshall-Wells,  etc.  Co.  v.  New  Era, 
etc.  Co.,  13  N.  Dak.  396  (1904). 

5  Approved  in  Latimer  v.  Citizens' 
State  Bank,  102  Iowa,  162  (1897).  As 
to  what  is  sufficient  to  dissolve  a  cor- 
poration for  this  purpose,  see  Kincaid 
v.  Dwinelle,  59  N.  Y.  548  (1875).  Un- 
der a  statute  requiring  dissolution  of 
the  corporation  before  corporate  cred- 
itors can  reach  unpaid  subscriptions, 


505 


§  201.] 


SUBSCRIPTIONS    AND    CORPORATE    CREDITORS. 


[CH.  XI. 


A  bill  in  equity  lies  to  enforce  the  subscription  liability  of  a  stock- 
holder in  a  foreign  corporation.1  No  judgment  against  the  corpo- 
ration need  be  obtained  in  the  state  where  such  suit  is  brought,  if 
judgment  has  been  obtained  and  execution  returned  unsatisfied  where 
the  corporation  exists,  and  it  is  shown  that  the  company  has  no  prop- 
erty and  service  cannot  be  made  in  the  state  upon  the  company.2 
The  bill  in  equity  must  show  that  the  remedy  against  the  corpora- 
tion has  been  exhausted.3 

§  201.  The  remedy  by  garnishment  or  attachment  or  by  notice  to 
the  stockholder. — There  are  various  remedies  which  corporate  cred- 


the  corporation  is  deemed  to  be  dis- 
solved when  it  has  ceased  to  exercise 
its  proper  functions,  is  without  funds, 
and  is  indebted.  Penniman  v.  Briggs, 
1  Hopk.  Ch.  300  (1824);  Slee  v. 
Bloom,  19  Johns.  456  (1822);  Bank 
of  Poughkeepsie  v.  Ibbotson,  24  Wend. 
473,  479  (1840).  Cf.  Terry  v.  Ander- 
son, 95  U.  S.  028  (1877).  Remington 
v.  Samana  Bay  Co.,  140  Mass.  494 
(1886),  holds  that  the  judgment  here- 
in against  the  corporation  is  void  if 
the  corporation  has  been  dissolved. 
See  §  642,  infra.  It  has  been  said 
that  corporate  creditors  need  not 
await  the  collection  by  the  corpora- 
tion of  doubtful  claims,  but  may  com- 
pel the  payment  of  their  claims  by 
the  stockholders  and  let  the  latter 
take  the  risk  and  delay.  "Creditors," 
says  the  supreme  court  of  Tennessee, 
"will  not  be  required  to  wait  the  col- 
lection of  doubtful  claims  or  claims 
in  litigation.  The  stockholders  must 
pay  promptly,  and  take  upon  them- 
selves the  onus  of  delay  and  risk  as 
to  all  such  claims."  Moses  v.  Ocoee 
Bank,  1  Lea  (Tenn.),  398,  413  (187S). 
See  also  Stark  v.  Burke,  9  La.  Ann. 
341,  343  (1854).  General  creditors 
may  also  reach  unpaid  subscriptions, 
although  another  corporate  creditor 
has  a  mortgage  lien  on  the  corporate 
property,  rights,  privileges,  and  fran- 
chises. Dean  v.  Biggs,  25  Hun,  122 
(1881).  Aff'd,  93  N.  Y.  662.  See  also 
§§  219,  852,  infra. 

i  See  §  199,  supra. 

2  Rule  v.  Omega,  etc.  Co.,  64  Minn. 
326   (1896).     See  also  note  3,  p.  503. 


Unless  such  proof  is  given,  judgment 
in  the  state  where  suit  is  brought 
must  be  shown.  National  Tube  Works 
v.  Ballou,  146  U.  S.  517  (1892);  s.  c, 
42  Fed.  Rep.  749;  Rocky  Mountain 
Nat.  Bank  v.  Bliss,  89  N.  Y.  338 
(18S2).  In  this  case  it  is  held  that 
a  proceeding  in  rem,  affecting  only 
the  property  of  the  corporation  at- 
tached, and  execution  against  that 
property,  is  not  what  the  rule  re- 
quires; and  again,  that  the  recovery 
of  a  judgment  and  issue  of  execu- 
tion in  another  state  is  not  a  compli- 
ance with  the  rule,  but  that  a  judg- 
ment in  and  execution  issued  out  of 
a  court  of  the  state  where  the  statute 
is  in  force  is  necessary.  To  the  same 
effect,  see  Brice  v.  Munro,  5  Can.  Law 
T.  130,  Ont.  High  Ct.  of  Just.,  Q.  B. 
Div.  (1S85),  in  which  case  it  is  held 
that  an  execution  issued  and  returned 
in  Quebec  is  not  sufficient  as  against 
a  company  incorporated  and  existing 
in  Ontario.  Contra,  Shickle  v.  Watts, 
94  Mo.  410  (1888).  Mere  insolvency  of 
a  corporation  does  not  obviate  the  ne- 
cessity of  a  judgment  and  execution 
returned  unsatisfied  before  a  corpo- 
rate creditor  can  sue  the  stockholders 
on  their  unpaid  subscriptions.  Neither 
does  that  fact  that  the  corporation  is 
a  foreign  corporation  and  that  service 
cannot  be  obtained  upon  it  in  the 
state,  obviate  the  necessity  of  such 
judgment.  Dickinson  v.  Traphagan, 
147  Ala.  442   (1906). 

3  Doak  v.  Stahlman,  58  S.  W.  Rep. 
741    (Tenn.  1899). 


506 


CH.  XI.] 


SUBSCRIPTIONS   AND    CORPORATE    CREDITORS. 


[§   201. 


itors  may  employ  to  enforce  the  payment  of  partially  paid-up  sub- 
scriptions. Among  these  is  that  of  garnishment.  Thus,  where  a  sub- 
scription has  been  called  in,  in  part  or  wholly,  and  has  not 
been  paid  by  the  subscriber,  it  is,  at  least  to  the  extent  of  such  calls, 
an  asset  of  the  corporation,  and,  like  other  assets,  is  subject  to  gar- 
nishment at  the  instance  of  a  corporate  creditor.1 

But  this  remedy  is  not  available  to  reach  that  part  of  the  unpaid 
subscription  for  which  calls  have  not  been  made.2    In  a  garnishment 


l  Kern  v.  Chicago,  etc.  Assoc,  140 
111.  371  (1892);  Bohrer  v.  Adair,  61 
Neb.  824  (1901) ;  Joseph,  v.  Davis,  10 
S  Rep.  S30  (Ala.  1892);  Meints  v. 
East  St.  Louis,  etc.  Co.,  89  111.  4S 
(1878);  Hannah  v.  Moberly  Bank,  67 
Mo.  678  (1878);  Simpson  v.  Reynolds, 
71  Mo.  594  (1880);  Faull  v.  Alaska, 
etc.  Min.  Co.,  8  Sawyer,  420  (1883); 
Curry  v.  Woodward,  53  Ala.  371 
(1875);  Bingham  v.  Rushing,  5  Ala. 
403  (1843) ;  Hays  v.  Lycoming  F.  Ins. 
Co.,  99  Pa.  St.  621  (1882).  Cf.  Rand 
v.  White  Mountains  R.  R.,  40  N.  H.  79 
(I860);  Brown  v.  Union  Ins.  Co.,  3 
La.  Ann.  177  (1848);  Scott  v.  Wind- 
ham, 73  Miss.  76  (1894);  Dean  v. 
Biggs,  25  Hun,  122  (1881).  Aff'd,  93 
N.  Y.  662.  The  creditor  of  a  corpora- 
tion may  garnishee  a  person  owing 
such  corporation  on  a  subscription 
for  stock,  even  though  such  corpora- 
tion has  sold  its  assets  to  another  cor- 
poration. Prentice  v.  U.  S.,  etc. 
Steamship  Co.,  78  Fed.  Rep.  106 
(1897).  An  attachment  of  unpaid 
subscriptions  due  to  a  foreign  corpo- 
ration will  be  stayed  where  seques- 
tration proceedings  are  commenced, 
but  the  priority  of  the  attachment 
creditor  will  be  preserved.  Re  Queens- 
land, etc.  Co.,  58  L.  T.  Rep.  878 
(188S).  See  s.  c,  [1892]  1  Ch.  219. 
Where  garnishee  process  lies  at  the 
Instance  of  a  judgment  creditor  to 
collect  unpaid  subscriptions,  a  suit  in 
equity  will  not  lie.  Henderson  v. 
^all,  134  Ala.  455  (1900). 

2  Quoted  and  approved  in  Bohrer 
v.  Adair,  61  Neb.  S24  (1901)  ;  Bing- 
ham v.  Rushing,  5  Ala.  403  (1843)  ; 
Brown  v.  Union  Ins.  Co.,  3  La.  Ann. 


177  (1848);  Bunn's  Appeal,  105  Pa. 
St.  49  (1884).  See  also  Coalfield  Co. 
v.  Peck,  98  111.  139  (1881).  In  Nevada 
the  right  of  garnishment  in  a  case 
where  calls  had  not  been  made  was 
expressly  denied.  McKelvey  v.  Crock- 
ett, 18  Nev.  238  (1884).  Cf.  Meints  v. 
East  St.  Louis,  etc.  Co.,  S9  111.  48 
(1878);  Hughes  v.  Oregonian  Ry.,  11 
Oreg.  158  (1883);  Peterson  v.  Sin- 
clair, 83  Pa.  St.  250  (1877);  Lang- 
ford  v.  Ottumwa  W.  P.  Co.,  59  Iowa 
283  (1882);  Chandler  v.  Siddle,  10 
Nat.  Bankr.  Reg.  236  (1874);  s.  c, 
5  Fed.  Cas.  459.  Collection  may  be  by 
garnishee  process  in  Alabama.  Hen- 
derson v.  Mayfield,  etc.  Mills,  45  S. 
Rep.  211  (Ala.  1907.).  In  New  York 
there  is  no  process  of  garnishment, 
but  instead  thereof  an  attachment  is 
allowed.  Under  an  attachment  against 
a  foreign  corporation  not  chartered 
by  the  United  States,  the  sheriff  may 
levy  upon  the  sums  remaining  unpaid 
upon  a  subscription  to  the  capital 
stock  of  the  corporation,  the  sub* 
scriber  being  within  the  county  and 
having  property  therein;  "or  upon 
one  or  more  shares  of  stock  therein 
held  by  such  a  person,  or  transferred 
by  him  for  the  purpose  of  avoiding 
payment  thereof."  N.  Y.  Code  Civ. 
Proa,  §  646.  See  also  Cooper  v.  Adel, 
etc.  Co.,  122  N.  C.  463   (1898). 

It  has  also  been  held  that  a  corpo- 
rate creditor,  by  an  execution  against 
the  corporation,  may  reach  an  unpaid 
subscription,  though  no  call  has  been 
made.  Re  Glen  Iron  Works,  17  Fed. 
Rep.  324  (1883);  s.  c,  20  Fed.  Rep. 
674  (1884);  Cucullu  v.  Union  Ins.  Co., 
2    Rob.    (La.)    571,   573    (1S42).     Cf. 


507 


§  201.] 


SUBSCRIPTIONS   AND   CORPORATE    CREDITORS. 


[Cll.  XL 


suit  against  a  corporation  and  a  stockholder  to  reach  an  unpaid  sub- 
scription the  stockholder  may  contesl  the  validity  of  the  claim  against 
the  corporation,  even  though  the  corporation  has  defaulted  in  the 
.suit.1  The  California  courts  will  nol  enforce  the  subscription  lia- 
bility of  stockholders  in  an  [llinois  corporation  where  the  Illinois 
statutes  prescribe  that  the  remedy  may  be  by  garnishment.8 

Attachment  lies  against  resident  subscribers  to  Btock  in  a  foreign 
corporation,  the  subscription  juice  not  having  been  fully  paid.8 

Still  another  remedy  is  often  given  by  statute.  The  statute  may 
provide  that,  after  the  remedy  is  exhausted  against  the  corporation, 

the  stockholders  may  by  summons  be  brought  into  that  sa suit 

and  compelled  to  pay.4     This  Bpecial  remedy  in  .Missouri  for  col- 


Bunn's  Appeal,  105  Pa.  St.  49  (1884) ; 
and  see  Hannah  v.  Moberly  Bank,  07 
Mo.  078  (1878).  But  this  is  a  some- 
what questionable  rule,  and  the  rem- 
edy proposed  by  it  is  probably  very 
seldom  invoked.  For  the  remedy  in 
Pennsylvania,  where  by  statute,  after 
execution  returned  unsatisfied  against 
the  corporation,  on  order  of  the  court, 
execution  issues  against  the  stock- 
holders, see  Lauder  v.  Tillia,  117  Pa. 
St.  304  (1887).  Bank  of  Virginia  v. 
Adams,  1  Pars.  Sel.  Cas.  534  (1850), 
holding  that  a  court  of  equity  in 
Pennsylvania  has  no  jurisdiction  to 
compel  stockholders  of  a  foreign  cor- 
poration residing  there  to  pay  a  sub- 
scription to  its  stock  on  the  applica- 
tion of  its  creditors.  As  regards  the 
statutory  remedy  of  a  creditor  in  en- 
forcing an  unpaid  subscription  in 
Maine,  see  Libby  v.  Tobey,  82  Me.  397 
(1890). 

In  the  case  of  Ogilvie  v.  Knox  Ins. 
Co.,  22  How.  380  (1859),  the  court 
said:  "The  creditors  of  the  corpora- 
tion are  seeking  satisfaction  out  of 
the  assets  of  the  company  to  which 
the  defendants  are  debtors.  If  the 
debts  attached  are  sufficient  to  pay 
their  demands  the  creditors  need  look 
no  further.  They  are  not  bound  to 
settle  up  all  the  affairs  of  this  corpo- 
ration, and  the  equities  between  its 
various  stockholders  or  partners, 
corporators,  or  debtors."  If  a  corpo- 
ration has  been  dissolved,  garnishee 


process  does  not  lie  against  a  stock- 
holder at  the  instance  of  a  corporate 
creditor  to  reach  an  unpaid  subscrip- 
tion. Paschall  v.  Whitsell,  11  Ala. 
472  (1847). 

i  Doak  r.  Stahlman,  58  S.  W.  Rep. 
741   (Tenn.  1S99). 

2  Russell  v.  Pacific  Ry.,  113  Cal. 
258  (1S96).  See  also  Christensen  v. 
Eno,  106  N.  Y.  97  (1887). 

3  Cooper  v.  Adel,  etc.  Co.,  122  N.  C. 
463   (1898). 

4  A  state  statute  may  provide  that 
a  judgment  creditor  of  a  corporation 
may  summon   in  a  stockholder  who 
has    not    paid    his    subscription    and 
compel  him  to  pay  such  subscription 
to  such  judgment  creditor.  Hill  v.  Mer- 
chants' Mut.   Ins.  Co.,   134  U.   S.  515 
(1890).    Where  the  stockholder's  lia- 
bility attaches  upon  a  notice  served 
upon    him,    the    creditor    who    first 
serves    the    notice    acquires    a   prior 
right  to  collect.     Wells  v.  Robb,   43 
Kan.  201  (1890).    Although  the  stock- 
holder's subscription  liability  may  be 
enforced  by  levy  of  execution  against 
bis  property  on  a  judgment  against 
the  corporation,   "after  sufficient  no- 
tice,"   yet    notice    to    a    non-resident 
stockholder  by  publication  is  not  suf- 
ficient.   Wilson  v.  St.  Louis,  etc.  Ry., 
108  Mo.  588  (1891).    Where  the  statu- 
tory mode  of  collecting  subscriptions 
is   by   motion   based   on   a   judgment 
against  the  corporation,  notice  of  the 
motion    being    given    to    the    stock- 


SOS 


en.  xi.] 


SUBSCRIPTIONS   AND    CORPORATE    CREDITORS. 


[§  202. 


lecting  unpaid  subscriptions  does  not  prevent  a  corporate  creditor 
maintaining  a  suit  in  equity  in  Connecticut  against  stockholders  in 
a  Missouri  corporation.1  At  common  law  such,  notice  cannot  be 
given  by  publication  to  a  non-resident2 

§  202.     The  remedy  by  mandamus.— -It  is  doubtful  whether  cor- 
porate creditors  may,  in  this  country,  have  recourse  to  the  writ  of 


holder,  such  notice  is  not  good  when 
served  out  of  the  state  on  a  non-resi- 
dent A  judgment  based  on  such 
notice  is  not  good.  "Wilson  v.  Selig- 
man,  144  U.  S.  41  (1892),  aff'g  36  Fed. 
R'ep.  154.  In  Missouri  it  is  held  that 
"a  proceeding  by  motion  for  execu- 
tion against  a  stockholder  of  an  in- 
solvent corporation  is  in  no  sense  the 
institution  of  an  independent  suit, 
but  a  mere  supplementary  proceeding 
in  aid  of  the  execution  against  the 
corporation."  Kohn  v.  Lucas,  17  Mo. 
App.  29  (1885);  Paxon  v.  Talmage, 
87  Mo.  13  (18S5).  A  proceeding  un- 
der the  Missouri  statute  after  judg- 
ment against  the  corporation  to  col- 
lect stockholders'  subscription  liabil- 
ity after  a  mere  notice  may  be  re- 
moved into  the  federal  court.  Lacka- 
wanna, etc.  Co.  v.  Bates,  5G  Fed.  Rep. 
737    (1893). 

The  statutory  remedy  of  issuing  ex- 
ecution against  stockholders  for  their 
unpaid  subscriptions  on  a  judgment 
against  the  corporation  ceases  when 
a  receiver  is  appointed.  Showalter 
v.  Laredo  Imp.  Co.,  83  Tex.  162 
(1S92).  In  England  this  plan  ha3 
been  tried  and  was  unsatisfactory. 
Creditors,  when  they  could  not  obtain 
satisfaction  from  companies,  singled 
out  some  unfortunate  stockholder, 
and  compelled  him  to  pay  the  whole 
amount  for  which  judgment  had  been 
recovered.  This  course  was  in  the 
highest  degree  unfair;  and  parlia- 
ment was  induced,  when  legislating 
on  joint  stock  companies  in  1856,  to 
leave  out  all  those  clauses,  found  in 
the  preceding  acts,  enabling  creditors 
to  execute  judgments  against  indi- 
vidual stockholders,  and  to  provide, 


instead,  that  creditors  should  have 
the  power,  upon  non-payment  of  the 
debts  due  to  them  from  the  company, 
to  cause  it  to  be  wound  up.  The  same 
view  prevailed  when  the  acts  relating 
to  joint-stock  companies  were  remod- 
eled in  1S62.  Consequently,  a  cred- 
itor of  a  company  registered  under 
the  Companies  Act,  1862,  can  only  ex- 
ecute a  judgment  obtained  against 
the  company  by  proceeding  against 
the  corporate  property,  and,  if  neces- 
sary, by  having  recourse  to  a  petition 
for  winding  up  the  company.  In 
Lowry  v.  Inman,  46  N.  Y.  119  (1871), 
a  charter  permitting  the  property  of 
stockholders  to  be  taken  upon  execu- 
tion on  a  judgment  against  the  corpo- 
ration, and  providing  that  such  stock- 
holders may  use  the  same  powers 
against  others  to  enforce  contribu- 
tion, was  held  not  to  create  such  a 
general  individual  liability  as  would 
sustain  a  personal  action. 

The  legislature  may  modify  a  sum- 
mary remedy  to  collect  subscriptions. 
Ex  parte  Northeast,  etc.  R.  R.,  37 
Ala.  679  (1861) ;  Howard  v.  Kentucky, 
etc.  Ins.  Co.,  13  B.  Mon.  (Ky.)  282 
(1S52).  A  statutory  remedy  of  one 
state  is  not  available  in  another  state. 
Christensen  v.  Eno,  106  N.  Y.  97 
(1887). 

i  Lewisohn  v.  Stoddard,  78  Conn. 
575   (1906). 

2  Even  though  property  purchased 
for  $2,500  and  worth  not  over  $5,000 
is  turned  in  for  $13,500  of  stock,  yet 
the  bankruptcy  court  where  the  com- 
pany is  organized  cannot  hold  a  non- 
resident stockholder  liable  on  the 
stock  by  service  by  publication.  In 
re  Haley,  158  Fed.  Rep.  74  (1908). 


509 


§  203.] 


SUBSCRIPTIONS    AND    OORPOBA1  DITOBS. 


[CH.  M. 


mandamus  to  compel  the  officers  of  the  corporation  to  make  a  call 

for  the  purpose  of  raisin-  money  to  meet  corporate  obligations.1 

In  the  English  courts  a  mandamus  is  sometimes  awarded  in  these 
cases.2  But  in  this  country  the  question  of  calls  is  not  usually  of 
much  importance  in  such  cases.  The  corporation  is  generally  in- 
solvent; a  bill  is  filed  in  a  court  of  equity  to  collect  and  distribute 
all  the  assets,  and  calls  on  the  subscriptions  are  made  by  the  court 

itself.3 

§  203.  The  remedy  by  action  at  law. — Another  remedy  is  by  an 
action  at  law.  It  has  been  held  that  unpaid  subscriptions,  after 
call,  may  be  enforced  by  an  action  at  law  brought  directly  by  the 

creditor  against  the  delinquent  subscriber,  and  that  in  such  an  action 
each  subscriber  is  liable,  nol  tor  his  proportionate  share,  but  to  the 
full  extent  of  his  unpaid  subscription.4 

The  tendency  of  the  law,  however,  is  to  do  away  with  this  rem- 
edy, and  to  compel  the  creditor  in  all  cases  to  seek  his  remedy  in  a 
court  of  equity.  This  tendency  is  in  accord  with  the  best  interests 
of  corporate  creditors  and  stockholders  and  the  prevention  of  a  mul- 
tiplicity of  suits.5 

1  Dalton,  etc.  R.  R.  v.  McDaniel,  Glenn  v.  Lancaster,  109  N.  Y.  641 
5G  Ga.  191(1870) ;  Hatch  v.  Dana,  101  (1SSS).  Concerning  the  pleadings  in 
TJ  S  205  215  (1S79).  Cf.  Cucullu  a  suit  at  law  to  collect  subscriptions, 
v  Union  ins.  Co.,  2  Rob.  (La.)  571,  see  Glenn  v.  Sumner,  132  U.  S.  152 
573  (1842);  Allen  v.  Montgomery  R.  (1SS9).  A  suit  by  contractors  against 
R    11  Ala.  437   (1847).  subscribers  for   stock   in   a  company 

2  Regina  v.  Victoria  Park  Co.,  1  must  be  against  each  separately  and 
Q  B  288  (1841);  Regina  v.  Ledgard,  not  against  all  in  one  suit.  Davis  v. 
1  Q  B  C16  (1841) ;  Rex.  v.  St.  Kather-  McMillan,  13  Ind.  App.  424  (1895). 
ine  Dock  Co.,  4  B.  &  Ad.  360   (1832).     See  also  §§208,  220,  223,  infra. 

3  See  §  108,'  supra.  A  subscription  paper,  "We  agree  to 

4  Bank  of  United  States  v.  Dallam,     pay,"  is  several  and  not  joint.    A  suit 


4  Dana  (Ky.),  574  (1836);  Allen  v. 
Montgomery  R.  R-,  11  Ala.  437 
(1847) ;  Persch  v.  Simmons,  3  N.  Y. 
Supp.  7S3    (1889).     An  action  to  re 


against  all  the  subscribers  will  fail. 
Davis,    etc.    Co.    v.    Barber,    51    Fed. 
Rep.  148  (1892).    Cf.  §  76,  supra. 
The    legislature    may    by    statute 


cover  unpaid  subscriptions  may  be  at  make  a  court  of  law  the  sole  forum 

law      Faull  v.  Alaska,  etc.  Min.  Co.,  in  which  to  collect  unpaid  subscnp- 

14  Fed    Rep    657   (1S83) ;   Tama  Wa-  tions.    Shickell  v.  Berryville,  etc.  Co., 

ter-power  Co.  v.  Hopkins,  79  Iowa,  653  99   Va.   88    (1901).     Under  the  Iowa 

(1890);   Calumet  Paper  Co.  v.  Stotts  statute  authorizing  a  corporate  credi- 

Inv    Co,  96   Iowa,  147    (1895);   Wil-  tor  to  sue  a  stockholder  on  an  unpaid 

bur  v    Stockholders,  18   Nat.   Bankr.  subscription,  the  suit  may  be  brought 

Reg    178    (187S);    s.  c,  29  Fed.  Cas.  in  the  federal  court  in  New  York  to 

1189-    White    v. '  Blum,    4    Neb.    555  enforce  such  liability,  and  such  suit 

(876)'  McCarthy  v.  Lavasche,  89  111.  may   be  at  law   under  such   statute. 

270    (1878);   Freeman  v.  Winchester,  Atlantic  T.  Co.   v.   Osgood,   116   Fed. 

18  Miss    577   (1848).     Contra,  Griffith  Rep.  1019    (1902). 

v   Mangam,  73  N.  Y.  611  (1878).  Cf.  5  See  §204,  infra. 

510 


CH.  XI.] 


SUBSCRIPTIONS   AND    CORPORATE    CREDITORS. 


[§  204. 


§  204.  The  remedy  by  bill  in  equity. — The  remedy  most  usually 
adopted  by  corporate  creditors  to  obtain  the  payment  of  their  claims 
against  the  corporation  from  the  unpaid  balances  of  subscriptions 
due  the  corporation  by  the  subscribers  to  the  capital  stock  is  a  bill 
in  equity.  This  is  in  the  nature  of  a  creditor's  bill,  reaching  the 
equitable  assets  of  the  principal  debtor.  It  is  the  most  effectual, 
simple,  and  just  remedy,  and  is  not  only  the  favorite  remedy  of  the 
courts,  but  is  generally  resorted  to  by  the  corporate  creditors  them- 
selves.1     Some  of  the  courts  have  even  gone  to  the  extent  of  hold- 


i  Pfohl    v.    Simpson,    71    N.    Y.    137 
(1878);   Mathez  v.  Neidig,  72   N.  Y. 
100  (1878) ;  Dayton  v.  Borst,  31  N.  Y. 
435    (1865);   Mann  v.  Pentz,  3  N.  Y. 
415    (1850);    Stephens  v.  Fox,   83  N. 
Y.   313    (1881);    s.   c,   17   Hun,   435; 
Griffith    v.    Mangam,    73    N.    Y.    611 
(187S) ;  Christensen  v.  Eno,  106  N.  Y. 
97,  100  (1887) ;  Ward  v.  Griswoldville 
Mfg.  Co.,  16  Conn.  593  (1844) ;  Bank 
of  United   States  v.  Dallam,   4  Dana 
(Ky.),  574  (1836);   Shickle  v.  Watts, 
94  Mo.  410  (1888);  Crawford  v.  Roh- 
rer,  59  Md.  599  (1882);  Hightower  v. 
Thornton,   8   Ga.   4S6    (1S50);    High- 
tower  v.  Mustian,  8  Ga.  506   (1850) ; 
Dalton,  etc.  R.  R.  v.  McDaniel,  56  Ga. 
191  (1876);  Germantown  Pass.  Ry.  v. 
Fitler,  60  Pa.  St.  124   (1869);   Adler 
v.    Milwaukee,    etc.    Co.,    13    Wis.    57 
(1860);   Gianella  v.  Bigelow,  96  Wis. 
185    (1897);    Curry  v.  Woodward,  53 
Ala.  371    (1875);    Allen  v.  Montgom- 
ery R.  R.,  11  Ala.  437  (1847) ;  Win- 
cock  v.   Turpin,   96   111.   135    (18S0); 
Hickling     v.     Wilson,     104     111.     54 
(1S82);   Henry  v.  Vermillion,  etc.  R. 
R.,    17    Ohio,    187    (184S);    Miers   v. 
Zanesville,  etc.  Turnp.  Co.,   11   Ohio, 
273   (1842) ;  Judson  v.  Rossie  Galena 
Co.,   9   Paige,   598    (1S42);    Van   Pelt 
v.  U.  S.  Met.  Spring,  etc.  Co.,  13  Abb. 
Pr.    (N.  S.)    325,  331    (1872).     [Com- 
pare with  this  case  Sherwood  v.  Buf- 
falo,   etc.    R.    R.,    12    How.    Pr.    137 
(1855),  and  Hammond  v.  Hudson  Riv- 
er,   etc.    Co.,    11    How.    Pr.    29,    33 
(1854).]       Marsh    v.     Burroughs,     1 
Woods,  463  (1871);  s.  c,  16  Fed.  Cas. 
800;   Louisiana  Paper  Co.  v.  Waples, 
3  Woods,   34    (1S77);    s.  a,   15   Fed. 


Cas.  968;  Faull  v.  Alaska,  etc.  Min. 
Co.,  8  Sawyer,  420  (1883);  Holmes 
v.  Sherwood,  16  Fed.  Rep.  725  (1881) ; 
Chandler  v.  Siddle,  10  Nat.  Bankr. 
Reg.  236  (1874) ;  s.  c,  5  Fed.  Cas.  459; 
Myers  v.  Seeley,  10  Nat.  Bankr.  Reg. 
411  (1874);  s.  c,  17  Fed.  Cas.  1118; 
Wilbur  v.  Stockholders,  18  Nat. 
Bankr.  Reg.  178  (1878) ;  s.  c,  29  Fed. 
Cas.  1189;  Harmon  v.  Page,  62  Cal. 
448  (1882);  Ogilvie  v.  Knox  Ins.  Co., 
22  How.  380  (1859);  Sanger  v.  Up- 
ton, 91  U.  S.  56,  60  (1875);  Hatch 
v.  Dana,  101  U.  S.  205  (1879);  Sal- 
mon v.  Hamborough  Co.,  1  Cas.  in 
Ch.  (Eng.)  204  (1671);  Patterson  v. 
Lynde,  106  U.  S.  519  (18S2),  saying 
that  "no  one  creditor  can  assume  that 
he  alone  is  entitled  to  what  any  stock- 
holder owes,  and  sue  at  law  so  as  to 
appropriate  it  exclusively  to  him- 
self." A  bill  in  equity  may  be  filed 
in  the  federal  courts  to  collect  un- 
paid subscriptions  and  apply  them  to 
the  payment  of  claims  of  claimants 
who  are  corporate  creditors.  If  the 
sums  due  the  original  complainants 
amount  to  more  than  $2,000,  the  court 
has  jurisdiction.  If  the  aggregate 
collections  are  more  than  $5,000,  an 
appeal  lies.  Handley  v.  Stutz,  137  U. 
S.  366  (1S90).  In  determining  the 
jurisdiction  of  the  federal  court  in 
suits  to  enforce  a  stockholder's  sub- 
scription liability,  the  aggregate  lia- 
bility of  all  the  stockholders  who  are 
joined  as  defendants  is  not  consid- 
ered, but  the  separate  liability  is 
considered.  Wilson  v.  Kiesel,  164 
U.  S.  248  (1896).  In  Ohio  it  has 
been  held  that  an  action  for  unpaid 


511 


204.] 


SUBSCRIPTIONS   AND    CORPORATE    CREDITORS. 


[CH.  XI. 


ing  a  bill  in  equity  to  be  the  exclusive  remedy  for  the  corporate 
creditor  in  these  cases.1  Occasionally,  also,  statutes  arc-  enacted 
prescribing  that  a  creditor  who  seeks  to  apply  such  assets  to  the 
payment  of  his  claim  can  do  so  only  by  a  suit  in  equity.2  The  right 
to  proceed  by  a  suit  in  equity  herein  has  been  held  to  exist,  even 
where  the  general  equitable  remedy  by  creditor's  bill  has  been  abol- 


assessments  on  subscription  for  stock 
might  be  joined  in  an  action  on  the 
statutory  liability  of  stockholders. 
Warner  v.  Callender,  20  Ohio  St.  190 
(1870).  A  bill  in  equity  is  the  proper 
remedy.  Johnston  v.  Markle  Paper 
Co.,  153  Pa.  St.  189  (1893);  Baines 
v.  Babcock,  95  Cal.  581  (1892).  A  bill 
may  be  filed  by  a  judgment  creditor 
whose  execution  has  been  returned 
unsatisfied  to  enjoin  executions,  have 
a  receiver  appointed,  have  subscrip- 
tions collected,  etc.  Ballin  v.  Loeb, 
78  Wis.  404  (1890).  In  an  action  to 
enforce  the  liability  of  stockholders 
in  a  foreign  corporation  the  plaintiff 
may  examine  the  defendant  before 
trial  in  order  to  frame  his  complaint. 
Thayer  v.  Humphreys,  69  Hun,  343 
(1893).  A  judgment  creditor  of  a 
corporation  with  an  execution  re- 
turned unsatisfied  may  file  a  bill 
against  a  stockholder  to  reach  an  un- 
paid subscription  of  the  latter  and  to 
reach  corporate  property  which  was 
illegally  conveyed  to  him.  Hall  v. 
Henderson,  114  Ala.  601  (1896) ;  s.  a, 
126  Ala.  449.  A  corporate  creditor, 
where  the  corporate  property  has 
been  exhausted,  may  file  a  bill  in  the 
nature  of  a  creditor's  bill  to  collect 
unpaid  subscriptions.  The  suit  may 
be  against  one  subscriber.  But  the 
bill  must  be  so  framed  that  other 
creditors  may  come  in.  Gilchrist  v. 
Helena,  etc.  R.  R.,  49  Fed.  Rep.  519 
(1892).  The  fund  realized  from  the 
suit  in  equity  is  distributed  ratably 
among  all  the  creditors.  Mathis  v. 
Pridham,  1  Tex.  Civ.  App.  58  (1892). 
The  capital  stock  is  not  a  trust  fund 
for  the  benefit  of  creditors,  and  hence 
a  court  of  equity  has  no  jurisdiction 
on  that  ground  to  collect  unpaid  sub- 


scriptions.     Henderson    v.    Hall,    134 
Ala.  455   (1900). 

i  Thomson,  etc.  Co.  r.  Murray,  60 
N.  J.  L.  20  (1897) ;  Van  Pelt  v.  Gard- 
ner, 54  Neb.  701  (1898);  Jones  v. 
Jarman,  34  Ark.  323  (1879);  Harris 
v.  First  Parish,  40  Mass.  112  (1839); 
Knowlton  v.  Ackley,  62  Mass.  93 
(1851);  Erickson  v.  Nesmith,  81 
Mass.  221  (1860);  Smith  v.  Hucka- 
bee,  53  Ala.  191  (1875);  Umsted  v. 
Buskirk,  17  Ohio  St.  113  (1866);  Pol- 
lard v.  Bailey,  20  Wall.  520  (1874); 
Terry  v.  Little,  101  U.  S.  216  (1879). 
Cf.  Spear  v.  Grant,  16  Mass.  9  (1819) ; 
Hodges  v.  Silver  Hill  Min.  Co.,  9 
Oreg.  200  (18S1).  The  remedy  is  in 
equity  alone.  Hamilton  v.  Clarion, 
etc.  R.  R,  144  Pa.  St.  34  (1891); 
Burch  v.  Taylor,  1  Wash.  St.  245 
(1890);  Universal  F.  Ins.  Co.  v.  Ta- 
bor, 16  Colo.  531  (1891).  It  seems  to 
be  well  settled  that,  in  the  United 
States  courts,  unpaid  subscriptions 
can  be  reached  by  a  corporate  cred- 
itor in  a  court  of  equity  only.  Brown 
v.  Fisk,  23  Fed.  Rep.  228  (1885).  In 
Bunn's  Appeal,  ,105  Pa.  St.  49  (1884), 
the  supreme  court  of  Pennsylvania 
clearly  held  that  upon  corporate  in- 
solvency no  creditor  can  sue  at  law 
for  the  application  of  unpaid  sub- 
scriptions to  his  debt.  His  remedy  is 
in  equity  alone.  In  Nebraska  a  cred- 
itor cannot  collect  an  unpaid  sub- 
scription by  a  suit  at  law.  His  rem- 
edy is  in  equity.  Reed  v.  Burg,  96 
N.  W.  Rep.  414  (Neb.  1901).  As  to 
discovering  the  names  of  stockhold- 
ers, see  Hippie  v.  Five  Mile,  etc.  Co., 
3  Atl.  Rep.  682  (N.  J.  Eq.  1886) ;  also, 
§  519,  infra. 

2  Hadley  v.  Russell,   40  N.  H.  109 
(1860). 


512 


CH.  XI.] 


SUBSCRIPTIONS   AND    CORPORATE    CREDITORS. 


[§  205. 


ished  by  statute.  *  Where  stock  has  been  issued  as  full  paid  with- 
out any  money  or  property  being  paid  therefor,  a  judgment  cred- 
itor's remedy  is  in  equity  and  not  at  law.2  Where  the  same  de- 
fense is  involved  in  various  suits  against  subscribers  to  stock,  a  court 
of  equity  has  jurisdiction,  and  all  the  subscribers  may  be  made  parties 
defendant.3  A  statute  giving  a  remedy  in  equity  is  not  unconstitu- 
tional as  depriving  the  defendant  of  trial  by  jury.4  A  recent  case 
in  the  federal  court  holds  that  equity  has  jurisdiction  pf  a  suit  by  a 
receiver  to  collect  unpaid  subscriptions  where  the  stockholders  are 
numerous  and  can  be  joined  in  one  suit,  and  the  cost  of  a  separate 
suit  would  be  excessive  and  the  full  assessment  is  not  necessary  and 
the  average  amount  of  assessment  is  small." 

§  205.  Parties  to  the  bill  in  equity— Parties  plaintiff. — A  cor- 
porate creditor  who  seeks  in  this  way  to  obtain  payment  of  his 
claim  for  the  unpaid  subscriptions  to  the  capital  stock  of  the  cor- 
poration should  file  his  bill  on  behalf  of  himself  and  such  other 


1  Adler  v.  Milwaukee,  etc.  Mfg.  Co., 
13  Wis.  57  (18G0).  The  equitable  ju- 
risdiction herein  seems  to  have  been 
based  on  various  grounds.  See  Wil- 
bur v.  Stockholders,  18  Nat.  Bankr. 
Reg.  178  (1878);  s.  c,  29  Fed.  Cas. 
1189.  In  one  case  the  bill  in  equity- 
has  been  held  to  be  in  the  nature  of 
an  equitable  attachment  in  which  the 
subscribers  are  in  effect  called  on  to 
answer  as  garnishee  of  the  principal 
debtor.  Ogilvie  v.  Knox  Ins.  Co.,  22 
How.  380  (1859).  In  practice  a  re- 
ceiver is  usually  appointed,  the 
amount  of  the  corporate  debts  and 
the  amount  necessary  to  be  contrib- 
uted by  the  holders  of  shares  not 
paid  up  are  ascertained  by  proof,  or 
through  a  referee  and  master's  report, 
and  then  there  is  a  final  decree  af- 
fording, so  far  as  the  assets  admit, 
adequate  relief,  and,  in  any  event, 
proportional  relief  to  all  parties.  Dal- 
ton,  etc.  R.  R.  v.  McDaniel,  56  Ga.  191 
(1876). 

2  First  Nat.  Bank  v.  Peavey,  69 
Fed.  Rep.  455  (1895).  A  judgment 
creditor's  bill  is  multifarious  where  it 
asks  to  hold  the  defendant  liable  on  a 
subscription  for  stock,  and  as  an  of- 
ficer for  causing  the  corporation  to 
buy  its  own  stock,  and  as  an  outsider 


for  obtaining  real  estate  of  the  com- 
pany without  consideration,  and  as 
an  outsider  misrepresenting  the  con- 
dition of  the  company.  First  Nat. 
Bank  v.  Peavey,  75  Fed.  Rep.  154 
(1896).  The  liability  of  subscribers 
for  stock  under  the  Maine  statutes, 
where  the  stock  is  not  properly  paid 
up,  cannot  be  enforced  in  the  federal 
courts  by  a  suit  in  equity,  even 
though  the  statutes  of  Maine  author- 
ize such  a  suit.  Alderson  v.  Dole, 
74  Fed.  Rep.  29  (1896).  It  is  doubt- 
ful whether  a  holder  of  stock  which 
purports  to  be  fully  paid  up  can  be 
held  liable  thereon  in  an  action  at 
law,  because  the  certificate  of  stock 
must  first  be  disposed  of  and  annulled 
as  having  been  fraudulently  issued. 
See  v.  Heppenheimer,  69  N.  J.  E'q. 
36  (1905). 

3  Wyman  v.  Bowman,  127  Fed. 
Rep.  257  (1904),  holding  also  that 
where  the  chief  part  of  an  action 
against  the  transferrer  of  stock  to  en- 
force his  subscription  liability  is  to 
set  aside  a  transfer  and  release, 
equity  has  jurisdiction. 

4Parmelee  v.  Price,  208  111.  544 
(1904). 

5  Brown  v.  Allebach,  156  Fed.  Rep. 
697  (1907). 


(33) 


513 


§  205.] 


SUBSCRIPTIONS    AND    CORPORATE    CREbll 


[CH.  XI. 


creditors  as  may  wish  to  come  in.1  The  genera]  rule  i-  thai  such  ;i 
suit  is  ami  should  be  for  the  benefit  of  any  or  all  creditors  who 
elect  to  come  in  as  parties  complainant^  and  establish  their  debtfl 
according  to  the  course  and  practice  of  a  court  of  chancery.2  While 
the  bill  must  be  so  framed  as  to  permit  other  creditors,  if  they  elect, 
to  come  in  and  be  made  parties  to  the  suit,  it  is  in  no  way  neces- 
sary to  join  them  as  parties.     The  other  creditors  are  proper  but 


i  Handley  v.  Stutz,  137  U.  S.  366 
(1890);  First  Nat.  Bank  v.  Peavey, 
75  Fed.  Rep.  154  (1S96);  Crease  v. 
Babcock,  51  Mass.  525  (1S46); 
Holmes  v.  Sherwood,  16  Fed.  Rep. 
725  (1881);  Sawyer  v.  Hoag,  17  Wall. 
610  (1873);  Mills  v.  Scott,  99  U.  S. 
25  (1878);  Patterson  v.  Lynde,  106 
U.  S.  519  (1SS2).  A  creditor's  suit 
to  collect  unpaid  subscriptions  must 
not  only  be  in  equity  but  must  be  for 
the  benefit  of  all  creditors.  Bickley 
v.  Schlag,  46  N.  J.  Eq.  533  (1S90)  ; 
Van  Pelt  v.  Gardner,  54  Neb.  701 
(1S98). 

2  Wetherbee  v.  Baker,  35  N.  J.  Eq. 
501  (1882);  Coleman  v.  White,  14 
Wis.  700  (1862);  Carpenter  v.  Marine 
Bank,  14  Wis.  705,  n.  (1S62) ;  Morgan 
v.  New  York,  etc.  R.  R.,  10  Paige, 
290  (1843);  Masters  v.  Rossie  Lead 
Min.  Co.,  2  Sandf.  Ch.  301  (1845); 
Mann  v.  Pentz,  3  N.  Y.  415  (1850); 
Umsted  v.  Buskirk,  17  Ohio  St.  113 
(1866);  Crease  v.  Babcock,  51  Mass. 
525  (1846) ;  Pollard  v.  Bailey,  20  Wall. 
520  (1S74);  Terry  v.  Little,  101  U.  S. 
216  (1879).  Any  creditor  has  a  right 
to  come  in,  establish  his  claim,  and 
share  pro  rata  in  the  distribution  of 
the  assets,  even  though  the  bill  was 
not  filed  for  the  benefit  of  such  as 
should  choose  to  come  in  and  share 
the  expense.  Turnbull  v.  Prentiss 
Lumber  Co.,  55  Mich.  387  (1884). 
See  also  Tallmadge  v.  Fishkill  Iron 
Co.,  4  Barb.  382,  393  (1848);  Walker 
v.  Crain,  17  Barb.  119,  131  (1853). 
In  consequence  thereof  no  one  cred- 
itor can,  by  superior  diligence  in  fil- 
ing a  bill,  obtain  a  preference  over 
other  creditors  in  respect  of  the  un- 
paid balances  of  subscriptions.     See 


the  cases  in  preceding  note.  There 
is,  however,  an  early  case  in  the 
Ohio  reports  which  seems  to  recog- 
nize such  a  preference.  Miers  v. 
Zanesville,  etc.  Turnp.  Co.,  13  Ohio, 
197  (1844).  See  Adler  v.  Milwaukee, 
etc.  Co.,  13  Wis.  57  (1860);  Wright 
v  McCormack,  17  Ohio  St.  86  (1866). 
There  must  be  an  account  taken  of 
the  amount  of  debts,  assets,  and  un- 
paid capital,  and  a  decree  for  an  as- 
sessment of  the  amount  due  by  each 
stockholder.  Bell's  Appeal,  115  Pa. 
St.  SS  (1887).  Otherwise  it  is  for 
the  jury  to  say  whether  the  whole  of 
the  unpaid  subscriptions  are  neeeded 
to  pay  corporate  debts.  Citizens',  etc. 
Co.  v.  Gillespie,  115  Pa.  St.  564 
(1SS7).  The  pleadings  may  be  of 
such  a  nature  that  the  trial  must  be 
at  law.  Glenn  v.  Lancaster,  109  N. 
Y.  641  (1SS8).  In  California  it  is 
held  that  a  judgment  creditor's  suit 
in  behalf  of  himself  and  other  credi- 
tors is  not  in  behalf  of  simple  credi- 
tors. Where  the  judgment  retains  the 
cause  for  other  judgment  creditors 
who  may  come  in  and  make  a  proper 
showing,  this  refers  only  to  judgment 
creditors  then  existing.  Several  judg- 
ment creditors  may  join  in  the  suit  in 
equity.  A  prior  judgment  in  favor 
of  another  creditor  is  not  evidence 
of  the  liability  of  the  stockholders. 
Baines  v.  West  Coast  Lumber  Co.,  104 
Cal.  1  (1894).  But  see  Thatcher  v. 
King,  156  Mass.  490  (1892).  As  to 
the  form  of  a  decree  in  a  creditor's 
action,  and  as  to  the  right  of  a  credi- 
tor to  discontinue  a  suit  brought  in 
hehalf  of  himself  and  other  creditors, 
see  Salisbury  v.  Binghamton  Pub.  Co., 
85  Hun,  99    (1895),  and  §222,  infra. 


514 


CH.  XI.] 


SUBSCRIPTIONS    AND    CORPORATE    CREDITORS. 


[§   205. 


not  necessary  parties.1  Several  creditors,  however,  cannot  bring 
separate  suits  of  this  nature.  They  must  all  join  in  one  proceed- 
ing.2 Where  the  suit  is  in  equity  in  behalf  of  all  the  creditors,  the 
judgment  cannot  be  in  behalf  of  the  plaintiff  only,  if  it  appears  that 
there  are  other  creditors.3  A  stockholder  who  is  also  a  creditor 
may  file  a  bill  as  a  creditor  to  reach  unpaid  subscriptions.  He  must, 
however,   pay  his  own   subscription.4      The   stockholders  need   not 


i  Marsh  v.  Burroughs,  1  Woods,  463 
(1871) ;  s.  c,  16  Fed.  Cas.  800;  Crease 
17.  Babcock,  51  Mass.  525  (1846); 
Hatch  v.  Dana,  101  U.  S.  205  (1879). 
Cf.  Adler  v.  Milwaukee,  etc.  Co.,  13 
Wis.  57  (I860).  One  creditor  can- 
not maintain  a  suit  in  his  behalf 
alone,  but  the  suit  must  be  in  behalf 
of  all  corporate  creditors  and  against 
all  stockholders  who  have  not  paid. 
A  receiver  will  be  appointed.  Van 
Pelt  v.  Gardner,  54  Neb.  701  (1898). 
A  judgment  creditor  may  commence 
a  suit  in  equity  against  a  stock- 
holder to  collect  his  unpaid  subscrip- 
tion without  joining  other  stock- 
holders, and  even  though  no  account 
has  been  taken  of  the  indebtedness  of 
the  company.  Cooper  v.  Adel,  etc. 
Co.,  127  N.  C.  219  (1900).  In  Cali- 
fornia the  bill  by  a  corporate  cred- 
itor may  be  against  one  or  more  stock- 
holders, but  the  fund  is  distributed 
among  all  creditors.  Welch  v.  Sar- 
gent, 127  Cal.  72  (1899).  A  corporate 
creditor's  right  to  recover  does  not 
depend  on  other  debts  of  the  corpora- 
tion, and  no  accounting  is  necessary, 
and  it  is  not  necessary  to  join  all 
stockholders  as  parties  defendant. 
Walter  v.  Merced,  etc.  Assoc,  126  Cal. 
582  (1899).  A  judgment  creditor  may 
maintain  a  suit  in  equity  to  reach 
unpaid  subscriptions,  and  need  not  al- 
lege that  it  is  in  behalf  of  all  cred- 
itors and  that  other  creditors  may  ap- 
ply to  come  in.  McBryan  v.  Uni- 
versal, etc.  Co.,  130  Mich.  Ill  (1902). 
A  creditor  may  file  a  bill  in  equity 
in  his  own  behalf  alone  against  some 
of  the  stockholders  to  collect  their 
unpaid  subscriptions.  Harrell  v. 
Blcunt,    112    Ga.    711    (1901).     Cor- 


porate creditor  suing  need  not  join 
all  the  corporate  creditors  as  co-com- 
plainants nor  all  the  stockholders  lia- 
ble as  defendants.  Cornell's  Appeal, 
114  Pa.  St.  153  (1886).  Other  cred- 
itors may  come  in  on  a  bill  by  a 
creditor  to  collect  unpaid  subscrip- 
tions. Bailey  v.  Pittsburgh,  etc.  R. 
R.,  139  Pa.  St.  213  (1891). 

2  Crease  v.  Babcock,  51  Mass.  525 
(1846).  But  see  Perry  v.  Turner,  55 
Mo.  418  (1874).  And  an  action  to 
compel  the  payment  of  an  unpaid  sub- 
scription may  be  joined  by  a  creditor 
with  an  action  to  enforce  a  statutory 
liability.  Warner  v.  Callender,  20 
Ohio  St.  190  (1870).  Accordingly, 
where  a  bill  is  filed,  on  behalf  of  all 
the  creditors  who  choose  to  come  in, 
against  all  the  stockholders  in  de- 
fault, the  courts  will  enjoin  a  sepa- 
rate creditor's  suit.  Pierce  v.  Milwau- 
kee Construction  Co.,  38  Wis.  253 
(1875).  Cf.  Coleman  v.  White,  14 
Wis.  700  (1862);  Carpenter  v.  Marine 
Bank,  14  Wis.  705,  n.  (1862);  Ball- 
ston  Spa  Bank  v.  Marine  Bank,  18 
Wis.  490   (1864). 

3  Hallett  v.  Metropolitan,  etc.  Co., 
69  N.  Y.  App.  Div.  258  (1902). 

4  Bickley  v.  Schlag,  46  N.  J.  Eq. 
533  (1890);  Bissit  v.  Kentucky  River 
Nav.  Co.,  15  Fed.  Rep.  353  (1882), 
and  the  valuable  note;  Thompson  v. 
Reno  Savings  Bank,  19  Nev.  103,  171, 
242,  291,  293  (1885).  Cf.  Hogg's  Ap- 
peal, 88  Pa.  St.  195  (1878);  Calhoun 
v.  Steam  Ferry  Boat,  27  Int.  Rev. 
Rec.  273  (1881),  in  which  case  it  is 
held  he  cannot  sue  the  corporation. 
But  see  Milvain  v.  Mather,  5  Exch. 
55  (1850),  in  which  it  is  held  that  a 
corporation    sued    by    a    stockholder 


515 


§  206.] 


SUBSCRIPTIONS    AND    CORPORATE    CREDITORS. 


[cn.  XI. 


wait  to  be  made  parties  defendant  to  a  creditors'  bill  before  moving 
for  contribution,  but  may,  in  a  proper  case,  before  a  suit  in  the  na- 
ture of  a  creditors'  bill  is  filed  against  them  by  creditors  of  the 
corporation,  file  a  bill  in  equity  upon  their  own  account,  making  the 
corporation  a  party,  to  enforce  the  payment  of  unpaid  balances  of 
subscription,  for  the  payment  of  corporate  indebtedness,  and  for  con- 
tribution.1 A  corpora  to  creditor  suing  a  stockholder  for  his  unpaid 
subscription  may  join  a  claim  against  the  defendants  for  corporate 
assets  wrongfully  appropriated  by  them.2 

§  206.     Parties  defendant. — The  defendants  to  such  a  suit  should 
be  the  corporation  itself,3  and  all  from  whom  an  unpaid  subscrip- 


may  set  off  any  amount  due  by  him 
on  calls.  Cf.  Ex  parte  Winsor,  3 
Story,  411  (1844);  s.  c,  30  Fed.  Cas. 
312;  Weber  v.  Fickey,  47  Md.  196 
(1877);  s.  c,  52  Md.  501;  holding 
that  a  stockholder  who  is  also  a 
creditor  and  who  has  not  fully  paid 
his  subscription  cannot  recover  from 
another  stockholder  the  full  amount 
of  his  claim.  Emmert  v.  Smith,  40 
Md.  123  (1874),  to  same  effect.  A 
stockholder  cannot  file  a  bill  to  com- 
pel others  to  pay  in  their  subscriptions 
where  he  has  not  paid  his  own.  Hol- 
ton  v.  Wallace,  66  Fed.  Rep.  409 
(1895).  A  stockholder  who  is  also  a 
creditor  may  enforce  the  liability, 
but  he  must  pay  his  proportion.  Wil- 
son v.  Kiesel,  9  Utah,  397  (1894). 
Under  the  New  Jersey  statute  where 
stockholders  are  held  liable  to  cor- 
porate creditors  on  stock  issued  for 
property  taken  at  a  fraudulent  over- 
valuation, a  creditor  is  entitled  to 
participate,  even  though  he  is  also 
one  of  the  stockholders  and  took  part 
in  the  illegal  issue.  Easton  Nat. 
Bank  v.  American,  etc.  Co.,  70  N.  J. 
Eq.  732  (1906);  rev'g  in  part  69  N. 
J.  Eq.  326.  In  a  suit  by  a  stock- 
holder as  a  corporate  creditor,  to  col- 
lect unpaid  subscriptions,  the  defend- 
ants cannot  set  off  the  plaintiff's  un- 
paid subscription.  Moreover  the  de- 
fendants are  liable  for  the  entire  un- 
paid subscription,  and  not  in  their 
proportion  of  all  unpaid  subscrip- 
tions,  since   the   liability   is  several 


and  not  joint.  Blood  v.  La  Serena, 
etc.  Co.,  89  Pac.  Rep.  1090  (Cal. 
1907). 

i  Fiery  v.  Emmert,  36  Md.  464 
(1872). 

2  Lewisohn  v.  Stoddard,  78  Conn. 
575  (1906).  A  judgment  creditor's 
suit  against  the  stockholders  to  reach 
assets  which  they  have  distributed 
among  themselves  may  also  pray  that 
they  be  held  liable  for  their  unpaid 
subscriptions.  Jahn  v.  Champagne, 
etc.  Co.,  147  Fed.  Rep.  631  (1906). 

3  The  corporation  is  ordinarily  a 
necessary  party.  Mann  v.  Pentz,  3 
N.  Y.  415  (1850);  Continental,  etc. 
Co.  v.  Cook,  152  Fed.  Rep.  652 
(1906);  Commercial,  etc.  v.  Warthen, 
119  Ga.  990  (1904);  Jones  Co.  v. 
Hoffman,  114  La.  996  (1905);  Cooper 
v.  Adel,  etc.  Co.,  122  N.  C.  463 
(1898) ;  Walsh  v.  Memphis,  etc.  R.  R., 
2  McCrary,  156  (1881);  s.  c,  6  Fed. 
Rep.  797;  s.  c.  sub  nom.  Walser  v. 
Memphis,  etc.  R.  R.,  19  Fed.  Rep.  152 
(1883);  Wilbur  v.  Stockholders,  18 
Bankr.  Reg.  178  (1878) ;  s.  c,  29  Fed. 
Cas.  1189;  Wetherbee  v.  Baker,  35 
N.  J.  Eq.  501  (1882);  First  Nat. 
Bank  v.  Smith,  6  Fed.  Rep.  215 
(1879);  Brinckerhoff  v.  Brown,  7 
Johns.  Ch.  217  (1823).  But  see, 
contra,  Van  Pelt  v.  Gardner,  54  Neb. 
701  (1898);  Walser  v.  Seligman,  13 
Fed.  Rep.  415  (1882),  a  well-con- 
sidered case,  and  Wellman  v.  How- 
land  Coal,  etc.  Works,  19  Fed.  Rep. 
51    (1884).     In  the  former  of  these 


516 


CH.  XI.]  SUBSCRIPTIONS   AND    CORPORATE   CREDITORS.  [§   206. 

tion  is  due,  except  as  are  unknown  or  insolvent,  or  beyond  the 
jurisdiction.1 

cases  the  court  says:  "Sufficient  rea-  in  equity  by  a  corporate  creditor  to 
sons  for  not  making  it  (the  corpora-  collect  unpaid  subscriptions  all  sub- 
tion)  a  party  are  found  in  the  fact  scribers  must  be  made  parties  defend- 
that  it  is  beyond  the  jurisdiction  of  ant,  unless  a  reason  is  given  for  not 
this  court,  and  also  in  the  fact  that  doing  so,  such  as  non-residence,  ill- 
it  is  practically  defunct."  In  the  case  solvency,  etc.  Fremont,  etc.  Co.  v. 
last  cited  it  was  held  that,  where  a  Storey,  96  N.  W.  Rep.  416  (Neb. 
corporation  is  without  property  or  1902).  In  a  suit  in  equity  by  a  cor- 
officers  or  place  of  business,  it  need  porate  creditor  against  stockholders 
not  be  made  a  party  of  record.  The  for  unpaid  subscriptions,  subscribers 
corporation  is  a  necessary  party  de-  who  did  not  pay  the  ten  per  cent,  re- 
fendant  in  an  action  by  corporate  quired  by  statute  to  make  them  stock- 
creditors  to  collect  unpaid  subscrip-  holders  need  not  be  joined  as  parties 
tions.  Service  upon  it  by  publication  defendant  nor  subscribers  whose 
is  insufficient.  King  v.  Sullivan,  93  shares  have  been  forfeited.  Ford  v. 
Ga.  621  (1894);  Van  Pelt  v.  Gard-  Chase,  118  N.  Y.  App.  Div.  605 
ner,  54  Neb.  701    (1898).  (1907);    aff'd   189  N.  Y.  504.     A  cor- 

l  Hadley  v.   Russell,   40   N.   H.   109    porate  creditor  may  proceed  against 
(1860);    Erickson  v.  Nesmith,  46   N.    a  single  stockholder  or  more  without 
H.  37l'(1866);    Pierce  v.  Milwaukee    bringing   in    other   stockholders,    the 
Construction  Co.,  38  Wis.  253  (1875);     liability   of   each   being   several    and 
Coleman     v.     White,     14     Wis.     700     fixed  by  the  amount  of  unpaid   sub- 
(1862) ;    Carpenter   V.   Marine   Bank,     scriptions.     Williams'   Ex'r  v.  Cham- 
14    Wis.    705,   n.    (1862);    Umsted   v.    berlain,  94  S.  W.  Rep.  29  (Ky.  1906). 
Buskirk,    17*  Ohio    St.    113     (1866);     Under    the    Illinois    statute    making 
Mann  v.  Pentz,  3  N.  Y.  415    (1850);     both  transferrer  and  transferee  liable 
Griffith    v.    Mangam,    73    N.    Y.    611     for  the  unpaid  subscription,  a  corpo- 
(1878);    Vick  V.   Lane,   56  Miss.   681    rate  creditor's  suit  need  not  join  all 
(1S79)';    Walsh   r.   Memphis,    etc.   R.    the  parties  who  are  liable.    Meyer  v. 
R.,   2  McCrary,   156    (1881);    s.  c,   6    Ruby,   etc.   Co.,  192  Mo.   162    (1905). 
Fed.  Rep.  797;  s.  c,  sub  nom.  Walser    It   is   not   necessary   to   join   all   the 
v.  Memphis,  etc.  R.  R.,  19  Fed.  Rep.    stockholders.     Martin   v.    South,    etc. 
152     (1883).      A    suit    must    be    in    Co.,  94  Va.  2S  (1896) ;  s.  c,  97  Va.  349. 
equity     and     all     stockholders     and    See  also  cases  in  note  2,  p.  514,  supra. 
creditors  within  the  jurisdiction  must    In  a  suit  by  a  receiver  to  collect  sub- 
be  brought  in.     Van  Pelt  v.  Gardner,    scriptions  several  subscribers  may  be 
54    Neb.    701    (1898).      Cf.   Young   v.    joined  as  parties  defendant.     Cox  v. 
New  York,  etc.  Steamship  Co.,  10  Abb.    Dickie,     93     Pac.     Rep.     523     (Wash. 
Pr-   229    (1860),    holding   that   judg-     1908).      "Where    the    attempt    is    to 
ment  creditors  are  not  proper  parties    reach  the  liability  of  the  stockholders 
defendant  without  showing  why  they    on  their  subscriptions  to  capital  stock, 
were  not  made  parties  plaintiff.    The    all    the    solvent   stockholders    within 
bill  should  contain  an  appropriate  al-    the  jurisdiction  must  be   joined,   ex- 
legation   as   to   the   stockholders   un-    cept  where  this  will  be  excused  upon 
known,  insolvent,  or  out  of  the  juris-    an  allegation  that  the  number  is  too 
diction,  and  a  prayer  that,  upon  dis-    great."     Vick  v.  Lane,  56  Miss.  681, 
covery,   they   be  made   parties   when     684   (1879).     But  on  the  other  hand, 
possible.    Bogardus  v.  Rosendale  Mfg.    with  respect  to  the  matter  of  joining 
Co     7  N.  Y.  147    (1852).     In  a  suit    all  the  solvent  stockholders  who  are 

517 


>lj.]  SUBSCRIPTIONS    AND    CORPORATE    CREDITORS.  [CH.  3 

The  stockholders  against  whom  the  bill   is   filed  may,   however, 
it  seems,  when  all  are  no1  made  parties,  file  a  cross  bill,  obtain  a 

in  arrears  as  parties  defendant  to  the  certainly,  his  subscription  may  be  en- 
bill,  provided  they  are  within  the  ju-  forced  against  bim  without  joinder  of 
risdiction,  we  find  a  line  of  authorities  other  subscribers,  and   in  equity  his 
in  support  of  the  proposition  that  all  liability  does  not  cease  to  be  several, 
such  stockholders  are  not  always  nee-  A   creditor's    bill    merely    subrogates 
essary  parties  to  the  bill;   that  such  the  creditor  to  the  place  of  the  debtor, 
a     suit     may    properly     be     brought  and   garnishes    the   debt   due    to   the 
against  one,  or  any,  of  the  delinquent  indebted    corporation.      It    does    not 
stockholders  as  well  as  against  all;  change  the  character  of  the  debt  at- 
and  that  a  bill  will  not  be  held  de-  tached  or  garnished.    It  may  be  that, 
fective  merely  because  it  fails  to  in-  if  the  object  of  the  bill  is  to  wind  up 
elude  all  the  delinquent  stockholders  the  affairs  of  this  corporation,  all  the 
as  parties  defendant.    Ogilvie  v.  Knox  stockholders,  at  least  so  far  as  they 
Ins.  Co.,  22  How.  380   (1859);   Hatch  can   be  ascertained,  should   be  made 
v.  Dana,  101  U.  S.  205  (1S79);  Marsh  parties,  that  complete  justice  may  be 
v.  Burroughs,   1  Woods,  463    (1S71) ;  done  by  equalizing  the  burdens,  and 
s.   c,   16   Fed.   Cas.   800;    Holmes  v.  in  order  to  prevent  a  multiplicity  of 
Sherwood,  16  Fed.  Rep.  725    (1881);  suits.    But  this  is  no  such  case.    The 
Glenn  v.  Williams,  60  Md.  93  (1882);  most   that   can    be   said    is    that   the 
Bartlett  v.  Drew,  57  N.  Y.  587  (1874) ;  presence  of  all  the  stockholders  might 
Erundage    v.    Monumental,    etc.    Min.  be  convenient,   not  that  it  is   neces- 
Co.,   12   Oreg.   322    (1885).     Cf.  Von  sary.    When  the  only  object  of  a  bill 
Schmidt    v.    Huntington,    1    Cal.    55  is  to  obtain  payment  of  a  judgment 
(1850) ;  Lamar  Ins.  Co.  v.  Gulick,  102  against     a     corporation     out     of     its 
111.  41  (1S82).    Any  other  rule  would  credits  or  intangible  property,  that  is, 
place    upon    the    creditor    a    burden  out  of  its  unpaid  stock,  there  is  not 
which  would  be  unjust  and  perhaps  the  same  reason  for  requiring  all  the 
destructive  of  the  remedy  itself.     In  stockholders  to  be  made  defendants. 
Hatch  v.  Dana,  101  U.  S.  205  (1879),  Cf.    Bonewitz    v.    Van    Wert    County 
there  was  a  bill  to  compel  payment  Bank,  41  Ohio  St   78    (1S84),  where 
of  a  debt  out  of  the  unpaid  subscrip-  it  was  held   error  to   give  judgment 
tion  of  a  single  stockholder.     It  was  against  the   defendants   properly  be- 
not  sought  to  wind  up  the  company,  fore  the  court,  when  the  return  of  the 
It  being  urged  that  a  cerditor  of  an  summons   was  entirely   silent  as   to 
insolvent  corporation  is  not  at  liberty  t^-o  of  the  defendants.     As  to  when 
to  proceed   against   one  or  more  de-  bills   brought   by   creditors   in    these 
linquent    subscribers    to   recover   the  cases   are  and   are   not  multifarious, 
amount  of  his  debt,  without  an  ac-  see  Allen  v.  Montgomery  R.   R.,   11 
count  being  taken  of  other  indebted-  Ala.   437    (1847);    Cambridge  Water- 
ness,  and  without  bringing  in  all  the  works  v.  Somerville  Dyeing,  etc.  Co., 
stockholders     for     contribution,     tha  80  Mass.  193   (1S60),  where  the  lia- 
court,   by   Mr.   Justice   Strong,   said:  bility  of  some  of  the  defendants  was 
"The  liability  of  a  subscriber  for  the  as  directors  and  of  others  as  stock- 
capital  stock  of  a  company  is  several  holders,  and  the  bill  was  held  to  be 
and  not  joint.     By   his   subscription  multifarious;     Barre    Nat.    Bank    v. 
each  becomes  a  several  debtor  to  the  Hingham    Mfg.    Co.,    127    Mass.    563 
company,  as  much  so  as   if  he  had  (1879);   Pope  v.  Leonard,  115  Mass. 
given    his    promissory    note    for    the  286    (1874);    Deaderick  v.  Wilson,   8 
amount  of  his  subscription.    At  law,  Baxt.  (Tenn.)  108  (1874).    Executors 

518 


CII.  XI.] 


SUBSCRIPTIONS   AND    CORPORATE    CREDITORS. 


[§  207. 


discovery  of  the  remaining  delinquent  stockholders,  bring  them  in 
as  parties,  and  thus  enforce  contribution.1  If  all  the  parties  who 
are  liable  have  not  been  brought  before  the  court,  it  has  been  held 
that  those  who  are  defendants  of  record  cannot  be  charged  with 
liability  which  should  fall  upon  those  who  are  absent,  unless  it  be 
shown  that  the  absentees  are  insolvent  or  beyond  the  jurisdiction 
of  the  court.2  This,  however,  can  hardly  be  considered  sound  law.3 
§  207.  A  court  of  equity  may  make  a  call. — It  is  well  settled 
that,  when  stock  is  subscribed  to  be  paid  in  upon  call  by  the  corpo- 
rate authorities,  and  the  company  neglects  or  refuses  to  make  such 
calls  as  are  necessary  to  raise  funds  to  meet  the  just  corporate  ob- 


of  a  deceased  stockholder  may  be 
joined  with,  other  stockholders  as  de- 
fendants where  the  suit  is  in  equity. 
Hamilton  v.  Clarion,  etc.  R.  R.,  144 
Pa.  St.  34  (1891).  A  creditor's  bill 
filed  to  collect  the  unpaid  subscrip- 
tions of  stockholders  will  be  dis- 
missed where  only  a  few  of  the  stock- 
holders are  made  party  defendants 
and  no  allegation  is  made  showing 
clearly  and  in  detail  that  the  other 
stockholders  cannot  be  reached  and 
brought  in.  Dunston  v.  Hoptonic  Co., 
83  Mich.  372  (1S90).  An  insolvent 
stockholder  is  not  a  necessary  party 
to  a  suit  by  corporate  creditors  to 
collect  subscriptions.  Wilson  v.  Cali- 
fornia Wine  Co.,  95  Mich.  117  (1893). 
All  the  stockholders  need  not  be 
joined  as  defendants.  Baines  v.  Bab- 
cock,  95  Cal.  581  (1S92);  Gibbons 
v.  Grinsel,  79  Wis.  3G5  (1S91).  A 
stockholder  may  be  held  liable  on  a 
subscription,  although  the  corpora- 
tion is  not  made  a  party  defendant 
and  other  stockholders  are  not 
joined.  A  court  of  equity  has  juris- 
diction. Potter  v.  Dear,  95  Cal.  578 
(1S92).  In  Michigan,  by  statute, 
stockholders  may  be  joined  as  parties 
defendant  in  a  judgment  creditor's 
suit,  in  order  to  collect  unpaid  sub- 
scriptions. Schaub  v.  Welded,  etc.  Co., 
130  Mich.  606  (1902).  The  directors 
are  proper  parties  where  they  refuse 
to  collect  the  unpaid  subscriptions. 
Lewisohn  v.  Stoddard,  78  Conn.  575 
(1906).     In  a  suit  brought  by  a  cor- 


porate creditor  against  many  stock- 
holders to  collect  unpaid  subscrip- 
tions, the  plaintiff  is  not  entitled  to 
an  order  allowing  him  to  examine  per- 
sons for  the  purpose  of  ascertaining 
the  residence  of  the  defendants  in 
order  that  they  may  be  served. 
Union  Collection  Co.  v.  Superior 
Court,  149  Cal.  790  (1906). 

i  Hatch  v.  Dana,  101  U.  S.  205 
(1S79).  In  the  original  bill  itself 
there  may  properly  be  a  prayer,  when 
some  of  the  delinquent  stockholders 
are  unknown,  for  a  discovery,  in 
order  that  such  unknown  stock- 
holders may  be  made  parties  by 
amendment.  Hippie  v.  Five-Mile,  etc. 
Imp.  Co.,  3  Atl.  Rep.  682  (N.  J.  18S6) ; 
Bogardus  v.  Rosendale  Mfg.  Co.,  7 
N.  Y.  147  (1S52);  Morgan  v.  New 
York,  etc.  R.  R.,  10  Paige,  290  (1843). 

■2  Wood  v.  Dummer,  3  Mason,  308 
(1824);  s.  c,  30  Fed.  Cas.  435.  But 
see  Marsh  v.  Burroughs,  1  Woods,  463 
(1871);  s.  c,  16  Fed.  Cas.  800.  Cf. 
Erickson  v.  Nesmith,  46  N.  H.  371 
(1866).  Contra,  Cornell's  Appeal,  114 
Pa.  St.  153  (1886),  citing  Stang's  Ap- 
peal, 10  W.  N.  Cas.  409  (1881). 
When  there  are  delinquent  stock- 
holders beyond  the  jurisdiction,  the 
stockholders  who  have  been  sued  and 
compelled  to  pay  more  than  their  due 
proportion  must  look  to  them  for  con- 
tribution. Holmes  v.  Sherwood,  16 
Fed.  Rep.  725  (1881).  See  also  §  208, 
infra. 

3  See  §  211,  infra. 


519 


§   207.]                 SUBSCRIPTIONS    AND    CORPORATE    CREDITORS.  [OH.  XL 

ligations,  a  court  of  equity  will  itself  make  the  necessary  calls  if 
the  interests  of  the  creditors  require  it.1     The  court  will,  in  behalf 

of  the  creditors,  do  what  it  is  the  duty  of  the  corporation  to  do  in 

respect  of  calls.2     And  the  court  may  make  the  call  although  the 

statute  says  calls  shall  be  made  by  the  tru  directors,  or  man- 
agers.3 When  a  receiver  is  liquidating  a  corporation,  an  unpaid 
subscription  is  considered  as  immediately  due.4     An  order  of  the 

i  See  §108,  supra.  Howard  v.  Glenn,  85  Ga.  238  (1890). 

'2  Great  Western  Tel.  Co.  v.  Purely,  Where    the    statute    requires    twenty 

162    U.    S.    329     (1896);     Scovill    v.  days'    notice    to    stockholders    before 

Thayer,   105   U.   S.   143,   155    (1881);  calls   are  made,   creditors   must  give 

Hatch   v.   Dana,    101    U.    S.    205,    214  this   notice   before  claiming  and  col- 

(1879);    Covell   v.    Fowler,    144    Fed.  lecting  the  unpaid  subscription.    Uni- 

Rep.  535  (1906);  Curry  v.  Woodward,  versal  F.  Ins.  Co.  v.  Tabor,  16  Colo. 

53  Ala.  371   (1875);  Wilbur  v.  Stock-  531  (1S91).     In  a  suit  by  creditors  to 

holders,    18    Nat.     Bankr.    Reg.    178  collect  unpaid  subscriptions  the  court 

(1S78);  s.  c,  29  Fed.  Cas.  1189;  Marsh  may  levy   an   assessment  and    direct 

v.  Burroughs,   1  Woods,   463    (1871);  execution  for  collection  of  the  same, 

s.  c,  16  Fed.  Cas.  800;  Myers  v.  See-  The  court  may  also  subsequently  levy 

ley,  10  Nat.  Bankr.  Reg.  411   (1874);  another    assessment.      The    Virginia 

s.    c,    17    Fed.    Cas.    1118;    Henry   v.  statute  of  1S97  requiring  collection  to 

Vermillion,   etc.  R.  R.,   17   Ohio,   1S7  be  at  law  did  not  apply  to  pending 

(1848);  Robinson  v.  Bank  of  Darien,  proceedings.      Martin    v.    South,    etc. 

18  Ga.  65   (1855);  Ward  v.  Griswold-  Co.,  97  Va.  349   (1899);   s.  c,  94  Va. 

ville  Mfg.  Co.,  16  Conn.  593   (1844);  28. 

Sanger  v.  Upton,  91  U.  S.  56  (1S75);  3  Crawford   v.   Rohrer,    59   Md.   599 

Chubb  v.  Upton,  95  U.  S.  665  (1S77) ;  (1S82).     Cf.  Glenn  v.  Saxton,  68  Cal. 

Glenn  v.  Williams,  60  Md.  93   (18S2).  353   (1SS6).     A  call  may  be  made  in 

Cf.   Germantown  Pass.  Ry.  v.  Fitler,  behalf  of  corporate  creditors  although 

60   Pa.    St.   124    (1869);    Chandler   v.  the  company  had  contracted  with  the 

Keith,  42   Iowa,  99    (1S75) ;    Mann  v.  stockholders  not  to  call   in  the  sub- 

Pentz,    3    N.   Y.   415    (1850);    Ogilvie  scriptions  until  a  later  date.    Re  Cor- 

v.  Knox  Ins.  Co.,  22  How.  3S0  (1S59);  dova,    etc.    Co.,     [1891]     2    Ch.    580. 

Adler  v.  Milwaukee,  etc.  Co.,  13  Wis.  Where,  however,  it  was  provided  by 

57   (1860);   Armstrong  v.  Danahy,  75  the  charter   of   the  corporation   that 

Hun,  405    (1894).     And  see  Seymour  all  calls  are  to  be  made  only  upon  a 

v.    Sturgess,    26    N.    Y.    134     (1862);  three-fourths  vote  of  the  stockholders, 

Wheeler  v.  Millar,  90  N.  Y.  353  (1S82).  it  was  held  that  a  call  by  the  court 

The    court   itself   may  make   a   call,  was  irregular.     Louisiana  Paper  Co. 

Marson    v.    Deither,     49    Minn.     423  r.  Waples,  3  Woods,  34   (1877);  s.  c, 

(1892).     A  call  is  necessary,  or  the  15  Fed.  Cas.  968.     A  court  of  equity 

equivalent,  where  the  receiver  sues,  may  make   a  call,   even   though  the 

Chandlers.  Siddle,  3  Dill.  477  (1874);  statute  provided  that  calls  should  be 

s.   c,   5   Fed.   Cas.   459.     No   call   is  paid  after  having  been  made  by  the 

necessary  where  creditors  file  a  bill  directors    and    certain    notice    given, 

to  reach  unpaid  subscriptions.    Ham-  Kroegher   v.    Calivada,    etc.    Co.,    119 

ilton  v.   Clarion,   etc.   R  R.,   144   Pa.  Fed.  Rep.  641  (1902). 

St.    34    (1891).      Non-resident    stock-  4  Carnahan    v.    Campbell,    158    Ind. 

holders  are   bound   by  the  decree  of  226    (1902). 
the    court    levying    the    assessment. 

520 


CH.  XI.] 


SUBSCRIPTIONS    AND    CORPORATE    CREDITORS. 


[§  207. 


court  deciding  the  amount  of  debts  and  the  necessity  of  collecting 
subscriptions  to  pay  the  same  and  specifying  payments  to  be  made 
by  stockholders,  and  authorizing  suit  for  that  purpose,  constitutes 
an  assessment.1  The  order  of  the  court  levying  an  assessment  is 
binding  on  the  stockholders,  even  though  no  notice  was  given  to 
them.2  The  court  may  direct  the  receiver  to  make  a  call  instead  of 
the  court  making  the  call  itself  directly.3  A  receiver  may  collect  a 
call  made  by  the  directors.4  In  ordering  a  receiver  to  collect  a  por- 
tion of  unpaid  subscriptions  the  court  must  determine  judicially  how 
much  will  be  needed  to  pay  the  debts,  and  the  application  of  the 
receiver  for  an  order  will  be  denied  if  the  assets  have  not  yet  been 
exhausted,  and  if  the  real  owners  of  stock  held  in  the  name  of  dum- 
mies might  be  ascertained,  but  has  not  been.5  A  call,  whether  made 
by  the  court  or  by  the  directors,  is  conclusive  evidence  of  the  necessity 
therefor,  unless  directly  attacked  and  set  aside  by  judicial  proceed- 
ings.6    A  stockholder  may  file  a  bill  in  equity  to  review  an  assess- 


i  McCarter  v.  Ketcharn,  67  Atl. 
Rep.  610  (N.  J.  1907). 

2  Brown  v.  Allebach,  156  Fed.  Rep. 
697    (1907). 

3  Falk  v.  Whitman,  etc.  Co.,  55  N. 
J.  Eq.  396  (1897).  See  also  §208, 
infra.  A  receiver  may  make  calls 
when  so  directed  by  the  court.  Max- 
well v.  Akin,  89  Fed.  Rep.  178  (1898). 
A  petition  of  a  receiver  to  make  calls 
on  stock  will  be  granted  if  it  shows 
the  necessity  therefor  and  facts  from 
which  the  amount  of  the  necessary 
call  can  be  determined  by  the  court. 
Kirkpatrick  v.  American,  etc.  Co.,  140 
Fed.  Rep.  186  (1905).  The  court  may 
disregard  the  formality  of  a  call  and 
order  the  unpaid  subscriptions  to  be 
paid  to  the  receiver,  or  the  court  may 
require  the  receiver  to  make  and  en- 
force a  call.  Knight  &  Wall  Co.  v. 
Tampa,  etc.  Co.,  46  S.  Rep.  285  (Fla. 
1908). 

4Wyman  v.  Williams,  52  Neb.  833 
(1897).     See  also  §208,  infra. 

•r>  Kirkpatrick  v.  American,  etc.  Co., 
135  Fed.  Rep.  230  (1905).  Before  the 
bankruptcy  court  authorizes  its  trus- 
tee to  collect  unpaid  subscriptions, 
the  court  must  determine  how  much 
has  been  paid  on  the  stock,  and  also 
whether  collection  is  necessary  to  pay 


corporate  debts,  and  also  how  much 
the  unpaid  corporate  debts  will 
amount  to.  In  re  Remington,  etc.  Co., 
153  Fed.  Rep.  345  (1907);  holding, 
also,  that  in  the  bankruptcy  court  a 
stockholder  cannot  defend  against  a 
decision  already  rendered  by  the 
court  as  to  the  amount  still  due  on 
the  stock  and  the  amount  of  corporate 
debts,  but  he  may  defend  as  to  any 
matter  peculiar  to  his  own  case.  See, 
also,  §  208,  infra. 

c  Great  Western  Tel.  Co.  v.  Purdy, 
162  U.  S.  329  (1896).  A  member  of  a 
mutual  insurance  company  cannot 
contest  an  assessment  by  the  receiver 
on  the  ground  that  it  is  excessive. 
Collins  v.  Welch,  141  Mich.  676 
(1905).  Although  a  court  in  Vir- 
ginia, where  a  company  is  incorpo- 
rated, levies,  at  the  instance  of  a  cor- 
porate creditor,  an  assessment  upon 
the  stock  larger  than  is  necessary 
to  pay  the  debts,  yet  the  courts  of 
another  state  will  not  inquire  into  the 
propriety  of  the  amount  of  the  assess- 
ment. Furnald  v.  Glenn,  56  Fed.  Rep. 
372  (1893).  Where  the  court  has  as- 
sessed the  stockholders,  the  necessity 
of  the  assessment  cannot  be  con- 
tested. Cumberland,  etc.  Co.  v.  Clin- 
ton  Hill,  etc.   Co.,   57  N.  J.   Eq.   627 


521 


§  208.]  SUBSCRIPTIONS   AND    CORPORATE    CREDITORS.  [CH.  XI. 

mi  nt  niade  by  a  receiver  of  an  insolvent  corporation  where  the 
claim  upon  which  the  receivership  is  based  and  all  the  proceedings 
subsequent  thereto  arc  permeated  with  fraud.1  An  assessment  is 
necessary  before  suit  against  a  subscriber,  and  such  assessment  must 
be  made  by  the  corporation  if  solvent,  and  by  the  court  if  insolvent. 
The  assessment  by  the  court  will  be  on  all  stockholders,  and  if  part 
cannot  be  collected  a  further  assessment  may  be  made  later.2  The 
question  of  whether  interest  on  the  call  may  be  collected  is  consid- 
ered elsewhere,3  as  is  also  the  question  of  the  form  of  the  judgment 
against  each  stockholder.'1  Where  the  amount  still  due  on  unpaid 
stock  is  sufficient  the  judgment  against  the  stockholders  may  include 
the  claims  proved  and  allowed  with  interest;  also  fees  for  creditors 
in  winding  up  the  company  and  in  the  suit  to  recover  from  the  stock- 
holders; also  counsel  fees  and  compensation  to  the  receiver  and  ex- 
penses incurred  in  enforcing  the  decree.5  In  a  hearing  on  an  ap- 
plication by  a  receiver  to  levy  assessments  on  unpaid  subscriptions 
and  for  the  collection  of  the  same,  the  special  defenses  of  the  sub- 
scribers will  not  be  considered.  The  court  will  only  ascertain  the 
amount  of  the  debts,  the  names  of  the  stockholders  who  have  not 
paid,  and  the  amount  of  the  assessment  necessary.  A  receiver  will 
not  be  required  first  to  try  to  collect  a  claim  which  he  has,  he  having 
no  funds  to  prosecute  the  same  and  the  stockholders  not  offering  to 
indemnify  him.0 

§  208.  Receivers  and  assignees  for  the  benefit  of  creditors— Their 
duties,  powers,  and  liabilities  as  to  unpaid  subscriptions.  — When  a 
corporation  becomes  insolvent,  with  corporate  creditors  on  the  one 
hand  pressing  their  claims,  and  subscriptions  to  the  capital  stock 

(1899);  s.  c,  54  Atl.  Rep.  450  (1903).  tachment  by  a  receiver  to  collect  the 

The    decree   appointing   the    receiver  unpaid  subscriptions  of  non-residents, 

and  fixing  the  amount  of  assessment  Kohler  v.  Agassiz,  99  Cal.  9    (1893). 

is  conclusive  on  stockholders.    Castle-  In  a  suit  in   equity   by  a  corporate 

man    v.    Templeman,     87    Md.     546  creditor  to  enforce  unpaid  subscrip- 

(1898).  tions  several  judgments  may  be  en- 

i  Farwell  v.  Great  Western  Tel.  tered  against  those  who  are  served 
Co.,  161  111.  522  (1896),  reviewing  in  and  appear  for  the  amounts  for 
full  the  twenty  years*  litigation  grow-  which  they  should  be  assessed  in 
ing  out  of  the  insolvency  of  the  Great  order  to  pay  the  debts,  but  such  as- 
Western  Telegraph  Company.  Cf.  sessment  must  first  be  made  by  the 
Furnald  v.  Glenn,  64  Fed.  Rep.  49  court.  Turner  v.  Fidelity,  etc.,  2  Cal. 
(1894).  App.  122  (1905).    See  §  108,  supra. 

2  Covell   v.   Fowler,   144   Fed.   Rep.  3  See  §  112,  supra. 

535    (1906).      Cf.    Ross,    etc.    Co.    v.  4  See  §  211,  infra. 

Southern,  etc.  Co.,  72  Fed.  Rep.  957  5  See    v.    Heppenheimer,    69    N.    J. 

(1896).     An  assessment  by  a  board  Eq.  36   (1905). 

of  directors  or  a  decree  in  chancery  c  Cumberland,    etc.    Co.    r.    Clinton 

Is   not   necessary   to   sustain   an   at-  Hill,  etc.  Co.,  64  N.  J.  Eq.  517  (1903). 

522 


CH.  XI.]  SUBSCRIPTIONS   AND    CORPORATE    CREDITORS.  [§   208. 

wholly  or  partially  uncollected  on  the  other  hand,  it  is  usual  to 
place  the  assets  of  the  company,  including  the  claims  against  de- 
linquent stockholders,  in  the  hands  of  a  third  person  for  the  bene- 
fit of  all  concerned.  Such  a  person  may  he  an  assignee  under  state 
insolvent  laws,  a  receiver,  or  an  assignee  for  the  benefit  of  cred- 
itors. A  receiver  in  such  a  case  may  be  defined  to  be  a  third  per- 
son appointed  by  a  court  of  equity  to  act  as  the  representative  alike 
of  creditors  and  stockholders  for  the  purpose  of  collecting  the  cor- 
porate assets  and  paying  the  corporate  debts.1  It  is  the  right  and 
duty  of  such  a  receiver  to  collect  the  unpaid  subscriptions,  so  far 
as  may  be  necessary,  for  the  purpose  of  paying  the  corporate  debts 
in  full.2 

1  Johnson  v.  Laflin,  5  Dill.  65  vision  in  the  Nebraska  constitution 
(1878);  s.  C,  13  Fed.  Cas.  758;  aff'd,  rendering  subscribers  liable  to  cred- 
103  U  S.  80o'  (1SS0).  The  court  may  itors  to  the  extent  of  their  unpaid  sub- 
levy  an' assessment  for  the  benefit  scriptions,  makes  them  liable,  even 
of  corporate  creditors  and  may  ap-  though  they  have  transferred  their 
point  a  receiver  to  collect.  Carter,  stock,  and  may  be  enforced  by  a  re- 
etc  Co.  v.  Hauo  Co.,  73  N.  H.  5SS  ceiver.  This  is  the  rule,  even  though 
(19q6)  the  transferee  gave  his  notes  to  the 

■2  See     §  207,     supra.       Dayton     v.     corporation  in  substitution  for  notes 
Borst    31  N.  Y.  435  (1865);  Myers  v.     of  the  transferrer  which  the  corpora- 
Sturgis     193    N.    Y.    App.    Div.    470     tion   gave  up.     Wyman   v.   Bowman, 
(1908);  Nathans  Whitlock,  9  Paige,     127     Fed.     Rep.     257     (1904).      The 
152    (1841);    Means's  Appeal,  85  Pa.     remedy  is  a  suit  by  some  one  properly 
St    75    (1877);    Dorr  is  v.   French,   4    representing   the  corporation  to  col- 
Hun     292    (1S75);    Van    Wagenen    v.    lect  the  subscriptions  for  the  benefit 
Clark    22  Hun    497   (1880);  Frank  u.     of    all    the    creditors.      Jones    Co.    v. 
Morrison,  5S  Md.  423   (1S82) ;  Chand-     Hoffman,  114  La.  996   (1905).     A  re- 
ler    v     Brown,    77    111.    333     (1875);     ceiver     in    a    stockholder's    suit    to 
Calkins     v.     Atkinson,     2     Lans.     12     marshal  and  distribute  the  assets  of 
(1S70);    Dalton,    etc.    R.    R.    v.    Mc-    an     insolvent    corporation     may     by 
Daniel'   56    Ga.    191    (1S76);    Berry    order  compel  the  complainant  to  pay 
v    Rood    16S  Mo.  316   (1902);  Camp-    a  balance   due   on    his   subscription, 
bell  v  Chapman,  31  S.  Rep.  101  (Miss.    Calef   v.   Wyandotte    Realty    Co.,    70 
1902).    Cf.  Tucker  v.  Oilman,  45  Hun,     Kan.  318  (1904).    A  receiver  may  col- 
193     (1SS7)-    aff'd,    121    N.    Y.    189;     lect  unpaid  subscriptions   in   accord- 
Tobey  v   Russell,  9  R.  I.  5S   (1S6S)  ;     ance  with  an  order  of  the  court.    Mc- 
Stewart  v.  Lay,  45  Iowa,  604  (1S77) ;     Carter  v.  Ketcham,  67  Atl.  Rep.   610 
Clarke   v.    Thomas,    34    Ohio    St.    46     (N.   J.   1907).     A  receiver  may  sue 
(1S77)-   Phoenix  Warehousing  Co.  v.     to  collect  calls  which  became  due  be- 
Bad-er'    67   N    Y.   294    (1S76).     See    fore  his  appointment.    Basting  v.  An- 
alsoVs69     infra.      A    creditor    and    keny,  64  Minn.  133  (1896).    See  also 
stockholder  in  an  insolvent  corpora-    §207,  supra.     A  receiver  of  the  cor- 
tion    which  has  no  assets  except  un-    poration  may  levy  an  attachment  to 
paid   subscriptions,   may   have  a   re-    collect    the    unpaid    subscriptions    of 
ceiver  appointed  to  collect  such  sub-     non-residents.     Kohler  v.  Agassiz,  99 
scriptions.     Lamont   v.   Lamont,   etc.     Cal.  9  (1893).    An  assignee  for  bene- 
Co    109  Mo.  App.  46  (1904).    A  pro-    fit  of  creditors  of  an  insolvent  cor- 

523 


§  208.] 


SUBSCRIPTIONS  AND  CORPORATE  CREDITORS. 


[cn.  XI. 


As  long  as  the  authority  of  the  receiver  exists,  a  creditor  cannot 
directly  bring  suit  against  delinquent  stockholders,  but  the  receiver 


poration  may  enforce  unpaid  subscrip- 
tions. Chamberlain  v.  Bromberg,  83 
Ala.  576  (1888).  As  incidental  to  the 
receiver's  power  to  collect  unpaid  bal- 
ances of  subscription,  it  is  held  that 
he  may,  as  an  officer  of  the  court, 
make  calls  for  the  amount  due.  Hall 
v.  U.  S.  Ins.  Co.,  5  Gill  (Md.),  484 
(1847);  Rankine  v.  Elliott,  16  N.  Y. 
377  (1S57).  Lionberger  v.  Broadway 
Sav.  Bank,  10  Mo.  App.  499  (1881), 
holds  that  an  assignee  for  benefit  of 
creditors  may,  by  a  bill  in  equity, 
compel  the  directors  of  the  insolvent 
corporation  to  make  an  assessment 
upon  the  capital  stock,  payable  to 
him;  such  a  suit  is  not  affected  by 
the  fact  that  certain  creditors  are 
proceeding  against  the  stockholders 
by  motion  under  the  statute,  since 
the  proceeding  by  motion  is  cumula- 
tive merely  and  not  exclusive.  Chand- 
ler v.  Keith,  42  Iowa,  99  (1875),  holds 
that  a  stockholder  who  had  paid  all 
regular  assessments  could  not  be 
called  upon  by  the  receiver,  in  an 
action  at  law,  to  pay  the  remainder 
of  his  subscription  until  a  general 
call  is  made  upon  the  stockholders 
for  the  amount  assessed  upon  their 
shares,  and  this  call  should  be  pre- 
ceded by  the  fact  that  losses  have 
been  sustained  by  the  corporation, 
showing  a  necessity  for  an  assess- 
ment and  call  upon  the  stockholders. 
A  receiver  represents  the  corporation, 
its  stockholders  and  creditors.  Hub- 
bell  v.  Syracuse,  etc.  Works,  42  Hun, 
182  (1886).  "The  receiver  represents 
the  creditors  as  well  as  all  other 
parties  interested  in  the  corporation." 
A  subscriber  sued  by  him  on  the  sub- 
scription cannot  set  up  fraudulent 
representations  inducing  him  to  sub- 
scribe. Ruggles  v.  Brock,  6  Hun,  164 
(1875).  See  also  §164,  supra.  A 
receiver  may  cause  to  be  assessed  and 
may  collect  assessments  on  parties 
liable     therefor     to     pay     insurance 


losses.  McDonald  v.  Ross-Low  in,  29 
Hun,  87  (1883).  An  order  that  the 
receiver  may  collect  the  unpaid  sub- 
scriptions is  not  a  "call,"  but  merely 
gives  authority.  Liggett  v.  Glenn,  51 
Fed.  Rep.  381  (1892).  The  statute  of 
limitations  runs  only  from  the  time 
when  the  court  makes  a  call.  An 
action  at  common  law  on  subscrip- 
tions must  be  in  the  company's  name, 
and  not  in  the  name  of  the  assignee 
of  the  company.  Glenn  v.  Marbury, 
145  U.  S.  499  (1892).  Under  the 
English  Railway  Companies  Act  of 
1867,  §  4,  a  receiver  has  no  such  pow- 
er. Re  Birmingham,  etc.  Ry.,  L.  R. 
18  Ch.  D.  155  (1881).  In  New  York, 
by  statute,  the  receiver  may  sue.  See 
Dayton  v.  Borst,  31  N.  Y.  435  (1865) ; 
and  see,  previous  to  the  statute,  Mann 
v.  Pentz,  3  N.  Y.  415  (1850),  revers- 
ing 2  Sandf.  Ch.  257.  The  receiver 
cannot  enforce  the  subscription  where 
the  defendant  had  transferred  his 
stock  and  been  discharged  by  the  cor- 
poration. Cutting  v.  Damerel,  88  N. 
Y.  410  (1882).  In  regard  to  the  pow- 
er of  the  receiver  to  enforce  the  stat- 
utory liability,  see  §  218,  infra. 

The  receiver  of  a  foreign  corpora- 
tion, duly  empowered  to  sue  at  home, 
may  sue  resident  stockholders  for  the 
balances  due  the  company,  provided 
the  corporation  itself  could  have 
done  so  if  it  had  remained  solvent. 
Dayton  v.  Borst,  31  N.  Y.  435  (1865), 
a  case  where  a  receiver  appointed  by 
the  court  of  chancery  in  New  Jersey 
was  held  competent  to  maintain  a 
suit  of  this  nature  in  New  York 
against  a  citizen  thereof;  Mann  v. 
Cooke,  20  Conn.  178  (1850).  See 
also  McDonough  v.  Phelps,  15  How. 
Pr.  372  (1856);  Seymour  v.  Sturgess, 
26  N.  Y.  134  (1862).  After  a  transfer, 
the  transferrer  is  not  liable  to  the 
receiver  any  more  than  he  would  have 
been  to  the  corporation.  Billings  v. 
Robinson,  94  N.  Y.  415  (1884),  affirm- 


524 


CII.  XI.] 


SUBSCRIPTIONS   AND    CORPORATE    CREDITORS. 


[§   208. 


may  be  compelled  to  act  in  the  matter  at  the  instance  of  creditors.1 
Although  a  receiver  has  been  appointed  by  the  United  States  court 

ins:  28  Hun,  122  (18S2).    See  en.  XV,    pel  stockholders  to  refund  corporate 
_c  +-u„  nm,rt     n-irmoTc  whiph  thpv  have  taken  after 


infra.  As  to  the  power  of  the  court 
to  give  a  receiver  power  to  compro- 
mise claims  upon  unpaid  subscrip- 
tions, see  Chandler  v.  Brown,  77  111. 
333  (1875),  also  §§  167-171,  supra,  and 


moneys  which  they  have  taken  after 
paying  in  the  same  on  their  sub- 
scriptions. South  Bend,  etc.  Co.  v. 
Pierre  F.  &  M.  Ins.  Co.,  4  So.  Dak. 
173  (1893).     It  is  the  receiver's  duty 


333  (l8*o),  aiso  38  j-oi-j-i-l,  o«i"«, -•-   v ' ■ 

8?10    infra      A  receiver  cannot  en-    to  act  promptly  and  vigilantly  m  the 


force  subscriptions  which  the  corpora 
tion   could    not  enforce.     Winters   v. 
Armstrong,  37  Fed.  Rep.  508   (18S9). 
The  receiver  may  sell  the  subscription 
at   auction   and   the   subscriber    may 
buy  it.     Dean  v.  Biggs,  25  Hun,  122 
(1881);    aff'd   93   N.   Y.   662;    Castle- 
man     v.     Templeman,     87     Md.     546 
(1898).     A  receiver  in  a  foreclosure 
suit   cannot  collect  unpaid   subscrip- 
tions.    Lea  v.  Iron,  etc.  Co.,  119  Ala. 
271   (1S98).     Even  though  a  receiver 
is  in  charge,  yet  if  all  the  debts  are 
paid  the  court  will  not  authorize  him 
to   collect  unpaid   subscriptions,   not- 
withstanding existing  contracts  may 
call  for  further  money  later.    Tiche- 

"03 


collection  of  the  assets,  and  to  com- 
pel payment  of  balances  due  by  sub- 
scribers on  unpaid  stock,  if  such  a 
course  is  necessary  to  meet  the   de- 
mands of  creditors.     If  the  receiver 
fails  to  do  his  duty  in  this  respect 
the  creditors  may  compel  him  to  act, 
inasmuch  as  they  cannot  act  directly 
themselves.      Gas    Light,    etc.    Co.    v. 
Haynes,  7  La.  Ann.  114  (1852) ;  New 
Orleans  Gas  Light  Co.  v.  Bennett,  6 
La.  Ann.  457  (1851);  Stark  v.  Burke, 
9    La.    Ann.    341    (1854);    Atwood   v. 
Rhode    Island   Agric.   Bank,   1   R.    I. 
376  (1850);  Rankine  v.  Elliott,  16  N. 
Y.   377    (1S57),  holding  that  when  a 
receiver  of   an  insolvent  railroad    is 
appointed  in  an  action  in  behalf  of 


Z^^^^™^  2*  errors.  tbe  r,sbt to  proceed 
to  notify  a  subscriber  to  pay  bis  un-  ior  tbe  collection  of  unpa.d  subsenp. 
£,7sobseri„tion  is  material,  even    Uons  vests  Jn  nun an la  ^ent 


though  ordered  by  the  court,  inas 
much  as  that  defense  may  be  set  up 
in  the  answer  and  payment  made  and 
the  defendant  relieved  from  costs. 
Berry  v.  Rood,  168  Mo.  316  (1902). 
i  After    a    receiver    has    been    ap 


creditor  will  be  enjoined  from  pro- 
ceeding against  a  stockholder  in  an 
action  begun  after  the  order  was 
made,  but  before  the  appointment  is 
perfected.  While  the  receiver  is  in 
charge,   a   corporate   creditor   cannot 


poto^  a3—  cannot  —    soe  to  enforce  a  stoe.  bolder,  Lab, 


proceedings  to  collect  unpaid  sub 
scriptions.  Rouse,  -etc.  Co.  r.  Detroit, 
etc.  Co.,  Ill  Mich.  251  (189G).  After 
a  receiver  has  been  appointed,  he 
alone  can  collect  the  unpaid  sub- 
scriptions. Big  Creek  Stone  Co.  v. 
Seward,  144  Ind.  205  (1895).  A 
creditor  who  has  caused  a  receiver 
to  be  appointed  and  directed  to  col- 
lect subscriptions  cannot  himself 
bring  suit  for  such  collection.    Castle 


ity  on  an  unpaid  subscription.  Mer- 
chants' Nat.  Bank  v.  Northwestern 
Mfg.  Co.,  48  Minn.  361   (1892). 

In  Indiana  a  creditor  of  a  manu- 
facturing corporation  may  collect  his 
debt  from  unpaid  subscriptions 
through  a  receiver,  and  in  that  way 
only.  Wheeler  v.  Thayer,  121  Ind.  64 
(1S89).  The  United  States  district 
court  has  jurisdiction  of  an  action  by 
the  receiver  of  an  insolvent  national 


E?."S5^5E"*i  <«•>•  ban,  to  collect  assessments  on  stoC, 
Tbere  I  recover  bas  been  appointed,  Stepbens  j  =>  «F£B^«« 
he  alone  can  bring  an  action  to  com-     (1890).    A  receiver  may  ^ 

525 


§  208.] 


SUBSCRIPTIONS    AND    COKI'oRATE    CREDITORS. 


[CII.  XI. 


in  Pennsylvania,  of  the  assets  of  a  West  Virginia  corporation,  the 
corporation  may  sue  in  New  York  to  recover  an  unpaid  subscrip- 
tion and  may  continue  the  suit  although  subsequently  an  ancillary 
receiver  is  appointed  in  New  York.1  A  receiver  appointed  in  one 
state  may  sue  a  stockholder  in  another  state  on  an  unpaid  subscrip- 
tion.2 In  the  United  States  court,  however,  it  is  held  that  a  re- 
ceiver appointed  by  a  state  court  cannot  maintain  a  suit  in  anotln  r 
jurisdiction  to  collect  unpaid  subscriptions,  even  though  the  court 
;ij>[>ointing  him  authorized  such  suit.  Neither  can  ho  maintain  such 
a  suit  in  the  name  of  the  corporation,  but  the  rule  may  be  otherwise 
where  by  statute  or  otherwise  title  was  vested  in  the  receiver.3  A 
suit  by  a  federal  receiver  to  collect  unpaid  subscriptions  to  stock 


assessed  and  may  collect  assessments 
on  parties  liable  therefor  to  pay  insur- 
ance losses.  McDonald  v.  Ross-Lewin, 
29  Hun,  S7  (1883).  Where  a  receiver 
is  appointed  to  take  charge  of  "the 
property"  he  may  sue  to  collect  un- 
paid subscriptions.  Showalter  v.  La- 
redo Imp.  Co.,  S3  Tex.  1G2  (1892).  In 
a  judgment  creditor's  suit  for  seques- 
tration and  a  receiver,  both  the  cor- 
poration and  a  stockholder  liable  on 
his  subscription  being  made  parties, 
the  receiver  may  have  judgment 
against  a  stockholder.  Spooner  v. 
Bay  St.  Louis  Synd.,  47  Minn.  464 
(1891).  Although  some  fraudulent 
claims  have  been  allowed  in  the  court 
which  appointed  the  receiver  and 
made  the  calls,  yet  a  stockholder  who 
is  sued  in  another  state  cannot  en- 
join the  collection  of  the  judgment 
on  that  ground.  Foote  v.  Glenn,  52 
Fed.  Rep.  529  (1892).  Although  the 
statute  of  limitations  is  a  bar  unless 
the  court  allows  creditors  to  be  sub- 
stituted in  place  of  a  receiver  who 
has  brought  suits  to  enforce  the  lia- 
bility of  stockholders  and  is  held  not 
to  have  had  authority  to  do  so,  yet 
such  substitution  will  not  be  granted. 
Fairbanks  v.  Farwell,  141  111.  354 
(1892).  See  also  §222,  infra.  The 
position  of  the  receiver  as  regards 
the  collection  of  subscriptions  is 
stated  in  Republic  Life  Ins.  Co.  v. 
Swigert,  135  111.  150,  167,  172  (1890). 
The  court  referred  to  and  considered 
many  authorities.     Where  the  bonds 


are  invalid  a  receiver  appointed  in 
the  foreclosure  suit  has  no  power  to 
collect  subscriptions.  Farmers'  L.  & 
T.  Co.  v.  San  Diego,  etc.  Co.,  49  Fed. 
Rep.  188  (1S92).  A  receiver  may  col- 
lect the  unpaid  par  value  of  stock  is- 
sued for  cash  at  less  than  par,  even 
though  the  corporation  agreed  with 
the  stockholders  that  no  more  than 
the  amount  already  paid  should  ever 
be  required.  Such  an  agreement  does 
not  bind  the  receiver  in  so  far  as  it 
is  necessary  for  him  to  collect  the 
money  to  pay  creditors.  Mathis  v. 
Pridham,  1  Tex.  Civ.  App.  58  (1892). 

i  Sigua,  etc.  Co.  v.  Brown,  171  N. 
Y.  488  (1902).  Where  at  the  instance 
of  the  attorney-general  a  bank  has 
been  declared  insolvent  and  the  trans- 
action of  further  business  enjoined, 
an  assessment  on  the  stock  levied  be- 
fore the  decree,  but  payable  after  the 
decree,  cannot  be  enforced  by  the 
bank.  Bank  of  National  City  v.  Johns- 
ton, 133  Cal.  185  (1901). 

^  Fish  v.  Smith,  73  Conn.  377 
(1900).  A  Virginia  receiver  of  a 
Virginia  corporation  may  sue  in 
Maryland  in  the  name  of  the  corpora- 
tion to  collect  unpaid  subscriptions  of 
Maryland  stockholders,  it  appearing 
that  no  harm  is  thereby  don©  to 
Maryland  creditors.  Castleman  v. 
Templeman,  87  Md.  546   (1898). 

3  Great  Western,  etc.  Co.  v.  Harris, 
128  Fed.  Rep.  321  (1903);  aff'd  198 
U.  S.  561. 


526 


en.  xi.] 


SUBSCRIPTIONS   AND    CORPORATE    CREDITORS. 


[§  208. 


may  be  in  the  federal  court,  irrespective  of  citizenship  or  the  amount 
involved.1  Before  the  court  authorizes  a  receiver  to  collect  unpaid 
subscriptions  there  must  be  a  judicial  ascertainment  of  the  corporate 
debts.2  JS!o  judgment  is  necessary  against  the  corporation  in  a 
suit  by  a  receiver  against  directors  for  calls  which  had  been  made 
by  the  directors.3  The  court  may  direct  a  receiver  to  make  a  call 
instead  of  the  court  making  the  call  itself  directly.4  A  receiver 
may  collect  a  call  made  by  the  directors.5  Where  a  receiver  fails  to 
allege  that  his  suit  to  collect  subscriptions  was  authorized  by  the 
court,  his  action  will  fail.6  If  the  receiver  refuses  to  collect  the 
subscriptions,  the  remedy  of  the  creditor  is  to  apply  for  the  removal 
of  the  receiver,7  or  a  creditor  may  intervene  and  proceed  himself.8 
But  a  creditor  cannot  sue  to  reach  subscriptions  for  stock,  unless  the 
receiver  refuses  to  sue.9     The  receiver's  suit  to  collect  unpaid  sub- 


i  Brown  v.  Allebach,  156  Fed.  Rep. 
697    (1907). 

2  See  §  207,  supra.  State  v.  Ger- 
man, etc.  Bank,  50  Neb.  734  (1897). 
A  receiver  cannot  bring  suit  to  collect 
subscriptions  until  the  corporate  debts 
have  been  ascertained  and  the  cor- 
porate property  exhausted,  but  unpaid 
calls  made  by  the  directors  may  be 
collected  by  the  receiver  as  a  part  of 
the  corporate  assets.  "Wyman  v.  Wil- 
liams, 53  Neb.  670  (1898);  s.  C,  52 
Neb.  833  (1897).  In  a  receiver's  suit 
at  law  to  collect  subscriptions,  his 
allegation  that  all  the  subscriptions 
were  necessary  to  pay  the  debts  will 
raise  a  presumption  that  the  court 
ascertained  such  to  be  the  fact  be- 
fore the  suit  was  commenced.  Worth 
v.  Wharton,  122  N.  C.  376  (1898).  It 
has  been  held  that  a  receiver  may 
collect  unpaid  balances  due  on  sub- 
scriptions, although  the  other  cor- 
porate assets  have  not  been  collected 
and  the  amount  of  the  liabilities  is 
undetermined.  Stark  v.  Burke,  9  La. 
Ann.  341  (1854).  And  that  if,  on  the 
final  settlement,  there  is  a  surplus,  it 
is  to  be  returned  pro  rata  to  the 
shareholders  who  have  paid  in  full. 
Pentz  v.  Hawley,  1  Barb.  Ch.  (N.  Y.) 
122  (1S45).  But  the  more  modern 
and  better  rule  is  that  a  receiver  has 
no  authority  to  call  upon  a  subscriber 


833 


58 


66 


for  his  unpaid  balance  until  the  court 
have  determined  the  amount  of  the 
corporate  indebtedness  and  fixed  defi- 
nitely the  liability  of  each  share  of 
the  stock.  Chandler  v.  Keith,  42  Iowa, 
99  (1875).  See  also  Mills  v.  Scott, 
99  U.  S.  25  (1878). 

3  Wyman  v.  Williams,  52  Neb. 
(1897). 

■i  See   §  207,  supra. 

•r»  See  §  207,  supra. 

c>  Gainey    v.    Gilson,    149     Ind. 
(1897). 

7  Links  v.  Connecticut,  etc.  Co 
Conn.  277  (1895).  Even  though  a  re- 
ceiver apointed  by  the  United  States 
Court  declines  to  bring  suit  against 
certain  stockholders  to  collect  alleged 
unpaid  subscriptions,  a  bill  in  equity 
will  not  lie  in  the  state  court  for  a 
receiver  to  make  such  collection,  no 
application  to  the  federal  court  for 
that  purpose  having  been  made.  Gal- 
lagher v.  Asphalt  Co.,  67  N.  J.  Eq. 
441    (1904). 

8  Spilman  v.  Mendenhall,  57  N.  W. 
Rep.  468   (Minn.  1894). 

o  First  Nat.  Bank  v.  Dovetail,  etc. 
Co.,  143  Ind.  534  (1896).  A  creditor 
cannot  maintain  a  bill  to  collect  un- 
paid subscriptions  where  a  receiver 
is  in  charge,  Morgan  v.  Gibian,  115 
Ga.  145  (1902). 


527 


§  208.] 


SUBSCRIPTIONS    AND    CORPORATE    CREDITORS. 


I'll.  XI. 


scriptions  may  bo  at  law1  or  in  equity.2    Ho  may  also  maintain  a 

bill  in  equity  for  discovery  to  ascertain  the  names  of  the  stock- 
holders.3 A  receiver,  with  the  authority  of  the  court,  may  accept 
an  offer  of  a  number  of  stockholders  to  compromise  all  the  claims 
against  them  for  unpaid  subscriptions  for  a  specified  sum,  even 
though  some  of  such  subscriptions  can  be  collected  in  full  and  others 
not  at  all,  the  compromise  being  a  fair  one.4  It  has  been  held  that  a 
receiver  may  hold  stockholders  liable  on  "watered"  stock,5  but  there 
is  strong  authority  to  the  contrary.0 


1  Where  a  court  of  equity  makes  a 
call  and  directs  the  receiver  to  col- 
lect, his  remedy  is  at  law  and  not  in 
equity.  Barkalow  v.  Totten,  53  N. 
J.  Eq.  573  (1895).  The  receiver  may 
sue  each  stockholder  separately  at 
law.  His  appointment  cannot  be 
questioned.  Elderkin  v.  Peterson,  8 
Wash.  674  (1894).  A  suit  by  the  re- 
ceiver to  collect  is  at  law  and  not  in 
equity.  Smith  v.  Johnson,  57  Ohio 
St.  486  (1898). 

2  A  receiver  of  an  insolvent  cor- 
poration appointed  by  a  federal  court 
may  file  a  bill  in  the  United  States 
court  to  collect  unpaid  subscriptions. 
Bausman  v.  Denny,  73  Fed.  Rep.  69 
(1896).  See  79  id.  172.  The  receiver 
may  file  a  petition  in  connection  with 
the  main  suit,  and  by  this  petition 
bring  in  the  stockholders  and  compel 
them  to  pay  their  subscriptions.  Peck 
v.  Elliot,  79  Fed.  Rep.  10  (1897).  The 
enforcement  of  the  liability  of  a  sub- 
scriber to  the  stock  of  a  corporation 
by  an  auxiliary  suit  in  equity,  brought 
by  the  receiver  of  the  corporation  ap- 
pointed in  a  creditors'  suit  instituted 
upon  its  insolvency,  does  not  infringe 
the  constitutional  right  of  such  sub- 
scriber to  a  trial  by  jury.  Ross- 
Meehan,  etc.  Co.  v.  Southern,  etc.  Co., 
72  Fed.  Rep.  957   (1896). 

3  See  §  519,  supra.  A  broker  may 
be  compelled  to  disclose  the  name  of 
his  customer  for  whom  he  purchased 
stock  and  put  the  stock  in  the  name 
of  a  clerk.  A  receiver  of  the  corpora- 
tion may  file  a  bill  of  discovery  for 
that  purpose  in  order  that  an  assess- 
ment may  be  levied  on  the  stock  for 


the  unpaid  subscription  price.    Brown 
v.  Palmer,  157  Fed.  Rep.  797   (19u7). 

i  Alorriaon  r.  Lincoln,  etc.  Co.,  89 
N.  W.  Rep.  996  (Neb.  1902).  See  also 
§  171,  supra,  and  §  222,  infra. 

•>  The  liability  on  stock  issued  for 
property  at  an  overvaluation  may  be 
enforced  by  a  receiver.  See  v.  Hep- 
penheimer,  69  N.  J.  Eq.  36  (1905). 
See  cases  in  §§  46,  47,  supra.  In  the 
case  Gillett  v.  Chicago  Title  &  T.  Co., 
222  111.  254  (1907),  where  stock  had 
been  issued  for  property  at  an  over- 
valuation and  the  holders  were  held 
liable,  interest  was  not  allowed  from 
the  commencement  of  the  suit  to  the 
time  of  decree,  a  supplemental  decree 
to  that  effect  not  having  been  ap- 
pealed. 

6  A  railroad  construction  contract 
by  which  the  work  is  paid  for  by 
stock  and  bonds  is  not  a  stock  sub- 
scription nor  a  sale  of  the  stock,  but 
is  merely  a  contract,  and  the  receiver 
of  the  railroad  cannot  hold  a  contract- 
or liable  for  the  alleged  value  of  the 
stock  and  bonds,  he  being  estopped 
the  same  as  the  corporation  itself, 
and  there  being  no  promise  to  pay 
the  par  value  of  the  stock.  Bostwick 
v.  Young,  118  N.  Y.  App.  Div.  490 
(1907).  A  promoter's  possible  liabil- 
ity and  the  liability  of  stockholders 
on  unpaid  stock  will  not  be  adjusted 
and  offset  in  the  distribution  among 
bondholders  after  foreclosure  sale, 
even  though  the  bondholders  were 
promoters  and  stockholders.  Inde- 
pendent suits  must  be  instituted  for 
that  purpose  especially  as  general 
creditors   are  interested.     Land,   etc. 


528 


CLE.  XI.] 


SUBSCRIPTIONS    AND    CORPORATE    CREDITORS. 


[§  208, 


There  has  been  considerable  controversy  as  to  whether  a  stock- 
holder who  is  sued  by  a  receiver  on  a  subscription  may  set  up  de- 
fenses which  were  good  as  against  the  corporation,  but  which  are 
no  longer  good  as  against  corporate  creditors.  The  question  is 
theoretically  difficult  because  the  receiver  represents  the  corpora- 
tion as  well  as  corporate  creditors.  Practically,  however,  a  receiver- 
ship means  insolvency  and  the  final  elimination  of  the  corporation, 
and  the  just  rule  seems  to  be  that  defenses  which  are  not  good  as 
against  corporate  creditors  are  not  good  as  against  a  receiver  of  an  in- 
solvent corporation.1  A  receiver's  suit  on  notes  given  in  payment 
for  stock  cannot  be  defeated  on  the  ground  that  all  the  creditors  have 
been  paid.2 

An  assignee  for  the  benefit  of  the  creditors  of  a  corporation,  like 
a  receiver,  represents  both  the  corporation  and  the  creditors,  and 
should  collect  unpaid  subscriptions.3  An  Illinois  assignee  for  the 
benefit  of  creditors  of  an  insolvent  Illinois  corporation  may  file 
a  bill  in  equity  in  a  Xew  York  court  to  collect  the  subscription 
liability  of  New  York  stockholders   in  such  Illinois   corporation.4 


Co.    v.    Tatnall,    132    Fed.    Rep.    305 
(1904).     See  also  §§  38,  46,  47,  supra. 

1  Cole  v.  Satsop,  etc.  R.  R.,  9  Wash. 
487  (1S94).  Cf.  Republic  L.  Ins.  Co. 
v.  Swigert,  135  111.  150  (1890);  Win- 
ters v.  Armstrong,  37  Fed.  Rep.  508, 
521   (1S6j>;    §§  46,  47,  supra. 

2  Pope  v.  Merchants'  T.  Co.,  103  S. 
W.  Rep.  792  (Tenn.  1907). 

3  Cook  v.  Carpenter,  212  Pa.  St. 
165  (1905).  Shockley  v.  Fisher,  75 
Mo.  498  (1882);  Vanderwerken  v. 
Glenn,  85  Va.  9  (1888) ;  Beal  v.  Dillon, 
5  Kan.  App.  27  (1896).  Cf.  German- 
town  Pass.  Ry.  v.  Fitler,  60  Pa.  St.  124 
(1869);  Eppright  v.  Nickerson,  78 
Mo.  482  (1S83),  holding  that  an  in- 
solvent corporation  may  include  in 
an  assignment  for  the  benefit  of  its 
creditors  the  liability  of  its  stock- 
holders for  unpaid  stock  for  which 
no  call  has  been  made.  An  action  at 
common  law  on  subscriptions  must 
be  in  the  company's  name  and  not  in 
the  name  of  the  assignee  of  the  com- 
pany. Glenn  v.  Marbury,  145  U.  S. 
499  (1892).  An  assignee  of  the  cor- 
poration for  the  benefit  of  creditors 
may  sue.  Cartwright  v.  Dickinson, 
88  Tenn.  476  (1890).    An  assignment 


for  the  benefit  of  creditors,  made  by 
order  of  a  directors'  meeting  at  which 
three  directors  were  present  and  the 
other  two  were  not  notified,  is  invalid 
and  no  bar  to  a  creditor's  action  to 
collect  unpaid  subscriptions.  Doern- 
becher  v.  Columbia,  etc.  Co.,  21  Oreg. 
573  (1S92).  It  has  been  held  that  the 
assignee  cannot  sue  to  set  aside  a 
fraudulent  device  by  which  a  stock- 
holder has  escaped  payment  of  his 
subscription.  Bouton  v.  Dement,  123 
111.  142  (1887).  Where  the  corpora- 
tion has  been  dissolved,  and  its  as- 
sets distributed,  and  its  trustees  dis- 
charged by  a  decree  of  court,  a  cred- 
itor who  was  a  party  to  the  suit  can- 
not afterward  maintain  a  bill  against 
the  trustees  to  reach  unpaid  sub- 
scriptions. Chavent  v.  Schefer,  59 
Fed.  Rep.  231  (1894). 

4  Stoddard  v.   Lum,   159   N.   Y.   265 

(1899).  A  trustee  in  insolvency  may 
collect  unpaid  subscriptions  without 
any  order  from  the  court.  In  a  suit 
the  trustee  need  not  allege  what  the 
amount  is  needed  to  pay  the  debts, 
but  may  prove  the  same  upon  the 
trial.     Johnston  v.  Allis,  71  Conn.  207 

(1898).    An  assignee  of  an  insolvent 


(34) 


529 


§  209.] 


SUBSCRIPTIONS   AND    CORPORATE    CREDITORS. 


[cn.  XI. 


A  trustee  in  bankruptcy  may  collect  unpaid  subscriptions  by  a  suit 
in  equity,  and  the  statutory  liability  of  the  directors  is  not  considered 
as  an  asset  in  estimating  the  amount  necessary  to  be  collected  from 
the  stockholders.1 

§  209.  The  judgment  against  the  corporation  impeachable  only 
for  fraud  or  want  of  jurisdiction.-. — That  a  judgment  conclusively 
settles  all  matters  of  controversy  involved  in  the  suit,  so  far  as  par- 
ties or  their  privies  are  concerned,  excepting  where  it  may  be  im- 
peached for  fraud  or  want  of  jurisdiction,  is  well-established  Law.2 
When,  therefore,  a  corporate  creditor  has  obtained  judgment  against 
the  corporation,  and  execution  is  returned  unsatisfied,  and  he  then 
proceeds  to  enforce  his  remedy  against  the  holders  of  stock  not  paid 
up,  the  question  arises  whether  the  stockholders  may  set  up  in  de- 
fense matters  which  the  corporation  might  have  set  up  or  did  set 
up  to  defeat  the  creditor's  claim  against  the  corporation. 

It  has  been  strenuously  insisted  that  they  might.  This  was 
Chancellor  Kent's  contention  in  the  case  of  Slee  v.  Bloom  ;3  but  the 


corporation  in  Maine  may  collect  un- 
paid subscriptions  without  any  assess- 
ment by  the  court  where  the  deficien- 
cy is  equal  to  the  unpaid  stock.  Dunn 
17.  Howe,  96  Fed.  Rep.  160  (1S99), 
rev'd  on  another  point  in  107  Fed. 
Rep.  849. 

i  In   re   Crystal,   etc.    Co.,    96    Fed. 
Rep.  945   (1899).  The  right  to  collect 
unpaid  subscriptions  passes  to  a  trus- 
tee in  bankruptcy.     Commercial,  etc. 
v.  Warthen,  119   Ga.  990    (1904).     A 
trustee  in  bankruptcy  of  a  corpora- 
tion succeeds  to  its  right  to  collect  un- 
paid subscriptions.    Rathbone  v.  Ayer, 
84  N.  Y.  App.  Div.  186   (1903).     The 
United  States  bankruptcy  court  may 
order  an  assessment  on  holders  of  un- 
paid stock  and  may  direct  the  trustee 
in   bankruptcy  to   bring  suit  at  law 
therefor  in  the  state  court.    Clevenger 
v.  Moore,  71  N.  J.  L.  148  (1904).    An 
order  of  the   bankrupt  court   is   the 
same  as  a  call.     Allen  v.  Grant,  122 
Ga.  552    (1905).     A  trustee  in  bank- 
ruptcy  may   collect  unpaid  subscrip- 
tions, but  cannot  enforce  a  statutory 
liability.     Tiger,  etc.  Co.'s  Trustee  v. 
Shanklin,   102    S.   W.  Rep.   295    (Ky. 
1907).      The    bankruptcy    court    may 
authorize  a  trustee  in  bankruptcy  to 


collect   unpaid   subscriptions   to   pay 

corporate   debts.     In   re   Remington, 

etc.    Co.,    153    Fed.    Rep.    345    (1907), 

holding    also    that    the    bankruptcy 

court  will  not  order  an  execution  to 

be   levied   on    the    stockholders,    but 

will  direct  the  trustee  to  bring  suit. 

A  creditor  who  is  also  a  holder  of 

unpaid  stock  will  not  be  allowed  to 

prove  his  claim  in  bankruptcy  until 

he  has  paid  his  unpaid  subscription. 

In  re  Wiener,  etc.  Co.,  96  Fed.  Rep. 

949    (1899).     A  court  of  bankruptcy 

may  collect  unpaid  subscriptions.  In 

re  Miller,  etc.  Co.  Ill  Fed.  Rep.  515 

(1901) ;  Sawyer  v.  Hoag,  17  Wall.  610, 

621    (1873);    Upton  v.   Tribilcock,  91 

U.  S.  45  (1875);  Sanger  v.  Upton,  91 

U.   S.  56    (1875);    Webster  v.  Upton, 

91  U.  S.  65   (1875);   Chubb  v.  Upton, 

95  U.  S.  665   (1877);  Payson  v.  Stoe- 

ver,  2  Dill.  427  (1873);  s.  c,  19  Fed. 

Cas.  27;  Upton  v.  Hansbrough,  3  Biss. 

417    (1873);    s.  c,   28   Fed.  Cas.   839. 

Cf.  Morgan  County  v.  Allen,  103  U.  S. 

498  (1880). 

2  Quoted  and  approved  in  Saylor  v. 
Commonwealth,  etc.  Co.,  38  Oreg.  204 
(1900). 

35  Johns.  Ch.  366  (1820);  reversed 
by  19  Johns.  456,  473  (1822). 


530 


CH.  XI.] 


SUBSCRIPTIONS    AND    CORPORATE    CREDITORS. 


[§   209. 


authorities  Lave  firmly  established  the  rule  that,  in  the  absence  of 
fraud  and  collusion,  judgments  against  the  corporation,  if  the  court 
had  jurisdiction,  are  conclusive  against  the  stockholders,  as  to  the 
validity  and  amount  of  the  creditor's  claim.1     Thus,  it  is  held  that 


i  Quoted  and  approved  in  Montgom- 
ery v.  Whitehead,   90   Pac.  Rep.   509 
(Col.  1907).    Slee  v.  Bloom,  20  Johns. 
669    (1S22);    Hawkins  v.   Glenn,    131 
U.   S.   319    (1S89);    Henry  v.  Vermil- 
lion, etc.  R.  R.,  17  Ohio,  1S7   (1848); 
Hampson  v.  Weare,  4  Iowa,  13  (1856) ; 
Milliken  v.   Whitehouse,    49   Me.   527 
(I860);     Wilson    v.    Pittsburgh,    etc. 
Coal  Co.,  43  Pa.  St.  424  (1862);  Bank 
of  Wooster  v.  Stevens,  1  Ohio  St.  233 
(1853);    Stephens   v.   Fox,    83    N.   Y. 
313    (1881);    Marsh   v.  Burroughs,   1 
Woods,  463  (1871);  s.  c,  16  Fed.  Cas. 
800;    Grund    v.    Tucker,    5    Kan.    70 
(1869);  Bissit  v.  Kentucky,  etc.  Xav. 
Co.,   15   Fed.   Rep.   353,   and   note,   p. 
360    (1882);    Hawes    v.    Anglo-Saxon 
Petroleum  Co.,  101  Mass.  385   (1869); 
Nichols  v.  Stevens,  123  Mo.  96  (1894) ; 
Hawkins    v.    Citizens',    etc.    Co.,    38 
Oreg.  544   (1901);   Cole  v.  Adams,  19 
Tex.  Civ.  App.  507  (1898).    "A  stock- 
holder of  a  corporation   is  so  far  a 
privy  to  a  judgment  against  the  cor- 
poration   that   he   cannot   attack  the 
judgment   in   any   collateral   proceed- 
ing."    National  Foundry,  etc.  Works 
v.  Oconto  Water  Co.,  68  Fed.  Rep.  1006 
(1895);  Bigelow,  Estop.,  129,  4th  ed.; 
Freeman,  Judgm.,  §  177,  3d  ed.     So, 
also,  in  actions  to  enforce  statutory 
liability  of  stockholders,  a  judgment 
against  the  corporation  is  equally  con- 
clusive.   See  £  224,  infra.    Cf.  Hudson 
v.  Carman,   41  Me.  84    (1S56),  hold- 
ing that  the  judgment  obtained  may 
not  be  conclusive  evidence  of  the  or- 
ganization and  existence  of  the  cor- 
poration, and  if  denied  they  must  be 
proved.      The    stockholder    may,    of 
course,  set  up  that  he  is  not  a  stock- 
holder,   and    other   similar   defenses, 
such   as   are  specified   in   chapter  X, 
supra.     See   §  210,  infra.     Johnson  v. 
Somerville,    etc.   Co.,     81     Mass.     216 
(1860);    Glenn    v.    Springs,    26    Fed. 


Rep.  494  (1885);  Powell  v.  Oregonian 
Ry.,  38   Fed.  Rep.   187    (1889);    Bar- 
ron v.  Paine,  83  Me.  312  (1891).  Stock- 
holders will  not  be  allowed  to  inter- 
vene in  a  suit  brought  by  a  creditor 
against  the  corporation   itself,   even 
though  they  wish  to  set  up  the  statute 
of  limitations,   and  even  though   the 
directors  had  directed  the  company's 
lawyer  to  admit  the  allegations  of  the 
complaint,  and  even  though  the  com- 
pany is  insolvent,  and  the  stockhold- 
ers are  liable  on  the  stock,  no  fraud 
being  shown.     Meyer  v.  Bristol,  etc. 
Co.,  163  Mo.  59    (1901).     The  decree 
of  the  court  where  the  corporation  is 
located  is  conclusive  as  to  whether 
service    was    properly   made    on    the 
corporation,  such  service  being  on  two 
directors  and  the   cashier.     The   de- 
cree is  also  conclusive  that  no  laches 
existed  in  bringing  suit;  that  the  stat- 
ute of  limitations  was  no  bar  to  the 
decree;   that  the  court  had  authority 
to   make   the    assessment;    that    the 
change  in  the  corporate  name  did  not 
discharge  the  stockholders'  liability; 
and   that  the   trustee,    Glenn,   might 
sue   the     stockholders.       Lehman     v. 
Glenn,  87  Ala.  618   (1889).     The  judg- 
ment against  the  corporation  is  con- 
clusive, and  it  cannot  be  shown  that 
it  arose  on  a  contract  which  was  ultra 
vires.    Sumner  v.  Marcy,  3  Woodb.  & 
M.  105  (1847) ;  s.  c,  23  Fed.  Cas.  384; 
Baines  v.  Babcock,  95  Cal.  581  (1892). 
Stockholders  cannot  attack  the  debts 
upon    which   the   judgment   was   ob- 
tained.    Hambleton  v.  Glenn,  72  Md. 
351  (1890).    And  it  is  no  defense  that 
the  judgment  against  the  corporation 
was  obtained  by  collusion  with  one  of 
the   directors.     Hambleton   v.   Glenn, 
72   Md.   351    (1890).     In  Chestnut  v. 
Pennell,  92  111.  55  (1879),  it  was  held 
that  a  decree  against  the  corporation 
is  not  admissible  in  evidence  against 
1 


§  209.] 


SUBSCRIPTIONS    AND    CORPORATE    CREDITORS. 


[Cll.  XI. 


the  stockholder  cannot  take  advantage,  in  the  suit  against  bim,  of 
a  defect  in  the  service  of  process  upon  the  corporation  in  the  orig- 
inal suit.  His  remedy  in  such  a  case  is  by  a  direct  proceeding.1 
A  stockholder  sued  on  his  liability  cannot  file  a  bill  in  another 
court  to  enjoin  the  suit  on  the  ground  that  the  decree  establishing 
the  indebtedness  of  the  corporation  was  fraudulent.2  Eia  remedy 
is  in  the  same  court,  the  Buit  being  still  pending.8  Nor  can  the 
judgment  be  attacked  on  the  ground  that  the  judgment  was  ob- 
tained in  the  federal  court  by  one  to  whom  the  claim  was  trans- 
ferred in  order  to  give  jurisdiction.4  In  New  York,  as  .-land 
above,  the  conclusiveness  of  the  judgment  in  these  cases   lias   been 


a  stockholder  who  was  not  a  party  to 
the  bill  or  decree,  actually  or  con- 
structively, and  that  in  such  a  case 
proof  of  the  liability  of  the  corpora- 
tion to  the  creditor  should  be  given. 
A  stockholder's  suit  on  his  unpaid 
subscription     to     pay     a     judgment 


546  (1898).  A  judgment  by  the  cor- 
poration against  a  stockholder  is  con- 
clusive in  a  suit  by  a  corporate  cred- 
itor to  obtain  the  benefit  of  such  judg- 
ment. Welch  v.  Sargent,  127  Cal.  72 
(1899).  The  court  may  investigate 
whether  the  judgment  of  the  creditor 


against   the   corporation    may    attack  is  such  as  to  bind  the  stockholders  in 

the  judgment  on  the  ground  that  it  a  proceeding  to  enforce  their  subscrip- 

is  based  on  a  fraudulent  claim.   Saylor  tion    and   statutory   liability.     Covell 

v.  Commonwealth,   etc.   Co.,   38   Oreg.  V.  Fowler,  144  Fed.  Rep.  535   (190C). 

204    (1900).     In   a  garnishment  suit  The    legislature    may     enact     that    a 

against  a  corporation  and  a  stockhold-  stockholder  may  set  up  any  defenses 

er   to  reach   an  unpaid   subscription,  that   the    corporation   might   set   up. 


the  stockholder  may  contest  the  valid- 
ity of  the  claim  against  the  corpora- 
tion, even  though  the  corporation  has 
defaulted  in  the  suit.  Doak  v.  Stahl- 
man,  58  S.  W.  Rep.  741  (Tenn.  1S99). 
In  a  suit  by  a  judgment  creditor  to  en- 
force a  liability  for  stock  issued  for 
property  at  an  overvaluation,  a  stock- 
holder     may     attack    the    judgment 


Williams    v.    Wattero,    97    Md.     113 

(1903). 

i  Came  v.  Brigham,  39  Me.  35 
(1854).  The  stockholder  sued  on  his 
subscription  may  set  up  that  the  judg- 
ment against  the  corporation  was  ob- 
tained by  service  on  one  who  had 
ceased  to  be  an  officer.  Beardsley  v. 
Johnson,  121  N.    Y.    224     (1890).  Cf. 


against  the  corporation  on  the  ground    Wheeler  v.  Miller,  24  Hun,  541  (1881) ; 

aff'd  90  N.  Y.  353.  A  stockholder 
may  petition  the  court  to  have  a  judg- 
ment vacated  and  that  he  be  allowed 
to  defend  in  behalf  of  the  corporation, 
he  being  still  liable  as  a  stockholder. 
Stanton  r.Gilpin,  38  Wash.  191  (1905). 

2  Furnald  v.  Glenn,  64  Fed.  Rep.  49 
(1894). 

3  See  Farwell  r.  Great  Western  Tel. 
Co.,  161  111.  522  (1896);  Great  West- 
ern Tel.  Co.  v.  Purdy,  162  U.  S.  329 
(1896);  also  §§839,  848,  infra. 

4  Tuthill  Spring  Co.  V.  Smith,  90 
lowa,  331  (1894). 


that  it  was  on  a  claim  for  property 
purchased,  which  property  had  been 
taken  back  by  the  vendor.  McBryan 
v.  Universal,  etc.  Co.,  130  Mich.  Ill 
(1902).  The  suit  may  be  on  the  judg- 
ment against  the  corporation,  and  not 
on  the  original  claim.  Henderson  v. 
Turngren,  9  Utah,  432  (1894).  The 
judgment  is  not  conclusive  where  it 
was  for  an  excessive  amount  and  was 
entered  by  consent  of  the  president, 
who  had  an  interest  in  the  judgment. 
Wilson  v.  Kiesel,  9  Utah,  397  (1894). 
Cf.  Castleman  v.  Templeman,  87  Md. 


532 


CH.  XI.] 


SUBSCRIPTIONS    AND    CORPORATE    CREDITORS. 


[§   209. 


much  questioned.1  In  a  recent  case  the  New  York  court  of  appeals 
has  held  that  a  judgment  obtained  in  England  against  an  American 
stockholder  in  an  English  corporation  for  an  unpaid  call,  the  stockj 
holder  not  having  been  served  in  England,  is  not  enforceable  in  the 
United  States.2 

Where  the  stockholders  are  liable  only  on  a  particular  class  of 
corporate  debts,  or  to  certain  classes  of  creditors  only,  the  court  will 


i  New  York  is  practically  the  only 
state    where    this    question    presents 
any     difficulty,    and     the     confusion 
which  there  reigns  is  largely  due  to 
the    failure    to    distinguish    between 
cases  of  liability  for  unpaid  subscrip- 
tions and  liabilities  created  by  stat- 
ute. In  some  of  the  cases  the  mean- 
ing of  the  court  is  not  clear,  and  often 
the  question  did  not  come  up  directly 
for   decision.     The   general   rule  was 
originally  stated  essentially  as  in  the 
text,    by    Spencer,    C.    J.,    in    Slee    v. 
Bloom,  20  Johns.  669   (1822),  revers- 
ing s.  c,  5  Johns.    Ch.    366     (1821). 
This  was  followed  by  Moss  v.  Oakley, 
2   Hill,   265    (1842).    Moss  v.   McCul- 
lough,  5  Hill,   131   (1S43),  started  a 
new  theory,  that  the  case  was  the  or- 
dinary  one    of   principal   and   surety, 
and    hence   a  judgment  against   the 
corporation  was  not  even  prima  facie 
evidence  against  the  stockholder.  Al- 
though this  ruling  was  overturned  on 
the  final  determination  (s.  c,  7  Barb. 
279  —  1849),     it     was     followed     in 
Strong   v.    Wheaton,     38     Barb.     616 
(1861),  which  in  turn  was  overruled 
in  57  Barb.  508.    In  Belmont  v.  Cole- 
man, 21  N.  Y.  96    (1860),  on  appeal 
from  1  Bosw.  1S8,  three  justices  af- 
firmed the  ruling  below  that  the  judg- 
ment was  prima  facie  evidence,  while 
the   other  four    refused    to    commit 
themselves   to   that   doctrine.     Conk- 
lin  v.  Furman,  57  Barb.  484    (1S65), 
accepts  the  original  rule  as  stated  by 
Spencer,  C.  J.  Then  follow  two  later 
cases,  Miller  v.  White,  50  N.  Y.   137 
(1872),  and  McMahon  v.  Macy,  51  N. 
Y.  155  (1S72),  which  reject  that  rule 
in  strong  terms.    But  both  these  cases 
are  easily  distinguishable  on  the  prin- 


ciple stated  supra.  They  were  suits 
to  enforce  a  statutory  penalty  against 
trustees  for  failure  to  file  a  certain 
report.  It  may  be  said,  then,  that, 
after  all,  the  New  York  rule,  in  the 
cases  really  covered  by  the  language 
of  the  text,  differs  comparatively  lit- 
tle from  the  general  law.  The  courts, 
under  the  influence  of  some  of  the 
earlier  decisions,  hesitate  to  accept 
the  rule  of  conclusiveness;  but  the 
court  of  appeals  has  used  this  lan- 
guage: "The  creditor  thus  claims 
through  the  corporation,  and  to  en- 
title him  to  this  statutory  subrogation 
or  transfer  he  need  only  show  that  he 
is  a  creditor.  If  he  shows  this  fact 
by  evidence  which  is  binding  and 
conclusive  against  the  corporation, 
such  evidence  should  be  competent 
against  the  stockholder  to  establish 
the  title  of  the  creditor  to  succeed 
to  the  rights  of  the  corporation.  A 
judgment  against  the  corporation, 
being  the  highest  evidence  against  it, 
should  be  as  effectual  to  pass  its  title 
to  the  fund  in  question  as  a  deed  or 
any  other  form  of  transfer."  Stephens 
v.  Fox,  83  N.  Y.  313,  317  (1881).  Cf. 
Wheeler  v.  Miller,  24  Hun,  541 
(1881);  aff'd  90  N.  Y.  353;  also 
§  224,  infra. 

2  Bank  of  China  v.  Morse,  168  N. 
Y.  458  (1901).  A  judgment  obtained 
in  England  by  the  liquidators  of  an 
English  corporation  against  a  New 
York  subscriber  to  the  stock,  no  per- 
sonal service  having  been  made  upon 
such  subscriber,  is  not  enforceable  as 
a  judgment  in  New  York,  although 
such  judgment  may  be  legal  in  Eng- 
land under  the  statutes  in  force  at  the 
time  the  subscription  was  made.  An- 


533 


210.] 


■IPTIONS    AND    COK11' .KATE    CREDITORS. 


[OH.  XI. 


not  reject  evidence  tending  to  show  that  the  debt  recovered  belongs 
or  does  not  belong  to  the  class  on  which  the  stockholder  La  Liable.1 

§  210.  Defenses  available  against  corporate  creditors  in  actions 
to  compel  payment  of  balances  of  subscriptions. — There  are,  of 
course,  certain  defenses  which  subscribers  may  set  up  when  actions 
are  brought  against  them  on  behalf  of  corporate  creditor  .  These 
defenses  are  to  a  certain  extent  the  same  as  those  which  may  1m-  set 
up  to  defeat  an  action  by  the  corporation  to  enforce  the  subscrip- 
tion.2 But  both  in  England  and  in  this  country  the  courts  do  not 
favor  such  defenses  after  the  corporation  has  become  insolvent.  More- 
over, there  are  many  defenses  which  mighl  defeat  an  action  by  the 
corporation,  but  which  do  not  prevent  the  corporate  creditor  from 
enforcing  the  subscription.8  Anv  secret  agreement  Limiting  the  lia- 
bility of  a  stockholder  on  his  unpaid  subscription  is  void  as  against 
corporate  creditors.  Such  agreement,  however,  is  binding  on  suck 
corporate  creditors  as  are  chargeable  with  notice  thereof.4     A  cred- 


derson  v.  Haddon,  33  Hun,  435  (1884). 
A  judgment  rendered  in  Massachu- 
setts against  a  resident  of  Nebraska 
holding  the  latter  liable  as  a  stock- 
holder, without  service  upon  him  or 
appearance  by  him,  cannot  be  en- 
forced in  Nebraska.  The  judgment  of 
the  Massachusetts  court  is  conclusive 
only  as  to  the  amount  of  debts  of  the 
company  and  the  necessity  of  making 
an  assessment.  Commonwealth,  etc. 
Co.  v.  Hayden,  61  Neb.  454  (1901), 
rev'g  60  Neb.  636. 

i  Wilson  v.  Pittsburgh,  etc.  Coal 
Co.,  43  Pa.  St.  424  (1862);  Conant  v. 
Van  Schaick,  24  Barb.  87  (1857) ;  Lar- 
rabee  v.  Baldwin,  35  Cal.  155  (1868). 

2  See  ch.  X,  supra. 

3  Such  as  fraud  on  the  part  of 
the  corporation,  inducing  a  subscrip- 
tion. See  §§  163,  164,  supra.  An  ar- 
rangement entered  into  between  the 
corporation  and  its  stockholders,  for 
the  purpose  of  defeating  the  claims 
of  creditors,  in  pursuance  of  which 
the  stockholders  are  allowed,  after  it 
is  ascertained  that  the  corporation  is 
insolvent,  to  buy  in  depreciated  and 
repudiated  claims  against  the  com- 
pany, and  thus  to  extinguish  their  in- 
debtedness for  stock  subscribed,  is 
fraudulent  and  void.    Goodwin  v.  Mc- 


Gehee,  15  Ala.  232  (1S49);  Thompson 
v  Meisser,  108  111.  359  (1884).  Prom- 
inent among  these  defenses  is  the  de- 
fense that  the  corporation  contracted 
with  the  defendant  that  his  stock 
should  be  deemed  fully  paid-up  stock, 
although  in  fact  the  full  par  value 
had  never  been  paid.  See  ch.  III.  It 
is  sufficient  to  allege  that  the  defend- 
ant holds  stock  which  has  never 
been  paid  up.  The  defense  that  the 
defendant  did  not  subscribe  for  the 
stock  or  did  not  agree  to  pay  for  it, 
or  that  he  is  not  liable,  must  be  set 
up  in  the  answer.  Atlantic  T.  Co. 
v.  Osgood,  116  Fed.  Rep.  1019  (1902). 
4  Carnahan  v.  Campbell,  158  Ind. 
226  (1902).  Cf.  previous  decision  in 
59  N.  E.  Rep.  1054.  See  also  §  191. 
As  against  a  receiver  it  is  no  defense 
that  the  corporation  agreed  that  the 
subscriber  need  pay  only  fifty  per 
cent,  of  the  par  value  of  the  stock,  or 
that  fraudulent  representations  in- 
duced him  to  subscribe,  or  that  the 
full  capital  stock  was  not  subscribed, 
or  that  the  company  was  defectively 
organized,  or  that  the  name  of  the 
company  was  different  from  the  one 
contemplated.  Cox  v.  Dickie,  93  Pac. 
Rep.  523  Wash.  (1908). 


534 


CH.  XI.] 


SUBSCRIPTIONS   AND   CORPORATE   CREDITORS. 


[§  210. 


iter  mav,  by  express  contract,  waive  his  right  to  compel  stockholders 
to  pay  their  unpaid  subscriptions.1  The  defendant  may  deny  that 
he  is  a  stockholder.2  If  a  statute  authorizing  an  increase  of  stock 
is  unconstitutional,    the  subscribers  therefor  are  not  liable/* 

The  unpaid  subscription  may  be  collected  in  payment  of  damages 
for  a  tort  the  same  as  for  a  contract  debt.4  The  burden  of  proof 
that  a  subscription  is  unpaid  is  on  the  judgment  creditor.5  A  coun- 
ter claim  or  set-off  may  be  a  good  defense,6  as  may  also  be  the  stat- 
ute of  limitations.7 


1  Bush    17.    Robinson,    95    Ky.    492 
(1894).       See     also      §216,      infra. 
Coupons  are  negotiable,  even  though 
the  trust    deed    securing    them    pro- 
vides   for    a  waiver    of    default    in 
and  postponed  payment  of  such  cou- 
pons,   inasmuch    as    such    provisions 
merely   control  any  procedure  under 
the  trust  deed  for  enforcing  payment. 
Neither  is  negotiability  destroyed  by 
a  provision  that  the  members  of  the 
unincorporated  joint  stock  association 
shall  not  be  personally  liable.    Hibbs 
v.   Brown,   190    N.   Y.   167    (1907),   a 
minority    of  the   court   holding    also 
that    the    provision    exempting    the 
stockholders   from    personal    liability 
is  void.      An  agreement  of  a  corpo- 
rate creditor  that  he  will  not  hold  a 
stockholder  liable  on  unpaid  subscrip- 
tions is  binding  on  his  assignees,  if 
they  took  with  notice.     Carnahan  v. 
Campbell,  158  Ind.  226   (1902). 

2  Howell     r.     Malmgreen,     112     N. 
W.  Rep.  313  (Neb.  1907). 

3  Marion   T.   Co.    v.   Bennett,    82   N. 
E.  Rep.  782  (Ind.  1907). 

4  Powell  v.  Oregonian  Ry.,  36  Fed. 
Rep.  726  (1888);  s.  C,  38  Fed.  Rep. 
187.  In  Maine  this  rule  is  declared  by 
statute.  Grindle  v.  Stone,  78  Me.  176 
(1886).  For  many  other  defenses,  see 
ch.  XII,  where  defenses  were  set  up 
to  defeat  the  statutory  liability.  As 
to  the  statute  of  limitations,  see  §  195, 

supra. 

5  Merrill  v.  Timbrell,  123  Iowa,  375 

(1904). 

3  See  §  193,  supra,  and  §  225c, 
infra.  While  an  ordinary  corporate 
debtor  may  offset  claims  against  the 


corporation  which  he  has  purchased, 
yet  officers,  stockholders,  or  persons 
occupying  a  trust  relationship  cannot 
do  so.  Nix  v.  Ellis,  118  Ga.  345  (1903). 
As  against  a  liability  on  stock  issued 
on  property  at  an  overvaluation  a 
stockholder  cannot  set  off  bonds 
which  he  holds  but  which  had  not 
been  filed  as  a  claim  against  the  cor- 
poration and  which  have  been  barred 
by  the  decree  barring  creditors.  See 
v.   Heppenheimer,   69   N.    J.    Eq.    36 

(1905). 

7  The    statute    of    limitations    does 
not  run  against  the  liability  created 
by  the  Nebraska  constitution  on  the 
part  of  subscribers  to  stock  until  after 
judgment  against  the  corporation  and 
exhaustion  of  corporate  property.    As 
a  rule  the  statute  of  limitations  in 
law   will   be   followed   in   a  court  of 
equity.    Wyman  v.  Bowman,  127  Fed. 
Rep.  257  (1904).    The  statute  of  limi- 
tations does  not  begin  to  run  against 
an    unpaid    subscription    until    judg- 
ment and  execution  are  returned  un- 
satisfied, even  though  the  stockhold- 
ers have  turned  in  property  in  what 
they  considered  full  payment  for  the 
stock.     Montgomery,    etc.    Works    v. 
Roman,  147  Ala.  434   (1906).  Where 
the  statute  requires  a  judgment  first 
against  the  corporation,  the  statute  of 
limitations  does  not  begin  to  run  un- 
til such  judgment  has  been  obtained. 
Vaughn  v.  Alabama  Nat.  Bank,   143 
Ala.  572    (1905).     Under  the  Illinois 
statute  the  statute  of  limitations  be- 
gins to  run  from  the  time  when  the 
debt  against  the  corporation  falls  due, 
where  the  suit  is  at  the  instance  of  a 


'535 


§  211.] 


OPTIONS   AND   CORPORATE    I 


[ill.  XI. 


§211.  Contribution. — Corporate  creditors  compelling  stockhold- 
ers to  pay  their  subscript  ions  an-  under  no  obligation  to  see  Unit 
the  payments  made  by  the  subscribers  are  proportionately  equal.1 
A  court  of  chancery  will  compel  subscribers  to  pay  in  full  the  amount 
of  their  unpaid  subscriptions  if  the  corporate  indebtedness  make 
it  necessary,  leaving  them  to  seek  contribution  from  the  other 
stockholders.2  The  rule,  however,  is  will  settled  that  a  stockholder 
who  has  been  compelled  to  pay  more  than  his  proportion  of  the 
debts  of  the  company  may  maintain  an  action  against  his  co- 
stockholders    for    contribution.''      A    stockholder    who    is    compelled 


creditor.  Parmeleie  v.  Price,  208  111. 
544  (1904).  The  defense  of  the  stat- 
ute of  limitations  cannot  he  first 
raised  on  appeal  by  the  stockholders. 
Easton  Nat.  Bank  v.  American,  etc. 
Co.,  70  N.  J.  Eq.  732   (1906). 

i  Pentz  v.  Hawley,  1  Barb.  Ch.  122 
(1845).    Cf.  §206,  supra. 

2  Pentz  v.  Hawley,  1  Barb.  Ch.  122 
(1845);  Evans  v.  Coventry,  25  L.  J. 
Ch.  489  (1856);  Marsh  v.  Burroughs, 
1  Woods,  463  (1871);  s.  c,  16  Fed. 
Cas.  800.  The  execution  should  be 
against  each  stockholder  for  his  pro- 
portionate part  of  the  debts,  interest 
and  cost,  with  a  subsequent  execution 
for  such  part  of  such  debts  as  turn 
out  to  be  uncollectible  from  other  sub- 
scribers. Van  Pelt  v.  Gardner,  54 
Neb.  701  (1898).  As  to  whether  solv- 
ent stockholders  are  required  to 
make  up,  for  the  benefit  of  creditors, 
the  deficiency  of  defaulting  or  in- 
solvent subscribers  to  the  full  amount 


the  stockholders  are  insolvent,  the 
solvent  must  pay  the  proportion  of 
the  insolvent,  to  be  apportioned 
among  them  according  to  and  up  to 
the  amount  of  their  stock  subscribed 
and  unpaid.  Hodges  v.  Silver  Hill 
Min.  Co.,  9  Oreg.  200  (1881).  All  of 
the  stockholders  who  are  defendants 
will  have  judgment  entered  against 
them  for  their  full  liability,  and  they 
must  seek  contribution  themselves. 
Hamilton  v.  Clarion,  etc.  R.  R.f  144 
Pa.  St.  34  (1891).  In  Maine  it  is  held 
that  stockholders'  ratable  liability  is 
not  increased  by  reason  of  the  fact 
some  of  the  stockholders  are  insolvent 
or  beyond  the  reach  of  process.  Maine, 
etc.  Co.  v.  Southern,  etc.  Co.,  92  Me. 
444  (1899).  A  creditor  having  col- 
lateral must  first  exhaust  that  before 
holding  the  stockholders  liable  on 
their  subscription  liability,  there 
being  other  creditors.  Welch  v.  Sar- 
gent, 127  Cal.  72  (1899).  But  see  §  473, 


of  the  former's  own  unpaid  subscrip-    infra.   The  stockholders'  liability  may 


tions,  see  South  Carolina  Mfg.  Co.  v. 
Bank  of  South  Carolina,  6  Rich.  Eq. 
(S.  C.)  227  (1854).  But  actual  sub- 
scribers are  not  liable  for  that  part  of 
the  capital  stock  which  was  never 
subscribed.  Evans  v.  Coventry,  25  L. 
J.  Ch.  489  (1856),  and  §  243,  infra.  It 
is  no  defense  to  show  that  notes  were 
given  in  payment  of  subscriptions,  or 
that  notes  by  insolvent  persons  were 
procured  to  be  given,  when  it  appears 
that  nothing  was  ever  realized  from 
the  notes.  Nathan  v.  Whitlock,  9 
Paige,    Ch.    152    (1841).   When   it   is 


be  enforced  by  a  corporate  creditor, 
even  though  the  corporation  has  given 
collateral  security  to  such  creditor. 
Dawson  v.  Sholley,  4  Kan.  App.  367 
(1896).  In  holding  stockholders  liable 
on  stock  fraudulently  issued  for  prop- 
erty at  an  overvaluation,  the  court 
may  hold  liable  to  the  full  extent  of 
their  liability  stockholders  who  reside 
in  the  state,  leaving  the  latter  to  seek 
contribution  from  stockholders  out- 
side of  the  state.  See  v.  Heppenheim- 
er,  69  N.  J.  Eq.  36  (1905). 

3  Quoted  and  approved  in   Putnam 


made  to  appear  by  proof  that  some  of    v.  Misochi,  189  Mass.  421  (1905).  Win- 

536 


CH.  XI.] 


SUBSCRIPTIONS    AND    CORPORATE    CREDITORS. 


[§  211. 


to  pay  a  tax  levied  by  the  government  on  liquor  distilled  by  the 
corporation  may  have  contribution  from  the  other  stockholders.1 

Contribution  may  properly  be  enforced  in  the  corporate  creditor's 
suit.  It  is  largely  for  this  purpose  that  all  the  delinquent  stock- 
holders  may  be   and  should   be   made   parties   defendant.2      Even 


cock  v.   Turpin,   96   111.   135    (1880); 
Bennison    v.   McConnell,    56    Neb.    46 
(1898);  Van  Pelt  v.  Gardner,  54  Neb. 
701    (189S);   Millaudon    v.    New    Or- 
leans,  etc.   R.   R.,   3   Rob.    (La.)    488 
(1843);  Thomson's  Succession,  46  La. 
Ann.    1074     (1894);    Marsh,    v.    Bur- 
roughs, 1  Woods,  463    (1871);    s.  c, 
16  Fed.  Cas.  800;  Holmes  v.  Sherwood, 
16  Fed.  Rep.  725   (18S1);   Umsted  v. 
Buskirk,  17  Ohio  St.  113  (1866) ;  Mat- 
thews V.  Albert,  24  Md.  527    (1866); 
Stewart  v.  Lay,  45  Iowa,  604  (1877); 
Hadley    v.    Russell,    40    N.    H.    109 
(1860);    Erickson  v.  Nesmith,  46   N. 
H.  371  (1866) ;  Masters  v.  Rossie  Lead 
Min.   Co.,   2    Sandf.   Ch.   301    (1845); 
Aspinwall   v.   Torrance,   1   Lans.    (N. 
Y.)    381    (1870),  aff'd   57   N.  Y.   331; 
Stover  v.  Flack,  30  N.  Y.  64   (1864); 
Farrow  v.  Bivings,  13  Rich.  Eq.    (S. 
C.)  25  (1866) ;  Allen  v.  Fairbanks,  45 
Fed.  Rep.  445    (1891).     Cf.  Andrews 
v.    Callender,    30    Mass.    484    (1833); 
Gray  v.  Coffin,  63  Mass.  192    (1852); 
Sutton's   Case,   3   De   G.   &   Sm.   262 
(1850).     In    Pennsylvania   the    right 
to   contribution  is  said  to  be   purely 
statutory.     Brinham    v.    "Wellersburg 
Coal    Co.,   4  7   Pa.    St.    43    (1864).     A 
liability  for  contribution  on  subscrip- 
tions does  not  cease  upon  the  death 
of   the  stockholders.     Allen  v.   Fair- 
banks, 40  Fed.  Rep.  188  (1889).    The 
remedy  of  one  stockholder  against  an- 
other  for    contribution    is    in   equity 
and  not  at  law.    Koons  v.  Martin,  66 
Hun,  554  (1893);  aff'd  143  N.  Y.  672. 
A  stockholder  may  have  contribution. 
Van  Pelt  v.    Gardner,    54    Neb.    701 
(1898).     Stockholders   who  are  held 
liable  on  their  stock  by  reason  of  its 
not  being  paid  up  may  have  contribu- 
tion from    other    stockholders,    even 
though   all  the   stock  was   originally 
issued  for  property  taken  at  an  over 


valuation.     See  v.  Heppenheimer,  69 
N.  J.  Eq.  36    (1905).     A  stockholder 
who  has  been  obliged  to  pay  his  un- 
paid subscription  to  a  corporate  cred- 
itor   may    have     contribution     from 
other  stockholders,  and  his  suit  may 
be  instituted  in  the  state  where  the 
other  stockholders  reside.    Putnam  v. 
Misochi,  189  Mass.  421  (1905).  Where 
several   stockholders    assign    as    se- 
curity to  a  corporate  note  their  un- 
paid subscriptions  and  the  holder  of 
the  note  enforces  the  same  against  a 
part  of  them  they  may  have  contribu- 
tion from  the  others.   Hart  v.  Sickles, 
45  N.  Y.  Misc.  Rep.  174   (1904).  Even 
though  the  judgment  against  a  stock- 
holder is  for  more  than  is  necessary 
to  pay  the  creditors  the  judgment  is 
good  because  he  may  recover  back  the 
surplus.    In  re  New,  etc.  Co.,  113  La. 
404  (1904).    A  judgment  in  a  suit  be- 
tween the  corporation  and  the  presi- 
dent which  fixes  his  liability,  is  not 
binding  on  stockholders  in  a  suit  to 
adjust  equities  among  the  stockhold- 
ers on  winding  up.     Gund  v.  Ballard, 
73  Neb.  547   (1905).     See  also   §227, 
infra. 

i  Wolters    v.   Henningsan,    114   Cal. 
433    (1896). 

2N.  Y.  Code  Civ.  Proa,  §§  1791- 
1794;  Masters  v.  Rossie  Lead  Min.  Co., 
2  Sandf.  Ch.  301  (1845);  Holmes  v. 
Sherwood,  3  McCrary,  405  (1881); 
Hadley  v.  Russell,  40  N.  H.  109 
(1860) ;  Umsted  v.  Buskirk,  17  Ohio 
St.  113  (1866);  Hodges  v.  Silver  Hill 
Min.  Co.,  9  Oreg.  200  (1881).  In  a 
suit  for  contribution  between  guaran- 
tors of  the  company's  note,  liabilities 
on  stock  cannot  be  adjusted  unless  all 
solvent  stockholders  are  made  parties. 
Smith  v.  Dickinson,  100  Wis.  574 
(1898).  In  a  judgment  creditors'  suit 
to  collect  unpaid    subscriptions,    the 


537 


211.] 


SUBSCRIPTIONS    AND    CORPORATE    CREDITORS. 


[CH.  XI. 


though  several  creditors  join  in  a  suit  against  one  stockholder,  a  re- 
lease by  one  of  them  tines  not  affect  the  others.1 


court  may,  in  the  judgment,  order 
contribution  as  between  the  stock- 
holders where  some  of  the  stockhold- 
ers are  also  creditors.  Richardson  v. 
Chicago,  etc.  Co.,  63  Pac.  Rep.  74  (Oal. 
1900). 

i  Welch  v.  Sargent,  127  Cal.  72 
(1899).  A  voluntary  payment  to  one 
creditor  is  no  release,  under  the  Cali- 
fornia statute,  but  the  stockholder  is 


entitled  to  come  in  as  a  creditor  to  the 
extent  of  such  payment.  Welch  v.  Sar- 
gent, 127  Cal.  72  (1899).  It  is  no  de- 
fense that  judgment  against  the  de- 
fendant stockholder  for  the  full 
amount  of  his  liability  has  been  re- 
covered by  other  creditors,  and  that 
he  settled  the  same  at  a  discount. 
Kunkelman  v.  Rentchler,  15  111.  App. 
271   (1884). 


53S 


CHAPTEE  Xn. 

STATUTORY  LIABILITY  OF  STOCKHOLDERS  TO  CORPORATE 

CREDITORS. 


A.     EXTENT    OF    THE   LIABILITY. 

i§  212,  213.  Statutory  liability  in  gen- 
eral— Constitutionality. 

214.  The    liability    is    strictly    con- 

strued and  limited. 

215.  Particular  statutes  construed  as 

to  the  extent  of  the  liability. 

21G.  Waiver  by  corporate  creditors  of 
their  statutory  rights  against 
stockholders. 

217.  Statutory  liability  not  enforce- 
able to  pay  damages  recov- 
ered against  the  corporation 
in  tort. 


!.        ENFORCEMENT     OF     THE     STATUTORY 
LIABILITY. 

218.  The   statutory   liability  can  be 

enforced  by  corporate  credit- 
ors only — Stockholders  and 
directors  as  creditors — Re- 
ceivers— National   Banks. 

219.  Judgment,        execution,        etc., 

against  the  corporation,  a 
condition  precedent  to  the 
right  to  enforce  the  statutory 
liability. 


§  220.  Difficulty  in  determining 
whether  the  creditor's  remedy 
is  at  law  or  in  equity — ■ 
Special  remedies. 

221.  The  remedy  at  law. 

222.  The  remedy  in  equity. 

223.  Enforcement    of    the    statutory 

liability  by  means  of  courts 
in  other  states — Penal  liabili- 
ties— 'Construction  of  liabil- 
ity created  by  another  state. 

224.  How  far  the  judgment  against 

the  corporation  is  conclusive 
of  the  creditor's  claim. 

225.  Stockholder's  miscellaneous  de- 

fenses  against  his   statutory 

liability. 

(</)  Defense  of  release,  exten- 
sion, and  renewal. 

(/>)  Defense  of  liability  already 
paid. 

(c)   Defense  of  set-off. 

(r/)   Defense  as  to  interest. 

(c)    Defense  of  costs. 

(/)  Defense  of  statute  of  lim- 
itations. 

((/)    Other  defenses. 

226.  Priority  among  creditors. 
227-229.  Contribution   among  stock- 
holders. 


A.    EXTENT  OF  THE  LIABILITY. 

§§  212,  213.  Statutory  liability  in  general— Constitutionality.— 
Probably  the  most  characteristic  feature  of  a  corporate  existence  is 
the  fact  that,  by  being  a  corporation,  its  stockholders  are  liable 
only  for  the  par  value  of  the  stock  held  by  them,  and  when  that  is 
once  paid  in  money  or  property  there  is  no  further  liability.  This 
exemption  from  liability  need  not  be  declared  in  the  charter,  but 
arises  from  the  very  fact  of  incorporation.  For  this  reason  legis- 
latures are  very  careful,  in  giving  joint-stock  companies  special 
powers,  to  distinctly  declare  that  the  company  shall  not  thereby 
become  a  corporation.  The  very  fact  of  incorporation  by  itself  re- 
leases subscribers  for  stock  from  all  liability  for  corporate  debts, 
except  to  the  extent  of  their  unpaid  subscriptions.     The  state  legis- 

539 


§214.]  STATUTORY    LIABILITY  OP  STOCKHOLDERS.  [CH.  xif. 

latures,  however,  in  many  instances,  desire  to  increase  the  liability 
of  stockholders  to  corporal  litors.       Accordingly,  statutes   arc- 

passed  expressly  declaring  that  the  stockholders  shall  be  liable  Eor 
a  specified  sum,  in  addition  to  their  unpaid  subscriptions.  Thifi  is 
called  the  statutory  liability  of  stockholders.  It  rarely  exists  as 
regards  stockholders  in  railroad  corporations,  but  frequently  exists 
in  the  case  of  manufacturing  and  various  other  corporations,  and 
nearly  always  exists  as  against  stockholders  in  banks. 

This  additional  liability  may  be  imposed  by  the  state  constitu- 
tion, or  by  the  charter,  or  by  a  general  statute.  A  statute  imposing 
additional  liability  upon  the  stockholders  cannot  be  repealed  so  as  to 
affect  those  who  were  corporate  creditors  previous  to  the  repeal.1 
Where  a  statutory  liability  is  imposed  by  a  provision  existing  at  the 
time  of  the  creation  of  the  corporation,  there  is  no  doubt  of  its  con- 
stitutionality. But  whore  the  liability  is  created  by  a  statute  or 
constitutional  provision  enacted  after  the  corporation  was  incorpo- 
rated, then  there  arise  difficult  questions  of  constitutional  validity.  A 
full  discussion,  however,  of  the  constitutionality  of  such  a  statute 
is  contained  elsewhere.2  A  statute  rendering  directors  liable  may 
apply  to  rent  becoming  duo  thereafter  on  a  lease  made  before  the 
passage  of  such  statute.8 

§  214.  This  liability  is  strictly  construed  and  limited.* — Inas- 
much as  all  statutes  creating  an  additional  liability  on  the  part  of 
stockholders  are  in  derogation  of  the  common  law,  they  are  to  be 
strictly  construed.  They  are  a  wide  departure  from  established  rules, 
and,  though  supposed  to  be  founded  on  considerations  of  public  pol- 
icy and  general  convenience,  are  not  to  bo  extended  l>eyond  the  plain 
intent  of  the  words  of  the  statute.5     A  statute  imposing  such  a  lia- 

i  See  §  497,  infra.  of  the  common  law  the  statute  cannot 

2  See  §  497,  infra.  It  is  constitu-  he  extended  beyond  the  words  used." 
tional  for  the  legislature,  at  the  time  Gray  v.  Coffin,  63  Mass.  192  (1852); 
of  enacting  a  general  incorporating  O'Reilly  v.  Bard,  105  Pa.  St.  569 
act,  to  provide  for  an  extra  liability  (1884);  Chase  v.  Lord,  77  N.  Y.  1 
of  directors  who  make  false  reports.  (1S79);  Means's  Appeal,  85  Pa.  St.  75 
Huntington  v.  Attrill,  118  N.  Y.  365  (1877) ;  Dane  v.  Dane  Mfg.  Co.,  80 
(1890).  Mass.    488      (1860);     Chamberlin     v. 

3  Stieffel  v.  Tolhurst,  67  N.  Y.  App.  Huguenot  Mfg.  Co.  118  Mass.  532 
Div.  521   (1902).  (1875);     Grose   v.   Hilt,     36    Me.    22 

4  Wing  v.  Slater,  19  R.  I.  597  (1853);  Coffin  v.  Rich,  45  Me.  507 
(1896);  Tradesman  Pub.  Co.  v.  Knox-  (1858);  Wheatley  v.  Glover,  125  Ga. 
ville  Car  Wheel  Co.,  95  Tenn.  634  710  (1906);  Smathers  v.  Western,  etc. 
(1895).  Bank,  135  N.  C.  410  (1904) ;  Windham 

5  In  the  case  Brunswick  T.  Co.  v.  Provident  Inst.  v.  Sprague,  43  Vt. 
Nat'l  Bank,  etc.,  192  U.  S.  3S6  (1904)  502  (1871);  Dauchy  v.  Brown,  24  Vt. 
the  court,  in  speaking  of  a  statutory  197  (1852);  Moyer  v.  Pennsylvania 
liability,  said:  "As  it  is  in  derogation  Slate   Co.,    71    Pa.    St.    293    (1872); 

540 


CH.  XII.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


r§  214. 


bility  is  not  construed  to  apply  to  existing  corporations  unless  the 
statute  expressly  so  provides.1  Hence,  a  provision  of  the  general 
statutes  imposing  a  personal  liability  upon  directors  of  a  corpora- 
tion is  not  incorporated  into  a  special  charter  by  a  clause  declaring 
that  that  corporation  shall  possess  all  the  general  powers  and  privi- 
leges and  be  subject  to  all  the  liabilities  conferred  and  imposed  upon 
corporations  organized  under  the  general  act.2  And  where  con- 
gress wanted  to  a  California  corporation  certain  moneys,  and  took 
corporation  bonds  therefor,  it  being  the  clear  intent  of  congress,  as 
shown  by  the  statutes,  to  treat  such  California  corporation  as  a  part 
of  a  general  plan  for  the  building  of  a  railroad  through  many  states, 
the  statutory  liability  of  all  stockholders  in  California  corporations 
does  not  apply  to  such  a  debt.3  A  statute  rendering  directors  liable 
for  not  filing  reports  is  highly  penal  and  is  strictly  construed. 


Youghiogheny  Shaft  Co.  v.  Evans,  72 
Pa.  St.  331  (1872);  Diven  v.  Lee,  36 
N  Y.  302  (1867) ;  Lowry  V.  Inman,  46 
N.  Y.  119  (1871) ;  Salt  Lake  City  Nat. 
Bank  v.  Hendrickson,  40  N.  J.  L.  52 
(1878).     Cf.  Priest  v.  Essex  Hat  Mfg. 
Co.,  115  Mass.  380   (1874) ;  Ripley  V. 
Sampson,     27     Mass.     371       (1S30) ; 
Knowlton    v.    Ackley,    62    Mass.    93 
(1851);   Bassett  v.  St.  Albans  Hotel 
Co     47   Vt.  313    (1875);   Davidson  v. 
Rankin,  34  Cal.    503    (1868);    Mokel- 
umne  Hill,  etc.  Co.  v.  Woodbury,  14 
Cal    265   (1859);  Dewey  v.  St.  Albans 
Trust  Co.,  57  Vt.  332  (1885).    A  con- 
trary rule  seems  to  have  been  adopted 
in    Carver   v.    Braintree   Mfg.    Co.,    2 
Story,  432   (1843);   s.  c,  5  Fed.  Cas. 
235,  where  liability  for  debts  contract- 
ed during  membership  was  held  to  in- 
clude "dues  owing."    Also  in  Rider  v. 
Fritchey,  49    Ohio    St.    285     (1892); 
Freeland  v.  McCullough,  1  Denio,  414 
(1S45).     The  liability  is  strictly  con- 
strued and  "courts  will  not  hunt  ex- 
cuses to  carry  it  beyond  the  plain  pro- 
visions   of    the    statute."      Foster    v. 
Row,  120  Mich.  1  (1S99).    A  statutory 
liability   of   stockholders   in   corpora- 
tions, except  manufacturing  corpora- 
tions, does  not  apply  to  a  manufactur- 
ing  corporation,  even  though  it  has 
engaged      in      a     non-manufacturing 
business      without     authority      from 
its     charter.      Senour,     etc.     Co.     v. 


Church,     etc.     Co.,     81     Minn.     294 
(1900).      A     corporation     amending 
its  charter  in  accordance  with  a  new 
statute  thereby  subjects  its  stockhold- 
ers to  a  statutory  liability  provided 
for   in   such   new    statute.      Senn   v. 
Levy,  111  Ky.  318  (1901).    The  consti- 
tution of  the  state  of  Nebraska  is  con- 
strued to  forbid  the  imposition  of  any 
statutory  liability  except  in  the  case 
of  banks.     Van   Pelt  v.   Gardner,   54 
Neb.  701  (1898).    The  Iowa  provision 
that  the  stockholder  shall   be   liable 
for  the  debts  unless  there  is  published 
a  statement  of  the  time  and  condi- 
tions on  which  the  capital  stock  was 
paid,  will  be  strictly  construed,  and 
the  further  provision  that  they  shall 
be  liable  if  there  are  defects  in  the 
organization  does  not  apply  to  errors 
after  incorporation.   Brinkley,  etc.  Co. 
v.  Curfman,  114  N.  W.  Rep.  12  (Iowa, 

1907). 

i  See  §  2,  supra,  §  497,  infra. 

2  Park  Bank  v .  Remsen,  158  U.  S. 

337   (1895). 

3  United  States  v.  Stanford,  161  U. 

S.  412   (1896). 

4  Manhattan  Co.  v.  Kaldenberg,  165 
N.  Y.  1  (1900).  Where  a  report  is 
mailed  to  the  secretary  of  state,  but 
is  lost  in  the  mail,  a  director  is  not 
liable  under  the  statute  rendering 
him  liable  if  reports  are  not  filed  with 
the  secretary  of  state.    Ford,  etc.  Co. 


541 


§  215.] 


STATUTORY   l.IAIMl.lTV  of  STOCKHOLM] 


[CH.  XII. 


failure  of  a  national  bank  director  to  perform  his  duty,  as  required 
by  the  act  of  congress,  subjects  him  to  damages  only  when  he  know- 
ingly violated  the  national  banking  act  as  specified  in  the  act,  and 
there  is  no  common-law  liability.1 

§215.  Particular  statutes  construed. — The  character,  nature  and 
extent  of  the  liability  imposed  by  constitutional  provisions  or  by 
statute  upon  stockholders,  in  addition  to  their  common-law  liability, 
vary,  of  course,  widely,  and  the  extent  of  the  liability  created  by 
each  statute  will  depend  entirely  upon  the  particular  words  of  the 
statute  itself.2  Occasionally,  however,  a  provision  imposing  addi- 
tional liability  is  found  to  be  substantially  repeated  in  the  statutes 
of  many  states.  Such  is  the  case  with  the  provision  that  stockhold- 
ers shall  be  liable  "to  an  amount  equal  to  their  stock/'     This  i-  con- 


v.  Perron,  111  N.  W.  Rep.  1074  (Mich. 
1907).     The   constitutional   provision 
in  California  rendering  directors  lia- 
ble   for    moneys    misappropriated    is 
highly  penal  and  will  be  strictly  con- 
strued,   inasmuch    as    it    renders    an 
honest  official   liable  for  the  embez- 
zlements of  a  dishonest  official.    "Win- 
chester    v.     Howard,     136     Cal.     432 
(1902).     In  the  case  of  Train  v.  Mar- 
shall, etc.  Co.,  ISO  Mass.  513    (1902), 
being  a  suit  to  enforce  the  statutory 
liability   of  directors,  the  court  held 
that  a   judgment  against  the   corpo- 
ration after  it  had  been  discharged  in 
bankruptcy  was  not  sufficient  to  sat- 
isfy the  statute,  and  the  court  said: 
"The  liability  is  a  statutory  liability, 
and  we  perceive  no  clear  indication 
of  policy  that  should  carry  it  beyond 
the  conditions  precedent  in  the  form 
in  which  they  are  expressed."  Bonds 
secured  by  a  mortgage  are  debts  with- 
in the  meaning  of  the  New  York  stat- 
ute making   the  directors   personally 
liable  for  failure  to  file  annual  reports. 
Morgan  v.   Hedstrom,  164   N.  Y.   224 
(1900).    The  court  will  not  allow  an 
amendment  of  a  bill  in  equity  to  en- 
force a  highly  penal  liability  of  direc- 
tors where  a  demurrer  has  been  sus- 
tained  and  there  has   been   long   de- 
lay.   Boston,  etc.  Co.  v.  Parr,  98  Fed. 
Rep.   483    (1899).  Liability   for  debts 
contracted   by    officers   while   officers 


does  not  apply  to  debts  existing  when 
they  beoame  officers.  Bagley,  etc.  Co. 
v.  Lenning,  61  N.  Y.  App.  Div.  26 
(1901).  Under  the  Indiana  statute 
making  directors  in  certain  corpora- 
tions liable  for  "all  damages"  result- 
ing from  failure  to  make  certain  re- 
ports unliquidated  as  well  as 
liquidated  damages  are  included. 
The  plaintiffs  claimed  in  this  case" 
that  they  were  damaged,  in  that 
by  the  failure  to  make  reports  they 
believed  that  the  company  was  solv- 
ent. MacVeagh  v.  Wild,  95  Fed.  Rep. 
84  (1899).  A  court  has  no  power  to 
extend  the  time  within  which,  by 
statute,  directors  must  file  a  certifi- 
cate or  else  be  personally  liable  for 
the  debts.  Cannon  v.  Breckenridge, 
etc.  Co.,  18  Colo.  App.  38  (1902).  See 
also  note  1,  p.  548,  infra. 

i  Yates  v.  Jones  Nat.  Bank,  206  U. 
S.  158  (1907),  rev'g  105  N.  W.  Rep. 
287. 

2  Root  v.  Sinnock,  120  111.  350 
(1887),  citing  many  cases;  Wheeler 
v.  Millar,  90  N.  Y.  353,  359  (1882); 
U.  S.  Trust  Co.  v.  U.  S.  F.  Ins.  Co,  18 
N.  Y.  199,  218  (1858) ;  Ohio  L.  Ins.  Co. 
v.  Merchants'  Ins.  Co.,  11  Humph. 
(Tenn.)  1,  23  (1850);  Lewis  v.  St. 
Charles  County,  5  Mo.  App.  225  (1878). 
Cf.  Briggs  v.  Penniman,  8  Cow.  387 
(1826);  Bank  of  Poughkeepsie  v.  Ib- 
botson,  24  Wend.  473  (1840). 


542 


en.  xii.] 


STATUTORY  LIABILITY  OP  STOCKHOLDERS. 


[§   215. 


strucd  to  impose  a  double  liability.1  When  it  has  been  enforced, 
each  share  of  stock  will  have  been  paid  for  twice — once  on  the  sub- 
scription and  once  on  the  statutory  liability.  In  Maryland  it  is  held 
that  a  statute  making  stockholders  liable  to  creditors  for  "double  the 
amount"  of  the  par  value  of  their  stock,  makes  them  liable  for  three 
times  the  par  value  of  their  stock;  once  on  the  subscription  and 
twice  on  the  statute.2 

Under  a  statute  providing  that  "each  stockholder  shall  be  indi- 
vidually and  personally  liable  for  his  proportion  of  all  the  debts  and 
liabilities    of    the    company   contracted    or    incurred,     .     .     .     for 


l  A  liability  "to  an  amount  equal 
to  the  amount  of  stock  held  by  them 
respectively"  has  been  construed  to 
create  the  double  liability.  Booth  v. 
Campbell,  37  Md.  522  (1872);  Mat- 
thews v.  Albert,  24  Md.  527  (1866); 
Norris  v.  Johnson,  34  Md.  485  (1871) ; 
Hager  v.  Cleveland,  36  Md.  476,  491 
(1872).  The  former  constitutional 
provision  in  Alabama  that  stockhold- 
ers were  "liable  to  the  extent  of  their 
stock"  meant  a  double  liability.  Mc- 
Donnell v.  Alabama,  etc.  Ins.  Co.,  85 
Ala.  401  (18S8).  To  same  effect,  Willis 
v.  Mabon,  48  Minn.  140  (1882).  A 
liability  of  stockholders  for  "double" 
the  amount  of  their  stock  means  a 
liability  once  for  the  unpaid  subscrip- 
tions and  then  an  additional  liability 
of  twice  the  par  value  of  the  stock, 
making  a  triple  liability  altogether. 
Dreisbach  v.  Price,  133  Pa.  St.  560 
(1890).  A  liability  "equally  and  rat- 
ably to  the  extent  of  their  respective 
shares  of  stock"  does  not  authorize  a 
judgment  against  one  for  any  more 
than  his  proportion.  Buenz  v.  Cook, 
15  Colo.  38  (1890).  The  constitution 
of  Missouri  formerly  contained  a  pro- 
vision, now  repealed,  imposing  a 
double  liability.  Perry  v.  Turner,  55 
Mo.  41S  (1874);  Provident  Sav.  Inst. 
v.  Jackson  Place,  etc.  Rink,  52  Mo. 
552  (1873).  A  provision  in  the  con- 
stitution of  1875,  taken  from  an 
amendment  of  1870,  that  "in  no  case 
shall  any  stockholder  be  individually 
liable  in  any  amount  over  and  above 
the  amount  of  the  stock  owned   by 


him,"  was  construed  in  Schricker  v. 
Ridings,  65  Mo.  208  (1877),  to  limit 
liability  to  unpaid  subscriptions.  But 
see  Miller  v.  Great  Republic  Ins.  Co. 
50  Mo.  55  (1872);  Ochiltree  v.  Rail- 
road Co.,  21  Wall.  249  (1874).  A 
statute  imposing  a  liability  to  the 
amount  of  the  stock  has  been  held  in 
Texas  to  be  merely  declaratory  of  the 
subscription  liability.  Walker  v. 
Lewis,  49  Tex.  123  (1878).  A  liability 
"to  the  amount  of  what  remains  un- 
paid upon  his  subscription  to  the  cap- 
ital stock"  is  declaratory  and  creates 
no  liability  beyond  the  subscription 
price.  Burch  v.  Taylor,  1  Wash.  St. 
245  (1890) ;  Root  v.  Sinnock,  120  111. 
350  (18-87).  In  Massachusetts,  by  stat- 
ute, stockholders  in  manufacturing 
corporations  are  liable  as  tenants  in 
common  to  creditors  to  the  extent  of 
the  capital  stock  until  it  has  been 
divided  into  shares.  Hawes  v.  Anglo- 
Saxon  Petroleum  Co.,  101  Mass.  385 
(1S69);  s.  c,  111  Mass.  200  (1872). 
Cf.  Burnap  v.  Haskins  Steam  Engine 
Co.,  127  Mass.  586  (1879);  Hager  v. 
Cleveland,  36  Md.  476  (1872);  Norris 
v.  Johnson,  34  Md.  485  (1871).  In 
the  case  Reid  v.  De  Jarnette,  123 
Ga.  787  (1905),  the  provision  that 
stockholders  shall  be  liable  to  the 
amount  of  their  unpaid  subscriptions 
and  for  an  additional  equal  amount, 
was  held  to  apply  only  to  the  original 
subscribers  and  not  to  transferees. 

2  Murphy  v.  Wheatley,  102  Md.  501 
(1906). 


543 


215.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[cn.  XII. 


the  recovery  of  which  joint  or  several  actions  may  be  .  .  . 
prosecuted,"  it  has  been  held  that  the  liability  of  the  stockholders 
is  substantially  that  of  partners,  but  may  be  enforced  at  law.1  A 
general  joint  and  several  liability  for  all  the  corporate  debts  makes 
the  stockholders  liable  as  partners,  as  though  there  had  been  no 
incorporation.2  Under  the  provisions  of  the  constitution  and  stat- 
utes of  Ohio,  and  of  other  states,  it  is  held  that  while  the  under- 
taking of  the  stockholder  is  not  primary,  and  is  to  be  resorted  to 
only  in  case  of  the  insolvency  of  the  corporation,  still  the  liability, 
when  it  does  properly  arise,  is  essentially  that  of  partners.3     This 


i  Davidson   v.   Rankin,   34   Cal.   503 
(1868).  Cf.  Young  v.  Rosenbaum,  39 
Cal.  646  (1S70);  Larrabee  v.  Baldwin, 
35  Cal.  155  (1868);  McAuley  v.  York 
Min.  Co.,  6  Cal.  80  (1856);  Adkins  v. 
Thornton,    19    Ga.    325    (1856)     [this 
case  is  frequently  miscited,  owing  to 
a  misprint  in  the  original  report,  as 
Dozier     v.     Thornton] ;      Branch     v. 
Baker,   53   Ga.   502    (1874);   Dane  v. 
Young,  61  Me.  160  (1872) ;    Castleman 
v.  Holmes,   4   J.  J.  Marsh.      (Ky.)    1 
(1830).     Cf.  Fuller  v.  Ledden,  87  111. 
312    (1877);    Brown  V.   Hitchcock,   36 
Ohio   St.   678    (1881).     The  constitu- 
tional and  statutory  liability  of  stock- 
holders in  California  is  a  contract  ob- 
ligation, and  may  be  enforced  by  at- 
tachment.   Kennedy  v.  California  Sav. 
Bank,  97  Cal.  93  (1892).  The  liability 
of  a  stockholder  in  a  California  bank 
for  his  proportion  of  a  corporate  debt 
was  enforced  at  law    in    Barling    v. 
Bank  of  British  North   America,   50 
Fed.  Rep.   260    (1892).     See  also,   in 
general,  Southmayd  v.  Russ,  3  Conn. 
52    (1819)  ;   Middletown  Bank  v.  Ma- 
gill,  5  Conn.  28,  45    (1823) ;   Deming 
v.  Bull,  10  Conn.  409  (1835);  Conant 
v.  Van  Schaick,  24  Barb.  87   (1857) ; 
Allen  v.  Sewall,  2  Wend.  327  (1829); 
Moss  v.   Oakley,   2   Hill,   265    (1842); 
Harger  v.  McCullough,    2    Denio,    119 
(1846) ;  McCullough  v.  Moss,  5  Denio, 
567  (1846);  Corning  v.  McCullough,  1 
N.  Y.  47   (1847);  Moss  v.  Averell,  10 
N.  Y.  449    (1853);   Wiles  v.  Suydam, 
64  N.  Y.  173,  176   (1876);   Conklin  v. 
Furman,  57  Barb.  484  (1865);  Abbott 
v.    Aspinwall,    26    Barb.    202   (1857); 


Erickson  v.  Nesmith,  46  N.  H.  371 
(1866);  White  v.  Blum,  4  Neb.  555 
(1876);  New  England  Com.  Bank  v. 
Newport  Steam  Factory,  6  R.  I.  154 
(1859);  Moies  v.  Sprague,  9  R.  I. 
541  (1870);  Parker  v.  Carolina  Sav. 
Bank,  53  S.  C.  583  (1898).  The  stat- 
utory liability  of  stockholders  in  a 
Colorado  corporation  "in  double  the 
amount  of  the  par  value  of  the  stock 
owned  by  them,  respectively,"  is  a 
triple  liability;  in  other  words,  is  a 
double  liability  in  addition  to  the 
subscription  liability.  Zang  v.  Wyant, 
25  Colo.  551  (1898). 

2  Planters'  Bank  v.  Bivingsville 
Cotton  Mfg.  Co.,  10  Rich.  L.  (S.  C.) 
95  (1856). 

3  And  that  although  the  stated  ex- 
tent of  the  stockholder's  liability,  as 
provided  by  the  statute,  cannot  be  ex- 
ceeded, still,  up  to  the  full  measure 
of  his  liability,  he  may  be  charged, 
although  it  be  shown  that,  if  other 
solvent  stockholders  had  contributed 
their  full  proportion,  it  would  not  be 
necessary  for  him  to  pay.    Wehrman 
v.  Reakirt,  1  Cin.  Super.  Ct.   (Ohio), 
230    (1871);    Brown  v.  Hitchcock,  36 
Ohio  St.  678  (1881);   Harpold  v.  Sto- 
bart,    46    Ohio    St.   397    (1889).    This 
case  holds  also  that  a  stockholder  in 
Ohio  "is  liable  to  creditors  of  the  cor- 
poration for  such  portion  only  of  the 
debts  existing  while  he  held  the  stock 
and  remaining  due   (not  in  excess  of 
the  amount  of  stock  assigned),  as  will 
be  equal  to  the  proportion  which  the 
capital  stock  assigned  by  him  bears  to 
the  entire  capital  stock  held  by  solv- 


544 


CH.  XII.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[§  215. 


class  of  cases  holds  that,  unless  the  statute  prescribes  otherwise, 
the  common-law  rules  as  to  the  liability  of  partners,  and  the  rem- 
edies for  enforcing  that  liability,  apply  to  the  statutory  liability  of 
stockholders  in  incorporated  companies.1 

A  very  common  statutory  liability  is  that  which  makes    stock- 
holders liable  for  debts  due  from  the  corporation  to  its  servants  or 

ent  stockholders,  liable  in  respect  of     erally  personally  liable  for  debts  con 


the  same  debts,  who  are  within  the 
jurisdiction,  to  be  ascertained  at  the 
time  judgment  is  rendered."  Cf. 
Stewart  v.  Lay,  45  Iowa,  604  (1877) ; 
Crease  v.  Babcock,  51  Mass.  525 
(1846).  Article  XIII,  §  3,  of  the  con- 
stitution of  Ohio  of  1851,  providing 
that  dues  from  corporations  be  se- 
cured by  individual  liability  of  the 
stockholders  as  may  be  prescribed  by 
law  to  a  further  sum  over  and  above 
their   stock    at   least    equal    to    the 


tracted  by  the  corporation,  which  it 
cannot  or  does  not  pay,  in  proportion 
to  the  number  of  shares  they  own,  it 
seems  to  be  settled  that  they  are  to  be 
held  principal  debtors  and  not  mere 
sureties  for  the  corporation.  Harger 
v.  McCullough,  2  Denio,  119  (1846); 
Corning  v.  McCullough,  1  N.  Y.  47 
(1847),  the  court  saying  that  the 
stockholders  stand  towards  the  cred- 
itors "on  the  same  ground  and  under 
the    same    responsibility    ...    as 


amount  of  such  stock,  is  not  so  far    they    would    if    unincorporated    have 


self-executing  that  it  may  be  enforced 
outside  of  the  jurisdiction  of  that 
state  without  compliance  with  the  re- 
quirements of  the  state  statute  fixing 
the  amount  of  the  liability  and  the 
method  of  enforcing  it.  Middletown 
Nat.  Bank  v.  Toledo,  etc.  Ry.,  197  U. 
S.  394  (1904).  In  Wisconsin  stock- 
holders in  banking  corporations  are 


stood;"  Moss  v.  Averell,  10  N.  Y.  449 
(1853);  Simonson  v.  Spencer,  15 
Wend.  548  (1836),  sustaining  the  ac- 
tion for  debt;  Bailey  v.  Bancker,  3 
Hill,  1S8  (1842),  holding  also  that  a 
creditor  must  sue  a  stockholder  upon 
the  original  demand  and  not  upon 
the  judgment  against  the  company; 
Southmayd  v.  Russ,  3  Conn.  52  (1819), 


liable  by  statute  as  original  and  prin-     holding   that,    since    the    liability    is 


cipal  debtors,  substantially  as  though 
they  were  partners,  except,  as  in  Ohio, 
that  the  responsibility  of  each  is 
limited  to  a  sum  equal  to  his  shares 
of  stock.  Coleman  v.  White,  14  Wis. 
700  (1862). 

i  Story   v.    Furman,   25   N.   Y.    214, 


original,  scire  facias  will  not  lie 
against  a  stockholder,  but  he  must 
be  sued  as  if  there  were  no  incor- 
poration; Marcy  v.  Clark,  17  Mass. 
330  (1821).  In  Michigan  it  is  held 
that  they  are  sureties.  Hanson  v. 
Donkersley,  37  Mich.  184  (1877).    Cf. 


221,  222   (1862);    New  England  Com.     Grand  Rapids  Sav.  Bank  v.  Warren, 


Bank  v.  Newport  Steam  Factory,  6  R. 
I.  154,  189  (1859);  Moies  v.  Sprague, 
9  R.  I.  541  (1870).  It  is  sometimes 
held  that  a  general  statutory  liability 
means  a  liability  on  the  part  of  the 
stockholder  only  in  the  proportion 
which  his  interest  bears  to  the  total 
indebtedness  of  the  corporation.  Boyd 
v.  Hall,  56  Ga.  563  (1876);  Reynolds 
i'.  Feliciana  Steamboat  Co.,  17  La. 
Rep.  397  ( 1841) .  In  such  a  case,  where 
the  stockholders  are  jointly  and  sev- 


52  Mich.  557  (1884).  It  has  been 
held  that  they  are  not  sureties  for 
each  other.  Lane  v.  Harris,  16  Ga. 
217,  234  (1854);  Crease  v.  Babcock, 
51  Mass.  525  (1846).  Cf.  Larrabee  v. 
Baldwin,  35  Oal.  155  (1868).  This 
seems  to  be  the  rule,  in  general,  as 
to  all  statutory  liability.  Young  v. 
Rosenbaum,  39  Cal.  646  (1870); 
Erickson  v.  Nesmith,  46  N.  H.  371 
(1866) ;  Thompson  v.  Meisser,  108  111. 
359    (1884). 


(35) 


545 


§  215.] 


STATUTORY  LIABILITY  OF  STOCKHO 


[CH.  XII. 


laborers.     There  has  been  difficulty  in  determining   whal    pere 
are  to  be  classed  as  servants,  bnt  the  courts  arc  nol  inclined  to  give 
a  broad  application  to  the  word.1 


i  It  may  be  stated  as  the  rule,  that 
only    those   who    perform    menial    or 
manual  services  are  within  the  class 
contemplated  in  the  statute;  "that  ho 
who  performs  them  must  be  of  a  class 
whose  members  usually   look  to   the 
reward  of  a  clay's  labor  or  service  for 
immediate   or    present   support,   from 
whom   the  company  does  not  expect 
credit,  and  to  whom  its  future  ability 
to  pay  is  of  no  consequence."    Wake- 
field   v.    Fargo,    90    N.    Y.    213,    217 
(1882).     Cf.   Adams   v.   Goodrich,   55 
Ga.  233   (1875).    This  overrules  some 
of  the  earlier  New  York  cases;  e.  g., 
Vincent    v.    Bamford,    1    Jones    &    S. 
506  (1S71);  s.  c,  12  Abb.  Pr.  (N.  S.) 
252,  which  held  an  engineer  and  fore- 
man,   who   sometimes    also    acted    as 
superintendent,  to  be  a  servant  with- 
in the  meaning  of  the  rule;    Hai 
v.  Norvell,  1  Abb.  N.  Cas.  127   (187G), 
which  held  a  reporter  employed  by 
a  newspaper  company,  and  a  city  or 
assistant  editor,    if  not  an  officer  of 
the  company,  to  be  a  servant;  Hovey 
v.   Ten   Broeck,   3   Rob.    (N.   Y.)    316 
(1S65),     holding     an     overseer     and 
book-keeper  within  the  protection  of 
the   act.     The   word   "employees"   in- 
cludes salesmen  on  salaries.     Palmer 
v.    Van    Santvoord,    153    N.    Y.    612 
(1897).     An  attorney   is  not  an   em- 
ployee   within    the    statute    making 
stockholders     personally     liable     for 
debts    to    laborers,    servants,    or    em- 
ployees.    Bristor  v.  Smith,  158  N.  Y. 
157    (1899).     An   attorney   of  a  rail- 
road   company    is    not   a    laborer    or 
employee    entitled    to    a    preference, 
under   the    Arkansas    statute.     Latta 
v.  Lonsdale,  107  Fed.  Rep.  585  (1901). 
A  preference  given  by  statute  to  the 
wages  of  employees,  etc.,  does  not  ap- 
ply  to   clerks,  book-keepers,    superin- 
tendents,  shop   foremen,   and    drafts- 
men.    Matter  of   Stryker,   158    N.   Y. 
526    (1899).     A   superintendent   of   a 


mine    is    not    a    laborer,    servant,    or 
operative.      Cocking    v.    Ward,    48    S. 
W.  Rep.  287    (Tenn.  189S).     A  pr< 
erence  to  laborers  does  not  include  a 
corporation,  especially  where  the  lat- 
ter's  claim  is  for  printing  and  bind- 
ing books.    In  re  Barr-Dinwiddie,  etc. 
Co.,    42   Atl.   Rep.    575    (X.    J.    1899). 
A  salesman  who  is  paid  partly  in  cash 
and   partly   by   commissions   may   be 
an    employee.     Matter    of    Luxton    & 
Black   Co.,    35    N.   Y.    App.    Div.    243 
(189S).     A  general  manager  is  not  a 
workman  within  the  meaning  of  the 
bankruptcy  act.     In  re  Grubbs-Wiley, 
etc.    Co.,    96    Fed.    Rep.    183     (1S99). 
A  book-keeper  is  an  "employee,"  that 
word  being  of  a  wider  meaning  than 
"laborers  and  operatives."     People  v. 
Beveridge  Brewing  Co.,  91  Hun,  313 
(1895).      Book-keepers,     superintend- 
ents, and  foremen  paid  by  the  month 
are    not    employees,    operatives,    and 
laborers    entitled    to    prior    payment 
under    the    New    York    statute.      Re 
Stryker,   73    Hun,   327    (1893);    aff'd, 
158  N.  Y.  526  (1899).     The  president 
is  not  a  "workman  or  employee"  in 
the  sense  of  the  New  Jersey  statute 
giving    a   preference.     Weatherby    v. 
Saxony,  etc.  Co.,  29  Atl.  Rep.  326  (N. 
J.    1894).     The   salary  of   a   general 
traveling  agent  is  not  a  debt  "owing 
for  labor"   and   is   not   entitled   to   a 
preference.    Clark's  Appeal,  100  Mich. 
448    (1894).     A  master-mechanic  and 
superintendent  of  works  is  a  servant 
or    laborer.      Sleeper   v.    Goodwin,    67 
Wis.    577    (1887).     A  superintendent 
of    laborers    is    a   "laborer"    himself. 
Pendergast  v.   Yandes,    124   Ind.    159 
(1890).     An   expert  employed  to   ad- 
just and  start  the  machinery   is  en- 
titled to  the  statutory  lien  for  "labor." 
Black's  Appeal,  83  Mich.  513    (1890). 
A    traveling    salesman    is    a    "clerk" 
within    the    meaning    of    the    statute 
rendering  stockholders  liable  for  debts 
516 


CII.  XII.] 


STATUTORY   LIABILITY   OP  STOCKHOLDERS. 


[§   215. 


Many  of  the  states  have  statutes  rendering  stockholders  or   di- 
rectors liable  to  creditors  unless  certain  reports  or  certificates  are 


to    "clerks,"   etc.     Hand   v.   Cole,    88 
Tenn.  400    (1S90). 

The  following  employees  have  been 
held   not  to  be  servants  or  laborers 
within    the   protection    of    the    rule: 
The    secretary    of    a    manufacturing 
company.     Coffin  v.  Reynolds,   37   N. 
Y.  G40  (186S),  overruling  Richardson 
v.    Abendroth,    43    Barb.    163    (1SG4), 
and    perhaps    Williamson    v.    Wads- 
worth,  49  Barb.  294  (1867),  which  is 
■the    case    of    a    civil    engineer    and 
traveling  agent  at  a  fixed  salary.     A 
civil  engineer.     Pennsylvania,  etc.  R. 
R.  v.  Leuffer,  84   Pa.  St.  168    (1877). 
Contra,    Conant   v.   Van    Schaick,    24 
Barb.   87    (1857).     Cf.  Williamson  v. 
Wadsworth,  49  Barb.  294    (1867).     A 
consulting     engineer.       Ericsson     v. 
Brown,  38  Barb.  390   (1862).     An  as- 
sistant chief  engineer.     Brockway  v. 
Innes,  39  Mich.  47   (1878).     Cf.  Peck 
v.  Miller,    39   Mich.   594    (1S78).     An 
overseer  on   a  plantation.     Whitaker 
v.  Smith,  81  X.  C.  340    (1879).     Con- 
tra, Hovey  v.  Ten  Broeck,  3  Rob.  (X. 
Y.)    316   (1S65).     A  contractor.     Rog- 
ers v.  Dexter,  etc.  R.  R.,  85  Me.  372 
(1893);     Boutwell    v.    Townsend,    37 
Barb.   205    (1860);    Aikin  v.  Wasson, 
24   X.   Y.   482    (1862);    Balch  v.  Xew 
York,  etc.  R.  R.,  46  X.  Y.  521  (1871) ; 
Atcherson  v.  Troy,  etc.  R.  R.,  6  Abb. 
Pr.   (X.  S.)    329    (1856).     Cf.  Kent  v. 
Xew  York  Cent.  R.  R.,  12   X.  Y.  628 
(1855);    McCluskey   v.   Cromwell,    11 
X.   Y.-  593    (1854).     An   agent   of    a 
mining  corporation  employed  to  take 
charge  of  its  mines  in  a  foreign  coun- 
try.    Hill   v.   Spencer,   61   X.   Y.   274 
(1S74);    Dean  v.    De  Wolf,   16   Hun, 
186     (1878);     aff'd,    82    X.    Y.    626; 
Krauser    v.     Ruckel,     17     Hun,     463 
(1S79).     A  book-keeper  and   general 
manager.     Wakefield  v.  Fargo,  90   X. 
Y.    213     (1882).      A    superintendent. 
Kincaid    v.    Dwindle,    59    X.    Y.    548 
(1875).      Cf.   Gordon  v.   Jennings,    L. 
R.  9  Q.  B.  D.  45    (1882).     And  com- 


pare also  Gurney  v.  Atlantic,  etc.  Ry., 
58  X.  Y.  358  (1874).  Counsel  is  not 
an  "employee."  Louisville,  etc.  R.  R. 
v.  Wilson,  138  U.  S.  501  (1891).  A 
contractor  is  not  an  employee  under 
the  Indiana  statute.  Vane  v.  Xew- 
combe,  132  U.  S.  220  (1889).  A  stat- 
utory preference  to  servants  and  em- 
ployees gives  no  preference  to  the  sec- 
retary. Wells  v.  Southern  Minn.  Ry., 
1  Fed.  Rep.  270  (1S80).  In  general, 
only  manual  or  menial  laborers  are 
protected  by  the  statute.  Adams  v. 
Goodrich,  55  Ga.  233  (1S75);  People 
v.  Remington,  45  Hun,  329  (1887); 
aff'd,  109  X.  Y.  631.  Cf.  Heebner  v. 
Chave,  5  Pa.  St.  115  (1847);  Harrod 
v.  Hamer,  32  Wis.  162    (1873). 

Under  the  mechanic's  lien  laws  of 
the  several  states,  a  wider  meaning 
has  been  given  to  the  word  "la- 
borers." These  cases  are  frequently 
confused  with  the  statutes  considered 
herein.  Stryker  v.  Cassidy,  76  X.  Y. 
50  (1879);  Mutual  Benefit  L.  Ins.  Co. 
v.  Rowand,  26  X.  J.  Eq.  3S9  (1S75); 
Bank  of  Pennsylvania  v.  Gries,  35  Pa. 
St.  423  (1860);  Arnoldi  v.  Gouin,  22 
Grant,  Ch.  (Up.  Can.)  314  (1875); 
Mulligan  v.  Mulligan,  18  La.  Ann.  20 
(1866);  Knight  v.  Xorris,  13  Minn. 
473  (1868) ;  Raeder  v.  Bensberg,  6  Mo. 
App.  445  (1879);  Foushee  v.  Grigsby, 
12  Bush.  (Ky.)  75  (1876);  Small- 
house  v.  Kentucky,  etc.  Co.,  2  Mont. 
443  (1876);  Capron  v.  Strout,  11  Xev. 
304  (1876).  The  mere  fact  that  one 
does  some  manual  labor  incidental  to 
his  position  as  manager  or  foreman 
or  superintendent  will  not  constitute 
him  a  laborer  within  the  intent  of 
these  statutes.  Krauser  v.  Ruckel,  17 
Hun,  463  (1879);  Ericsson  v.  Brown, 
38  Barb.  390  (1862).  Cf.  Wakefield  v. 
Fargo,  90  X.  Y.  213  (1882).  But 
where  a  foreman  did  so  much  manual 
labor  that  it  was  not  a  mere  incident 
of  his  foremanship,  it  was  held  that 
he  might  recover  as  a  laborer.  Short 
47 


§  215.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[CH.  XII. 


filed,1    and   the  statutes  often   impose   a  personal   liability   on   the 


v.  Medberry,  29  Hun,  39  (1883).  For 
construction  of  the  Pennsylvania  lia- 
bility for  labor  and  supplies,  see 
Weiss  v.  Mauch  Chunk  Iron  Co.,  58 
Pa.  St.  295  (18GS);  Reading  Indus- 
trial Mfg.  Co.  v.  Graeff,  64  Pa.  St. 
395  (1870);  Moyer  v.  Pennsylvania 
Slate  Co.,  71  Pa.  St.  293  (1872), 
where  a  statute  imposing  liability  for 
debts  due  workmen,  etc.,  and  ma- 
terials furnished  was  construed  not 
to  include  debts  for  hauling,  repair- 
ing wagons,  lumber  for  erecting  ma- 
chinery, powder  for  blasting,  etc.; 
Weigley  v.  Coal  Oil  Co.,  5  Phila.  67 
(1862).  A  claim  against  stockholders 
on  their  statutory  liability  to  la- 
borers is  assignable.  Day  v.  Vinson, 
78  Wis.  198  (1890).  A  laborer  hav- 
ing recourse  by  statute  against  stock- 
holders may  assign  his  rights.  Day 
v.  Buckingham,  87  Wis.  215  (1894). 
The  liability  for  debts  to  laborers 
applies  to  such  debts  though  due  to 
non-residents.  Clokus  v.  Hollister 
Min.  Co.,  92  Wis.  325  (1896).  A 
person  having  a  claim  against  a  di- 
rector on  a  liability  of  the  latter, 
created  by  statute,  may  assign  that 
claim,  and  the  assignee  may  enforce 
it.  Bedford  v.  Sherman,  68  Hun,  317 
(1893). 

i  As  to  whether  this  liability  is  a 
penal  liability,  see  §  223,  infra.  Such 
a  liability  is  strictly  construed.  See 
§  214,  supra.  Cases  on  statutes  of 
this  character  are  given  throughout 
this    chapter.      The    following    cases 


ing  for  goods  bought  until  the  goods 
are  delivered,  under  the  Rhode  Island 
statute  making  the  stockholders  liable 
for  failure  to  file  a  report.  Wing  v. 
Slater,  19  R.  I.  597  (1896).  Directors 
are  not  liable  by  statute  requiring  an 
annual  report,  where  such  report  is 
filed,  even  though  it  be  false.  If  the 
statute  makes  them  liable  for  know- 
ingly making  a  false  report,  knowl- 
edge must  be  averred.  Matthews  v. 
Patterson,  16  Colo.  215  (1891).  A 
corporation  which  files  its  certificate 
of  incorporation  with  the  Secretary 
of  State,  but  not  with  the  County 
Clerk,  as  required  by  statute,  and 
transacts  no  business  except  to  au- 
thorize the  issue  of  stock  for  prop- 
erty, which  issue  is  never  made,  is 
not  even  a  de  facto  corporation,  and 
hence  the  directors  are  not  liable  for 
failing  to  file  a  report  as  required  by 
statute.  Emery  v.  De  Peyster,  77  N. 
Y.  App.  Div.  65  (1902).  This  statu- 
tory liability  of  directors  for  failure 
to  file  reports  is  not  avoided  by  the 
fact  that  the  company  is  insolvent 
and  has  gone  out  of  business.  Gans 
v.  Switzer,  9  Mont.  408  (1890).  The 
California  statute,  allowing  any  stock- 
holder to  collect  $1,000  from  the  di- 
rectors in  a  mining  company  if  they 
fail  to  post  a  balance  sheet  monthly, 
was  construed  in  Ball  v.  Tolman,  119 
Cal.  358  (1897).  Where  the  directors 
of  a  mining  corporation  are  liable 
for  $1,000  unless  they  file  weekly  re- 
ports of  the  receipts,  disbursements, 


may  also  aid  in  giving  an  idea  of  this    number  of  employees,  and  wages,  no 


kind  of  liability:  Under  a  statute 
rendering  the  stockholders  liable  to 
corporate  creditors  to  the  extent  of 
the  unpaid  portion  of  the  par  value 
of  their  stock,  unless  a  true  statement 
of  the  affairs  of  the  company  is  made 
annually,  the  stockholders  are  so  lia- 
ble if  the  statement  which  is  filed  is 
a  false  statement.  Congdon  v.  Win- 
sor,  17  R.  I.  236  (1891),  refusing  to 
follow  Stedman  v.  Eveleth,  47  Mass. 
114   (1843).     There  is  no  debt  exist- 


damage  need  be  proved  by  a  stock- 
holder in  suing  for  the  $1,000.  Shank- 
lin  v.  Gray,  111  Cal.  88  (1896);  Miles 
v.  Woodward,  115  Cal.  308  (1896).  A 
Statutory  liability  of  officers  for  a 
false  report  applies  only  to  debts  cre- 
ated after  the  false  report  is  made. 
Torbett  v.  Godwin,  62  Hun,  407 
(1891).  The  statutory  liability  of  di- 
rectors for  corporate  debts,  where 
they  fail  to  give  notices  of  the  debts 
of  the  company,  is  not  available  to 


548 


CH.  XII.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[§   215. 


directors  for  making  loans  in  excess  of  the  capital  stock.1     A  state 
may,  by  its  statutes,  impose  a  personal  liability  on  the  stockholders  of 


any    creditors    except    those    giving 
credit  after  the  directors  should  have 
given  notice.     Gorder  v.  Plattsmouth 
Canning    Co.,    36    Neb.    548     (1893). 
"Wilful  neglect"  or  refusal  does  not 
arise  from  mere  neglect  of  a  director 
under  a  statute  calling  for  an  annual 
report.     Gennert   v.    Ives,   102    Mich. 
547    (1894).      Where    a    water-works 
company  issues  $197,000  of  stock  and 
$150,000  of  bonds  for  work  which  is 
worth  only  the  amount  of  the  bonds, 
the  Indiana  statute   rendering  direc- 
tors personally  liable  for  not  causing 
the  capital  stock  to  be  paid  up  within 
eighteen   months   is   applicable.     The 
court  said,  "the  plan  of  the  promoters, 
stockholders  and  directors  of  the  com- 
pany   was    to    build    a    water-works 
without  capital  and  without  risk  of 
expense  to  themselves,"  and  that  by 
taking  all  the  stock  and  all  the  bonds 
they    left    the    corporation    where    it 
was  unable  to  pay  any  other  debts, 
either  by  the  sale  of  stock  or  bonds. 
Brown  v.  Clow,  158  Ind.  403   (1902). 
In   Illinois   by   statute   the   directors 
are    personally    liable    for    debts    in- 
curred before  all  "stock  named  in  the 
articles  of  incorporation  shall  be  sub- 
scribed in  good  faith."    Kent  v.  Clark, 
181    111.    237     (1899).      The    Illinois 
statute   rendering  a  director  person- 
ally liable  for  the  debts  of  a  corpora- 
tion  where  the   incorporating  act   is 
not  complied  with  in  certain  particu- 
lars was  applied   in   Edwards  v.  Ar- 
mour,'etc.    Co.,    190    111.    467    (1901). 
Under  the  former  New   York  law   a 
director    was    liable    for    debts    con- 
tracted   after   he   became    a    director 
where  no  report  had  been  filed  before 
he  became  such  director  and  no  re- 
port was  filed  after  he  became  a  di- 
rector.   Union  Bank  v.  Keim,  52  N.  Y. 
App.  Div.  135  (1900)  ;  aff'd,  169  N.  Y. 
587.     As  to  the  statute   in   Colorado 
rendering  the  directors  liable  for  the 
debts  where  they  fail  to  file  specified 


reports,  see  Thatcher  v.  Salomon,  16 
Colo.  App.  150  (1901).  In  Minnesota 
by  statute  directors  who  participate 
in  an  ultra  vires  act  are  liable  for  ail 
debts  thereafter  contracted,  even 
though  they  go  out  of  office.  Citizens' 
State  Bank  v.  Story,  etc.  Co.,  84  Minn. 
408  (1901).  See  also  n.  4,  p.  541, 
supra. 

i  Where  directors  are  liable  for 
corporate  debts  in  excess  of  the  sub- 
scribed capital  stock,  the  capital 
stock  includes  that  paid  for  by  prop- 
erty as  well  as  in  cash.  Moore  v. 
Lent,  81  Cal.  502  (1889).  A  director 
liable  by  statute  for  debts  in  excess 
of  a  certain  amount  is  liable  only  to 
creditors  holding  such  excess.  Hil- 
liard  v.  Lyman,  138  Fed.  Rep.  469 
(1905);  aff'd,  154  Fed.  Rep.  339.  In 
enforcing  a  liability  of  directors  for 
debts  in  excess  of  the  capital,  a  credi- 
tor must  sue  for  the  benefit  of  all, 
and  can  recover  only  a  proportion  of 
the  excess  over  such  capital  stock. 
Anderson  v.  Speers,  21  Hun,  568 
(1880).  A  director  cannot  enforce  a 
statutory  liability  of  the  directors 
for  debts  contracted  by  the  corpora- 
tion in  excess  of  the  capital  stock, 
the  directors  being  liable  "jointly  and 
severally"  by  statute;  but  such  debt 
due  to  the  director  is  counted. 
Thacher  v.  King,  156  Mass.  490 
(1892).  Where  the  constitution  of  an 
unincorporated  association  limits  the 
debts  and  the  directors  incur  a  larger 
amount  of  debts,  the  directors  can- 
not obtain  contribution  from  the 
stockholders.  McFadden  v.  Leeka,  48 
Ohio  St.  513  (1891).  The  liability  of 
directors  in  New  York  for  excessive 
debts  can  be  enforced  only  in  a  suit 
in  which  all  the  directors  are  joined. 
Milsom,  etc.  Co.  v.  Baker,  16  N.  Y. 
App.  Div.  581  (1897);  aff'd,  153  N.  Y. 
687.  Where  creditors  are  enjoined 
from  suing  the  corporation  they  need 
not  obtain   a   judgment   against  the 


549 


§  215.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[CH.  XII. 


a  foreign  corporation  that  does  business  in  such  state,  to  the  extent 
at  least  that  its  business  is  done  in  that  state,  e  pecially  where  the 
charter  provided  for  the  carrying  on  of  the  principal  pari  of  the 
business  in  such  stale1  A  statute  giving  a  remedy  against  directors 
of  a  corporation,  who  are  guilty  of  fraud,  applies  to  directors  in  for- 
eign corporations,  as  well  as  those  in  domestic  corporations,  unless  its 
language  is  clearly  to  the  contrary.2     A  liability  imposed  by  a  con- 


corporation  before  suing  to  hold  di- 
rectors personally  liable  by  statute, 
by  reason  of  the  debts  exceeding  the 
paid-up  capital  stock.  Wbitney  v. 
Pugh,  58  N.  Y.  App.  Div.  316  (1901). 
The  statutory  liability  of  stockholders 
for  a  failure  to  file  a  certificate  that 


v.  Boston,  etc.  Co.,  183  Mass.  114 
(1903). 

i  Pinney  v.  Nelson,  183  U.  S.  144 
(1901). 

2  Miller  v.  Quincy,  179  N.  Y.  294 
(1904);  rev'g  Miller  v.  Barlow,  88  N. 
Y.  App.  Div.  529.    Under  the  statutes 


the  capital  stock  has  been  fully  paid,  of   New   York   where   a  New   Jersey 

and  the  statutory  liability  of  directors  corporation,    doing   business    in   New 

for    debts    in   excess    of    the    capital  York,  pays  dividends  from  the  capital 

stock,   do   not   apply   to   a   judgment  stock,  a  director  participating  in  de- 


in    an    action    of    tort.      Leighton    v. 


claring  the  dividend  is  personally  lia- 


Campbell,  17  R.  I.  51  (1890).  As  to  ble  therefor,  and  if  the  corporation  re- 
the  liability  of  directors  of  a  national  fuses  to  bring  the  action  a  stock- 
bank  for  loans  in  excess  of  the  holder  may  bring  it  in  behalf  of  him- 
amount  allowed  by  law,  see  Witters  self  and  other  stockholders.  Hutchin- 
v.  Sowles,  43  Fed.  Rep.  405    (1890);  son  v.   Stadler,    85   N.   ,Y.   App.    Div. 


Stephens  v.  Overstolz,  43  Fed.  Rep. 
771  (1S90).  The  liability  of  directors 
under  the  National  Banking  Act  for 
loans  to  separate  persons  of  amounts 
in  excess  of  one-tenth  of  the  cap- 
ital stock  can  be  enforced  only  in 
a  court  of  equity.  Welles  v.  Graves, 
41  Fed.  Rep.  459  (1890);  Peters  v. 
Foster,  56  Hun,  607  (1890).  As  re- 
gards the  remedy  under  the  National 
Bank  Act,  see  also  Kennedy  v.  Gib- 
son, 8  Wall.  498  (1869);  Casey  v. 
Galli,  94  TJ.  S.  673  (1S76),  and  Act 
of  June  30,  1876,  ch.  44;  Witters  v. 
Sowles,  32  Fed.  Rep.  767  (1887); 
Richmond  v.  Irons,  121  TJ.  S.  27 
(1SS7),  as  to  joinder  of  causes  of 
action.  A  statute  rendering  directors 
liable  for  debts  in  excess  of  the  capi- 
tal stock  does  not  prohibit  the  in- 
curring of  such  debts.  In  Massachu- 
setts this  statutory  liability  does  not 
apply  to  past  debts  which  have  been 
reduced  to  less  than  the  capital  stock 
at  the  time  suit  is  commenced.    Flint 


424  (1903).  Where  an  officer  of  a 
foreign  corporation  signs  and  de- 
livers to  the  commissioner  of  corpora- 
tions a  certificate  which  states  that 
its  copyrights  and  privileges  are 
worth  $120,000  when  in  fact  they 
were  worth  only  $10,000,  he  is  liable 
to  the  corporate  creditors  under  the 
statutes  of  Massachusetts,  and  it  is  no 
defense  that  the  stockholders  did  not 
intend  to  sell  the  stock.  Heard  v. 
Pictorial  Press,  182  Mass.  530  (1903). 
A  Montana  statute  rendering  directors 
liable  for  corporate  debts  if  they  fail 
to  file  a  specified  report  applies  to 
foreign  as  well  as  domestic  corpora- 
tions. Nelson  v.  Bank  of  Fergus 
County,  157  Fed.  Rep.  161  (1907). 
The  Massachusetts  statute  making 
corporate  officers  liable  for  corporate 
debts  unless  the  capital  stock  has 
been  paid  in  and  a  certificate  filed, 
does  not  apply  to  foreign  corpora- 
tions. Standard,  etc.  Co.  v.  Merri- 
mack,   etc.    Co.,    81    N.    E.   Rep.    262 


550 


en.  xii.] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§    2i; 


stitution  may  or  may  not  Le  self-executing  without  any  statutory 
provision,  according  to  the  wording  of  the  constitutional  provision 
itself.1     An  increase  or  reduction  of  the  capital  stock  leads  often 


(Mass.  1907).  A  Montana  statute 
rendering  directors  liable  for  corpo- 
rate debts  if  they  fail  to  file  a  speci- 
fied report  applies  to  foreign  as  well 
as  domestic  corporations.  Nelson  v. 
Bank  of  Fergus  County,  157  Fed.  Rep. 
161  (1907).  A  statutory  liability  of  a 
director  in  a  foreign  corporation,  do- 
ing business  in  New  York,  for  failure 
to  file  a  report  required  by  the  New 
York  statutes,  was  sustained  in  Stat- 
en  Island,  etc.  R.  R.  v.  Hinchliffe, 
17Q  N.  Y.  473   (1902). 

1 A  constitutional  liability  may 
not  be  enforceable  where  no  statute 
has  been  passed  to  enforce  it;  as,  for 
example,  the  provision  that  "dues 
from  corporations  shall  be  secured  by 
individual  liability  of  the  stock- 
holders to  an  additional  amount  equal 
to  the  stock  owned  by  each  stock- 
holder, and  such  ether  means  as  shall 
be  provided  by  law."  Morley  v. 
Thayer,  3  Fed.  Rep.  737  (1SS0). 
Under  the  Ohio  constitutional  provi- 
sion imposing  a  liability  on  stock- 
holders, a  general  act  authorizing  in- 
corporations must  contain  a  provision 
to  that  effect  or  the  act  will  be  void. 
State  v.  Sherman,  22  Ohio  St.  411 
(1872).  Where  the  United  States  Cir- 
cuit Court  of  Appeals  is  in  doubt  as 
to  whether  a  constitutional  provision 
creating  a  double  liability  is  self- 
executing  the  case  will  be  referred 
to  the  Supreme  Court  of  the  United 
States  for  decision.  Middletown,  etc. 
Bank  v.  Toledo,  etc.  Ry.,  127  Fed. 
Rep.  85  (1903).  A  constitutional  pro- 
vision that  stockholders  shall  be  lia- 
ble to  the  extent  of  their  stock  is  self- 
executing  and  applies  to  all  corpora- 
tions. Willis  v.  Mabon,  48  Minn.  140 
(1892).  The  Kansas  constitution  is 
self-enforcing  as  to  stockholder's  lia- 
bility. Sterne  v.  Atherton,  7  Kan. 
App.  20  (1897);  Fowler  v.  Lamson, 
146   111.   472    (1893).     The   Nebraska 


constitutional  provision  imposing  a 
double  liability  on  stockholders  in 
banks  is  self-executing.  Farmers'  L. 
&  T.  Co.  v.  Funk,  49  Neb.  353  (1896). 
The  New  York  constitutional  provi- 
sion imposing  a  double  liability  on 
stockholders  is  not  self-executing. 
Marshall  v.  Sherman,  148  N.  Y.  9 
(1895).  The  constitutional  liability 
of  stockholders  in  California  is  not 
self-executing.  A  statute  which  ap- 
plies it  "in  proportion"  to  the  amount 
of  stock  held  by  each  stockholder  is 
too  vague  for  enforcement.  United 
States  v.  Stanford,  69  Fed.  Rep.  25 
(1S95);  aff'd,  161  U.  S.  412.  The 
term  "self-executing,"  as  applied  to  a 
constitution  imposing  a  liability  on 
stockholders,  refers  to  whether  the 
provision  is  enforceable  without  a 
specific  remedy  being  created.  Eau 
Claire,  etc.  Bank  v.  Benson,  106  "Wis. 
624  (1900).  The  Kansas  constitu- 
tional liability  of  stockholders  is  not 
self-executing.  Yv^oodworth  v.  Bowles, 
61  Kan.  569  (1900).  A  constitutional 
provision  that  "dues  from  corpora- 
tions, other  than  banking,  shall  be 
secured  by  such  individual  liability 
of  the  corporators,  or  other  means,  as 
may  be  prescribed  by  law,"  does  not 
render  unconstitutional  a  general 
statute  for  incorporation  which  does 
not  prescribe  any  statutory  liability 
of  stockholders,  and  hence  that  de- 
fense is  not  available  to  a  subscriber 
who  is  sued  on  his  subscription.  Wil- 
liams v.  Citizens',  etc.  Co.,  153  Ind. 
496  (1899).  A  constitutional  provi- 
sion making  the  directors  liable  for 
moneys  misappropriated  by  officers 
during  their  term  of  office  is  self- 
executing,  and  they  are  liable  for 
using  the  funds  to  purchase  worthless 
paper  from  a  bank  which  they  wish 
to  keep  going.  The  liability  is  not 
penal,  inasmuch  as  it  is  not  a  punish- 
ment, but  a  compensation  for  a  loss. 


551 


215.] 


STATUTORY  LIABILITY   OF   STOCKHOLDERS. 


[CIl.  XII. 


to  complications  in  addition  to  the  usual  ones  incident  to  the  stat- 
utory liability.1  Various  decisions  on  the  liability  of  stockholders 
and  directors  under  particular  statutes  arc  given  in  the  notes  below.2 


A  creditor  who  became  such  after  the 
misappropriation  may  maintain  a  suit 
as  well  as  one  before,  and  he  need 
not  bring  a  suit  in  behalf  of  all,  nor 
first  obtain  a  judgment  against  the 
corporation.  Rice  v.  Howard,  69  Pac. 
Rep.  77  (Cal.  1902). 

1  See  §§  288,  289,  infra,  concerning 
this  subject. 

2  Under    the    Illinois    statute    mak- 
ing directors  liable  for  debts  before 
the   statute   is   complied   with   as   to 
incorporation,   and   the   issue  by   the 
secretary  of  state  of  a  certificate  of 
completed  organization  and  recording 
of  the  same  in  the  county  where  the 
principal   office   is,   the   directors   are 
liable  if  such  certificate  is  not  so  re- 
corded.    Liability    may   be   enforced 
even   by    a    corporate    creditor    who 
has  filed  his  claim  with  an  assignee 
of  the  corporation  for  the  benefit  of 
its  creditors.    Loverin  v.  McLaughlin, 
161  111.  417  (1896).     The  Illinois  stat- 
ute rendering  personally  liable  direc- 
tors and  officers  of  a  pretended  cor- 
poration which  has  not  complied  with 
the  statutes  does  not  apply  to  an  un- 
incorporated  joint  stock   association 
Gay   v.   Kohlsaat,   79   N.    E.   Rep.    77 
(111.  1906).    By  statute  in  Iowa  stock- 
holders are  liable  for  debts  if  a  no- 
tice of  incorporation  is  not  published. 
Houts  v.  Sioux  City,  etc.,  110  N.  W. 
Rep.    166    (Iowa    1907).     Under    the 
Iowa  statute  a  stockholder   is  liable 
for  corporate  debts  where  the  notice 
of  incorporation  was  not  published  as 
required  by  statute,  it  appearing  that 
he  became  a  stockholder  during  the 
time     allowed     for    the     publication. 
Clinton,    etc.   Works   v.    Neiting,    111 
N.    W.    Rep.    974     (Iowa    1907).      A 
debt  guaranteed  by  a  corporation   is 
not   a   debt   of   the    corporation    and 
until    it    becomes    such    the     stock- 
holders  are    not  liable   for   it  under 
the  Kansas  statute.    McHale  v.  Moore, 


66    Kan.    267    (1903).      Where   a    di- 
rector in  a  bank  is  liable  by  statute 
for  failure  to  become  familiar   with 
its  affairs,  it  is  no  defense  that  even 
if    he    had    examined    the    books    he 
could  not  have  discovered  the  fraud 
of   the   cashier.     Forbes  v.  Mohr,   69 
Kan.  342  (1904).    In  Florida  by  stat- 
ute   the   stockholders   are    liable    for 
the  debts  the  same  as  partners  where 
the  statute   relative  to  incorporation 
is  not  complied  with.    Heinberg  Bros. 
v.  Thompson,  47  Fla.  163  (1904).     In 
New  Hampshire  stockholders  are  lia- 
ble   for    corporate    debts    until    the 
whole  amount  of  the  capital  stock  has 
been    paid    in.      Carter,    etc.    Co.    v. 
Samuel,  etc.  Co.,  72  N.  H.  549  (1904). 
On   the  sale  of  bank  stock  for  non- 
payment of  an  assessment,  levied  to 
make  good  impaired  capital  stock,  as 
allowed   by   the   Indiana  statute,   the 
price  at  which  the  stock  sells  belongs 
to   the  stockholder  in  default.     Chi- 
cago, etc.  Co.  v.  State  Bank,  121  Fed. 
Rep.    58    (1902).      Even    though    the 
president   buys    treasury    stock   from 
the  company  at  two  cents  a  share  and 
sells  it  for  twenty  cents  a  share,  this 
is  not  a  misappropriation  of  its  funds 
rendering  the   directors  liable  under 
the  California  statute.     Hercules,  etc. 
Co.    v.    Hocknell,    91    Pac.    Rep.    341 
(Cal.    1907).      Under    the    Massachu- 
setts statute  of  1906  making  directors 
of  street  railways  liable  for  all  debts 
to    the    extent    of    the    capital    stock 
until  it  is  all  paid  in,  and  a  certifi- 
cate to  that  effect  filed,  the  directors 
continue  liable  if  the  certificate  is  un- 
true.    A  judgment  against  the  com- 
pany is  not  first  necessary.    Westing- 
house,    etc.    Co.    v.    Reed,    80    N.    E. 
Rep.  621    (Mass.   1907).     The  United 
States   statute   making  every   person 
interested  in  a  still  of  liquors  liable 
for  the  tax  thereon  renders  the  stock- 
holders of  the  distilling  corporation 


552 


en.  xil] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[§  215. 


It  remains  to  add  that  this  class  of  statutes,  except  in  the  case  of 
banks,  have  on  the  whole  proved  signal  failures.     They  drive  cor- 


liable,  and  one  who  pays  the  tax 
may  have  contribution  from  the 
others.  Richter  v.  Henningsan,  110 
Cal.  530  (1895).  A  statute  may  re- 
quire the  word  "limited"  to  be  a  part 
of  the  corporate  name,  and  may  ren- 
der the  stockholders  personally  liable 
for  omitting  the  same.  Lehman  v. 
Knapp,  48  La.  Ann.  1148  (1896). 
The  liability  of  stockholders  under 
the  Michigan  statute,  relative  to 
goods  sold,  is  applied  in  Kirkpatrick 
v.  Mehalitch,  113  Mich.  631  (1897). 
There  is  no  statutory  liability  of 
stockholders  in  ordinary  corporations 
in  New  Jersey.  Thomson,  etc.  Co.  v. 
Murray,  60  N.  J.  L.  20  (1897).  Under 
the  Iowa  statutes  the  stockholders 
are  liable  as  partners  where  the  cer- 
tificate of  incorporation  failed  to 
state  the  highest  amount  of  indebted- 
ness which  the  company  might  incur. 
Heuer  v.  Carmichael,  82  Iowa,  288 
(1891).  "Dues"  include  insurance 
policies.  McDonnell  v.  Alabama,  etc. 
Ins.  Co.,  85  Ala.  401  (1888).  The 
case  of  Austin  v.  Berlin,  13  Colo.  198 
(1889),  holds  that  new  directors  are 
not  liable  for  the  statutory  delinquen- 
cies of  the  old.  A  debt  contracted  in 
the  midst  of  acts  for  which  di- 
rectors are  liable  by  statute  is  con- 
tracted "after  such  violation."  Pat- 
terson v.  Stewart,  41  Minn.  84  (18S9). 
In  Maine,  by  statute,  stockholders 
were  formerly  liable  as  subscribers  if 
their"  stock  was  paid  for  by  property 
taken  at  an  overvaluation.  Libby  v. 
Tobey,  82  Me.  397  (1890).  Under  the 
Iowa  statute  rendering  officers,  etc., 
liable  for  diversion  of  funds,  a  policy- 
holder may  recover  where  a  consoli- 
dation with  another  company  has 
been  made  and  plaintiff  was  excluded 
from  the  new  company.  Grayson  v. 
Willoughby,  7S  Iowa,  83  (1889).  A 
complaint  to  enforce  a  stockholder's 
liability  for  labor  done  in  the  con- 
struction of  the  road  is  not  good  if  it 


omits  the  allegation  as  to  the  con- 
struction of  the  road.  Toner  v.  Fulk- 
erson,  125  Ind.  224  (1890).  Where 
stockholders  are  liable  for  debts  other 
than  mortgage  debts,  an  agreement  of 
the  company  to  pay  another  com- 
pany's mortgage  debt  is  not  a  mort- 
gage debt  of  its  own  such  as  would 
exempt  its  stockholders  from  liability. 
Barron  v.  Paine,  83  Me.  312  (1891). 
Where  the  constitution  renders  the 
stockholders  liable  doubly  except  in 
manufacturing  and  mechanical  cor- 
porations, a  statute  exempting  from 
liability  the  stockholders  in  companies 
engaged  in  dealing  in  mineral  lands 
is  unconstitutional.  Anderson  v.  An- 
derson Iron  Co.,  65  Minn.  281  (1896). 
The  double  liability  in  Minnesota  on 
all  stockholders  excepting  corpora- 
tions engaged  in  manufacturing  or  me- 
chanical business  does  not  apply  to  a 
mining  corporation,  that  being  a  me- 
chanical business.  Cowling  v.  Zenith 
Iron  Co.,  65  Minn,  263  (1896).  The 
constitutional  liability  of  stockholders 
applies  if  a  part  of  the  business  as 
set  forth  in  the  charter  consists  of 
mercantile  business.  The  objection 
that  all  stockholders  and  creditors 
are  not  joined  must  be  raised  by 
answer.  Densmore  v.  Shepard,  46 
Minn.  54  (1891).  Where  stockholders 
are  liable  unless  the  corporation  is  a 
manufacturing  corporation,  they  are 
liable  if  the  corporation  is  to  manu- 
facture and  "deal"  in  certain  articles. 
Commercial  Bank  v.  Azotine,  etc.  Co., 
66  Minn.  413  (1896);  aff'd,  69  Minn. 
232  (1897).  The  Minnesota  statutory 
liability,  being  absolute,  will  not  be 
construed  as  a  proportionate  liability 
only  (First  Nat.  Bank  v.  Winona 
Plow  Co.,  58  Minn.  167—1894),  where 
the  stockholders  not  made  parties  are 
shown  to  be  insolvent,  dead,  or  be- 
yond the  reach  of  process.  Clarke 
v.  Cold  Spring,  etc.  Co.,  58  Minn.  16 
(1894).      The    statutory    liability    of 


553 


§  216.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


porations  from  a  state,  arc  rarely  relied  upon  by  creditors,  and  are 
productive  of  interminable  litigation. 

§  216.  Waiver  by  corporate  creditors  of  their  statutory  rights 
against  stockholders. — A  corporate  creditor  may,  by  express  con- 
tract, when  the  debt  is  incurred,  waive  his  right  to  collect,  from 
the  stockholder,  debts  which  the  corporation  fails  to  pay.1  And 
the  corporation  in  its  contracts  with  third   pi  may,  it  is   I. 

in   England,   lawfully  stipulate   for   the  |  tion   of  its  mi 

from  the  liability  imposed  upon  them  by  statute  in  the  event  of  the 
insolvency  of  the  corporation,2  and  it  has  been  held  to  be  compete  nt 


officers  of  corporations  in  Minnesota 
lor  any  "unfaithfulness"  means  "un- 
faithfulness" to  the  creditor  who  is 
^uing.  This  suit  may  be  at  law. 
First  Nat.  Bank  v.  Harper,  61  Minn. 
375  (1895).  Where  stockholders  in 
manufacturing  corporations  are  not 
liable,  but  in  other  companies  are 
liable,  under  a  statute,  yet,  if  the 
charter  authorizes  other  business 
than  manufacturing,  they  are  liable 
although  only  the  manufacturing 
business  is  pursued.  Arthur  r.  Wil- 
lius,  44  Minn.  409   (1890). 

i  Quoted  and  approved  in  Bush  v. 
Robinson,  95  Ky.  492   (1S94),  (a  case 
of  waiver  of  recourse  to  unpaid  sub- 
scriptions) and  Hull  v.  Standard,  etc. 
Co.,    11    Ohio    Circuits    331    (1900); 
Robinson     v.     Bidwell,     22     Cal.     379 
(1863);    French   v.    Teschemaker,    24 
Cal.  518    (18C4);    Basshor  v.  Forbes, 
36  Md.  154  (1S72);  Brown  v.  Eastern 
Slate    Co.,     134    Mass.     590     (18S3), 
where    the    waiver    was    oral.      The 
written   agreement  of  the  vendor   of 
property  to  the  corporation  that  the 
subscribers   for  stock   are   not  to  be 
personally   liable   therefor  is  a   good 
defense  against  their  subscription  lia- 
bility, so  far  as  it  is  to  be  used  to 
pay    that    debt,     even    though    such 
agreement  is  made  prior  to  incorpora- 
tion.    Carnahan  v.  Campbell,  15S  Ind. 
226.      Cf.   previous   decision  in   59   N. 
E.    Rep.    1054    (1902).      A    corporate 
creditor's  agreement  that  stockholders 
should  not  be  individually  liable  on 
a  debt  does  not  relieve  directors  from 
their  statutory  liability,  and  the  court 


intimated  that  it  would  not  have  been 
legal  if  it  had  relieved  the  directors 
from    their    liability.       Swancoat    v. 
Remsen,  78  Fed.  Rep.  592  (1897).    An 
oral  agreement  prior  to  incorporation 
that  the  stockholders  should  not  be 
personally    liable    is   not   binding   on 
the  creditors.     Oswald  v.  Minneapolis 
Times  Co.,  65  Minn.  249   (1S96).     In 
United    States    v.    Stanford,    70    Fed. 
Rep.    346    (1895);    aff'd,    161    U.    S. 
412,  the  court  held  that  the  complain- 
ant had  by  its  acts  waived  the  statu- 
tory  liability    of   a   stockholder    in   a 
California     corporation.        Corporate 
creditors  may  waive  the  stockholders' 
statutory   liability.     Wells    v.   Black, 
117   Cal.   157    (1S97).     A  partnership 
may,  by  contract  with  a  party  with 
whom  it  is  dealing,  limit  the  liability 
of   the    partners.      Sentell   v.    Hewitt, 
50    La.   Ann.    3    (1898).     Where   the 
party  loaning  money  to  the  kssocia- 
tion  agrees  orally  to  rely  on  it  alone, 
he    cannot    afterwards    hold    its    offi- 
cers liable.     Elwell  v.  Tatum,  6  Tex. 
Civ.    App.    397    (1893).      The    agree- 
ment of  a  corporation  to  pay  a  speci- 
fied sum  of  money,  with  the  provision 
that  it  shall  not  be  chargeable  against 
a   certain   part  of  the   capital   stock, 
can  be  enforced  in  equity  only,  inas- 
much  as  an  accounting  is  involved. 
Heflin,  etc.  Co.  v.  Hilton,  124  Ala.  365 
(1899). 

2  Be  Athenaeum  L.  Ass.  Soc,  3  De  G. 
&  J.  660  (1859);  Halket  v.  Merchant 
Traders',  etc.  Assoc,  13  Q.  B.  960 
(1849);  Durham's  Case,  4  Kay  &  J. 
517   (1858).     Cf.  Shelf ord,  Joint-stock 


554 


en.  xil] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§  216. 


for  any  one  dealing  with,  the  company  to  contract  to  hold  the  stock- 
holders responsible  to  only  a  limited  extent,  to  no  extent  at  all,  or  to 
any  specihed  extent  mutually  agreed  upon.1     A  New  York  court  has 


Companies  (2d  London  ed.),  4.  Where 
the  agreement  limits  the  liability  of 
members  to  the  unpaid  part  of  their 
stock,  a  stockholder  who  is  also  a 
creditor  cannot  collect  in  excess  of 
this  par  value.  So  also  with  a  bank, 
one  of  whose  members  is  a  stockhold- 
er. In  re  Worcester,  etc.  Co.,  3  De 
G.,  M.  &  G.  180  (1853).  Although  the 
subscribers  themselves  may  stipulate 
with  each  other  for  such  a  restricted 
liability,  nothing  is  more  clear  than 
that,  as  to  tne  rest  of  the  world,  each 
stockholder  is  liable  for  the  whole 
amount  of  the  debts  of  the  company. 
Nor  will  notice  that  a  stipulation  of 
this  kind  has  been  entered  into  be: 
tween  the  stockholders  prevent  a 
<n  alitor  from  holding  each  of  them 
liable  to  the  full  extend  of  his  de- 
mand. See  Greenwood's  Case,  3  De 
G.,  M.  &  G.  459  (1854);  Re  State 
Fire  Ins.  Co.,  1  N.  R.  510  (V.-C.  W., 
1863). 

l  Quoted  and  approved  in  Hull  v. 
Standard,  etc.  Co.,  11  Ohio  Circuits, 
331  (1900).  Re  State  F.  Ins.  Co.,  1 
Hem.  &  M.  457  (1863);  s.  c,  1  De  G., 
J  &  S.  634;  ::G  L.  J.  (Ch.)  634;  34 
L.  J.  (Ch.)  43G;  Hassell  v.  Merchant 
Traders'  Assoc,  4  Exch.  525  (1849); 
Talbot's  Case,  5  De  G.  &  Sm.  386 
(1852);  s.  c,  21  L.  J.  (Ch.)  S4G.  See 
also  Reid  v.  Allan,  4  Exch.  326 
(1849);  s.  c,  19  L.  J.  (Exch.)  39. 
And  compare  Re  Independent  Assur- 
ance Co.,  1  Sim.  (X.  S.)  54  (1850); 
Sunderland  Marine  Ins.  Co.  v.  Kear- 
ney, 16  Q.  B.  925  (1851);  s.  c,  20 
L.  J.  (Q.  B.)  417;  Peddell  v.  Gwyn, 
1  Hurl.  &  N.  590  (1S57)  ;  s.  c,  26  L. 
J.  (Exch.)  199;  Gordon  v.  Sea  F.  & 
L.  Ass.  Soc,  1  Hurl.  &  N.  599  (1S57) ; 
s.  c,  26  L.  J.  (Exch.)  202.  And  see 
Hess  v.  Werts,  4  Serg.  &  R.  (Pa.)  35G, 
361  (1818);  King  v.  Accumulative, 
etc.  Ass.  Co.,  3  C.  B.  (N.  S.)  151 
(1857).      Cf.    Hallett   v.   Dowdall,    18 


Q.  B.  (N.  S.)  2  (1852).  The  mere  fact 
that  the  articles  of  association  of  an 
unincorporated  company  provide 
against  personal  liability  is  no  de- 
fense, even  though  the  contracts  say 
that  they  are  subject  to  the  provisions 
in  such  articles.  Sullivan  v.  Camp- 
bell, 2  Hall  (N.  Y.),  271  (1829) ;  Hess 
v.  Werts,  4  Serg.  &  R.  (Pa.)  356 
(1818);  Greenwood's  Case,  3  De  G., 
M.  &  G.  459  (1S54).  They  are  liable, 
even  though  their  articles  of  associa- 
tion provided  otherwise.  Manning  v. 
Gasharie,  27  Ind.  399  (1866).  The 
unincorporated  association  is  a  part- 
nership "and  subject  to  the  rules  gov- 
erning that  branch  of  the  law."  But 
if  the  by-laws  limit  the  amount  of 
debts  which  the  directors  may  incur, 
and  they  exceed  it,  they  cannot  have 
contribution  from  non-assenting  stock- 
holders. McFadden  v.  Leeka,  48  Ohio 
St.  513  (1891).  The  same  rule  pre- 
vails in  an  ordinary  copartnership. 
Bromley  v.  Elliot,  38  N.  H.  287  (1859). 
Directors  are  bound  to  know  of  the 
restriction  and  have  no  recourse  to 
the  stockholders;  nor  does  a  firm  in 
which  a  director  is  a  member.  Re 
Worcester  Corn  Exch.  Co.,  3  De  G., 
M.  &  G.  180  (1853).  A  contract  that 
promoters  shall  not  be  personally  lia- 
ble binds  an  engineer.  Landman  v. 
Entwistle,  7  Exch.  632  (1852).  Where 
promoters  stipulate  that  they  shall 
not  be  liable,  the  party  who  tacitly 
assents  to  that  condition  is  bound. 
Giles  v.  Smith,  11  Jur.  334  (1847). 
See  also  ch.  XLIII,  infra;  3  Kent, 
Com.  27;  Story,  Partn.,  §  1C4.  A 
contrary  doctrine  seems  to  have  pre- 
vailed in  Davis  v.  Beverly,  2  Cranch, 
C.  C.  (U.  S.)  35  (1811);  s.  c,  7  Fed. 
Cas.  112;  Riggs  v.  Swann,  3  Cranch, 
C.  C.  183  (1827);  s.  c,  20  Fed.  Cas. 
78S;  reversed  on  another  point  by 
Mandeville  v.  Riggs,  2  Pet.  482  (1829). 
The  exemption  from  liability  must  be 
55 


217.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[cn.  xh. 


said :  "There  can  be  no  doubt  that  it  is  competent  for  the  members  of 
a  joint  stock  association  to  have  the  contracts  so  drawn  as  to  confine 
tho  liability  to  the  assets,  and  thus  create  the  same  situation  as  to 
their  rights  and  liabilities  as  if  the  joint  stock  association  wore  a  cor- 
poration and  they  were  stockholders."1  A  by-law  cannot  release 
stockholders  from  their  statutory  liability.2  The  underwriters  of  an 
unincorporated  Lloyds  insurance  association  may  be  liable  personally 
on  its  policies,  even  though  by  the  terms  of  the  policy  each  under- 
writer assumed  only  his  proportionate  part  of  the  loss,  where  that 
provision  is  not  prominently  set  forth.  The  rule  is  that  the  members 
of  an  association  may  contract  against  personal  liability,  but  the 
notice  to  that  effect  must  bo  so  plain  and  fair  that  the  person 
contracting  with  the  association  knew  of  it,  or  it  was  his  own  fault 
that  he  did  not  know  of  it.3 

§  217.  Statutory  liability  not  enforceable  to  pay  damages  recov- 
ered against  the  corporation  in  tort. — The  statutory  liability  im- 
posed upon  tho  stockholders  in  corporations  is  a  liability  exclu- 
sively for  debts  and  demands  accruing  against  the  corporation  by 
reason  of  its  contracts.  It  cannot,  therefore,  be  enforced  to  pay 
damages  recovered  against  the  corporation  in  an  action  in  tort.4 

clearly   proved.      Skinner  v.   Dayton,  167    (1907),  a  minority  of  the  court 

19  Johns.  513,  537  (1822).    A  stipula-  holding   also   that   the   provision   ex- 

tion  against  holding  stockholders  lia-  empting   the   stockholders   from    per- 

ble  has  been  held  to  refer  to  statutory  sonal  liability  is  void, 

liability  and  not  to  the  subscription  2  Wells     v.     Black,     117     Cal.     157 

liability.     Preston  v.  Cincinnati,   etc.  (1897).      A   provision    inserted    in    a 

R.  R.,  36  Fed.  Rep.  54   (1S88).     Aff'd  certificate  of  incorporation  under  the 

in    Lloyd  v.   Preston,    146   U.    S.   630  Nebraska    statutes    limiting   the    lia- 

(1892).    A  provision  in  an  insurance  bility  of  the  stockholders  so  that  they 

policy  that  the  directors  shall  not  be  are  not  even  liable  for  the  subscrip- 

liable,    although    the    statute    makes  tion  price  is  void.     Van  Pelt  v.  Gard- 

them  liable,   is  not  good.     Greene  v.  ner,  54  Neb.  701  (1898). 

Walton,  59  Hun,  102,  618   (1891).  3  Imperial,   etc.   Co.    v.   Jewett,   169 

l  Hibbs   v.   Brown,   112   N.   Y.   App.  N.  Y.   143    (1901). 

Div.  214    (1906).     On  appeal  in  this  4  Heacock  v.  Sherman,  14  Wend.  58 

case  it  was  held  that  coupons  are  ne-  (1835).    In  this  case  the  stockholders 

gotiable,  even  though  the  trust  deed  in  a  company  which  owned  a  bridge, 

securing  them  provides  for  a  waiver  and   against  which   a   judgment   had 

of  default  in  and  postponed  payment  been  recovered  for  damages  because 

of  such   coupons,   inasmuch  as  such  the  bridge  was  out  of    repair,   were 

provisions  merely  control  any  proced-  held  not  to  be  liable  upon  such  a  de- 

ure  under  the  trust  deed  for  enforc-  mand,    since    the     act    imposing     a 

ing  payment.     Neither  is  negotiabil-  personal  liability  upon  them  contem- 

ity  destroyed  by  a  provision  that  the  plated   a  liability  only   for   demands 

members  of  the  unincorporated  joint  arising  ex  contractu.     In  general,  the 

stock  association  shall  not  be  person-  word  "debt,"  as  used  in  statutes  im- 

ally  liable.    Hibbs  v.  Brown,  190  N.  Y.  posing  a  personal  liability  upon  stock- 

556 


CH.  XII.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[§   218. 


B.     THE  ENFORCEMENT  OF  THE  LIABILITY. 

§  218.  The  statutory  liability  can  be  enforced  by  corporate  cred- 
itors only  —  Stockholders  and  directors  as  creditors  —  Receivers— 
National  banks. — The  statutory  liability  of  the  stockholder  is  cre- 
ated exclusively  for  the  benefit  of  corporate  creditors.  It  is  not  to  be 
numbered  among  the  assets  of  the  corporation,  and  the  corporation 
has  no  right  to  or  interest  in  it.1  It  cannot  enforce  it  by  an  assess- 
ment upon  the  stockholders.2  Nor  can  the  corporation,  upon  the 
insolvency,  assign  it  to  a  trustee  for  the  benefit  of  creditors.3  It  is 
a  liability  running  directly  and  immediately  from  the  stockholders 
to  the  corporate  creditors.4     Accordingly,  a  receiver  of  an  insolvent 


holders,  is  construed  to  include  only- 
liabilities   arising    ex    contractu,   and 
not  to  include   liability  for  damages 
recovered  against  the  corporation  in 
actions    sounding    in    tort.      Child    v. 
Boston,    etc.    Iron   Works,    137    Mass. 
516  (1884),  where  a  judgment  for  in- 
fringement   of    patent    was    not    en- 
forced;   Leighton  r.  Campbell,  17  R. 
I.  51    (1890);   Mill  Dam   Foundry   v. 
Hovey,  38  Mass.  417,  455  (1839),  sus- 
taining   an    unliquidated    claim    for 
damages;     Dryden  v.  Kellogg,  2  Mo. 
App.  87  (1876),  enforcing  a  judgment 
for  breach  of  warranty  of  title;    Doo- 
little  v.  Marsh,  11  Neb.  243    (1SS1); 
Esmond     v.     Bullard,     16     Hun,     65 
(187S);     s.   c,  aff'd  sub  nom.   Losee 
v.    Bullard,    79    N.    Y.    404     (1880); 
Archer  v.  Rose,  3  Brewst.    (Pa.)    264 
(1871).    The  Kansas  statutory  liabil- 
ity of  stockholders  is  for  the  benefit 
of  claims  founded  on  tort  as  well  as 
in  contract.    Henley  v.  Myers,  93  Pac. 
Rep.   168    (Kan.   1907).     A  director's 
statutory  liability  for  debts  does  not 
apply  to  a  judgment  for  damages  for 
tort.     Savage  r.  Shaw,  81  X.  E.  Rep. 
303   (Mass.  1907).     Cable  v.  McCune, 
26  Mo.  371   (1S58),  defeating  a  judg- 
ment for  damages  for  loss  of  a  steam- 
boat;    Bohn  v.  Brown,  33  Mich.  257, 
263   (1876),  refusing  to  enforce  here- 
in a  judgment  against  a  common  car- 
rier for   negligence.      Cf.    Stanton   v. 
•Wilkeson,  8  Ben.   357    (1876);    s.  c, 
22   Fed.   Cas.   1074;    Chase   v.   Curtis, 
113    U.    S.    452     (1885);    Carver    v. 


Braintree  Mfg.  Co.,  2  Story,  432,  448 
(1S43);  s.  c,  5  Fed.  Cas.  235;  Wy- 
man  v.  American  Powder  Co.,  62 
Mass.  168,  182  (1851);  Zimmer  v. 
Schleehauf,  115  Mass.  52  (1874).  But 
the  stockholders'  subscription  liabil- 
ity may  be  enforced  to  pay  damages 
arising  from  torts.  Powell  v.  Ore- 
gonian  Ry.,  36  Fed.  Rep.  726  (1888); 
38  Fed.  Rep.  1S7.  The  word  "dues," 
as  contained  in  the  Ohio  constitution, 
rendering  stockholders  individually 
liable,  renders  them  liable  not  only 
on  contracts  of  the  corporation,  but 
on  torts  committed  by  the  corpora- 
tion. Rider  v.  Fritchey,  49  Ohio  St. 
285  (1S92).  "Dues"  include  corpo- 
rate liability  for  personal  injuries. 
Flenniken  v.  Marshall,  43  S.  C.  80 
(1895).  Under  the,  Kansas  statute 
stockholders  are  liable  only  on  debts 
and  dues,  and  not  for  damages  for  a 
tort.  Brown  v.  Trail,  89  Fed.  Rep. 
641   (1898). 

i  Quoted  and  approved  in  Colton  v. 
Mayer,  90  Md.  711   (1900). 

2Umsted  v.  Buskirk,  17  Ohio  St. 
113  (1866);  Liberty  Female  College 
Assoc,  v.  Watkins,  70  Mo.  13   (1879). 

3  Wright  v.  McCormack,  17  Ohio  St. 
86,  95  (1S66) ;  Dutcher  v.  Marine  Nat. 
Bank,  12  Blatchf.  435  (1875);  s.  c, 
8  Fed.  Cas.  152.  See  also  Cuyken- 
dall  v.  Corning,  88  N.  Y.  129   (1S82). 

4  Bristol  v.  Sandford,  12  Blatchf. 
341  (1874);  s.  c,  4  Fed.  Cas.  163; 
Lane  v.  Morris,  8  Ga.  468  (1850);  s. 
c,  10  Ga.  162;    Arenz  v.  Weir,  89  Hi. 

557 


§  218.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[CH.  XII. 


corporation  lias  no  power  to  enforce  such  a  liability  as  this;  '  bul  in 

many  of  the  states,  in  order  to  avoid  a  multiplicity  of  suits,  and 
conflict  of  interest  and  collusive  settlements  and  doubt  as  to  the 
remedy,  statutes  have  been  passed  authorizing  receivers  to  enforce 


25  (1878).  This  was  an  action  by  a 
judgment  creditor  against  a  stock- 
holder after  a  distribution  of  corpo- 
rate assets  by  a  receiver.  The  cred- 
itor was  held  to  stand  "on  an  inde- 
pendent platform,  above  that  of  the 
receiver,  having  no  concern  with  the 
corporation,  and  the  stockholder  is 
bound,  under  the  law,  to  answer  to 
him." 

i  Quoted  and  approved  in  Stock 
Davidson,  74  Kan.  214   (1906).     Han- 
cock  Nat.    Bank    v.   Ellis,   166    Mass. 
414  (1896);    s.  c,  172  Mass.  39;    Col- 
ton    v.    Mayer,    90    Md.    711    (1900); 
Fidelity,   etc.   Co.   v.  Mechanics'    Sav. 
Bank,  97  Fed.  Rep.  297  (1899) ;    King 
v.  Cochran,  72  Vt.  107    (1900);    Min- 
neapolis,   etc.   Co.    v.    City    Bank,    66 
Minn.  441  (1S96);    Billings  v.  Robin- 
son, 94  N.  Y.  415  (18S4)  ;    Farnsworth 
v.  Wood,  91  N.  Y.  308    (1883);     Cuy- 
kendall    v.    Corning,    88    N.    Y.    129 
(1882);      Arenz    v.    Weir,    89    111.    25 
(1878) ;   Jacobson  v.  Allen,  20  Blatchf. 
525    (1882);    Cutting  v.  Damerel,   88 
N.  Y.  410  (1882);    Bauer  v.  Piatt,  72 
Hun,   326    (1893);     Steinke  v.   Loof- 
bourow,    17   Utah,    252    (1898);     Mc- 
Laughlin   r.    Kimball,    20    Utah,    254 
(1899).     Cf.  Davis  v.  Gray,  16  Wall. 
203      (1872);       Attorney-General     v. 
Guardian,  etc.  Ins.  Co.,  77  N.  Y.  272 
(1879).      A    receiver   cannot    enforce 
the  statutory  liability   except  at  the 
instance  of  the  creditors  and  of  the 
court  after  the  corporate  assets  have 
been    exhausted    and    the    creditors' 
claims  fixed.     Hamilton,  etc.  Bank  v. 
American,  etc.  Co.,  66  Neb.  67  (1902). 
A  receiver  appointed  under  the  gen- 
eral equity  powers  of  the  court,  and 
not  under  a  statutory  power,  in  the 
state  where  the  corporation  exists,  to 
enforce  the  stockholders'  statutory  lia- 
bility, cannot  maintain  a  suit  at  law 
in     another    jurisdiction     against     a 


non-resident  stockholder.     Hilliker  v. 
Hale,  117  Fed.  Rep.  220  (1902) ;    aff'd 
1S8  U.  S.  70.     The  appointment  of  a 
receiver   of   a   corporation    does    not 
prevent  creditors  from  enforcing  the 
directors'      liability.       Patterson       v. 
Stewart,  41  Minn.  84  (1SS9).    But  see 
Minnesota,  etc.  Mfg.  Co.  v.  Langdon, 
44  Minn.  37  (1S90).     At  common  law 
the  statutory  liability  cannot  be  en- 
forced   in    the    receivership    proceed- 
ings.    The  creditor  must  institute  an 
independent    suit.      Spilman   v.   Men- 
denhall,    57   N.   W.   Rep.    468    (Minn. 
1894).     The  creditor  may  proceed  to 
judgment  though  a  receiver  has  been 
appointed.     Mason  v.  N.  Y.  Silk  Mfg. 
Co.,  27  Hun,  307  (1882).    In  Farmers' 
L.    &    T.    Co.   v.    Funk,    49    Neb.    353 
(1896),  the  court  intimated  that  a  re- 
ceiver could  bring  the  suit  where  the 
liability  is  for  the  benefit  of  all  the 
creditors     ratably.      In     Cushing     v. 
Perot,  175  Pa.  St.  66  (1896),  the  court 
held   that  a  receiver  and  not  a  cor- 
porate creditor  was  the  proper  party 
to  enforce  the  statutory  liability.     In 
a  later  decision  the   court  held   that 
a   suit  to   enforce   the   liability   of   a 
stockholder  in  a  Kansas   corporation 
need   not   be  brought  by   a  receiver, 
but  (following  the  decision  of  the  su- 
preme   court    of    Kansas)    might    be 
brought  by  a  creditor.     Ball  v.  An- 
derson, 196  Pa.  St.  86   (1900).     Even 
though  the  receiver  does  not  file  a  bill 
to  enforce  the  statutory  liability  until 
more  than  six  years  after  his  appoint- 
ment,  yet  the  statute  of  limitations 
may  not  be  a  bar.     Andrews  v.  Ba- 
con, 3S  Fed.  Rep.  777  (1889).    Where 
a   receiver   of   a  bank   has   been   ap- 
pointed without  notice  to  the  bank,  a 
suit  by  him  against  the  stockholders 
to  enforce  the  statutory  liability  will 
fail.     Andrews  v.  Holcomb,  113  N.  W. 
Rep.  204  (Neb.  1907),  S4  N.E.  Rep.  827. 


558 


CH.  XII.] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§   218. 


the  statutory  liability  of  stockholders.1  Where  by  a  statute  every 
creditor  has  the  right  to  bring  suit  to  enforce  the  stockholders'  lia- 
bility, a  subsequent  statute  taking  away  this  right  and  giving  it  to  a 


i  By  the  statutes  of  Kansas  of  1899, 
the  receiver  is  given  the  sole  power 
to  enforce   the  statutory  liability   of 
stockholders.     Kisseberth  v.  Prescott, 
95    Fed.    Rep.    357    (1899).     A   judg- 
ment creditor  may  enforce  the  statu- 
tory  liability   of  a  stockholder   in   a 
Kansas    corporation,    although    a    re- 
ceiver is  in  charge.     Brown  v.  Trail, 
89  Fed.  Rep.  641   (1898).     In  Michi- 
gan by  statute  the  receiver  of  an  in- 
solvent bank  may  enforce  the  stock- 
holders'  statutory   liability,    and   the 
order  of  the  court  stating  the  amount 
necessary  to  so  collect  is  binding  on 
the  stockholders  and  the  court  need 
not    wait    until    the    assets    are    ex- 
hausted   before   enforcing   the    same. 
Foster  v.  Row,   120   Mich.   1    (1S99). 
In  Minnesota  now,   by  statute,  a  re- 
ceiver may  enforce  the  statutory  lia- 
bility.    Ueland  v.  Haugan,  70  Minn. 
349   (1897).     And  a  creditor  will  not 
be  allowed  to  sue  except  by  leave  of 
the  court.     Anderson  v.  Seymour,  70 
Minn.  358  (1897).    Under  the  Minne- 
sota  statute    the    receiver    may    join 
with    creditors   in   enforcing   the   lia- 
bility.    Finney  v.  Guy,  106  Wis.  256 
(1900).     A  receiver  may  enforce  the 
statutory  liability  of  stockholders  in 
a  bank  organized  under  the  Iowa  stat- 
utes.    State  v.  Union,  etc.  Bank,  103 
Iowa,   549    (1897),   holding  also  that 
any  matter  determined  at  the  time  of 
the  assessment  cannot  be  disputed  by 
the  stockholder.     In  Georgia  the  re- 
ceiver of  an  insolvent  state  bank  may 
enforce     the     statutory     liability     of 
stockholders     and     the     corporation 
need     not    be    joined     in     his     suit. 
Moore  v.  Ripley,  106  Ga.  556   (1899). 
Where    a    receiver    is    enforcing    the 
statutory  liability  a  creditor  will  not 
be    allowed    to   interfere.      Brown    v. 
Brink,  57  Neb.  606  (1899).    The  statu- 
tory   liability    of    stockholders    in    a 
Washington    bank    may,    under    the 


statutes,   be  enforced   by   a   receiver, 
and  the  order  of  the  court  fixing  the 
amount  of  liability  is  binding  on  all 
stockholders.     Howarth  v.  Ellwanger, 
86   Fed.   Rep.   54    (1898).      In   Wash- 
ington the  statutory  liability  of  stock- 
holders in  banks  can  be  enforced  only 
by  a  receiver.     Watterson  v.  Master- 
son,  15  Wash.  511   (1896);   Wilson  v. 
Book,    13   Wash.   676    (1896).     A   re- 
ceiver can  enforce  the  statutory  lia- 
bility of  stockholders  in  a  Washing- 
ton  bank,   inasmuch   as  the  statutes 
so  provide.    It  is  no  defense  that  the 
stockholder  was  induced  to  subscribe 
by  fraud.    Sheafe  v.  Larimer,  79  Fed. 
Rep.    921     (1897).      Under   the  Wash- 
ington statute,  after  the  statutory  lia- 
bility of  stockholders  has  been  deter- 
mined by  a  decree  of  the  court,  a  re- 
ceiver may  bring  a  suit  at  law  against 
any  stockholder  to  enforce  his  liabil- 
ity.    Shuey  v.   Adair,   24   Wash.   378 
(li)01).      Even   though   a   receiver    is 
entitled  to  enforce  the  statutory  lia- 
bility, yet  where  an  assessment  has 
been   levied   for  the  full  amount  of 
the  liability,  the   remedy  of  the   re- 
ceiver is   at  law  and  not  in  equity. 
Hale  v.   Allison,    102    Fed.   Rep.    790 
(1900);    aff'd  188  U.  S.  56.     In  New 
York  by  statute  the  receiver  is  now 
the  only  person  who  can  enforce  the 
statutory  liability  of  stockholders  in 
state  banks,  unless  he  refuses  to  do 
so.     Ch.  441,  L.  1897.    A  statute  that 
a  receiver  may  enforce  the  statutory 
liability  does  not  prevent  suit  by  a 
en  ditor   who  commences  suit  before 
the   receiver   is  appointed.     Mahoney 
v.  Bernhard,  45  N.  Y.  App.  Div.  499 
(1899);    aff'd  169  N.  Y.  589.     A  re- 
ceiver suing  under  a  statute  need  not 
allege    that    the    creditors    requested 
that  the  suit  be  brought.     It  is  suffi- 
cient that  the   court  authorized   the 
suit.    Wheatley  v.  Glover,  125  Ga.  710 
(1906).    A  stockholder  sued  by  a  re- 


559 


§  218.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[(  II.  XII. 


receiver  is  unconstitutional.1  A  receiver  appointed  not  under  a 
statutory  power,  but  under  the  general  jurisdiction  of  the  court  of 
equity,  cannot  maintain  a  suit  in  another  state  to  enforce  the  statu- 
tory liability  of  stockholders,  especially  where  in  such  other  state 
receivers   have  no  such   power.2     The    New    York  statute  limiting 


ceiver  under  the  Minnesota  statute 
cannot  set  up  that  the  money  is  not 
needed  to  pay  the  debts.  Robinson 
v.  Brown,  126  Fed.  Rep.  429  (1903). 
A  receiver  may  file  a  bill  in  equity 
to  enforce  the  statutory  liability  of 
stockholders  in  banks  in  North  Caro- 
lina, and  he  may  sue  either  in  his 
own  name  or  in  the  name  of  the  cor- 
poration. Smathers  v:  Western,  etc. 
Bank,  135  N.  C.  410   (1904). 

i  Woodworth  v.  Bowles,  Gl  Kan.  569 
(1900).  The  Kansas  statute  of  1889, 
repealing  the  old  method  of  enforcing 
the  stockholders'  statutory  liability 
and  providing  that  the  receiver  shall 
enforce  the  liability,  is  unconstitu- 
tional as  against  creditors  whose 
claims  arose  prior  to  such  statute. 
Evans  v.  Nellis,  101  Fed.  Rep.  920 
(1900);  aff'd,  187  U.  S.  271  (1902). 
A  statute  authorizing  a  receiver  to 
enforce  the  statutory  liability  does 
not  prevent  a  creditor  enforcing  that 
liability  on  a  contract  existing  at  the 
time  of  the  passage  of  tJhe  statute. 
Webster  v.  Bowers,  104  Fed.  Rep.  627 
(1900).  The  legislature  may  author- 
ize the  liability  to  be  enforced  by  a 
receiver,  even  in  corporations  which 
have  passed  into  a  receiver's  hands 
prior  to  the  enactment  of  the  statute. 
Persons  v.  Gardner,  42  N.  Y.  App. 
Div.  490  (1899).  As  regards  corpo- 
rate debts  already  incurred,  a  statute 
is  unconstitutional  which  provides 
that  the  stockholder's  statutory  lia- 
bility shall  be  enforced  only  by  a  re- 
ceiver. Harrison  v.  Remington,  etc. 
Co.,  140  Fed.  Rep.  385  (1905).  A 
statute  authorizing  a  court  to  mar- 
shal the  assets  of  an  insolvent  cor- 
poration and  levy  assessments  upon 
stockholders  and  to  appoint  a  special 
receiver  to  collect  the  same  is  con- 
stitutional,   even    though    it    applies 


to  corporations  existing  at  the  time 
of  the  passage  of  the  statute.  Rob- 
inson v.  Brown,  126  Fed.  Rep.  429 
(1903).  A  statute  authorizing  a  re- 
ceiver to  enforce  the  statutory  lia- 
bility applies  to  a  liability  already  ex- 
isting. Wheatley  v.  Glover,  125  Ga. 
710  (1906).  The  statute  that  a  re- 
ceiver shall  collect  a  stockholder's 
liability  is  not  valid  as  to  a  corporate 
creditor  having  a  judgment  when  the 
statute  was  enacted.  Pusey,  etc.  Co. 
v.  Love,  66  Atl.  Rep.  1013  (Del.  1906). 
A  stockholder  cannot  claim  that  a 
statute  authorizing  a  receiver  to  en- 
force his  liability  is  unconstitutional. 
Henley  v.  Myers,  93  Pac.  Rep.  168 
(Kan.  1907). 

2  Hale  v.  Allison,  188  U.  S.  56 
(1903);  aff'g  106  Fed.  Rep.  258.  An 
ordinary  receiver  of  an  insolvent 
bank  has  no  power  to  sue  in  another 
jurisdiction  to  enforce  a  liability  of 
stockholders.  Covell  v.  Fowler,  144 
Fed.  Rep.  535  (1906).  A  Minnesota 
receiver  of  an  insolvent  Minnesota 
corporation  cannot  enforce  in  Wis- 
consin the  statutory  liability  of  a 
Wisconsin  stockholder  in  such  cor- 
poration. Finney  v.  Guy,  189  U.  S. 
335  (1903).  Massachusetts  stock- 
holders in  a  Nebraska  state  bank,  be- 
ing liable  on  their  stock  by  statute, 
are  bound  by  a  final  decree  of  the 
Nebraska  court  that  the  corporation 
has  been  wound  up  and  has  no  more 
property  and  has  unpaid  judgments 
against  it,  and  that  the  receiver  will 
bring  suit  against  the  stockholders. 
Such  a  receiver  may  on  such  decree 
bring  suits  at  law  in  the  Massachu- 
setts courts  against  Massachusetts 
stockholders,  even  though  they  were 
not  parties  to  the  Nebraska  suit,  and* 
they  cannot  maintain  a  bill  in  equity 
to  enjoin  such  suits  at  law.     Francis 


560 


CH.  XII.  J 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[§  218. 


the  time  within  which  a  stockholder  may  be  held  liable  for  a  cor- 
porate debt  does  not  apply  to  a  suit  brought  in  the  United  States 
court  in  New  York  by  a  receiver  to  enforce  the  statutory  liability 
of  a  citizen  of  New  York  in  a  Minnesota  corporation.1  An  assignee 
of  an  insolvent  corporation  for  the  benefit  of  its  creditors  cannot 
enforce  the  statutory  liability  of  stockholders.2  A  trustee  in  bank- 
ruptcy of  a  Kansas  corporation  may  enforce  the  double  liability  of 
stockholders  and  no  judgment  against  the  corporation  need  first  be 
obtained.3     An  agent  selected  by  the  stockholders  of  an  insolvent 


v.  Hazlett,  192  Mass.  137  (1906). 
Where  a  foreign  receiver  of  a  foreign 
corporation  has  title  to  its  assets  and 
by  statute  has  power  to  collect  the 
statutory  liability  of  stockholders  he 
may  sue  non-resident  stockholders  in 
the  state  where  they  reside,  and  if 
the  amount  of  liability  has  been  de- 
termined by  valid  proceedings  in  the 
first  named  state,  in  accordance  with 
its  statutes,  the  suit  in  the  other 
states  may  be  at  law  for  the  amounts 
so  determined.  King  v.  Cochran,  76 
Vt.  141  (1904).  The  Ohio  statutory 
liability  may  be  enforced  in  the 
United  States  court  in  Kentucky 
against  a  Kentucky  stockholder  where 
it  is  shown  that  the  Ohio  stockhold- 
ers have  been  assessed  to  the  full 
amount  of  their  liability,  and  that  the 
corporation  is  insolvent,  and  that  the 
liabilities  of  the  corporation  exceed 
the  assets,  together  with  the  stock- 
holders' liability;  and  where,  under 
the  statutes  of  Ohio,  a  receiver  may 
enforce  the  liability,  such  receiver 
may  maintain  such  suits  in  the 
United  States  courts  in  other  states 
for  that  purpose.  Kirtley  v.  Holmes, 
107  Fed.  Rep.  1  (1901).  A  receiver 
of  a  Kansas  corporation  cannot  main- 
tain a  suit  in  the  United  States  court 
in  New  York  against  a  New  York 
stockholder  to  enforce  his  statutory 
liability,  unless  the  receiver  has  first 
brought  suit  in  Kansas  and  the 
amount  of  the  liability  of  all  resident 
stockholders  has  been  fixed,  such  be- 
ing the  requirement  of  the  Kansas 
statute,  and  there  being  no  common- 
law  right  of  the  receiver  to  institute 


such  suit.  Evans  v.  Nellis,  187  U.  S. 
271  (1902).  The  court  may  authorize 
a  receiver  to  enforce  the  statutory  lia- 
bility of  stockholders  under  the  Ohio 
statute.  Zieverink  v.  Kemper,  50 
Ohio  St.  208  (1893).  In  the  case  of 
Hale  v.  Hardon,  89  Fed.  Rep.  283 
(1898),  where  the  receiver  appointed 
by  a  court  in  Minnesota  brought  suit 
in  the  United  States  court  in  Massa- 
chusetts to  enforce  the  statutory  lia- 
bility of  a  Massachusetts  stockholder 
in  a  Minnesota  corporation,  the  court 
held  that  the  suit  would  not  lie  at 
the  instance  of  such  a  receiver.  In 
the  case  of  Hale  v.  Hardon,  95  Fed. 
Rep.  747  (1899),  a  receiver  appointed 
by  a  Minnesota  court  was  held  to 
have  power  to  enforce  the  statutory 
liability  of  Massachusetts  stockhold- 
ers in  a  Minnesota  corporation.  A 
receiver  appointed  in  Washington  of 
an  insolvent  state  bank  in  that  state 
may  bring  suit  in  the  New  York 
courts  to  enforce  the  statutory  liabil- 
ity of  a  New  York  stockholder  in 
such  bank,  it  appearing  that  no  New 
York  creditor  of  such  bank  will  be 
prejudiced  thereby.  Howarth  v.  An- 
gle, 39  N.  Y.  App.  Div.  151  (1899); 
aff'd,   162    N.  Y.    179. 

i  Bernheimer  v.  Converse,  206  U. 
S.  516    (1907). 

2  Runner  v.  Dwiggins,  147  Ind.  238 
(1897).  An  assignee  of  an  insolvent 
corporation  in  Colorado  cannot  en- 
force the  statutory  liability  of  stock- 
holders. Zang  v.  Wyant,  25  Colo.  551 
(1898). 

3  Stocker  v.  Davidson,  74  Kan.  214 
(1906).      A    trustee    in    bankruptcy 


(36) 


561 


§  218.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[CH.  XII. 


national  bank  to  wind  up  the  bank  cannot  enforce  the  statutory  lia- 
bility.1 

It  has  been  held  that  the  statutory  liability  of  stockholders  cannot 
be  enforced  by  the  directors  as  "creditors."  2 

It  is  uncertain  whether  a  stockholder,  who  is  also  a  creditor  of 
the  corporation,  may  bring  an  action  at  law  against  his  co-stock- 
holders to  enforce  a  statutory  liability.  In  Massachusetts,3  Illinois,1 
and    New   York 5   the  rule  is  settled   that  such  an  action  cannot  be 


may  enforce  the  liability  of  stock- 
holders for  stock  issued  for  property 
fraudulently  and  knowingly.  Allen  v. 
Grant,  122  Ga.  552  (1905).  A  trustee 
in  bankruptcy  may  collect  unpaid  sub- 
scriptions, but  cannot  enforce  a  statu- 
tory liability.  Tiger,  etc.  Co.'s  Trus- 
tee v.  Shanklin,  102  S.  W.  Rep.  295 
(Ky.  1907). 

i  Church  v.  Ayer,  80  Fed.  Rep.  543 
(1897). 

2McDowall  v.  Sheehan,  129  N.  Y. 
200  (1891).  A  director  who  is  a 
creditor  cannot  in  certain  cases  share 
with  the  other  creditors  and  prove  a 
claim  due  to  him  from  the  corpora- 
tion. Neither  can  such  claim  be 
proved  where  it  belongs  to  a  firm  or 
company  of  which  the  director  was  a 
member,  or  to  the  assignee  of  such 
firm  or  company.  Thacher  v.  King, 
156  Mass.  490  (1892).  A  director  may 
enforce  his  claim  as  a  creditor.  Jan- 
ney  v.  Minneapolis,  etc.  Exposition, 
79   Minn.   488    (1900). 

3  Thayer  v.  Union  Tool  Co.,  70 
Mass.  75    (1855). 

4  Meisser  v.  Thompson,  9  111.  App. 
368  (1881);  s.  c,  Thompson  v.  Meis- 
ser, 108  111.  359   (1884). 

5  Mabhez  v.  Neidig,  72  N.  Y.  100 
(1878);  Clark  v.  Myers,  11  Hun,  608 
(1S77);  Bailey  v.  Bancker,  3  Hill, 
1S8  (1S42)  (overruling  upon  this 
point  Simonson  v.  Spencer,  15  Wend. 
548—1836) ;  Beers  v.  Waterbury,  8 
Bosw.  396  (1S61);  Richardson  v. 
Abendroth,  43  Barb.  162  (1864) ;  Dem- 
ing  v.  Puleston,  33  N.  Y.  Super.  Ct. 
231  (1871).  Cf.  Sanborn  v.  Lefferts, 
58  N.  Y.  179  (1874);  Garrison  v. 
Howe,  17  N.  Y.  458  (1858).    To  same 


effect,  Perkins  v.  Sanders,  56  Miss. 
733  (1879).  Cf.  Slee  v.  Bloom,  5 
Johns.  Ch.  366,  382  (1821);  Terry 
v.  Bank  of  Cape  Fear,  20  Fed.  Rep. 
777  (1884);  Weber  v.  Fickey,  47  Md. 
196  (1877);  s.  c,  52  Md.  501.  See 
also  Emmert  v.  Smith,  40  Md.  123 
(1874);  Hollister  v.  Hollister  Bank, 
2  Abb.  App.  Dec.  367  (1865).  In  this 
case  stockholders  of  an  insolvent 
bank,  after  paying  the  judgments  had 
against  them  to  enforce  their  indi- 
vidual liabilities,  turned  around  and 
asked  to  be  made,  to  the  extent 
of  those  judgments,  creditors  of  the 
bank,  and  thus  entitled  to  participate 
pro  rata  with  other  creditors.  Held, 
nothing  is  to  be  repaid  to  the  stock- 
holders until  all  the  debts  of  the  bank 
are  paid.  An  assignee  of  a  stockhold- 
er's claim  against  the  corporation 
may  enforce  the  statutory  liability 
of  other  stockholders  where  he  is  the 
assignee  also  of  the  claim  from  a 
creditor  who  is  not  a  stockholder. 
Montgomery  v.  Brush,  etc.  Co.,  48  N. 
Y.  App.  Div.  12  (1900);  aff'd,  168  N. 
Y.  657.  A  creditor  who  is  also  a 
stockholder  cannot  sue  to  enforce  the 
statutory  liability  of  another  stock- 
holder unless  he  has  paid  his  own 
liability.  Milford  Sav.  Bank  v.  Jos- 
lyn,  55  Pac.  Rep.  756  (Kan.  1898). 
Where  a  creditor  who  is  also  a  stock- 
holder seeks  to  enforce  a  statutory 
liability,  he  is  entitled,  not  to  the 
entire  amount  claimed  by  him  as 
creditor,  but  only  to  contribution,  and 
his  bill  in  equity  must  be  based  on 
that  theory.  Cocking  v.  Ward,  48  S. 
W.  Rep.  287   (Tenn.  1898). 


562 


en.  xii.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[§  218. 


maintained.  In  those  jurisdictions  the  only  remedy  for  such  a 
creditor  in  such  a  case  is  by  a  bill  in  equity  for  contribution.1  But 
in  Pennsylvania,2  Maine,3  Minnesota,4  and  California,5  the  rule  is 
otherwise,  and  it  is  no  objection  to  the  creditor's  action  that  he  is 
himself  also  a  stockholder.6  Where  an  insolvent  bank  in  the  hands 
of  a  receiver  is  indebted  to  a  stockholder,  and  the  stockholder  is 
also  insolvent,  the  court  will  not  allow  such  stockholder  to  partici- 
pate in  the  distribution  of  the  assets,  but  will  offset  his  interest  in 
the  assets  against  his  statutory  liability  on  the  stock,  even  though 
the  stockholder  has  assigned  to  another  his  interest  in  the  assets.7 
Where  directors  and  officers  of  an  insolvent  bank  are  also  creditors, 


i  But  see  Potter  v.  Stevens  Machine 
Co.,  127  Mass.  592  (1879);  Savings 
Assoc,  v.  O'Brien,  51  Hun,  45  (1889), 
and  §  218,  infra. 

2  Brinham  v.  Wellersburg  Coal  Co., 
47  Pa.  St.  43   (18G4). 

3  Fowler  v.  Robinson,  31  Me.  189 
(1850). 

4  Oswald  v.  Minneapolis  Times  Co., 
65  Minn.  249  (189G);  Mendenhall  v. 
Duluth,  etc.  Co.,  72  Minn.  312  (1898). 

5  Brown  v.  Merrill,  107  Cal.  446 
(1895);  Knowles  v.  Sandercock,  107 
Cal.  629   (1895). 

c  In  a  suit  in  equity  to  enforce 
stockholders'  statutory  liability,  a 
plea  that  the  decedent  of  one  of  the 
complainants  was  also  a  stockholder, 
and  no  offer  to  pay  his  liability  had 
been  made,  is  not  a  good  plea.  New- 
berry v.  Robinson,  41  Fed.  Rep.  458 
(1890).  In  New  York  it  seems  that 
the  assignee  of  a  judgment  may  bring 
the  suit  to  enforce  the  statutory  lia- 
bility, though  the  assignee  be  a  stock- 
holder. Woodruff,  etc.  Iron  Works  v. 
Chittenden,  4  Bosw.  406  (1859).  See 
also  Garrett  v.  Sayles,  1  Fed.  Rep. 
371  (1880);  aff'd,  110  U.  S.  288;  Pot- 
ter v.  Stevens  Machine  Co.,  127  Mass. 
592  (1879).  A  judgment  creditor  of 
a  Kansas  corporation  may  enforce  the 
statutory  liability  of  a  stockholder 
therein,  even  though  the  former  is  a 
stockholder  himself,  but  he  can  en- 
force the  liability  only  for  a  balance 
due  after  deducting  from  the  claim 
his  own  liability.    Brown  v.  Trail,  89 


Fed.  Rep.  641  (1898).  A  stockholder 
who  has  paid  his  statutory  liability 
is  not  subrogated  to  the  claims  so 
paid,  and  hence  cannot  participate  in 
any  dividends  from  the  corporate  as- 
sets. Sacramento  Bank  v.  Pac.  Bank, 
124  Cal.  147  (1899).  As  to  the  pur- 
chase of  claims  or  judgments  by  the 
stockholders,  see  also  §  225  (e),  infra. 
7  King  v.  Armstrong,  50  Ohio  St. 
222  (1893).  Even  though  stockhold- 
ers are  liable  by  statute,  yet  if  they 
endorse  a  note  of  the  corporation  they 
may  have  contribution  thereon  as 
sureties.  Kellogg  v.  Lopez,  145  Cal.  497 
(1904).  Under  the  New  Jersey  statute 
where  stockholders  are  held  liable  to 
corporate  creditors  on  stock  issued  for 
property  taken  at  a  fraudulent  over- 
valuation, a  creditor  is  entitled  to 
participate,  even  though  he  is  also 
one  of  the  stockholders  and  took  part 
in  the  illegal  issue.  Easton  Nat. 
Bank  v.  American,  etc.  Co.,  70  N.  J. 
Eq.  732  (1906);  rev'g  in  part  69  N. 
J.  Eq.  326.  Where  a  stockholder  is 
also  a  creditor,  the  court  will  offset 
his  liability  against  his  claims  so  far 
as  possible.  Harper  v.  Carroll,  66 
Minn.  487  (1896).  Where  by  the 
charter  the  stockholders  are  liable 
for  all  debts,  and  they  buy  some  of 
the  company's  bonds,  the  remaining 
bonds  will  be  paid  first  out  of  the 
proceeds  of  foreclosure.  Shaw  v. 
Saranac,  etc.  Co.,  78  Hun,  7  (1894); 
aff'd  on  another  point  in  144  N.  Y. 
220.     The   receiver  cannot  set  off  a 


563 


218.] 


STATUTORY  LIABILITY  OF  STOCKHOLM  :i;    . 


XII. 


their  liability  for  negligence  may  bo  offset  againsl  their  claims  as 
liters.1 

Stockholders  in  national  banks  are  subject  to  a  double  liability. 
Not  only  that,  but  if  at  any  time  the  capital  stock  of  the  bank  be- 
comes diminished  by  losses,  the  comptroller  of  the  currency  may 
compel  the  stockholders  to  either  discontinue  business  or  assess  them- 
selves to  replace  the  loss.2  An  assessment  levied  by  stockholders 
in  a  national  bank  upon  themselves,  in  accordance  with  the  order 
of  the  comptroller,  cannot  be  collected  by  suit,  inasmuch  as  a  remedy 
is  given  by  the  act  of  Congress,  such  remedy  being  a  sale  of  the 
stock   itself.3 

The  double  liability  of  stockholders  in  national  banks  is  fixed 
by  an  order  of  the  comptroller  of  the  currency,  and  under  the  national 
bank  act  the  comptroller  of  the  currency  has  absolute  .authority  to 
direct  at  what  time,  and  to  what  extent,  the  stockholders'  statutory 
liability  shall  be  enforced.4      Successive  assessments  may  be  made 


stockholder's  statutory  liability  or 
debts  against  a  claim  by  a  party 
whose  money  was  deposited  in  the 
stockholder's  name.  Fisher  v.  Knight, 
61  Fed.  Rep.  491  (1894). 

i  Elliott  v.  Farmers'  Bank,  etc.,  57 
S.  E.  Rep.  242   (W.  Va.  1907). 

2  See  U.  S.  Rev.  Stat,  §  5205.  Where 
stock  in  a  national  bank  is  sold  on 
account  of  a  stockholder  failing  to 
pay  the  assessment  levied  upon  it  un- 
der section  5205  of  the  United  States 
Revised  Statutes,  the  sale  is  illegal 
unless  the  stock  brings  the  amount  of 
the  assessment.  Merchants'  Nat.  Bank 
v.  Fouche,  103  Ga.  851  (1898). 

3  Hulitt  v.  Bell,  85  Fed.  Rep.  89 
(1898).  The  stockholders  and  not 
the  directors  in  a  national  bank  are 
to  decide  whether  the  stock  shall  be 
assessed  in  order  to  restore  the  im- 
paired capital  stock.  Commercial, 
etc.  Bank  v.  Weinhard,  192  U.  S.  243 
(1904),  the  court  saying:  "It  would 
be  going  far  beyond  the  usual  pow- 
ers conferred  upon  directors  to  permit 
them  to  thus  control  the  corporation. 
.  .  .  The  origin  and  continuation 
of  the  association  would  seem  to  be 
matters  in  which  the  owners  and  not 
the  managers  of  the  bank  are  pri- 
marily   interested.    .      .      .      Action 

'5 


upon  the  comptroller's  order  involves 
extraordinary  action  of  the  associa- 
tion, and  determines  its  future  opera- 
tions or  liquidation,  and  is  not  found 
within  the  powers  conferred  upon 
the  directors  for  the  management  of 
the  business  of  the  bank.  If  this 
were  not  so,  then  the  decision  of  a 
question  of  such  vital  importance  is 
left  to  the  directors,  who  may  or  may 
not  be  large  holders  of  stock.  As  it 
is  a  matter  foreign  to  the  powers  of 
such  boards  and  not  conferred  by 
statute  or  required  for  the  transac- 
tion of  the  business  of  the  bank,  we 
think  it  was  intended  to  be  vested  in 
the  shareholders.  Whether  a  given 
power  is  to  be  exercised  by  the  di- 
rectors or  the  shareholders  depends 
upon  its  nature  and  the  terms  of  the 
enabling   act." 

4  King  v.  Armstrong,  50  Ohio  St. 
222  (1893).  The  comptroller  in  as- 
sessing national  bank  stock  need  not 
have  any  previous  judicial  ascertain- 
ment of  the  necessity  therefor.  Bush- 
nell  v.  Leland,  164  U.  S.  684  (1897). 
It  is  for  him  to  determine  whether, 
and  to  what  extent,  the  statutory  lia- 
bility of  the  stockholders  shall  be  en- 
forced. Casey  v.  Galli,  94  U.  S.  673 
(1876);  Kennedy  v.  Gibson,  8  Wall. 
64 


CH.  XII.  J 


STATUTORY  LLVBILITY  OF  STOCKHOLDERS. 


[§   218. 


on  national  bank  stockholders  upon  the  insolvency  of  the  hank,  not 
exceeding  in  amount  the  par  value  of  the  stock.1  The  receiver  of 
a  national  bank  is  the  proper  person  to  enforce  this  liability  of  the 
stockholders.2     In  the  voluntary  liquidation  of  a  national  bank,  a 


498  (1SG9);  Strong  v.  Southworth,  8 
Ben.  331  (1875);  s.  c,  23  Fed.  Cas. 
254;  National  Bank  v.  Case,  99  U.  S. 
628  (1878).  The  decision  of  the 
comptroller  as  to  the  amount  of  as- 
sessments on  stockholders  in  a  na- 
tional bank  is  conclusive.  De  Weese 
v  Smith,  97  Fed.  Rep.  309  (1899); 
Aldrich  v.  Campbell,  97  Fed.  Rep. 
663  (1899).  A  voluntary  assessment 
of  the  stockholders  by  themselves 
does  not  affect  or  decrease  this  statu- 
tory liability.  Delano  v.  Butler,  118 
U.  S.  634  (1886).  It  is  no  defense 
to  an  assessment  levied  by  the  comp- 
troller on  a  stockholder  in  a  national 
bank  that  the  full  amount  of  the  as- 
sessment will  probably  not  be  re- 
quired to  pay  the  debts.  O'Connor  v. 
Witherby,  111  Cal.  523  (1896).  As  to 
the  procedure  for  enforcing  the  lia- 
bility of  stockholders  in  a  national 
bank,  see  Williamson  v.  American 
Bank,  115  Fed.  Rep.   793    (1902). 

i  Studebaker  v.  Perry,  184  U.  S. 
259  (1902).  A  second  assesment  may 
be  levied  by  the  comptroller  on  stock- 
holders in  an  insolvent  national  bank 
and  collected  by  the  receiver,  but  the 
aggregate  assessments  cannot  exceed 
the  par  value  of  the  stock.  The  stat- 
ute of  limitations  does  not  begin  to 
run  until  the  assessment  is  levied. 
Deweese  v.  Smith,  106  Fed.  Rep.  438 
(1901);*  Aldrich  v.  Campbell,  97  Fed. 
Rep.  663  (1899).  A  second  assess- 
ment on  national  bank  stockholders 
cannot  be  made  to  pay  unpaid  first 
assessments.  Lease  v^  Barschall,  106 
Fed.   Rep.    762    (1900). 

2  A  receiver  of  a  national  bank  may 
by  suit  in  equity  in  the  United  States 
court  collect  an  assessment  levied  on 
the  stockholders.  Rankin  v.  Herod, 
140  Fed.  Rep.  661  (1905).  A  suit  to 
enforce  the  statutory  liability  of  di- 
rectors in  a  national  bank  for  negli- 


gence can  be  brought  by  the  receiver 
only.  Boyd  v.  Schneider,  124  Fed. 
Rep.  239  (1903).  The  United  States 
district  court  has  jurisdiction  of  an 
action  by  the  receiver  of  an  insolvent [ 
national  bank  to  collect  assessments 
on  stock.  Stephens  v.  Bernays,  44 
Fed.  Rep.  642  (1890).  A  receiver  of 
a  national  bank  may  collect  assess- 
ments in  the  federal  court  even 
though  the  amount  is  less  than  two 
thousand  dollars.  Brown  v.  Smith,  88 
Fed.  Rep.  565  (1898).  The  personal 
liability  of  officers  in  national  banks 
cannot  be  enforced  by  creditors  after 
a  receiver  has  gone  in.  The  receiver 
may  enforce  it.  Bailey  v.  Mosher,  63 
Fed.  Rep.  488  (1894).  As  to  the 
allegations  to  support  a  receiver's  ac- 
tion to  enforce  the  statutory  liability 
in  national  banks,  see  Nead  v.  Wall, 
70  Fed.  Rep.  806  (1895).  The  fed- 
eral courts  have  jurisdiction  of  a  suit 
brought  against  a  receiver  of  a  na- 
tional bank  to  compel  him  to  recog- 
nize a  depositor's  claim,  even  though 
both  parties  are  citizens  of  the  same 
state.  Bartley  v.  Hayden,  74  Fed. 
Rep.  913  (1896).  A  receiver  of  a 
national  bank  may  enforce  the  statu- 
tory liability  of  stockholders.  King 
v.  Armstrong,  50  Ohio  St.  222  (1893). 
The  receiver  of  a  national  bank  may 
sue  a  stockholder  in  the  state  courts 
to  recover  an  assessment.  Peters  v. 
Foster,  56  Hun,  607  (1890).  The 
United  States  circuit  court  has  juris- 
diction of  an  action  by  the  receiver 
of  an  insolvent  national  bank  to  col- 
lect assessments  on  stock.  Thompson 
v.  Pool,  70  Fed.  Rep.  725  (1895). 
The  statutory  liability  of  stockholders 
in  a  national  bank  may  be  enforced 
by  an  action  at  law,  and  the  assess- 
ment as  made  by  the  comptroller  is 
conclusive.  Young  v.  Wempe,  46  Fed. 
Rep.    354    (1891).     A    receiver   of   a 


565 


§  219.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[cn.  x;:. 


trustee  appointed  by  the  stockholders  cannot  enforce  the  stockholders' 
liability.  Such  liability  can  be  enforced  only  by  a  bill  in  equity 
filed  by  a  creditor.1  The  defenses  to  this  liability  are  substantially 
the  same  as  in  other  cases  of  statutory  liability.2  The  failure  of  a 
national  hank  director  to  perform  his  duly,  as  required  by  the  act 
of  Congress,  subjects  him  to  damages  only  when  lie  knowingly 
violated  the  national  banking  act  as  specified  in  the  act,  and  there 
is  no  common-law  liability.3 

§219.  Judgment  and  execution  must  be  obtained  against  the  cor- 
poration before  the  stockholder's  statutory  liability  can  be  enforced. 
Even  when  not  expressly  provided  by  statute,  it  is  the  rule,  accord- 
ing to  the  weight  of  authority,  that  corporate  creditors,  before  they 
can  proceed  against,  the  stockholders  upon  their  statutory  liability, 
must,  first  exhaust  their  remedy  against  the  corporation  and  its  assets.4 
This  rule  arises  from  the  fact  that  the  liability  of  the  stockholder  is 


national  bank  suing  in  another  state 
may  be  compelled  to  give  security 
for  costs,  unless  the  suit  was  ex- 
pressly directed  by  the  comptroller. 
Piatt  v.  Adriance,  90  Fed.  Rep.  772 
(1898). 

i  Williamson  v.  American  Bank,  109 
Fed.  Rep.  36  (1901);  aff'd,  115  Fed. 
Rep.  793. 

2  A  holder  of  increased  capital 
stock  of  a  national  bank  cannot  de- 
feat the  statutory  liability  on  the 
ground  that  the  increase  was  irregu- 
larly made  and  was  fraudulently 
made,  in  that  the  directors  issued  it 
to  themselves  without  paying  there- 
for. Latimer  v.  Bard,  76  Fed.  Rep. 
536  (1896).  The  state  statute  of 
limitations  runs  against  the  stock- 
holder's liability  in  a  national  bank 
from  the  day  when  the  assessment 
levied  by  the  comptroller  becomes 
payable,  and  this  statute  is  a  bar  both 
at  law  and  in  equity.  Thompson  v. 
German  Ins.  Co.,  76  Fed.  Rep.  892 
(1896).  A  holder  of  stock  in  a  na- 
tional bank  is  not  entitled  to  offset 
against  an  assessment  ordered  by 
the  comptroller  upon  his  stock  the 
amount  of  his  deposits  at  the  time 
the  bank  became  insolvent.  Wingate 
v.  Orchard,  75  Fed.  Rep.  241  (1896). 
Where   a   depositor   is   also    a   stock- 


holder in  an  insolvent  national  bank, 
his  claim  as  a  depositor  may  be  set 
off  by  the  receiver  of  the  bank  to  the 
extent  of  the  statutory  liability  on  the 
stock.  This  set-off  may  be  made,  al- 
though the  party  has  assigned  his 
right  to  the  deposit  before  an  assess- 
ment had  been  levied  upon  the  stock, 
the  assignment  having  been  after  the 
insolvency  of  the  bank.  King  v.  Arm- 
strong, 50  Ohio  St.  222  (1893).  Where 
stockholders  in  a  national  bank  have 
been  assessed  irregularly  and  a  sur- 
plus remains  after  paying  creditors, 
the  stockholders  who  have  paid  the 
irregular  assessments  will  first  be  re- 
paid out  of  the  surplus  assets.  In  re 
Hulitt,  96  Fed.  Rep.  785  (1899).  The 
court  refused  to  compromise  a  judg- 
ment against  a  stockholder  under  the 
national  bank  act  in  the  case  In  re 
Earle,  96  Fed.  Rep.  678    (1899). 

3  Yates  v.  Jones  Nat.  Bank,  206  U. 
S.  158  (1907);  rev'g  105  N.  W.  Rep. 
287. 

i  Quoted  and  approved  in  Ewing  v. 
Stultz,  9  Ind.  App.  1  (1894);  Means's 
Appeal,  85  Pa.  St.  75  (1877);  Fourth 
Nat.  Bank  v.  Francklyn,  120  U.  S.  747 
(1887);  Allen  v.  Arnold,  18  R.  I.  809 
(1895) ;  Globe  Pub.  Co.  v.  State  Bank, 
41  Neb.  175  (1894);  Com'l  Nat.  Bank 
v.  Gibson,  37  Neb.  750   (1893);   Bay- 


566 


CH.  XII,] 


STATUTORY  LIABILITY  OP  STOCKHOLDERS. 


[§  219. 


not  the  usual  fund  for  the  payment  of  corporate  debts,  but  that  the 
corporate  treasury  is  the  primary  resource.  Accordingly,  the  statu- 
tory liability  of  the  stockholders  is  not  to  be  resorted  to,  if  the  assets 
of  the  corporation,  including  the  unpaid  subscriptions  for  stock,  will 
suffice  to  pay  the  debts.1     There  is,  however,  a  line  of  authorities  in 


liss  v.  Swift,  40  Iowa,  648  (1875); 
McClaren  v.  Franciscus,  43  Mo.  452 
(18G9);  Wright  v.  McCormack,  17 
Ohio  St.  86  (1866);  Wehrman  v. 
Reakirt,  1  Cm.  Super.  Ct.  (Ohio),  230 
(1871);  Lane  v.  Harris,  16  Ga.  217 
(1854);  Drinkwater  v.  Portland  Ma- 
rine Ry.,  18  Me.  35  (1841);  Dauchy 
v.  Brown,  24  Vt.  197  (1852);  Wilson 
v.  Book,  13  Wash.  676  (1896);  Cam- 
bridge Waterworks  v.  Somerville  Dye- 
ing Co.,  86  Mass.  239  (1862);  Toucey 
v.  Bowen,  1  Biss.  81  (1855);  s.  c,  24 
Fed.  Cas.  70.  Cf.  Patterson  v.  Wyo- 
missing  Mfg.  Co.,  40  Pa.  St.  117 
(1861);  Harper  v.  Union  Mfg.  Co., 
100  111.  225  (1881);  Hatch  v.  Bur- 
roughs, 1  Woods,  439  (1870) ;  s.  c,  11 
Fed.  Cas.  795.  In  Colorado  stockhold- 
ers liable  by  statute  may  be  joined 
as  parties  defendant  in  the  original 
suit  against  the  corporation.  Tabor 
v  Goss,  etc.  Co.,  11  Colo.  419  (1888). 
The  statutory  liability  of  directors 
for  debts  contracted  in  excess  of  a 
certain  amount  is  secondary  and  can 
be  enforced  only  after  execution  re- 
turned unsatisfied  against  the  corpo- 
ration. Auburn  Nat.  Bank  v.  Dil- 
lingham, 147  N.  Y.  603  (1895).  A 
judgment  of  a  justice  of  the  peace  is 
sufficient.  Voight  v.  Dregge,  97  Mich. 
322  (1893).  A  claim  for  unliquidated 
damages  for  breach  of  contract  must 
first  be  reduced  to  judgment.  Hill  v. 
Weidinger,  110  N.  Y.  App.  Div.  683 
(1906).  Judgment  against  the  cor- 
poration is  first  necessary.  Where 
some  of  the  creditors  are  proceeding 
against  the  stockholders  without  first 
obtaining  judgment  against  the  cor- 
poration, a  creditor  who  has  procured 
a  judgment  and  exhausted  his  remedy 
against  the  corporation  may  enjoin 
the  other  creditors  from  pursuing 
their   remedy.     Hoyt  v.   Bunker,    50 


Kan.  574  (1893).  If  no  judgment 
has  been  obtained,  the  stockholders 
can  set  up  such  defenses  as  would 
have  been  available  to  the  company. 
Railroad  Co.  v.  Smith,  48  Ohio  St.  219 
(1891).  In  an  action  by  a  judgment 
creditor  to  enforce  a  statutory  lia- 
bility, claims  by  himself  and  others 
not  yet  reduced  to  judgment  may  be 
proved.  Thacher  v.  King,  156  Mass. 
490  (1892).  Cf.  Baines  v.  West  Coast 
Lumber  Co.,  104  Cal.  1   (1894). 

In  the  case  of  Train  v.  Marshall, 
etc.  Co.,  180  Mass.  513  (1902),  being 
a  suit  to  enforce  the  statutory  lia- 
bility of  directors,  the  court  held  that 
a  judgment  against  the  corporation 
after  it  had  been  discharged  in  bank- 
ruptcy was  not  sufficient  to  satisfy 
the  statute,  and  the  court  said  "the 
liability  is  a  statutory  liability,  and 
we  perceive  no  clear  indication  of 
policy  that  should  carry  it  beyond  the 
conditions  precedent  in  the  form  in 
which  they  are  expressed." 

In  Vermont  it  is  held  that  the  lia- 
bility cannot  be  enforced  until  a  re- 
ceiver has  been  appointed  and  the 
assets  collected  and  exhausted.  Bar- 
ton, etc.  Bank  v.  Atkins,  72  Vt.  33 
(1899).  Stockholders  will  not  be  al- 
lowed to  intervene  in  a  suit  brought 
by  a  creditor  against  the  corporation 
itself,  even  though  they  wish  to  set 
up  the  statute  of  limitations,  and  even 
though  the  directors  had  directed  the 
company's  lawyer  to  admit  the  allega- 
tions of  the  complaint,  and  even 
though  the  company  is  insolvent,  and 
the  stockholders  are  liable  on  the 
stock,  no  fraud  being  shown.  Meyer 
v.  Bristol,  etc.  Co.,  163  Mo.  59  (1901). 

i  Stewart    v.    Lay,    45     Iowa,    604 
(1877);    Wright    v.    McCormack,    17 
Ohio  St.  86   (1866).     Where  a  stock- 
holder has  guaranteed  the  bonds  of  a 
67 


219.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[CH.  XII. 


support  of  the  proposition  that  a  judgment  against  the  corporation 
is  not  a  prerequisite  to  the  enforcement  of  the  stockholders'  statutory 
liability.1 

Frequently  the  statutes  themselves  which  impose  this  additional 
liability  upon  stockholders  provide  that  a  creditor  shall  obtain  judg- 
ment against  the  corporation,  and  that  an  execution  duly  levied  there- 


corporation  and  allowed  the  mortgage 
to  cover  some  of  his  own  property 
and  the  corporation  becomes  insolv- 
ent, other  stockholders  when  sued 
on  their  statutory  liability  cannot  set 
up  that  this  guaranty  and  mortgage 
should  first  be  exhausted  before  they 
are  held  liable.  Winthrop,  etc.  Bank 
v.  Minneapolis,  etc.  Co.,  77  Minn.  329 
(1899). 

i  Perkins  v.  Church,  31  Barb.  84 
(1859);  Southmayd  v.  Russ,  3  Conn. 
52  (1819) ;  Culver  v.  Third  Nat.  Bank, 
64  111.  528  (1871);  Davidson  v.  Ran- 
kin, 34  Cal.  503  (1868);  Young  v. 
Rosenbaum,  39  Cal.  646  (1870);  Mor- 
row v.  Superior  Court,  64  Cal.  383 
(1883);  Bird  v.  Calvert,  22  S.  C.  292 
(1884).  No  prior  judgment  against 
a  corporation  is  necessary  to  enforce 
the  liability  of  directors  in  Illinois 
for  debts  in  excess  of  the  capital 
stock.  Wolverton  v.  George,  etc.  Co., 
157  111.  485  (1895).  No  prior  judg- 
ment or  execution  is  necessary  in  a 
suit  against  a  stockholder  in  a  Cali- 
fornia corporation.  Aldrich  v.  Anchor, 
etc.  Co.,  24  Oreg.  32  (1893).  No  pre- 
vious judgment  against  the  corpora- 
tion is  necessary  in  enforcing  direc- 
tors' statutory  liability  in  Minnesota. 
Patterson  v.  Stewart,  41  Minn.  84 
(1889).  Under  the  Wisconsin  statute 
it  is  unnecessary  to  exhaust  the  as- 
sets of  the  corporation  if  it  is  clear 
that  the  statutory  liability  must  be 
resorted  to.  Booth  v.  Dear,  96  Wis. 
516  (1S97).  In  Alabama  the  remedy 
against  the  corporation  need  not  be 
first  exhausted  unless  the  statutes  ex- 
pressly require  it.  McDonnell  v.  Ala- 
bama, etc.  Ins.  Co.,  85  Ala.  401  (1888). 
Cf.  §  200,  supra.  In  these  cases  it  is 
held  in  general  that  the  stockholder's 
liability  under  the  statute  is  uncon- 


ditional, original,  and  immediate,  not 
dependent  on  the  insufficiency  of  the 
corporate  assets,  and  not  collateral 
to  that  of  the  corporation  upon  the 
event  of  its  insolvency.  Thus,  in  Man- 
ufacturing Co.  v.  Bradley,  105  U.  S. 
175  (1881),  it  was  held  that,  upon 
a  bill  being  filed  against  the  corpo- 
ration for  the  collection  of  a  debt, 
the  stockholders  might  properly  be 
made  parties  in  order  to  avoid  a  mul- 
tiplicity of  suits,  and  upon  the  ground 
that  the  stockholders  were  immedi- 
ately liable  under  that  provision  of 
their  charter  which  made  members  of 
the  company  "jointly  and  severally 
liable  for  all  debts  and  contracts 
made  by  the  company  until  the  whole 
amount  of  capital  stock  fixed  and 
limited  by  the  company"  is  paid  in. 
A  trustee  in  bankruptcy  of  a  Kansas 
corporation  may  enforce  the  double 
liability  of  stockholders  and  no  judg- 
ment against  the  corporation  need 
first  be  obtained.  Stocker  v.  David- 
son, 74  Kan.  214  (1906).  A  creditor 
of  a  national  bank  may  hold  the 
stockholders  liable  under  the  statute 
without  first  obtaining  a  judgment 
against  the  corporation.  Wyman  v. 
Wallace,  201  U.  S.  230  (1906).  Un- 
der the  New  York  act  of  1875  (now 
repealed)  a  stockholder  could  be  sued 
before  judgment  against  the  corpora- 
tion, but  could  not  be  held  liable  un- 
til after  such  judgment.  Walton  v. 
Coe,  110  N.  Y.  109  (1888).  The  stat- 
utory liability  of  directors  in  Michi- 
gan for  failure  to  file  their  report 
may  be  enforced  by  one  suit  against 
all  of  them,  and  no  prior  judgment 
against  the  creditors  is  necessary  if 
the  failure  to  file  the  report  was 
wilful.  Wilcox  C.  &  S.  Co.  v.  Mosher, 
114  Mich.  64    (1897). 


56S 


.XII.  J                   STATUTORY  LIABILITY  OP  STOCKHOLDERS.  [§    219. 

under  shall  have  been  returned  wholly  or  partially  unsatisfied,  before 
the  creditor  has  a  right  to  proceed  against  the  stockholders  individ- 
ually.1 Where,  however,  the  proceedings  against  the  corporation 
would  be  nugatory  or  impossible,  they  need  not  be  had.2     Where  the 

i  Handy  v.  Draper,  89  N.  Y.  334  stockholders.  Where,  by  reason  of  an 
(1882).  Sometimes  the  statute  pro-  injunction  or  other  cause,  it  is  im- 
vides  that  a  specific  demand  shall  possible  to  obtain  judgment  against 
have  been  made.  Haynes  v.  Brown,  the  corporation,  it  may  be  excused. 
3G  N.  H.  545  (1858) ;  Hicks  v.  Burns,  Hunting  v.  Blun,  143  N.  Y.  511  (1894). 
38  N.  H.  141  (1839).  In  Wisconsin,  Even  where  the  statute  requires  it, 
by  statute,  there  need  be  no  prece-  a  suit  to  enforce  a  statutory  liability 
dent  judgment  against  the  corpora-  need  not  be  delayed  until  the  corpo- 
tion.  Sleeper  v.  Goodwin,  67  Wis.  577  rate  property  has  all  been  applied  to 
(1887).  In  Michigan,  by  statute,  the  the  payment  of  debts,  if  it  be  clear 
receiver  of  an  insolvent  bank  may  that  such  property  will  be  insufficient 
enforce  the  stockholders'  statutory  to  pay  everything.  Hunger  v.  Jacob- 
liability,  and  the  order  of  the  court  son,  99  111.  349  (1881).  Or  where 
stating  the  amount  necessary  to  so  the  corporation  is  clearly  insolvent, 
collect  is  binding  on  the  stockholders,  and  it  would  be  idle  to  wait  the  re- 
and  the  court  need  not  wait  until  the  turn  of  the  execution.  Plash  v. 
assets  are  exhausted  before  enforcing  Conn,  109  U.  S.  371  (1883);  Kincaid 
the  same.     Foster  v.  Row,  120  Mich.  v.    Dwinelle,    59    N.    Y.    458    (1875). 

1  (1899).  Judgment  against  the  corporation  is 
2  See  §  200,  supra.     Cf.  Shellington  first  necessary,  even  if  it  is  insolvent. 

r.    Howland,    53    N.    Y.    371     (1873),  Gause  v.  Boldt,  188  N.  Y.  546   (1907). 

where  proceedings  required  as  condi-  If  the   corporation   is   insolvent  and 

tions  precedent  to  liability  were  ren-  has  gone  into  voluntary  liquidation, 

dered  impossible  by  the  operation  of  a    judgment    against   it    is    not   first 

United   States   bankruptcy   law.     See  necessary.       George   v.    Wallace,    135 

also  State  Sav.  Assoc,  v.  Kellogg,  52  Fed.  Rep.  286  (1904);  aff'd,  201  U.  S. 

Mo.    583    (1S73);    Dryden  v.   Kellogg,  230.    Owing  to  the  doubt  as  to  wheth- 

2  Mo.  App.  87  (1876).  Cf.  Ansonia  er  a  judgment  against  the  corpora- 
Brass,  etc.  Co.  v.  New  Lamp,  etc.  Co.,  tion  is  first  necessary,  where  the  cor- 
53  N.  Y.  123  (1873);  s.  c,  aff'd,  91  U.  poration  is  insolvent,  a  bankrupt 
S.  656  (1875);  Fourth  Nat.  Bank  v.  court  will  allow  the  creditors  to  ob- 
Francklyn,  120  U.  S.  747  (1887);  tain  such  judgments,  but  proceedings 
Paine  v.  Stewart,  33  Conn.  516  (1866),  thereon  will  be  enjoined  and  only 
where^  under  a  statute  providing  that  one  proceeding  allowed  for  the  bene- 
the  property  of  stockholders  could  not  fit  of  all,  with  the  trustee  in  bank- 
be  levied  upon  while  corporate  prop-  ruptcy  as  a  party.  In  re  Remington, 
erty  could  be  found  to  satisfy  the  etc.  Co.,  119  Fed.  Rep.  441  (1902). 
debt,  it  was  held  that  evidence  that  An  allegation  that  the  company  is 
the  corporate  property  was  in  the  insolvent  and  has  no  property  ex- 
hands  of  a  receiver  was  sufficient  to  cuses  the  actual  issue  of  execution, 
prove  the  condition;  Chamberlain  v.  Andrews  v.  O'Reilly,  25  R.  I.  231 
Huguenot  Mfg.  Co.,  118  Mass.  532  (1903).  No  judgment  and  execution 
(1875),  holding  that  proceedings  in  are  necessary  if  the  company  has  as- 
bankruptcy  do  not,  in  Massachusetts,  signed  for  the  benefit  of  creditors, 
prevent  recovering  judgment  against  Minneapolis,  etc.  Co.  v.  Swinburne  Co., 
the  bankrupt  corporation  for  the  pur-  66  Minn.  378  (1896).  Cf.  Toucey  v. 
pose    of    perfecting    the    liability    of  Bowen,   1  Biss.   81    (1855);    s.   c,  24 

569 


§  219.] 


STAT  I  -Tory   LIABILITY  OF  STOCKHOLDERS. 


[cil.  XII. 


corporation  has  been  dissolved  and  an  injunction  issued  against  suits 
against  the  corporation  itself,  no  judgment  against  the  corporation 
is  necessary.3 

Thus,  where  the  statutes  provide  for  an  enforcement  of  the  stock- 
holder's statutory  liability  only  upon  the  dissolution  of  the  corpo- 
ration, it  is  held  that,  so  far  as  such  liability  is  concerned,  a  disso- 
lution takes  place  when  the  corporation  comes  into  the  condition  of 
having  debts  and  no  assets,  or  has  ceased  to  act  and  exercise  its 
corporate  functions,  or  has  suffered  acts  to  be  done  which  end  the 
object  for  which  it  was  created.2     But  an  injunction  against  bring- 


Fed.  Cas.  70;  Munger  v.  Jacobson,  99 
111.  349  (1881).  Or  the  corporation 
is  dissolved.  Patterson  v.  Lynde,  112 
111.  196  (1884).  A  judgment  against 
the  corporation  is  not  necessary  to 
enforce  the  stockholder's  liability 
when  the  corporation  is  insolvent, 
has  ceased  to  do  business,  and  has 
made  an  assignment  for  the  benefit 
of  creditors.  Morgan  v.  Lewis,  46 
Ohio  St.  1  (1888).  Judgment  against 
the  corporation  need  not  first  be  ob- 
tained if  the  corporation  has  been 
dissolved.  Hardman  v.  Sage,  124  N. 
Y.  25  (1891).  The  issue  and  return 
of  an  execution  unsatisfied  against 
the  corporation  is  necessary  where 
the  corporation  is  a  going  concern, 
but  not  where  it  is  insolvent  and  has 
assigned  for  the  benefit  of  its  cred- 
itors. Barrick  v.  Gifford,  47  Ohio  St. 
180  (1890).  A  judgment  and  execu- 
tion are  first  necessary  unless  the 
corporation  is  dissolved  or  has  ceased 
business  for  more  than  a  year.  Mer- 
rill v.  Meade,  6  Kan.  App.  620  (1897). 
See  also  note  2  below. 

If  the  corporation  has  been  ad- 
judged a  bankrupt  or  is  notoriously 
insolvent  or  has  been  dissolved,  the 
wholly  idle  and  useless  issue  of  exe- 
cution is  not  required.  Knight  & 
Wall  Co.  v.  Tampa,  etc.  Co.,  46  S. 
Rep.    285    (Fla.   1908). 

i  Lang  v.  Lutz,  180  N.  Y.  254 
(1905). 

2  Bank  of  Poughkeepsie  v.  Ibbot- 
son,  24  Wend.  473  (1840);  Slee  v. 
Bloom,  19  Johns.  456  (1822);  Penni- 
man  v.  Briggs,  1  Hopk.  Ch.  300  (1824) ; 


s.  c.  sub  nom.  Briggs  v.  Penniman, 
8  Cow.  387  (1826);  State  Sav.  Assoc. 
v.  Kellogg,  52  Mo.  583  (1873);  Dry- 
den  v.  Kellogg,  2  Mo.  App.  87  (1876)  ; 
Perry  v.  Turner,  55  Mo.  418  (1874); 
Central  Agric.  etc.  Assoc,  v.  Alabama, 
etc.  Ins.  Co.,  70  Ala.  120  (1881);  Mc- 
Donnell v.  Alabama,  etc.  Ins.  Co.,  85 
Ala.  401  (1S88).  Where  an  assignee 
for  the  benefit  of  creditors  is  in 
charge,  the  creditors  may  enforce 
the  statutory  liability  of  stock- 
holders if  it  is  evident  that  there 
are  no  corporate  assets  and  that  a  suit 
against  the  corporation  would  be  un- 
availing. Zang  v.  Wyant,  25  Colo.  551 
(1898).  Insolvency  may  be  dissolu- 
tion sufficient  to  enforce  statutory  lia- 
bility. Sleeper  v.  Norris,  59  Kan.  555 
(1898).  Under  the  Kansas  statute,  if 
the  judgment  is  "dormant,"  no  execu- 
tion can  be  issued  upon  it  as  prelim- 
inary to  enforcing  a  stockholder's  lia- 
bility. Chenault  v.  Chappell,  8  Kan. 
App.  807  (1899).  Execution  need  not 
be  returned,  etc.,  where  the  corpora- 
tion is  insolvent.  Parker  v.  Carolina 
Sav.  Bank,  53  S.  C.  583  (1898).  Not- 
withstanding bankruptcy  proceedings 
against  a  corporation,  the  statutory 
liability  of  stockholders  may  be  en- 
forced. In  re  Marshall  Paper  Co.,  95 
Fed.  Rep.  419  (1899).  Cf.  Morley  v. 
Thayer,  3  Fed.  Rep.  737  (1880),  hold- 
ing that  bankruptcy  of  the  corpora- 
tion is  not  a  dissolution  of  a  corpora- 
tion within  the  meaning  of  the  stat- 
ute of  Massachusetts  imposing  liabil- 
ity upon  stockholders.  In  Florida, 
upon  dissolution,  the  stockholders  are 


570 


CH.  XII.]  STATUTORY  LIABILITY  OF  STOCKHOLDERS.  [§   220. 

ing  suits  against  a  corporation  is  no  excuse  where  no  effort  is  made 
to  modify  such  injunction.1 

A  judgment  must  be  obtained  and  execution  issued  and  returned 
in  the  state  where  suit  is  brought,  or  good  reason  must  be  shown  why 
they  are  not.2 

§  220.  Difficulties  in  determining  whether  the  creditor's  remedy 
is  at  law  or  in  equity — Special  remedies. — Perhaps  the  most  diffi- 
cult, unsettled,  and  unsatisfactory  question  concerning  the  statutory 
liability  of  stockholders  is  the  question  whether  that  liability  must 
be  enforced  at  law  or  must  bo  in  equity,  or  may  be  in  either  a 
court  of  law  or  of  equity.  After  determining  this  point  there  arises 
the  further  difficulty  of  ascertaining  who  shall  be  parties  plaintiff 
and  parties  defendant — whether  one  corporate  creditor  may  sue,  or 
all  must  join;  whether  one  stockholder  may  be  pursued  as  a  single 
defendant,  or  all  the  stockholders  must  be  brought  in.  Not  only 
must  the  decisions  of  the  state  in  which  the  action  is  brought  be 
examined,  but  it  is  necessary  also  to  note  carefully  the  wording  of  the 
statute  creating  the  liability.  Where  the  statute  prescribes  expressly 
the  form  of  the  remedy,  it  is  the  well-established  rule  that  the  remedy 
was  intended  by  the  legislature  to  exclude  every  other,  and  it  must 
be  strictly  pursued.3  In  Ohio  the  statutory  liability  may  be  enforced 
in  proceedings  to  wind  up  and  distribute  the  assets  of  the  corpo- 

liable  "to  an  extent  equal  in  amount        3  Lowry    v.    Inraan,    46    N.    Y.    119, 

to  the  amount  of  stock  by  him  owned,  127  (1871) ;  Morley  v.  Thayer,  3  Fed. 

together    with    any    amount    unpaid  Rep.    737,    741     (1880);     Haskins    v. 

thereon."     The   dissolution   need   not  Harding,  2  Dill.  99   (1873);   s.  c,  11 

be  by  judicial   decree  to   that  effect.  Fed.    Cas.    778;    Allen   v.    Walsh,    25 

It  is  sufficient  if  there  are  debts  and  Minn.    543     (1879);     Windham,    etc. 

no    assets,    and    the    corporation   has  Inst.  v.  Sprague,  43  Vt.  502   (1871); 

ceased  to  act  and  exercise  its  corpo-  Dauchy  v.  Brown,  24  Vt.  197  (1852); 

rate   functions,   or   has   suffered   acts  Bassett  v.   St.   Albans   Hotel   Co.,   47 

to  be  done  which  end  the  object  for  Vt.  313   (1875);   Pollard  v.  Bailey,  20 

which   it  was  created.     Suit  against  Wall.  520    (1874);    Knowlton  v.  Ack- 

the  corporation  first  is  not  necessary  ley,  62  Mass.  93,  98   (1851) ;  Erickson 

in   such  a  case.     Gibbs  v.  Davis,  27  v.    Nesmith,    81    Mass.    221     (1860); 

Fla.  5*31  (1891).     See  note  2,  p.  569.  Brinham  v.  Wellersburg  Coal  Co.,  47 

1  United,  etc.  Co.  v.  Vary,  152  N.  Y.  Pa.  St.  43  (1864) ;  Hoard  v.  Wilcox, 
121  (1897).  Where  creditors  are  en-  47  Pa.  St.  51  (1864);  Youghiogheny 
joined  from  suing  the  corporation  Shaft  Co.  v.  Evans,  72  Pa.  St.  331 
they  need  not  obtain  a  judgment  (1872).  Cf.  Andrews  v.  Callender,  30 
against  the  corporation  before  suing  Mass.  484  (1833);  Potter  v.  Stevens 
to  hold  directors  personally  liable  by  Machine  Co.,  127  Mass.  592  (1879) 
statute  by  reason  of  the  debts  ex-  Grose  v.  Hilt,  36  Me.  22  (1S53) 
ceeding  the  paid-up  capital  stock.  Diven  v.  Lee,  36  N.  Y.  302  (1867) 
Whitney  v.  Pugh,  58  N.  Y.  App.  Div.  Wehrman  v.  Reakirt,  1  Cin.  Super.  Ct 
316  (1901).  (Ohio),  230    (1871). 

2  See  §  223,  infra. 

571 


§  221.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[ch.  xn*. 


ration,1  and  in  Kansas  a  stockholder  may  be  brought  into  the  original 
suit.-    But  the  Kansas  statute  authorizing  a  levy  of  execution  upon 

the  property  of  stockholders,  without  a  regular  suit  against  such 
stockholders,  does  not  prevent  the  creditor  proceeding  by  suit  instead 
of  resorting  to  the  execution  first.3  In  other  words,  although  collec- 
tion may  be  by  notice  in  the  original  suit  against  the  corporation, 
yet  this  does  not  prevent  an  independent  suit.4 

Another  remedy  still  is  to  allow  the  plaintiff  creditor  to  join  stock- 
holders as  defendants  in  his  original  suit  against  the  corporation.5 
A  remedy  by  motion  exists  in  Florida.6  These  special  remedies  may 
operate  to  prevent  the  enforcement  of  the  liability  in  the  courts  of 
other  states.7  An  attachment  lies  to  enforce  the  statutory  liability 
of  stockholders.8 

§  221.  The  remedy  at  law. — In  New  York  the  stockholder's  lia- 
bility, imposed  by  the  statute  of  1848,  was  held  to  be  such  that  any 
creditor  who  had  recovered  a  judgment  against  the  company,  and 
sued  out  an  execution  thereon,  which  had  been  returned  unsatisfied, 
might  sue  any  stockholder  and  recover  to  the  extent  provided  by  the 
statute  in  an  action  at  law.1'     A  similar  conclusion  was  reached  in 


1  Peter  v.  Farrel,  etc.  Co.,  53  Ohio 
St.  534   (1895). 

2  Buist  v.  Citizens'  Sav.  Bank,  4 
Kan.  App.  700  (1896).  See  also  §  201, 
supra.  The  summary  method  of  en- 
forcing the  statutory  liability  under 
the  Kansas  statutes  is  not  good  as 
against  an  estate  being  wound  up  in 
the  proper  court.  Achenbach  v.  Pom- 
eroy  Coal  Co.,  2  Kan.  App.  357  (1895). 
As  to  the  character  of  the  notice  to 
be  served  on  the  stockholder  before 
execution  is  issued  against  him  un- 
der the  Kansas  statute,  see  McClel- 
land v.  Cragun,  54  Kan.  599  (1895). 
The  summary  method  in  Kansas  is 
not  available  until  the  remedy 
against  the  corporation  has  been  ex- 
hausted. Carey  Lumber  Co.  v.  Neal, 
3  Kan.  App.  399  (1895).  Proceeding 
under  the  Kansas  statute  to  enforce  a 
stockholder's  liability  by  motion  for 
an  execution  is  construed  to  be  an 
independent  proceeding.  Fox  v.  First, 
etc.  Bank,  9  Kan.  App.  18   (1899). 

3  Bank  of  North  America  v.  Rindge, 
57   Fed.  Rep.   279    (1893). 


4  McVickar  v.  Jones,  70  Fed.  Rep. 
754  (1895). 

5  Milroy  v.  Spurr  Mountain,  etc.  Co., 
43  Mich.  231  (1880),  holding  that,  if 
the  statute  authorizes  a  suit  against 
the  corporation  alone  or  jointly  with 
one  or  more  stockholders,  a  creditor 
who  elects  to  sue  it  alone  cannot  aft- 
erwards proceed  upon  the  same  debt 
against  the  corporation  and  stockhold- 
ers jointly.  One  of  the  creditors  who 
is  a  party  to  the  sequestration  pro- 
ceedings may  in  those  proceedings 
enforce  the  stockholder's  statutory  lia- 
bility. McKusick  v.  Seymour,  etc. 
Co.,  48  Minn.  158    (1892). 

c  Hood  v.  French,  37  Fla.  117 
(1896). 

7  See  §  223,  infra. 

8  Adams  v.  Clark,  36  Colo.  65 
(1906). 

o  Abbott  v.  Aspinwall,  26  Barb.  202 
(1857);  Wiles  v.  Suydam,  64  N.  Y. 
173  (1876);  Shellington  v.  Howland, 
53  N.  Y.  371  (1873);  Handy  v.  Dra- 
per, 89  N.  Y.  334  (1882);  Rocky 
Mountain  Nat.  Bank  v.  Bliss,  89  N.  Y. 


572 


en.  xii.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[§  221. 


Illinois,1  Pennsylvania,2  Massachusetts,  and  Georgia.3  So  also  when 
it  is  provided  by  statute  that  the  stockholders  "shall,  to  the  amount 
of  the  stock  by  them  held,  be  jointly  and  severally  liable  for  all  the 
debts  and  responsibilities  of  such  company,"  it  is  held  that  an  action 
at  law  may  be  maintained  on  the  individual  liability  by  any  corporate 
creditor  against  any  individual  stockholder.4     Where,  by  statute,  a 


338  (1882);  Mathez  v.  Neidig,  72  N. 
Y.  100  (1878);  Flash  v.  Conn,  109  U. 
S.  371,  380  (1883);  Weeks  v.  Love, 
50  N.  Y.  568  (1872);  Bank  of  Poush- 
keepsie  v.  Ibbotson,  24  Wend.  473 
(1840).  Cf.  Van  Hook  v.  Whitlock,  3 
Paige,  409  (1832);  Simonson  v.  Spen- 
cer, 15  Wend.  548  (1836);  Walton  v. 
Coe,  110  N.  Y.  109  (1SSS).  The 
creditor  must  sue  one  or  all.  Dean 
v.  Whiton,  1G  Hun,  203    (1S78). 

i  In  Illinois,  under  the  charter  pro- 
vision that  "each  stockholder  shall  be 
liable  to  double  the  amount  of  stock" 
owned,  it  was  held  that  the  stock- 
holders were  severally  and  individual- 
ly liable;  that  is,  that  an  action  at 
law  against  one  or  all  of  them  would 
lie.  McCarthy  v.  Lavasche,  89  111. 
270  (1878);  Hull  v.  Burtis,  90  111. 
213  (1S7S);  Fuller  v.  Ledden,  87  111. 
310    (1877). 

2  In  Pennsylvania,  under  the  stat- 
ute relating  to  the  incorporation  of 
manufacturing  companies,  the  corpo- 
rate creditor  proceeds  against  the 
stockholders  in  an  action  at  law  upon 
the  original  contract,  making  the  cor- 
poration and  all  the  stockholders  par- 
ties defendant.  Brinham  v.  Wellers- 
burg  Coal  Co.,  47  Pa.  St.  43  (1864); 
Mansfield  Iron  Works  v.  Willcox,  52 
Pa.  St.  377  (1S66);  Hoard  v.  Wilcox, 
47  Pa.  St.  51  (1864);  McHose  v. 
Wheeler,  45  Pa.  St.  32  (1S63).  See 
Patterson  v.  Wyom.  Mfg.  Co.,  40  Pa.  St. 
117  (1861).  To  same  effect,  Thompson 
r.  Jewell,  43  Mich.  240  (1880). 

3  Pope  v.  Leonard,  115  Mass.  286 
(1874).  Under  a  Georgia  statute,  by 
the  provisions  of  which  each  stock- 
holder in  banking  corporations  in  that 
state  is  made  liable  to  redeem  his 
proportionate  share  of  the  outstand- 


ing circulation,  a  single  creditor  may 
have  his  action  at  law  against  any 
individual  stockholder.  Lane  v.  Har- 
ris, 16  Ga.  217  (1854);  Lane  v.  Mor- 
ris, 8  Ga.  468  (1S50);  s.  o,  10  Ga. 
162;  Branch  v.  Baker,  53  Ga.  502 
(1874);  Hatch  v.  Burroughs,  1 
Woods,  439  (1870);  s.  c,  11  Fed.  Cas. 
795.  Cf.  Bank  of  Poughkeepsie  v. 
Ibbotson,  24  Wend.  473    (1840). 

4  Grund  v.  Tucker,  5  Kan.  70 
(1S69);  Norris  v.  Johnson,  34  Md. 
485  (1871).  See  Bullard  V.  Bell,  1 
Mason,  243  (1817),  by  Story,  J.;  s.  c, 
4  Fed.  Cas.  625.  Cf.  Matthews  v. 
Albert,  24  Md.  527  (1866) ;  Culver  v. 
Third  Nat.  Bank,  64  111.  528  (1871); 
Bond  v.  Appleton,  8  Mass.  472  (1812). 
The  Missouri  statute  may  be  enforced 
at  law.  Savings  Assoc,  v.  O'Brien,  51 
Hun,  45  (18S9).  By  statute  in  Cali- 
fornia the  remedy  may  be  at  law. 
Borland  v.  Haven,  37  Fed.  Rep.  394 
(1888).  The  double  liability  of 
stockholders  in  a  Colorado  corpora- 
tion can  be  enforced  at  law  only. 
Auer  v.  Lombard,  72  Fed.  Rep.  209 
(1896).  In  Whitman  v.  National 
Bank,  83  Fed.  Rep.  288  (1897),  a 
Pennsylvania  bank,  as  a  judgment 
creditor  of  a  Kansas  corporation,  en- 
forced in  the  United  States  court  in 
w  York  the  statutory  liability  of  a 
New  York  stockholder  in  such  Kansas 
corporation.  The  action  was  at  law. 
The  New  York  statute  of  1892  (now 
repealed)  rendering  stockholders  lia- 
ble jointly  and  severally  to  creditors 
to  the  amount  of  their  stock,  until 
the  whole  capital  stock  issued  and 
outstanding  is  paid  in,  may  be  en- 
forced by  a  suit  at  law  brought  by 
any  creditor  against  any  one  or  more 
stockholders,    and    the   receiver   need 


573 


§  221.] 


STATUTORY   UAHIUTY  OK  STOCKHOLDERS. 


[CH.  XII. 


statutory  liability  may  be  enforced  by  any  creditor  in  a  separate 
action  at  law  against  any  stockholder,  the  statute  cannot  be  changed 
so  that  the  remedy  is  a  suit  in  behalf  of  all  creditors  against  all  the 
stockholders,  so  far  as  existing  creditors  arc  concerned.3 

Where  an  action  at  law  can  be  maintained,  and  the  stockholder's 
liability  is  limited  ami  several,  each  stockholder  being  made  liable 
for  a  sum  certain,  a  separate  action  w^l  lie  against  each  one.2  And 
unless  the  remedy  at  law  bus  been  enlarged  by  statute,  so  as  to  allow 
judgment  separately  againsl  each  <>ne  of  several  defendants  before  the 
court  in  the  same,  proceeding,  the  suit  must  be  by  one  creditor 
against  one  stockholder.3     A  corporate  creditor's  suit  against  direc- 


not  be  made  a  party.  Lang  v.  Lutz, 
180  N.  Y.  254  (1905).  The  stockhold- 
ers' statutory  liability  in  a  South  Da- 
kota bank  may  be  enforced  by  a  cred- 
itor in  a  suit  at  law  against  a  single 
stockholder,  and  the  suit  may  be  on 
the  judgment  obtained  against  the 
bank.  Union,  etc.  Bank  v.  Halley,  19 
S.  Dak.  474  (1905).  Under  the  Ken- 
tucky statute  the  court  may  enforce 
the  statutory  liability  of  the  one 
stockholder  without  the  others  being 
joined.  Gamewell,  etc.  Co.  v.  Fire, 
etc.  Co.,  11G  Ky.  759   (1903). 

i  Myers  v.  Knickerbocker  T.  Co., 
139  Fed.  Rep.  Ill  (1905),  involving 
a  Maryland  statute,  the  court  refusing 
to  follow  Miners',  etc.  Bank  v.  Sny- 
der, 100  Md.  57   (1904). 

'2  Bank  of  Poughkeepsie  v.  Ibbotson, 
24  Wend.  473  (1840);  Perry  v.  Tur- 
ner, 55  Mo.  418  (1874)  ;  Boyd  v.  Hall, 
56  Ga.  563  (1876),  where  the  liability 
was  pro  rata;  Paine  v.  Stewart,  33 
Conn.  516  (1866) ;  Culver  v.  Third 
Nat.  Bank,  64  111.  528  (1S71) ;  Abbott 
v.  Aspinwall,  26  Barb.  202  (1857); 
Garrison  v.  Howe,  17  N.  Y.  458 
(185S)  ;  Terry  v.  Little,  101  U.  S.  216 
(1879).  In  the  action  at  law,  other 
stockholders  need  not  be  joined,  un- 
der the  Kansas  decisions.  McVicar 
v.  Jones,  70  Fed.  Rep.  754  (1895). 
As  to  the  character  of  the  pleading 
for  the  defendant  in  the  United  States 
court  sitting  in  Maryland  in  an  action 
at  law  by  a  judgment  creditor  of  a 
Kansas    corporation    to    enforce    the 


statutory  liability  of  a  Maryland 
stockholder,  see  Brown  v.  Trail,  89 
Fed.  Rep.  641  (1898). 

••:  Abbott  v.  Aspinwall,  26  Barb.  202 
(1857);  Paine  v.  Stewart,  33  Conn. 
516  (1866);  Re  Hollister  Bank,  27  N. 
Y.  393  (1863);  Perry  v.  Turner,  55 
Mo.  418  (1874);  Bank  of  Poughkeep- 
sie v.  Ibbotson,  24  Wend.  473  (1840). 
Cf.  Milroy  v.  Spurr  Mountain,  etc.  Co., 
43  Mich.  231  (1880).  In  Medberry  v. 
Troutman,  94  Fed.  Rep.  952  (1899), 
the  court  held  that  the  remedy  of  a 
creditor  of  a  Kansas  corporation  to  en- 
force the  statutory  liability  of  stock- 
holders is  at  law  only.  Even  though 
a  receiver  may  by  statute  enforce  the 
statutory  liability,  yet  after  the 
amount  of  liability  of  each  stock- 
holder has  been  adjudicated,  he  must 
enforce  such  liability  at  law  and  not 
in  equity.  Hale  v.  Allison,  188  U. 
S.  56  (1903).  The  receiver  of  an  in- 
solvent Iowa  bank  cannot  file  a  bill 
in  equity  in  the  United  States  court 
in  Pennsylvania  to  hold  several  stock- 
holders liable  on  their  statutory  lia- 
bility. There  must  be  a  suit  at  law 
against  each  one  separately.  Tomp- 
kins v.  Craig,  93  Fed.  Rep.  885  (1899). 
Where  the  stockholder's  liability  is 
held  to  be  like  that  of  a  partner,  then 
all  must  be  joined  as  defendants,  and 
the  omission  of  any  one  is  ground  for 
a  plea  in  abatement.  Allen  v.  Sewall, 
2  Wend.  327  (1829),  but  holding  that 
it  cannot  be  taken  advantage  of  on 
the     trial;     Reynolds     v.     Feliciana 


574 


CH.  XII.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[§  222. 


tors  for  fraud  and  in  assumpsit  cannot  include  also  a  claim  for  a 
statutory  penalty.1 

§  222.  The  remedy  in  a  court  of  equity. — The  remedy  in  equity 
is  the  favorite  remedy  of  the  courts.  It  is  just,  certain,  impartial, 
and  clear.  It  enforces  once  for  all  the  liability  of  the  stockholders, 
and  at  the  same  time  provides  for  contribution.  It  distributes  the 
assets  equally  and  equitably  among  all  the  corporate  creditors.  It 
prevents  a  multiplicity  of  suits,  and  avoids  the  difficult  question  as 
to  whether  a  suit  at  law  will  lie.  The  only  and  great  objection  to 
the  remedy  in  equity  is  that  it  is  protracted,  vexatious  and  expensive.2 

Frequently  the  courts  have  held  that  an  action  at  law  to  enforce 
a  statutory  liability  is  not  a  proper  proceeding,  but  that  the  rights 
of  all  parties  can  be  properly  adjusted  only  in  a  court  of  equity, 


Steamboat     Co.,     17     La.     Rep.     397 
(1S41);  Dean  v.  Whiton,  16  Hun,  203 
(1878) ;  Bonewitz  v.  Van  Wert  County 
Bank,  41  Ohio  St.  78  (1884),  holding 
that     the     sheriff's     return     showing 
clearly  that  other  stockholders  are  out 
of  the  jurisdiction  must  be  in  proof. 
Cf.  Dodge   v.  Minnesota,  etc.  Co.,   16 
Minn.    368    (1871);    Culver   v.   Third 
Nat.  Bank,  64  111.  528   (1871) ;   Bran- 
son   v.   Oregonian  Ry.,   10   Oreg.   278 
(1882);    Hoag   v.   Lamont,    60    N.   Y. 
96    (1875);    Abbott  v.  Aspinwall,   26 
Barb.    202,   207    (1S57).     As    to    the 
joinder   of    parties    in   Pennsylvania, 
see  Mansfield  Iron  Works  v.  Willcox, 
52    Pa.    St.    377     (1866);    McHose    v. 
Wheeler,  45  Pa.  St.  32  (1863);  Hoard 
v.  Wilcox,  47   Pa.   St.  51    (1864).     A 
creditor   suing   directors   on   a   statu- 
tory liability  need  not  join  all  cred- 
itors nor  all  directors.     Patterson  v. 
Stewart,    41    Minn.    84    (1889).     The 
corporation  need  not  be  joined  as  a 
party  -defendant.     The   suit   may   be 
against  the  estate  of  a  deceased  stock- 
holder.    It   may   be   a  separate   suit 
from    that    against    the    corporation. 
Nolan  v.  Hazen,  44  Minn.  478  (1890). 
In  Pennsylvania  the  corporation  also 
should   be   made   a   party   defendant. 
Hoard  v.  Wilcox,  47  Pa.  St.  51  (1S64) ; 
Mansfield  Iron  Works  v.  Willcox,  52 
Pa.    St.    377    (1866).     Cf.   Deming  v. 
Bull,   10   Conn.   409    (1835);     Middle- 
town    Bank    v.    Magill,    5    Conn.    28 


(1823).  In  Vermont  a  provision  that 
stockholders  "shall  be  personally 
holden"  is  held  to  create  only  a  joint 
liability.  Windham  Prov.  Inst.  v. 
Sprague,  43  Vt.  502  (1871).  The  suit 
may  be  at  law  and  by  one  creditor 
against  one  stockholder.  The  cor- 
poration need  not  be  joined.  Gibbs 
v.  Davis,  27  Fla.  531  (1891).  The  lia- 
bility of  stockholders  under  the  Kan- 
sas statute  is  several  and  not  joint. 
The  creditors  cannot  join  several 
stockholders  in  one  suit.  Each  must 
be  sued  separately.  Abbey  v.  Grimes, 
etc.  Co.,  44  Kan.  415  (1890).  In  Min- 
nesota a  single  creditor  cannot  sue  a 
single  stockholder.  Hence  such  a 
claim  cannot  be  enforced  in  the  pro- 
bate court.  Re  Martin's  Estate,  56 
Minn.  420  (1894).  Under  the  Mon- 
tana statute  rendering  directors  liable 
for  not  filing  a  report,  any  creditor 
may  sue  any  director  at  law,  and  the 
right  of  action  may  be  assigned. 
Fitzgerald  v.  Weidenbeck,  76  Fed. 
Rep.  695  (1896). 

i  Wachusett,  etc.  Bank  v.  Steel,  135 
Mich.  688  (1904). 

2  Thus,  with  reason,  the  court  said, 
in  Mason  v.  Alexander,  44  Ohio  St. 
318  (1886) :  "By  reason  of  the  great 
number  of  stockholders,  the  frequent 
transfers  of  stock,  the  decease  of  par- 
ties, and  of  other  causes,  delays- 
vexatious,  expensive,  and  almost  in- 
terminable— seem  to  be  inevitable  in 


575 


§  222.  J 


STATUTOKV    LIABILITY  OF  STOCKHOLDERS. 


I'll.  XII. 


and  tliat  the  latter  remedy  is  exclusive  of  all  others.1    Such  arc  the 

all    such    proceedings;    so    much    so,  statute  of   1906   making  directors  of 
indeed,  that  such  liability  has  grown  street  railways  liable  for  all  debts  to 
to  be  looked  upon  as  furnishing  next  the  extent  of  the  capital  stock  until 
to  no  security  at  all  for  the  debts  of  it  is  all  paid  in,  and  a  certificate  to 
corporations."  that  effect  filed,  the  directors  continue 
i  A  suit  in  equity  is  the  exclusive  liable  if  the  certificate  is  untrue.   The 
remedy  to  enforce  the   usual   double  remedy  is  in  equity  and  not  in  law. 
liability  of  stockholders  for  corporate  Westinghouse,  etc.  Co.  v.  Reed,  80  N. 
debts.     Marshall  v.  Sherman,  148   N.  E.  Rep.  C21   (Mass.  1907).     The  New 
Y.  9    (1895).     The  statutory  liability  Jersey    statute    prohibiting    suits    at 
of  directors  for  debts  over  a  certain  law  to  enforce  the  statutory  liability 
amount    can    be     enforced     only     in  of    stockholders    in    foreign    corpora- 
equity.      Auburn    Nat.    Bank    v.    Dil-  tions,  and  prescribing  that  the  reme- 
lingham,   147  N.  Y.  003    (1895).     Un-  dy  shall  be  in  equity  only,  is  unconsti- 
der  the  New  York  statute  of  1848  the  tutional  so  far  as  liabilities  existing 
statutory  liability  of  stockholders  and  at  the  time  of  the  pasage  of  the  stat- 
directors  may  be  enforced  in  a  judg-  ute  are  concerned.  Western,  etc.  Bank 
ment  creditor's  suit  to  set  aside   an  v.  Reckless,  96  Fed.  Rep.  70    (1899). 
illegal    transfer   of    property    of    the  The   remedy  of  a  corporate  creditor 
company  and  to  enforce  such  liability,  to  enforce  the  liability  of  a  director 
Bagley,  etc.  Co.  v.  Lenning,  61  N.  Y.  under  the  constitution  of   California 
App.  Div.   26    (1901).     The  statutory  for  moneys  misappropriated   by  him 
liability  in  Ohio  of  incorporators  for  is    in    equity    for   the    benefit   of    all 
any    deficiency   in   the    ten   per   cent,  creditors.    Winchester  v.  Mabury,  122 
of  the   capital   stock  which   is   to   be  Cal.    522     (1S98).      The    liability    of 
paid  upon  incorporation  is  enforcible  stockholders    in    banks    in    Nebraska 
in  equity,  and  may  be  joined  with  a  can  be  enforced  only  by  one  creditor 
suit   to   enforce   liability    for   unpaid  or  a  receiver  suing  in  equity  in  behalf 
stock.     Hessler  v.  Cleveland,  etc.  Co.,  of  all.    Farmers'  L.  &  T.  Co.  v.  Funk, 
61   Ohio  St.   621    (1900).     A   suit  in  49    Neb.    353     (1896);     Pickering  v. 
equity    is   the   proper   remedy.     Bar-  Hastings,  56  Neb.  201    (1898) ;   Hast- 
ton,   etc.   Bank  v.   Atkins,   72   Vt.   33  ings  v.  Barnd,  55  Neb.  93  (1893);  Ger- 
(1899).      A    court    of    equity    is    the  man    Nat.    Bank    v.    Farmers'    &    M. 
proper  court  to  enforce  the  double  lia-  Bank,  54  Neb.  593   (1898).     The  rem- 
bility  of  stockholders.    Maine,  etc.  Co.  edy   must   be   in   equity.     Harper   v. 
v.    Southern,    etc.    Co.,    92    Me.    444  Carroll,  66  Minn.  4S7    (1896).     As  to 
(1899).      The    statutory    liability    of  the  form  of  the  plea  that  the  remedy 
stockholders  for  failure  of  the  corpo-  is    in    equity,    see    Glens    Falls    Nat. 
ration  to  publish  a  notice  as  required  Bank  v.   Cramton,   72   Fed.  Rep.   734 
by  the  statute,  can  be  enforced  only  (1896).     Thus,  under  a  charter  pro- 
by  a  receiver  or  by  a  creditor  suing  vision    that    stockholders    shall    "be 
in  behalf  of  himself  and  others,  all  bound  respectively  for  all  the  debts 
stockholders  being  joined   as  defend-  of   the   bank   in   proportion   to   their 


ants.  Emanuel  v.  Barnard,  71  Neb. 
756  (1904).  The  statutory  liability  of 
directors  for  corporate  debts  in  ex- 
cess of  two-thirds  of  the  capital  stock 


stock  holden  therein,"  it  was  held 
that  an  action  at  law  by  a  single 
creditor  against  a  single  stockholder 
would  not  lie.     Pollard  v.  Bailey,  20 


can  be  enforced  only  in  equity  for  the  Wall.  520  (1874) ;  Hatch  v.  Dana,  101 
benefit  of  all  the  corporate  creditors.  U.  S.  205  (1879);  Terry  v.  Little,  101 
Lyman  v.  Hilliard,  154  Fed.  Rep.  339  U.  S.  216  (1879);  Smith  v.  Huckabee, 
(1907).      Under    the    Massachusetts    53  Ala.  191  (1875);  Jones  v.  Jarman, 

576 


CH.  XII.  J 


STATUTORY   LIABILITY  OP  STOCKHOLDERS. 


[§    222. 


latest  decisions  in  Xew  York.  The  New  York  court  of  appeals 
holds,  however,  that  a  suit  in  equity  does  not  lie  to  enforce  a  stat- 
utory liability  where  the  liability  is  unlimited  and  there  is  no  fund 
to  be  protected  and  distributed.1     A  statute  changing  the  remedy 


34  Ark.  323  (1879).  Cf.  Wright  v. 
McCormack,  17  Ohio  St.  86  (1866); 
Sands  v.  Kimbark,  39  Barb.  108,  120 
(1863);  Cushman  v.  Shepard,  4  Barb. 
113  (1848).  Nor  under  a  statute 
making  the  stockholders  of  a  banking 
company  "individually  responsible  to 
the  amount  of  their  respective  share 
or  shares  of  stock  for  all  its  indebt- 
edness and  liabilities  of  every  kind." 
Sleeper  v.  Goodwin,  67  Wis.  577 
(1887) ;  Carpenter  v.  Marine  Bank,  14 
Wis.  705,  n.  (1862).  The  remedy  is 
in  equity.  Foster  v.  Posson,  105  Wis. 
99  (1899).  Under  the  statutes  of 
Wisconsin  the  affairs  of  an  insolvent 
corporation  may  be  wound  up  and 
the  directors  held  liable  for  fraud  or 
negligence,  and  stockholders  held  lia- 
ble under  statutory  liability,  all  in 
one  suit.  Gager  v.  Marsden,  101  Wis. 
598  (1899).  A  suit  to  enforce  the 
liability  in  a  Kansas  corporation  must 
be  in  equity.  Waller  v.  Hamer,  65 
Kan.  168  (1902).  Another  ground  is 
that  at  law  the  indebtedness  of  the 
corporation  and  the  several  liabilities 
of  the  members  could  not  be  equitably 
adjusted.  Low  v.  Buchanan,  94  111. 
76  (1879),  where  the  directors  were 
held  liable  for  an  excess  of  indebted- 
ness; Queenan  v.  Palmer,  117  111.  619 
(1886);  Stewart  v.  Lay,  45  Iowa,  604 
(1877);  Garrison  v.  Howe,  17  N.  Y. 
458  (1858);  Story  v.  Furman,  25  N. 
Y.  214  (1862).  Cf.  Flash  v.  Conn, 
109  U.  S.  371   (1883). 

Where,  in  South  Carolina,  the  char- 
ter of  a  bank  provided  that  upon  the 
failure  of  the  bank  "each  stockholder 
shall  be  liable  and  held  bound  .  .  . 
for  any  sum  not  exceeding  twice  the 
amount  of  .  .  .  his  .  .  .  shares,"  it 
was  held  by  the  supreme  court  of  the 
United  States  that  a  suit  in  equity 
by  or  on  behalf  of  all  the  creditors 
is  the  only  appropriate  mode  of  en- 


forcing the  liability  incurred  by  such 
a  failure.  Terry  v.  Little,  101  U.  S. 
216  (1879);  Harris  v.  First  Parish, 
40  Mass.  112  (1839);  Coleman  v. 
White,  14  Wis.  700  (1S62);  Ladd  v. 
Cartwright,  7  Oreg.  329  (1879)  ; 
Smith  v.  Huckabee,  53  Ala.  191 
(1875).  See  Patterson  v.  Lynde,  106 
U.  S.  519  (1882).  In  Illinois  there 
was  some  doubt  as  to  whether  the  bill 
in  equity  would  lie,  but  the  case  of 
Tunesma  v.  Schuttler,  114  111.  156 
(18S5),  holds  that,  in  case  the  corpo- 
ration is  insolvent  and  the  corporate 
creditors  numerous,  a  bill  in  equity  is 
the  proper  remedy.  Under  the  Man- 
ufacturing Company's  Act  of  Illinois, 
the  creditor's  remedy  is  held  to  be 
clearly  in  equity.  Rounds  v.  McCor- 
mick,  114  111.  252  (1885);  Harper 
v.  Union  Mfg.  Co.,  100  111.  225  (1881) ; 
Low  v.  Buchanan,  94  111.  76  (1879). 
See  Pierce  v.  Milwaukee  Constr.  Co., 
38  Wis.  253  (1875),  for  the  rule  in 
that  state.  Where  under  a  creditor's 
bill  a  receiver  is  appointed  and  the 
assets  administered,  and  then  by  a 
supplemental  bill  the  stockholder's 
liability  enforced,  a  creditor  who  re- 
ceived a  dividend  under  the  original 
bill  cannot  sue  a  stockholder  at  law. 
Tunesma  v.  Schuttler,  114  111.  156 
(1S85).  The  remedy  is  in  equity 
alone,  and  non-joinder  of  any  stock- 
holders as  defendants  will  render  the 
bill  demurrable.  Friend  v.  Powers, 
93    Ala.   114    (1891). 

l  Marsh  v.  Kaye,  168  N.  Y.  196 
(1901).  The  liability  of  a  director 
for  debts  to  a  certain  amount  is  con- 
tractual and  for  the  benefit  of  all 
creditors,  and  hence  a  creditor  may 
maintain  a  suit  in  equity  to  enforce 
the  same.  Bauer  v.  Parker,  82  N.  Y. 
App.  Div.  289  (1903).  Under  the 
statutes  of  New  York  where  a  New 
Jersey  corporation,  doing  business  In 


(37) 


577 


§  222.] 


STATUTORY    LIABILITY   OF  BTOCKHOLD 


[CH.  XII. 


from  law  to  equity  is  unconstitutional  as  againsl   prior  creditors.1 

In  some  jurisdictions  the  rule  prevails  that  creditors  in  the  e 
cases  have  a  concurrent  remedy,  either  at  law  or  in  equity.  Tho 
action  at  law  will  lie  upon  the  debt,  while,  on  the  other  hand,  the 
equitable  jurisdiction  arises  from  the  power  of  a  court  of  chancery 
to  compel  contribution  among  the  stockholders  and  to  effect  an 
equitable  distribution  among  the  creditors.2  The.  tendency  is  to  hold 
that  a  suit  in  equity  is  always  a  proper  remedy,  even  though  it  may 
not  be  tho  exclusive   remedy.'1      The   Supreme   court    of   the  United 


New  York,  pays  dividends  from  the 
capital  stock,  a  director  participating 
In  declaring  the  dividend  is  personal- 
ly liable  therefor,  and  if  the  corpora- 
tion refuses  to  bring  the  action  a 
stockholder  may  bring  it  in  behalf 
of  himself  and  other  stockholders. 
Hutchinson  v.  Stadler,  85  N.  Y.  App. 
Div.  424   (1903). 

i  Knickerbocker  T.  Co.  v.  Northern, 
etc.  Co.,  140  Fed.  Rep.  973  (1905). 
A  statute  may  provide  that  the  sole 
remedy  shall  be  in  equity  and  that 
pending  suits  at  law  shall  abate.  Mur- 
phy v.  Wheatley,  100  Md.  358  (1905); 
Miners'  &  Merchants'  Bank,  etc.  v. 
Snyder,  100  Md.  57  (1904).  But  see 
Myers  v.  Knickerbocker  T.  Co,  13D 
Fed.  Rep.  Ill   (1905). 

2  Bank  of  United  States  v.  Dallam, 
4  Dana  (Ky.),  574  (183G);  Van  Hook 
v.  Whitlock,  3  Paige,  409  (1832); 
Bank  of  Poughkeepsie  v.  Ibbotson,  24 
Wend.  473  (1840);  Masters  v.  Rossie 
Lead  Min.  Co.,  2  Sandf.  Ch.  301 
(1845);  Pfohl  v.  Simpson,  74  N.  Y. 
137  (1878);  Eames  v.  Doris,  102  111. 
350  (1S82);  Culver  v.  Third  Nat. 
Bank,  64  111.  52S  (1871);  Perry  v. 
Turner,  55  Mo.  418  (1874);  Norris  v. 
Johnson,  34'  Md.  4S5,  489  (1871); 
Matthews  v.  Albert,  24  Md.  527 
(1866).  Cf.  Weeks  v.  Love,  50  N.  Y. 
568  (1872);  Garrison  v.  Howe,  17  N. 
Y.  458  (1S5S).  And  see  the  following 
New  York  cases,  wherein  it  is  held 
that  a  remedy  in  equity  is  preferable: 
Morgan  v.  New  York,  etc.  R.  R.,  10 
Paige,  290  (1843);  Sherwood  v.  Buf- 
falo,   etc.    R.    R.,    12    How.    Pr.    136 


(1S55);  Hinds  v.  Canandaigua,  etc. 
R.  R.,  10  How.  Pr.  487  (1855);  Cour- 
tois  v.  Harrison,  12  How.  Pr.  359 
(1856) — the  last  three  cases  relating 
to  supplementary  proceedings.  The 
Kansas  liability  may  be  enforced  by  a 
bill  in  equity  to  reach  both  the  statu- 
tory and  subscription  liability.  New 
York,  etc.  Co.  v.  Beard,  80  Fed.  Rep. 
66  (1897).  The  Kansas  statutory  lia- 
bility against  a  non-resident  stock- 
holder may  be  enforced  against  land 
in  Kansas  owned  by  such  stockholder. 
Cooper  v.  Ives,  62  Kan.  395  (1901). 
The  remedy  in  equity  is  proper  even 
if  a  remedy  at  law  is  allowed.  Par- 
ker v.  Carolina  Sav.  Bank,  53  S.  C. 
583   (1S9S). 

3  A  bill  in  equity  by  one  creditor  in 
behalf  of  himself  and  all  others  and 
against  all  stockholders  is  proper. 
Harper  v.  Carroll,  62  Minn.  152 
(1895) ;  s.  c,  66  Minn.  487.  Where  by 
statute  directors  are  liable  for  debts 
in  excess  of  the  capital  stock,  a  part 
of  the  creditors  cannot  enforce  the 
liability  for  their  claims  alone.  Moul- 
ton  v.  Connell,  etc.  Co.,  93  Tenn.  377 
(1894).  A  liability  by  statute  of  di- 
rectors for  a  specified  amount  of  the 
debts  of  the  company  may  be  enforced 
by  a  creditor  suing  in  equity  in  be- 
half of  himself  and  others,  and  all  of 
the  directors  may  be  joined  as  parties 
defendant.  The  corporation  is  not  a 
necessary  party  defendant,  and  the 
other  creditors  are  not  necessary  par- 
ties plaintiff.  Bauer  v.  Piatt,  72  Hun, 
326  (1893).  All  the  stockholders  need 
not    be    joined,    but    those    who    are 


578 


CH.  XII.] 


STATUTORY   LIABILITY  OP  STOCKHOLDERS. 


[§    222. 


States  has  recently  held,  however,  that  the  jurisdiction  of  a  court  of 
equity,  on  the  ground  of  preventing  a  multiplicity  of  suits,  exists 
only  where  such  is  the  actual  situation.1 

In  general  in  the  courts  of  the  United  States  it  has  been  the  rule 
that,  where  a  stockholder's  statutory  liability  is  by  the  terms  of  the 
statute  a  joint  and  several  or  several  liability,  the  creditor  may,  after 
the  remedy  against  the  corporation  has  been  exhausted,  enforce  his 
rights  in  an  action  at  law;  but,  in  all  other  cases  of  statutory  lia- 
bility, the  remedy  must  be  in  equity,  as  in  cases  of  unpaid  subscrip- 
tions.2    The  corporation  and  all  solvent  stockholders  in  the  juris- 


joined  may  bring  in  the  others  by  a 
cross-bill.  Palmer  v.  Woods,  149  111. 
146    (1894). 

i  The  Supreme  Court  of  the  United 
States  in  passing  on  the  question  of 
■whether  a  court  of  equity  has  jurisdic- 
tion to  enforce  the  statutory  liability 
of  stockholders,  said:  "It  is  easy  to 
say  it  rests  upon  the  prevention  of 
a  multiplicity  of  suits,  but  to  say 
whether  a  particular  case  comes  with- 
in the  principle  is  sometimes  a  much 
more  difficult  task.  Each  case,  if  not 
brought  directly  within  the  principle 
of  some  preceding  case,  must,  as  we 
think,  be  decided  upon  its  own  merits 
and  upon  a  survey  of  the  real  and 
substantial  convenience  of  all  parties, 
the  adequacy  of  the  legal  remedy,  the 
situations  of  the  different  parties,  the 
points  to  be  contested  and  the  result 
which  would  follow  if  jurisdiction 
should  be  assumed  or  denied;  these 
various  matters  being  factors  to  be 
taken  into  consideration  upon  the 
question  of  equitable  jurisdiction  on 
this  ground,  and  whether  within  rea- 
sonable and  fair  grounds  the  suit  is 
calculated  to  be  in  truth  one  which 
will  practically  prevent  a  multiplicity 
of  litigation,  and  will  be  an  actual 
convenience  to  all  parties,  and  will 
not  unreasonably  overlook  or  obstruct 
the  material  interests  of  any.  The 
single  fact  that  a  multiplicity  of  suits 
may  be  prevented  by  this  assumption 
of  jurisdiction  is  not  in  all  cases 
enough  to  sustain  it.  It  might  be 
that  the  exercise  of  equitable  juris- 
diction   on    this    ground,    while    pre- 


venting a  formal  multiplicity  of  suits, 
would  nevertheless  be  attended  with 
more  and  deeper  inconvenience  to  the 
defendants  than  would  be  compen- 
sated for  by  the  convenience  of  a  sin- 
gle plaintiff;  and  where  the  case  is 
not  covered  by  any  controlling  prece- 
dent the  inconvenience  might  consti- 
tute good  ground  for  denying  juris- 
diction. 

"We  are  not  disposed  to  deny  that 
jurisdiction  on  the  ground  of  pre- 
venting a  multiplicity  of  suits  may  be 
exercised  in  many  cases  in  behalf 
of  a  single  complainant  against  a 
number  of  defendants,  although  there 
is  no  common  title  nor  community  of 
rights  or  interest  in  the  subject-mat- 
ter among  such  defendants,  but  where 
there  is  a  community  of  interest 
among  them  in  the  questions  of  law 
and  fact  involved  in  the  general  con- 
troversy." Hale  v.  Allison,  188  U.  8. 
56  (1903);  aff'g  106  Fed.  Rep.  258. 
The  court  in  this  case  declined  to  sus- 
tain the  jurisdiction  of  a  court  in 
equity  and  held  that  the  sole  remedy 
was  at  law.  Equity  has  no  jurisdic- 
tion on  the  ground  of  multiplicity  of 
suits  where  each  complainant  has  a 
separate  and  independent  claim,  and 
an  adjudication  as  to  one  does  not 
apply  to  the  others.  Miller  v.  Willett, 
65  Atl.  Rep.  981    (N.  J.  1907). 

2  Pollard  v.  Bailey,  20  Wall.  520 
(1874);  Terry  v.  Little,  101  U.  S.  216 
(1879);  Terry  v.  Tubman,  92  U.  S. 
156  (1875);  Andrews  v.  Bacon,  38 
Fed.  Rep.  777  (1889);  Cuykendall  v. 
Miles,  10  Fed.  Rep.  342  (1882),  where 


579 


§  DliJ.  J 


ITToKY   j.lAr.ll.lTY   OF  STOCKHOLDERS. 


[CH,  XII. 


diction  should  he  joined  as  defendants.1     A  bill  in  equity  for  • 
covery  lies  at  the  instance  of  a  judgment  creditor  of  a  corpora* 

tion  to  ascertain  the  names  and  addresses  of  the  stockholders   the 


the  court  said:  "The  supreme  court 
hold  that  the  mode  in  which  a  liabil- 
ity of  this  sort  is  to  be  enforced  de- 
pends entirely  upon  the  particular 
law  governing  the  corporation.  If 
that  law  merely  provides  for  a  pro- 
portionate liability  of  all  stockhold- 
ers for  all  debts,  there  should  be  a 
bill  in  equity  for  the  benefit  of  all 
the  creditors  and  against  all  the 
stockholders.  (Citing  cases.)  But  if 
the  law  of  the  state  authorizes  an 
action  by  one  creditor  against  one 
stockholder,  that  remedy  may  be  pur- 
sued." Patterson  v.  Lynde,  106  U.  S. 
519  (1882).  As  to  joinder  of  parties, 
see  U.  S.  Rev.  Stat.,  §  737.  The  lia- 
bility of  subscribers  for  stock  under 
the  Maine  statutes,  where  the  stock  is 
not  properly  paid  up,  cannot  be  en- 
forced in  the  federal  courts  by  a  suit 
in  equity,  even  though  the  statutes  of 
Maine  authorize  such  a  suit.  74  Fed. 
Rep.  29.  See  188  U.  S.  56.  An  action 
at  law  lies  in  the  federal  courts,  when 
that  remedy  is  apropriate.  Bullard 
v.  Bell,  1  Mason,  243  (1817);  s.  c, 
4  Fed.  Cas.  625.  Or  where  the  courts 
of  the  state  creating  the  liability  hold 
that  an  action  at  law  will  lie.  Mills 
v.  Scott,  99  U.  S.  25  (1878);  National 
Park  Bank  v.  Peavey,  64  Fed.  Rep. 
912  (1894).  In  the  feleral  courts  a 
suit  to  enforce  a  director's  statutory 
liability  is  in  equity.  Stone  v.  Chis- 
olm,  113  U.  S.  302  (1884).  The  lia- 
bility of  stockholders  under  the  Ohio 
law  is  several  and  to  all  creditors. 
Newberry  v.  Robinson,  41  Fed.  Rep. 
458  (1890).  When  the  equitable  rem- 
edy is  pursued,  the  corporation  and 
all  the  solvent  stockholders  within 
the  jurisdiction  who  are  known  must 
be  made  defendants.  Contribution 
among  the  stockholders  is  of  the  es- 
sence of  the  proceeding,  and  that  is 
best  effected  when  all  are  made  par- 
ties.    Walser  v.  Memphis,  etc.  R.  R., 


2  McCrary,  156  (1881);  s.  c,  6  Fed. 
Rep.  797,  and  19  Fed.  Rep.  152.  The 
liability  of  directors  in  a  national 
bank  for  excessive  loans  may  be  en- 
forced in  equity  where  the  board  of 
directors  change  during  the  existence 
of  such  loans.  Cockrill  v.  Cooper,  n<J 
Fed.  Rep.  7  (1898).  Where  a  re- 
ceiver has  power  by  statute  to  enforce 
the  statutory  liability  and  files  a  bill 
in  equity  in  the  state  court  against 
various  stockholders  to  recover  an 
assessment  already  levied  by  the 
court,  a  non-resident  stockholder  who 
is  one  of  the  defendants  may  remove 
his  part  of  the  case  into  the  federal 
court.  Calderhead  v.  Downing,  103 
Fed.  Rep.   27    (1900). 

l  All  the  stockholders  should  be 
made  parties,  but  the  defect  may  be 
waived.  Arthur  v.  "VVillius,  44  Minn. 
409  (1890);  Erickson  v.  Nesmith,  46 
X.  H.  371  (1866);  Hadley  v.  Russell, 
40  N.  H.  109  (1860).  In  a  creditor's 
suit  in  equity  to  enforce  a  stockhold- 
er's statutory  liability  all  the  stock- 
holders must  be  joined,  and  hence 
such  a  suit  against  one  stockholder 
will  not  lie.  Miller  v.  Smith,  26  R.  I. 
146  (1904).  Stockholders  who  are 
dead  and  their  estates  unrepresented, 
and  stockholders  beyond  the  jurisdic- 
tion of  the  court,  may  be  omitted  as 
defendants.  Wheatley  v.  Glover,  125 
Ga.  710  (1906).  The  joinder  of  all 
the  stockholders  may  be  dispensed 
with  in  a  case  where  it  is  shown  to 
be  impracticable.  Umsted  v.  Buskirk, 
17  Ohio  St.  113  (1S66);  Pettibone  v. 
McGraw,  6  Mich.  441  (1859);  Pierce 
v.  Milwaukee  Constr.  Co.,  38  Wis.  253 
(1875) ;  Coleman  v.  White,  14  Wis. 
700  (1862);  Crease  v.  Babcock,  51 
Mass.  525  (1846);  Brundage  v.  Monu- 
mental, etc.  Min.  Co.,  12  Oreg.  322 
(1885),  holding  also  that  a  defendant 
stockholder  desiring  to  bring  in  other 
stockholders  must  do  that  by  an  ap- 


5S0 


CH.  XII.] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§  221. 


object  being  to  enforce  the  statutory  liability,  but  such  bill  must 
allege  such  liability.1  A  stockholder  sued  at  law  may  institute  an 
equitable  proceeding  to  bring  in  all  the  parties.2  Where  man; 
have  been  brought  to  enforce  the  statutory  liability,  the  court  may 
enjoin  all  of  the  suits  excepting  one,  that  one  being  for  the  benefit 
of  all,  and  being  in  equity.3     The  corporation  is  a  proper,  but  not  a 


propriate  cross-proceeding.  And  an 
action  to  enforce  the  statutory  lia- 
bility may  be  joined  with,  an  action 
to  collect  unpaid  subscriptions.  War- 
ner v.  Callender,  20  Ohio  St.  190 
(1870);  New  York,  etc.  Co.  v.  Beard, 
80  Fed.  Rep.  66  (1897).  But  a  claim 
against  stockholders  upon  a  liability 


Ohio.  A  suit  to  enforce  the  statutory 
liability  of  stockholders  in  a  New 
York  state  bank  must  be  against  all 
the  stockholders  who  can  be  made 
parties.  Hirshfeld  v.  Bopp,  39  N.  Y. 
App.  Div.  613  (1899).  Where  some 
of  the  stockholders  are  not  made  par- 
ties   defendant    in    a   suit    in    equity 


imposed  by  statute  cannot  be  joined  they  may  be  brought  in  by  the  stock- 
in  one  bill  in  equity  with  a  penal  holders  who  are  made  defendants, 
claim    against    the    directors    of    the     Rehbein  r.  Rahr,  109  Wis.  136  (1901). 


company.  Cambridge  Water-works  v. 
Somerville  Dyeing,  etc.  Co.,  80  Mass. 
193  (1859);  Pope  v.  Leonard,  115 
Mass.  2S6  (1874);  Mappier  v.  Morti- 
mer, 11  Abb.  Pr.  (N.  S.)  455  (1871). 
Cf.  Wiles  v.  Suydam,  64  N.  Y.  173 
(1876).  The  case  of  Mason  r.  Alex- 
ander, 44  Ohio  St.  318  (1S86),  holds 
that  the  corporation  is  a  necessary 
party  to  the  creditor's  suit  in  equity; 
that  judgment  against  the  stockhold- 
ers is  to  be  against  them  severally, 
and    that   interest   is   to    be    allowed 


In  a  creditor's  suit  to  wind  up  a  mu- 
tual insurance  company  the  parties 
subject  to  assessment  are  proper  par- 
ties defendant.  Sugg  v.  Farmers', 
etc.  Assoc,  63  S.  W.  Rep.  226  (Tenn. 
1901).  A  receiver  of  a  national  bank 
may  bring  his  suit  in  a  court  of 
equity,  and  may  join  various  stock- 
holders as  defendants.  Bailey  v.  Til- 
linghast,  99  Fed.  Rep.  801  (1900).  In 
Maine  it  is  held  that  stockholders' 
ratable  liability  is  not  increased  by 
reason  of  the  fact  that  some  of  the 


from  the  commencement  of  the  suit,     stockholders  are  insolvent  or  beyond 


'although  the  amount  of  recovery 
may  thereby  exceed  the  stockholder's 
original  liability."  A  married  woman 
in  Arkansas  may  own  stock  and  be 
liable  thereon.  Her  liability  may  be 
enforced  in  equity.  Bundy  v.  Cocke, 
128  U.  S.  185  (1888).  Proceedings  to 
enforce  the  statutory  liability  are 
made  elastic,  and  applications  of  cred- 
itors who  come  in  may  cure  defects 
in  the  original  papers.  Arthur  v. 
Willius,  44  Minn.  409  (1890).  A  suit 
to  enforce  in  the  federal  court  in 
New  York  the  statutory  liability  of 
New  York  stockholders  in  an  Ohio 
corporation  failed  in  Middletown,  etc. 
Bank  v.  Toledo,  etc.  Ry.,  113  Fed. 
Rep.  587  (1901),  on  the  ground  that 
all  the  stockholders  were  not  made 
parties  as  required  by  the  statutes  of 


the  reach  of  process.  Maine,  etc.  Co. 
v.  Southern,  etc.  Co.,  92  Me.  444 
(1899). 

i  Clark  v.  Rhode  Island,  etc.  Works, 
24  R.  I.  307  (1902);  Post  v.  Toledo, 
etc.  R.  R.,  144  Mass.  341  (1887).  In 
a  corporate  creditor's  action  against 
a  few  stockholders,  to  enforce  their 
liability  and  to  obtain  discovery  of 
other  stockholders,  the  discovery  may 
be  compelled.  Hippie  v.  Five-Mile, 
etc.  Co.,  3  Atl.  Rep.  682  (N.  J.  1886). 
See  also  §  519,  infra. 

2  Pfohl  v.  Simpson,  74  N.  Y.  137 
(1878);  Cochran  v.  Wiechers,  119  N. 
Y.  399  (1890) ;  Garrison  v.  Howe,  17 
N.  Y.  458  (1858).  Semble,  Thebus  v. 
Smiley,  110  111.  316  (1884);  Eames  v. 
Doris,  102  111.  350  (1882). 

3  Bagley,    etc.    Co.    v.    Ehrlicher,    8 


581 


222.  | 


BTATUTOEl    l.lU'.H.l'i  f  OP  !  fOCKHOLDl 


[CH.  MI. 


necessary  party  defendant1  A  corporate  creditor's  suil  in  equity  in 
behalf  of  himself  and  all  others  to  enforce  the  stockholders'  stat- 
utory liability  does  not,  even  though  it  goes  to  a  decree,  prevent 
other  creditors  filing  a  suba  quenl  bill  for  the  same  purpose.2  Where 
in  a  suit  in  equity  to  enforce  the  liability  other  creditors  arc  not 
joined,  the  complainant  may  recover  his  full  claim,  even  though,  if 
other  creditors  bad  come  in,  th  tts  would  have  been  insufficient 

to  pay  all  claims  in  fulL8  The  judgmenl  againsl  each  stockholder  is 
for  the  full  amount  of  his  liability,  even  though  the  aggregate  of  such 
judgments  is  more  than  the  entire  debts;  bu1  the  execution  Bhould 
be  by  instalments,  the  first  one  being  for  a  pro  rata  share  of  each 
stockholder's  liability,  and  subsequent  levies  to  make  up  that  which 
cannot  be  collected  from  insolvent  stockholders.4     In  a  suit  brought 


N.  Y.  App.  Div.  581  (1896).  A  suit,  by 
a  creditor  to  enforce  the  statutory  lia- 
bility of  directors  for  debts  In  excess 
of  the  capital  stock  Bhould  be  for 
the  benefit  of  all  creditors,  and  where 
there  are  several  suits  all  will  be 
stayed  excepting  one.  American  Gro- 
cery Co.  v.  Flint,  5  N.  Y.  App.  Div. 
263  (1896).     See  also  §226,  intra. 

i  German  Nat.  Bank  v.  Farmers'  & 
M.  Bank,  54  Neb.  593  (1898).  See  s. 
c,  59  Neb.  229  (1899) ;  Nolan  v.  Ha- 
zen,  44  Minn.  478  (1890);  Bauer  0. 
Piatt,  72  Hun,  326  (1S93) ;  Third  Nat. 
Bank  v.  Angell,  18  R.  I.  1  (1894). 
Contra,  Mason  v.  Alexander,  44  Ohio 
St.  318  (1886).  The  corporation  is 
not  a  necessary  party  in  a  suit  under 
the  Massachusetts  statute  of  1906  to 
hold  directors  of  street  railways  lia- 
ble for  debts  to  the  amount  of  the 
capital  stock  before  it  is  all  paid  in 
and  a  certificate  thereof  filed.  Ameri- 
can, etc.  Co.  v.  Bearse,  80  N.  E.  Rep. 
623  (Mass.  1907).  Under  the  Wiscon- 
sin statute  making  stockholders  liable 
for  the  debts  where  business  is  com- 
menced before  one-half  the  capital 
stock  is  subscribed  and  twenty  per 
cent,  paid  in,  the  statute  allows  suit 
without  joining  the  corporation  as  a 
defendant.  Flour  City  Nat.  Bank  v. 
Wechselberg,  45  Fed.  Rep.  547  (1891). 
In  a  suit  to  enforce  the  statutory 
liability  of  directors  for  debts  in  ex- 
cess of  the  capital  stock,  the  corpo- 


ration is  not  a  necessary  party  de- 
fendant. James,  etc.  Co.  v.  Libbey, 
105  Fed.  Rep.  825  (1901).  The  de- 
fense that  the  corporation  and  its  as- 
;.  e  Bhould  be  made  parties  de- 
fendant may  be  waived  by  answering 
over  after  a  demurrer  has  been  over- 
ruled on  this  ground.  Zang  v.  Wyant, 
25  Colo.  551  (1S98).  An  Indiana 
creditor  of  an  insolvent  Minnesota 
corporation  cannot  enforce  in  equity 
in  the  federal  court  in  Pennsylvania 
the  statutory  liability  of  Pennsylvania 
stockholders  in  such  Minnesota  cor- 
poration, unless  the  latter  is  made  a 
party  defendant,  and  voluntarily  ap- 
pears. Elkhart  Nat.  Bank  v.  North- 
western, etc.  Co.,  87  Fed.  Rep.  252 
(1S98).  The  statutory  liability  of  an 
Ohio  stockholder  in  a  Kansas  corpo- 
ration may  be  enforced  in  Ohio,  and 
the  corporation  is  not  a  necessary 
party  defendant,  and  the  suit  may 
be  in  equity  against  one  or  more 
stockholders.  Blair  v.  Newbegin,  65 
Ohio   St.  425    (1902). 

2  Palmer  v.  Woods,  149  111.  146 
(1894). 

3  Rehbein  v.  Rahr,  109  Wis.  136 
(1901).  Cf.  §204,  supra.  All  the 
other  creditors  need  not  be  joined, 
the  suit  being  in  behalf  of  all  cred- 
itors. Herrick  v.  Wardwell,  58  Ohio 
St.  294  (1898). 

4  Harper  v.  Carroll,  66  Minn.  487 
(1896),  holding  also  that  the  court  in 


582 


CH.  XII.] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§  223. 


by  a  creditor  of  an  insolvent  bank  to  enforce  the  statutory  liability 
of  the  stockholders  of  the  bank,  such  creditor  has  the  right  to  con- 
trol the  action,  and  may  continue,  compromise,  abandon,  or  discon- 
tinue it  at  pleasure  until  a  creditor  similarly  situated  has  procured 
an  order  to  be  made  a  party  to  the  action  or  until  interlocutory 
judgmenl  is  entered.1  It  is  not  necessary  to  allege  the  amount  of 
stock  which  the  defendant  holds.2  A  demand  on  the  stockholder 
need  not  be  alleged.3  In  a  suit  by  creditors  to  hold  directors  person- 
ally liable  for  violating  the  statutes  in  the  conduct  of  the  corpo- 
rate business,  the  creditors  must  clearly  set  forth  the  character  and 
existence  of  the  amount  they  claim.4  In  a  suit  brought  by  a  cor- 
porate creditor  against  many  stockholders  to  collect  unpaid  sub- 
scriptions, the  plaintiff  is  not  entitled  to  an  order  allowing  him  to 
examine  persons  for  the  purpose  of  ascertaining  the  residence  of  the 
defendants  in  order  that  they  may  be  served.5 

§  223.  Enforcement  of  the  statutory  liability  in  the  courts  of  an- 
other state  — Penal  liabilities—  Construction  of  liability  created  by 
another  state. — The    stockholders    of    a   corporation    are   generally 


a  suit  in  equity  may  cause  the  prop- 
erty of  a  non-resident  stockholder  to 
be  attached.  Stockholders  sued  un- 
der the  Minnesota  statute  cannot 
question  the  amount  of  the  assess- 
ment which  has  been  levied  by  the 
court.  A  statute  to  that  effect  is 
not  unconstitutional.  Straw,  etc.  Co. 
v.  Kilbourne,  etc.  Co.,  80  Minn.  125 
M!)00).  A  judgment  should  be  for 
the  entire  liability  to  be  paid  from 
time  to  time  as  found  necessary. 
Man  v.  Boykin,  60  S.  E.  Rep.  17  (S.  C. 
1908). 

i  Hirshfield  r.  Fitzgerald,  157  N.  Y. 
166  (1898);  §§225,  74S,  infra;  and  p. 
528,  note  4,  supra.  After  a  receiver 
of  an  insolvent  corporation  has  been 
appointed  at  the  instance  of  a  cred- 
itor, and  under  an  order  of  the  court 
other  creditors  have  proved  their 
claims  in  such  suit,  the  court  has 
power  to  refuse  to  discontinue  the 
suit  at  the  instance  of  the  complain- 
ant of  record.  Johnson  v.  Miller,  96 
Fed.  Rep.  271  (1889).  In  a  cred- 
itor's suit  attacking  a  mortgage,  the 
suit  being  for  himself  and  other  cred- 
itors, there  being  no  funds  to  pay 
the  expense  of  litigation,  the  court 
may  require  parties  coming  in  to  con- 


tribute towards  such  expense  or  else 
be  excluded  iron,  the  suit.  Chick  v. 
Northwestern,  etc.  Co.,  US  Fed.  Rep. 
933  (1895).  As  to  the  form  of  a  de- 
cree in  a  creditor's  action,  and  as  to 
the  right  of  a  creditor  to  discon- 
tinue a  suit  brought  in  behalf  of  him- 
self and  other  creditors,  see  Salis- 
bury v.  Binghamton  Pub.  Co.,  85  Hun, 
99  (1895).  As  to  the  rules  governing 
intervention  by  one  creditor  in  a  suit 
instituted  by  another  creditor,  see 
§§734,   735,   748,  848,  infra. 

2  Rowell  v.  Janvrin,  151  N.  Y.  60 
(1896).  The  complaint  must  definite- 
ly allege  stockholdership.  McVickar 
v.  Jones,  70  Fed.  Rep.  754  (1895). 
In  a  suit  to  enforce  the  statutory  lia- 
bility of  stockholders  in  a  California 
corporation,  the  plaintiff  must  set 
forth  the  amount  of  stock  issued,  the 
amount  held  by  the  defendant,  and 
the  amount  of  the  debt.  Roebling's 
Sons  Co.  v.  Butler,  112  Cal.  677 
(1896). 

3  Newton,   etc.  Mills  v.   Springs,  56 
S.  C.  534    (1900). 

4  Boston,    etc.    R.    R.    v.    Parr,    104 
Fed.   Rep.   695    (1900). 

B  Fnion   Collection   Co.   v.   Superior 
Court,  149  Cal.  790  (1906). 


5S3 


2^;:.J 


STATUTOUV    LIABILITY 


[CH.  XII. 


widely  scattered,  and  reside  in  many  states.  Accordi  .  when 
some  or  all  of  them  are  non-residents  of  the  state  in  which  the  cor- 
poration exists,  the  important  question  arises  whether  the  courts  of 
one  state  will  enforce  a  stockholder's  statutory  liability  created  by 
the  statutes  of  another  state.  If  not,  then  non-residenl  stockhold- 
ers practically  escape  the  liability  which  they  assumed  when  tJ 
became  members  of  the  corporation. 

The  cases  arc  uniform  in  holding  that  the  extent  of  the  stock- 
holder's statutory  liability  and  the  eharacter  of  that  liability  depend 
upon  and  are  determined  by  the  charter  of  the  corporation  or  tho 
statutes  of  the  state  which  created  it.1 

In  general,  when  the  courts  of  one  state  arc  asked  to  enforce  the 
statutory  liability  of  stockholders  in  a  corporation  created  by  an- 
other state,  two  things  are  to  be  considered:  First,  is  the  statutory 


i  Payson  v.  Withers,  5  Biss.  269 
(1873);  s.  c,  19  Fed.  Cas.  29;  Sey- 
mour v.  Sturgess,  2G  N.  Y.  134  (1862) ; 
McDonough  v.  Phelps,  15  How.  Pr. 
372  (1856);  Ex  parte  Van  Riper,  20 
Wend.  614  (1839);  Aultman's  Ap- 
peal, 98  Pa.  St.  505  (1881).  When  the 
suit  is  maintainable,  the  construction 
placed  upon  the  statute  of  the  state 
in  which  the  corporation  exists,  by 
the  courts  of  that  state,  is,  as  a  gen- 
eral rule,  controlling,  and  will  be  fol- 
lowed by  the  courts  of  the  state 
where  the  suit  to  enforce  is  brought. 
Jessup  v.  Carnegie,  SO  N.  Y.  441 
(1880);  Chase  v.  Curtis,  113  U.  S. 
452  (1884) ;  Savings  Assoc,  v.  O'Brien, 
51  Hun,  45  (1889).  Cf.  Hill  v.  Beach, 
12  N.  J.  Eq.  31  (1858);  Nabob  of 
Carnatic  v.  East  India  Co.,  1  Ves.  Jr. 
371  (1791) ;  Dutch  West  India  Co.  v. 
Van  Moses,  1  Strange,  612  (1725).  In 
enforcing  the  statutory  liability  of 
stockholders  in  a  foreign  corporation, 
the  decisions  of  the  courts  in  the  state 
where  the  company  is  incorporated 
will  be  followed.  Fowler  v.  Lamson, 
146  111.  472  (1893),  holding  also,  how- 
ever, that  the  remedies  of  the  state 
where  the  company  is  incorporated 
will  not  be  applied.  This  principle 
applies,  of  course,  only  to  corpora- 
tions which  were  legally  incorporated. 
For  the  liability  where  the  incorpora- 
tion was  not  legal,  see  ch.  XIII,  infra. 


The  United  States  courts  take  judicial 
notice  of  the  statutes  of  the  various 
states.  Newberry  v.  Robinson,  36  Fed. 
p.  S41  (1SSS).  In  Bateman  v.  Serv- 
ice, L.  R.  6  App.  Cas.  3S6  (1881), 
the  ground  is  taken  that  a  liability 
created  by  statute  remains  the  same 
wherever  the  corporation  may  trans- 
act its  business,  or  wherever  the 
stockholders  may  happen  to  live,  and 
that  the  fact  of  doing  business  in 
a  foreign  state  does  not  subject  the 
stockholders  of  the  corporation  to  the 
operation  of  laws  which  create  statu- 
tory liability  in  such  foreign  state. 
In  accordance  with  this  view  it  was 
very  properly  held  in  Ohio  that  where 
a  foreign  corporation,  without  statu- 
tory liability  of  its  stockholders,  did 
business  in  Ohio,  where  the  statutes 
prescribe  a  personal  liability  for  stock- 
holders in  domestic  corporations  of 
similar  character,  the  stockholders  of 
the  foreign  corporation  are  protected 
by  the  exemption  they  enjoy  at  home. 
Second  Nat.  Bank  v.  Hall,  35  Ohio  St. 
158  (1878).  See  also  §§  12,  199,  supra, 
and  §  243,  infra.  It  is  constitutional, 
however,  for  a  state  to  prescribe  that 
the  stockholders  of  foreign  corpora- 
tions doing  business  in  the  state  shall 
be  personally  liable  the  same  as  stock- 
holders in  domestic  corporations. 
Pinney  v.  Nelson,  183  U.  S.  144 
(1901). 


584 


CH.  XII.] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§    223. 


liability  itself  a  contract  liability  or  a  mere  penalty?  Second,  are 
the  remedies  provided  by  the  laws  of  the  state  where  suit  is  brought 
adequate  to  the  just  enforcement  of  the  liability  ? 

The  answer  to  the  first  question  depends  on  the  words  of  the 
statute  imposing  the  liability.  The  law  is  clear  that  the  courts  of 
one  state  will  not  enforce  the  penalties  imposed  by  another  state.1 
But  the  usual  statutory  liability  of  stockholders  is  not  a  penalty.  The 
courts  are  nearly  unanimous  in  holding  that  where  by  statute  the 
stockholders  in  a  corporation,  instead  of  being  relieved  entirely  from 
liability  to  corporate-  creditors,  are  only  partially  relieved  there- 
from, the  additional  liability  is  a  contract  liability,  and  will  be  en- 
forced by  the  courts  of  any  state.  In  other  words,  the  ordinary 
statutory  liability  of  stockholders  is  a  contract  liability,  and  is  gener- 
ally held  to  be  such  by  the  courts  of  all  the  states.2    The  question  of 


i  Story,  Conf.  L.,  §§  620,  621;  Whar- 
ton, Conf.  L.,  §§4,  853  et  seq.;  Rorer, 
Interstate  L.  148,  149.  See  also 
Lowry  v.  Inman,  46  X.  Y.  119  (1871) ; 
Patterson  v.  Baker,  34  How.  Pr.  ISO 
(1867);  Howell  v.  Manglesdorf,  33 
Kan.  194  (1885).  Penal  laws  are 
strictly  local,  and  cannot  have  any 
operation  beyond  the  jurisdiction  of 
the  country  where  they  were  en- 
acted. Scoville  v.  Canfield,  14  Johns. 
338  (1817). 

2  Corning  v.  McCullough,  1  N.  Y.  47 
(1S47);  Freeland  v.  McCullough,  1 
Denio,  414  (1845);  Hanson  v.  Davi- 
son, 73  Minn.  454  (1S98) ;  Hodgson 
r.  Cheever,  8  Mo.  App.  318  (1880); 
Manville  v.  Edgar,  8  Mo.  App.  324 
(1880);  Queenan  v.  Palmer,  117  111. 
619  (1886) ;  Aultman's  Appeal,  98  Pa. 
St.  505  (1881);  Sackett's  Harbor 
Bank  v.  Blake,  3  Rich.  Eq.  (S.  C.) 
225  (1S51);  Woods  v.  Wicks,  7  Lea 
(fenn.),  40  (1881);  Ex  parte  Van 
Riper,  20  Wend.  614  (1839);  McDon- 
ough  v.  Phelps,  15  How.  Pr.  372 
(1856);  Lowry  v.  Inman,  46  N.  Y. 
119  (1871).  See  also  Paine  v.  Stewart, 
33  Conn.  516  (1866) ;  Bond  v.  Apple- 
ton,  8  Mass.  472  (1812);  Hutchlns 
v.  New  England  Coal  Min.  Co.,  86 
Mass.  580  (1862);  Grand  Rapids  Sav. 
Bank  v.  Warren,  52  Mich.  557  (1884). 
Cf.  Bateman  v.  Service,  L.  R.  6  App. 
Cas.    3S6     (1881);    Norris    v.    Wren- 


schall,  34  Md.  492  (1871)  ;  Terry  v. 
Calnan,  13  S.  C.  220  (1879);  Tinker 
v.  Van  Dkye,  1  Flippin,  521,  532 
(1876)  ;  s.  c.,  23  Fed.  Cas.  1297,  1301; 
Brown  v.  Hitchcock,  36  Ohio  St.  667, 
678  (1881);  Hatch  v.  Burroughs,  1 
Woods,  439,  443  (1870);  s.  c,  11  Fed. 
Cas.  795,  796;  Flash  v.  Conn,  109  U. 
S.  371  (1883);  Fourth  Nat.  Bank  v. 
Francklyn,  120  U.  S.  747  (1887) ;  Cuy- 
kendall  v.  Miles,  10  Fed.  Rep.  342 
(1S82) ;  Nimick  v.  Mingo  Iron  Works, 
25  W.  Va.  184  (1SS4).  Cf.  Lawler  v. 
Burt,  7  Ohio  St.  340  (1857).  The 
stockholder's  liability  under  the  New 
York  statute  of  1892  is  a  contractual 
liability.  Close  v.  Potter,  155  N.  Y. 
145  (1898).  In  the  case  of  New 
Haven,  etc.  Co.  v.  Linden  Spring  Co., 
142  Mass.  349  (1886),  the  court,  in  re- 
fusing to  enforce  a  subscription  made 
to  a  foreign  corporation,  without  an 
express  promise  to  pay,  said:  "That 
the  statutes  of  a  state  do  not  operate 
extraterritorially,  proprio  vigore,  will 
be  conceded.  How  far  they  should  be 
enforced  beyond  the  limits  of  the 
state  which  has  enacted  them  must 
depend  on  several  considerations — as, 
whether  any  wrong  or  injury  will  be 
done  to  the  citizens  of  the  state  in 
which  they  are  sought  to  be  enforced; 
whether  the  policy  of  its  own  laws 
will  be  contravened  or  impaired;  and 
whether  its  courts  are  capable  of  do- 


585 


§  223.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[CH.  XII. 


what  constitutes  a  penal  liability  and  what  constitutes  a  contractual 
liability  of  stockholders  and  directors  in  corporations  bag  been  <■.. 
fully  considered  by  the  supreme  court  of  the  United  States,3  and  by 
the  privy  council  in  England.2  A  statute  rendering  directors  liable 
may  lie  penal  so  far  as  they  arc  concerned,  and  hence  strictly  con- 
strued, and  yet  bo  net  '"a  penal  law  in  the  international  sense."3 

A  different  rule  prevails  as  to  tin-  statutory  liability  of  corporate 
officers  for  failure  to  file  report-,  or  give  certain  not  ires,  or  make 
certain  contracts.  Such  liability  is  generally  construed  to  be  penal, 
and  will  not  be  enforced  by  the  courts  of  other  states.4     Sometimes 


ing  complete  justice  to  those  liable 
to  be  affected  by  their  decrees."  To 
same  effect,  Halsey  v.  McLean,  94 
Mass.  438  (1SGG).  The  statutory  lia- 
bility of  stockholders  in  California  is 
a  contract  liability.  Dennis  v.  Su- 
perior Court,  91  Cal.  548  (1891).  The 
statutory  liability  of  stockholders  in 
New  York  business  corporations  to 
the  extent  of  their  stock  until  a  cer- 
tificate is  filed  that  the  whole  capital 
stock  is  paid  in  is  not  a  penal  lia- 
bility, and  it  survives  the  death  of 
a  stockholder.  Cochran  v.  Wiechers, 
119  N.  Y.  399  (1890).  A  statute  mak- 
ing the  stockholders  liable  for  all 
debts  if  certain  steps  in  incorporat- 
ing are  not  observed  is  penal.  Kleck- 
ner  v.  Turk,  45  Neb.  17G  (1895).  As 
to  what  is  a  penal  liability,  see  28 
Am.  Law  Rev.  518.  The  usual  double 
liability  of  stockholders  created  by 
statute  is  ex  contractu.  Coulbourn  v. 
Boulton,  100  Md.  350  (1905). 

i  Huntington  v.  Attrill,  146  U.  S. 
657  (1892).  The  court  reversed  the 
decision  in  Attrill  v.  Huntington,  70 
Md.  191  (1889),  which  refused  to  en- 
force in  Maryland  a  judgment  ob- 
tained in  New  York  by  a  corporate 
creditor  against  an  officer  of  the  cor- 
poration, who,  under  the  statutes  of 
New  York,  was  rendered  liable  to  cor- 
porate creditors  by  reason  of  signing 
a  false  certificate  as  to  the  amount  of 
the  capital  stock  of  the  company. 
The  supreme  court  of  the  United 
States  held  that  such  a  liability  was 
not  penal  in  the  international  sense. 

2  The  New  York  statute  making  of- 


ficers liable  for  corporate  debts  in 
case  they  file  a  false  certificate  as  to 
the  condition  of  the  company  is  not 
penal.  Hence  a  judgment  in  New 
York  on  such  a  liability  may  be  en- 
forced in  Canada.  Huntington  v.  At- 
trill, [1893]  A.  ('.  L50,  reversing  the 
tadian  court  below.  A  constitu- 
tional provision  making  the  directors 
liable  for  moneys  misappropriated  by 
officers  during  their  term  of  office  is 
self-executing,  and  they  are  liable  for 
using  the  funds  to  purchase  worthless 
paper  from  a  bank  which  they  wish 
to  keep  going.  The  liability  is  not 
penal,  inasmuch  as  it  is  not  a  pun- 
ishment, but  a  compensation  for  a 
loss.  A  creditor  who  became  such 
after  the  misappropriation  may  main- 
lain  a  suit  as  well  as  one  before,  and 
he  need  not  bring  a  suit  in  behalf  of 
all,  nor  first  obtain  a  judgment 
against  the  corporation.  Rice  v.  How- 
ard, 69  Pac.  Rep.  77  (Cal.  1902). 

•':  Park  Bank  v.  Remsen,  158  U.  S. 
337   (1895). 

4  Quoted  and  approved  in  Globe 
Pub.  Co.  v.  State  Bank,  41  Neb.  175 
(1894);  Derrickson  v.  Smith,  27  N.  J. 
L.  166  (1858);  First  Nat.  Bank  v. 
Price,  33  Md.  487  (1870),  where  a 
statute  of  Pennsylvania  imposing  lia- 
bility upon  directors  and  officers  con- 
tracting or  assenting  to  an  indebted- 
ness in  excess  of  the  amount  of  cap- 
ital was  held  to  be  penal.  But  see, 
contra,  Field  v.  Haines,  28  Fed.  Rep. 
919  (1886);  Halsey  v.  McLean,  94 
Mass.  438  (1S66);  Bird  v.  Hayden,  1 
Rob.   383    (1863);   Union   Iron   Co.  v. 


•5S6 


CH.  XII.  J 


STATUTORY   LIABILITY  OP  STOCKHOLDERS. 


[§  223. 


a    statute   rendering   directors   personally   liable   applies    to    direc- 
tors in  foreign  as  well  as  domestic  corporations.1 


Pierce,  4  Biss.  327    (1869);    s.  c,  24 
Fed.  Cas.   583.     A  statutory  liability 
of   directors    in    a   Montana   corpora- 
tion for  failure  to  file  reports  is  penal. 
Davis    v.    Mills,    113    Fed.    Rep.    678 
(1902).      A    statute   rendering   a   di- 
rector  liable   for   corporate   debts   in 
excess  of  the  capital  stock  is  not  penal 
and  may  be  enforced  in  another  state, 
inasmuch   as    the    remedy   is   not   to 
punish   an   offense,   but   is   a   private 
remedy   to   a   person   injured   by  the 
wrongful  act.    Farr  v.  Briggs'  Estate, 
72  Vt.  225    (1900).     The  twelfth  sec- 
tion of  the  New  York  Manufacturing 
Companies    Act    (Laws    of   184S,    ch. 
40),   to  the  effect  that  the  corporate 
officers  should  be  liable  for  the  debts 
of  the  corporation  in  case  they  failed 
to  make  an  annual  public  report  of 
the  business  of  the  corporation,  was 
generally  spoken  of  as  being  penal  in, 
its   character.     Chase   v.   Curtis,    113 
U.    S.    452    (1885);    Stokes   v.    Stick- 
ney,    96    N.    Y.    323    (18S4);    Pier   v. 
Hanmore,  86   N.  Y.  95    (1881);    Pier 
v.    George,    86    N.    Y.     613     (1881); 
Veeder  v.  Baker,  83  N.  Y.  156  (1880) ; 
Knox  v.  Baldwin,  80  N.  Y.  610  (1880)  ; 
Easterly    v.    Barber,    65    N.    Y.    252 
(lSTf,);    Wiles  v.   Suydam,   64    N.  Y. 
173    (1876);    Jones  v.    Barlow,    G2    N. 
Y.    202    (1S75);    Merchants'    Bank   v. 
Bliss,  35  N.  Y.  412   (1866);   Gadsden 
v.  Woodward,   103    N.  Y.  242    (1886). 
But   Huntington  v.  Attrill,  146  U.  S. 
657   (1892)    (rev'g  Attrill  v.  Hunting- 
ton, 70  Md.  191— 1S89),  decided  other- 


wise, and  the  decision  of  the  House  of 
Lords  is  to  the  same  effect.  Hunting- 
ton v.  Attrill,  [1893]  A.  C.  150.  As  to 
the  statutory  liability  of  the  stock- 
holders if  the  capital  stock  was  not 
fully  paid  up  and  a  certificate  filed, 
see  Howell  v.  Roberts,  29  Neb.  483 
(1890);  Halsey  v.  McLean,  94  Mass. 
438  (1866);  Erickson  v.  Nesmith,  86 
Mass.  233  (1S62) ;  Mitchell  v.  Hotch- 
kiss,  48  Conn.  9  (1880);  Steam  En- 
gine Co.  v.  Hubbard,  101  U.  S.  188 
(1879);  Savings  Assoc,  v.  O'Brien,  51 
Hun,  45  (1889).  A  stockholder's  lia- 
bility for  failure  of  the  directors  to 
file  a  certificate  each  year  is  a  penal 
liability  and  cannot  be  enforced  in 
a  foreign  jurisdiction,  and  foreign 
stockholders  cannot  be  sued  in  their 
state  for  contributions  towards  a 
penal  liability  paid  by  domestic  stock- 
holders. Sayles  v.  Brown,  40  Fed. 
Rep.  8  (1899).  But  see  Huntington 
v.  Attrill,  146  U.  S.  657  (1892),  re- 
versing Attrill  v.  Huntington,  70  Md. 
191  (1S89).  The  statutory  liability 
of  a  director  in  a  national  bank  is 
not  a  penal  liability,  and  it  survives 
the  death  of  the  director  who  is  lia- 
ble. Stevens  v.  Overstoltz,  43  Fed. 
Rep.  4G5  (1890).  The  statutory  lia- 
bility of  trustees  of  clubs  for  all 
debts  contracted  during  their  term 
of  office  is  a  contract  liability.  Rog- 
ers v.  Decker,  131  N.  Y.  490  (1892). 
A  liability  of  stockholders  for  fail- 
ure to  publish  annually  a  statement 
of  their  indebtedness  is  penal.    Globe 


i  A  statute  giving  a  remedy  against 
drrectors  of  a  corporation  who  are 
guilty  of  fraud  applies  to  directors 
in  foreign  corporations,  as  well  as 
those  in  domestic  corporations,  un- 
less its  language  is  clearly  to  the  con- 
trary. Miller  v.  Quincy,  179  N.  Y. 
294  (1904);  rev'g  Miller  v.  Barlow, 
88  N.  Y.  App.  Div.  529.  Under  the 
statutes  of  New  York  where  a  New 
Jersey  corporation   doing  business  in 


New  York,  pays  dividends  from  the 
capital  stock,  a  director  participating 
in  declaring  the  dividend  is  person- 
ally liable  therefor,  and  if  the  corpora- 
tion refuses  to  bring  the  action  a 
stockholder  may  bring  it  in  behalf 
of  himself  and  other  stockholders. 
Hutchinson  v.  Stadler,  85  N.  Y.  App. 
Div.  424  (1903).  See  also  §215,  su- 
pra. 


587 


§  223.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[CH.  XII. 


This  question  of  whether  the  liability  is  a  penalty  arises  often  in 
ascertaining  what  particular  statute  of  limitations  applies.3      There 

Pub.  Co.  v.  State  Bank,  41  Neb.  173     a  statute  making  tbem  liable  for  all 
(1894),  overruling  Howell  v.  Roberts,     debts  if  tbey  commit  ultra  vires  acts 

29  Neb.  483  (1890),  and  Coy  v.  Jones, 

30  Neb.  798  (1890).  A  director's  lia- 
bility for  failure  to  make  reports  is 
penal.  State  Sav.  Bank  v.  Jobnson, 
18  Mont.  440  (1896).  A  statute  ren- 
dering the  directors  liable  to  corpo- 
rate creditors  in  case  of  fraud  or  un- 
faithfulness is  not  a  penal  statute. 
Flowers  v.  Bartlett,  66  Minn.  213 
(1896).  A  director's  statutory  liabil- 
ity for  receiving  deposits  after  the 
bank  becomes  insolvent  is  penal.  Ash- 
ley v.  Frame,  4  Kan.  App.  265  (1896). 
The  statutory  liability  in  Oregon  of 
directors  for  declaring  dividends  from 
the  capital  stock  is  penal.  Patterson 
v.  Thompson,  86  Fed.  Rep.  85  (1898). 
In  New  York,  if  the  suit  is  com- 
menced by  summons  only,  to  re- 
cover a  penalty,  a  reference  must 
be  made  on  the  summons  to  the 
statute.  Code  Civ.  Proc,  §  1S97. 
The  statutory  liability  of  directors  in 
New  York  state,  for  failing  to  file  a 
report,  is  a  penalty,  and  the  summons 
must  state  that  fact  on  its  face.  Farm- 
ers', etc.  Bank  v.  Stringer,  75  N.  Y. 
App.  Div.  127  (1902).  The  statutory 
liability  of  directors  in  an  Oregon 
corporation  for  declaring  dividends 
out  of  the  capital  stock  is  a  penal 
liability.  Patterson  v.  Wade,  115  Fed. 
Rep.  770   (1902). 

l  Gridley  v.  Barnes,  103  111.  211 
(1882);  Diversey  v.  Smith,  103  111. 
378  (1882).  See  also  Cable  v.  Mc- 
Cune,  26  Mo.  380  (1858);  Lawler  v. 
Burt,  7  Ohio  St.  340  (1857);  Cady  v. 
Smith,  12  Neb.  628  (1882);  Knox  v. 
Baldwin,  80  N.  Y.  610  (18S0).  Cf. 
Duckworth  v.  Roach,  81  N.  Y.  49 
(1880);  Wiles  v.  Suydam,  64  N.  Yr. 
173  (1876).  The  federal  courts  fol- 
low the  state  decisions.  Price  v. 
Yates,  19  Fed.  Cas.  1322  (1S79).  The 
three  years'  statute  of  limitations 
relative  to  penalties  applies  to  an 
action  to  hold  directors  liable  under 


which  result  in  insolvency.  Mer- 
chants' Nat.  Bank  v.  X or th western 
Mfg.  Co.,  4S  Minn.  349  (1S92).  A 
statutory  liability  of  directors  for 
failure  to  file  reports  is  penal  and 
subject  to  the  statute  of  limitations 
on  penalties.  A  judgment  need  not 
be  obtained  against  the  corporation 
first.  Larsen  v.  James,  1  Colo.  App. 
313  (1S92).  A  penal  liability  of  a 
director  ends  in  case  of  his  death, 
unless  it  is  already  merged  into  a 
judgment,  in  which  case  it  survives. 
Carr  v.  Rischer,  119  N.  Y.  117  (1890). 
A  statutory  liability  of  directors  for 
illegal  payment  of  dividends  is  penal 
and  does  not  survive  the  death  of  a 
director  and  is  not  assignable.  Killen 
V.  Barnes,  106  Wis.  546  (1900).  The 
statutory  provision  in  Illinois  making 
officers  liable  for  debts  in  excess  of 
the  capital  stock  is  not  a  penal  lia- 
bility, and  is  not  barred  by  the  two- 
year  statute  of  limitations.  It  may 
be  enforced  in  equity.  Woolverton  v. 
Taylor,  132  111.  197  (1S90).  The  lia- 
bility of  directors  in  an  Indiana 
manufacturing  corporation  because 
the  capital  stock  was  not  paid  up 
within  eighteen  months  is  a  penal 
liability  and  is  barred  in  two  years. 
Brown  v.  Clow,  158  Ind.  403  (1902). 
The  statutory  liability  of  directors 
for  failure  to  make  a  report  or  for 
making  a  false  report  is  not  penal, 
and  is  not  affected  by  the  statute  of 
limitations  applicable  to  penalties. 
American,  etc.  Co.  v.  Ellis,  156  Ind. 
212  (1901).  As  to  the  statute  of  lim- 
itations applicable  to  the  liability  of 
directors  under  the  business  corpora- 
tion act  of  New  York  of  1S75  (now 
repealed),  see  Chapman  v.  Lynch,  156 
N.  Y.  551  (1898).  In  a  suit  against 
a  director  for  fraud  in  inducing  sub- 
scription, the  statute  of  limitations 
begins  to  run  from  the  time  of  sub- 
scription, and   the  liability   is  not  a 


588 


CH.  XII.] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§    223. 


can  never  be  such  a  thing  as  a  vested  right  to  enforce  a  penalty.1 
Until  judgment  is  obtained  the  legislature  may  relieve  the  parties 
from  this  penalty.2 

The  second  question  is  whether  the  courts  of  one  state  will  en- 
force a  statutory  liability  created  by  another  state,  when  the  legal 
procedure  for  enforcing  that  liability  is  prescribed  by  the  latter 
state  and  is  not  feasible  in  the  former  state.  As  explained  elsewhere, 
when  the  statute  creating  the  liability  prescribes  a  particular  pro- 
cedure for  enforcing  it,  that  procedure  is  exclusive  of  all  other 
remedies.3  Hence,  instances  have  occurred  in  which  the  enforce- 
ment of  tli is  statutory  liability  in  another  state  has  failed,  by  rea- 
son of  difficulties  attending  the  legal  procedure  to  be  used  in  en- 
forcing that  liability.4     The  liability  will  be  enforced  only  when  it 


penalty,  even  though  the  liability  is 
made  statutory.  Thomson  v.  Lord 
Clanmorris,  [1900]  1  Ch.  718.  A  stat- 
ute making  directors  personally  lia- 
ble for  failure  to  file  reports  is  not 
penal,  within  the  meaning  of  the 
statute  of  limitations.  Nebraska,  etc. 
Bk.  v.  Walsh,  68  Ark.  433  (1900). 
The  liability  of  an  officer  for  signing  a 
false  report  under  the  New  York  stat- 
ute is  not  a  penalty.  Hutchinson  v. 
Young,  80  N.  Y.  App.  Div.  246  (1903). 
On  this  subject  of  the  statute  of 
limitations,  see  also  §  225/,  infra. 

1  Yeaton  v.  U.  S.,  5  Cranch,  281 
(1809);  Norris  v.  Crocker,  13  How. 
429  (1S51).  See  also  Huntington  v. 
Attrill,  146  U.  S.  657,  679  (1S92),  a 
dictum. 

2  Cooley's  Constitutional  Limita- 
tions (5th  ed.),  p.  445,  note.  A  penal 
liability  of  stockholders  ceases  by  the 
passage  of  a  statute  repealing  it,  un- 
less such  liability  has  passed  into  a 
judgment.  Globe  Pub.  Co.  v.  State 
Bank,  41  Neb.  175  (1894).  A  penal 
liability  repealed  is  ended.  Hogue  v. 
Capital  Nat.  Bank,  17  Neb.  929  (1S96). 
A  repeal  of  the  statute  at  any  time 
prior  to  judgment  in  a  case  puts  an 
end  to  liability  in  that  case.  Kleck- 
ner  v.  Turk,  45  Neb.  176  (1S95).  A 
statute  rendering  directors  in  a  min- 
ing company  liable  for  $1,000  for 
failing  to  post  monthly  balance  sheets 


is  penal,  and  upon  the  repeal  thereof 
an  existing  judgment  becomes  null 
and  void,  there  being  a  pending  ap- 
peal from  such  judgment.  Anderson 
v.  Byrnes,  122  Cal.  272  (1898).  A 
penal  liability,  even  though  already 
incurred,  may  be  annulled  by  act  of 
the  legislature.  Davidson  v.  Witthaus, 
106  N.  Y.  App.  Div.  182  (1905).  The 
repeal  of  a  statute  which  imposes  a 
penalty  destroys  any  action  then 
pending  to  recover  such  penalty. 
Fisher  v.  New  York  Cent.  etc.  R.  R., 
46  N.  Y.  644,  657  (1871);  and  see 
note  in  4  Denio,  377,  to  case  of  Palmer 
v.  Conly;  Yeaton  v.  U.  S.,  5  Cranch, 
281  (1809);  Norris  v.  Crocker,  13 
How.  429  (1851);    also  §497,  infra. 

3  See  §  220,  supra. 

4  Lowry  v.  Inman,  46  N.  Y.  119 
(1871),  where  the  remedy  prescribed 
by  the  Georgia  corporation  was  an 
execution  levied  on  stockholders' 
property,  and  based  on  the  judgment 
against  the  corporation  only.  Nim- 
ick  v.  Mingo  Iron  Works,  25  W.  Va. 
184  (18S4).  See  also  Savings  Assoc. 
v.  O'Brien,  51  Hun,  45  (1889).  Where 
the  statute  provides  that  the  cred- 
itor's remedy  shall  be  by  bill  in 
equity,  and  that  all  stockholders 
shall  be  joined,  the  liability  cannot 
be  enforced  in  a  state  where  this  rem- 
edy is  not  possible.  Erickson  v.  Ne- 
smith,    86   Mass.   233    (1862);     s.   c, 


589 


223.] 


STATUTORY   LIABILITY  OF  STOCKHOLM 


[CH.  XII. 


may  be  enforced  by  the  procedure  of  the  state  wherein  the  enforce- 
ment is  sought3 

During  the  past  few  years  this  question  of  enforcing  a  statutory 
liability  created  by  the  laws  of  another  state  bas  come  prominently 
before  the  courts.  Especially  has  this  been  the  case  with  stock- 
holders in  insolvent  Kansas  corporations.  At  first  the  state  courts 
refused  to  enforce  the  liability,  and,  following  the  old  Massachusetts 
decisions,  declined  to  aid  the  corporate  creditors  as  againsl  resident 
stockholders.  The  New  York  court  of  appeals  especially  decided 
that  on  general  grounds  of  public  policy  it  would  not  enforce  the 
statutory  liability  of  New  York  stockholders  in  Kansas  corpora- 
tions.2 There  have  been  many  ether  derisions  to  practically  the 
same  effect,  not  only  as  to  the  Kansas  liability,  but  as  to  the  lia- 
bility in  Ohio  and  Illinois.3 


81  Mass.  221  (1860).  Cf.  s.  C,  46  N. 
H.  371   (1866). 

i  Lowry  v.  Inman,  46  N.  Y.  119 
(1871);  Drink-water  v.  Portland  Ma- 
rine R.  R.,  18  Me.  35  (1S41) ;  Niraick 
v.  Mingo  Iron  Works,  25  W.  Va.  184 
(1884);  Christensen  v.  Eno,  106  N. 
Y.  97  (1887);  Erickson  v.  Nesmith, 
81  Mass.  221  (1860).  Cf.  Taft  v. 
Ward,  106  Mass.  518  (1871).  Where 
a  statutory  liability  cannot  be  en- 
forced at  law,  and  can  only  be  en- 
forced in  equity  where  all  the  stock- 
holders and  creditors  are  brought  in, 
the  remedy  is  exclusive,  and  a  non- 
resident stockholder  cannot  be  sued 
in  the  state  where  he  resides.  Eau 
Claire,  etc.  Bank  v.  Benson,  106  Wis. 
624  (1900);  Finney  v.  Guy,  106  Wis. 
256   (1900). 

2  In  the  important  case  of  Marshall 
v.  Sherman,  148  N.  Y.  9  (1895),  rev'g 
84  Hun,  186,  the  New  York  court  of 
appeals  held  that  the  public  liability 
of  stockholders  in  Kansas  corpora- 
tions would  not  be  enforced  by  the 
New  York  courts.  The  court  said 
that  such  enforcement  would  be  in- 
equitable, inasmuch  as  all  the  stock- 
holders and  creditors  could  not  be 
brought  into  the  action;  also  that 
the  liability,  while  arising  on  con- 
tract, was  somewhat  penal  in  its  na- 
ture; also  that  the  Kansas  statute 
prescribed  the  mode  of  enforcing  the 


liability,  and  hence  the  enforcement 
must  be  local;  and  also  tbat  to  en- 
force such  a  liability  would  encour- 
age parties  to  buy  up  claims  for  the 
purpose  of  instituting  suits  of  this 
character.  The  court  said:  "It  is  to 
be  noticed  that  the  party  seeking  to 
enforce  such  a  statute  in  a  foreign 
jurisdiction  has  been  quite  uniformly 
defeated."  A  suit  cannot  be  main- 
tained in  New  York  to  enforce  a 
stockholder's  liability  under  the  Ohio 
statutes,  because  the  Ohio  statutes 
prescribe  a  remedy,  and  this  remedy 
is  not  available  in  New  York.  Barnes 
v.  Wheaton,  80  Hun,  8  (1894).  The 
New  York  courts  will  refuse  to  enter- 
tain a  suit  in  equity  brought  to  en- 
force the  statutory  liability  of  stock- 
holders in  an  Ohio  corporation.  Not 
only  does  the  Ohio  statute  give  a  lo- 
cal remedy,  but  it  is  impracticable 
to  adjust  all  the  liabilities  and  rights 
in  New  York  with  only  a  few  of  the 
parties  before  the  court.  In  a  suit 
at  law  it  may  be  different.  Cleve- 
land, etc.  Ry.  v.  Kent,  87  Hun,  329 
(1895),  with  a  remarkably  well-rea- 
soned opinion  by  O'Brien,  J. 

3  In  Coffing  v.  Dodge,  167  Mass.  231 
(1897),  the  court  refused  to  enforce 
the  Kansas  statutory  liability  because 
the  complaint  did  not  allege  that  the 
liability  was  on  contract  arising  from 
subscription  for  stock,  and  did  not  al- 


590 


CH.  XII.] 


STATUTORY  LIABILITY   OF  STOCKHOLDERS. 


[§  223. 


There  have  also  been  decisions  in  the  lower  federal  courts  to  the 
same  effect.1 


lege  that  such  liability  had  been  so 
construed  in  Kansas,  and  did  not 
make  other  allegations  to  show  that 
no  injustice  could  be  done  to  any  one 
by  the  court  entertaining  the  suit.  In 
Massachusetts  it  is  held  that  a  re- 
ceiver of  a  Kansas  corporation  can- 
not enforce  the  statutory  liability  of 
stockholders.  Hancock  Nat.  Bank  v. 
Ellis,  172  Mass.  39  (1S98).  A  resi- 
dent of  New  York  cannot  bring  suit 
in  Massachusetts  against  a  resident 
of  California  to  hold  him  liable  as  a 
stockholder  in  a  Kansas  corporation, 
under  a  statute  making  him  liable 
when  the  remedy  against  the  corpora- 
tion has  been  exhausted,  even  though 
judgment  against  the  latter  was  ob- 
tained in  Kansas.  The  courts  of  Mas- 
sachusetts have  uniformly  refused  to 
enforce  the  statutory  liability  in  cor- 
porations organized  in  other  states. 
Bank  of  N.  America  v.  Rindge,  154 
.Mass.  203  (1S91).  See  also  the  de- 
cisions in  the  preceding  three  notes. 
The  supreme  court  of  Illinois  refused 
to  enforce  the  statutory  liability  of 
stockholders  in  a  Kansas  corporation 
on  the  ground  that  the  special  rem- 
edy provided  by  the  Kansas  statute 
could  be  enforced  only  in  the  state  of 
Kansas.  Tuttle  v.  National  Bank,  161 
111.  497  (1896).  The  Illinois  courts 
will  not  enforce  the  statutory  liability 
of  Illinois  stockholders  in  a  Michigan 
corporation  where  the  Michigan 
courts  have  never  construed  the  stat- 
ute and  no  bill  has  been  filed  there  to 
determine  the  debts,  assets,  and  vari- 
ous liabilities.  Young  v.  Farwell,  139 
111.  326  (1891).  Where  a  special  rem- 
edy is  given  for  the  enforcement  of  a 
stockholder's  statutory  liability,  that 
liability  cannot  be  enforced  in  an- 
other state.  Fowler  v.  Lamson,  146 
111.  472  (1893),  refusing  to  enforce 
the  liability  of  stockholders  in  a  Kan- 
sas corporation.  The  California 
courts  will  not  enforce  the  subscrip- 
tion  liability   of   stockholders   in    an 


Illinois  corporation  where  the  Illinois 
statutes    prescribe    that    the    remedy 
may  be  by  garnishment.     Russell  v. 
Pacific  Ry.,  113  Cal.  258  (1896).    The 
supreme  court  of  New  Hampshire  re- 
fused to  enforce  the  statutory  liabil- 
ity of  a  citizen  of   New   Hampshire 
in  a  Kansas  corporation,  in  the  case 
of  Crippen  v.  Laighton,  69  N.  H.  540 
(1S99).      Creditors    of    an    insolvent 
Colorado  corporation  cannot  maintain 
a    suit    in    equity    in    Pennsylvania 
against   a   single   stockholder   to    en- 
force his  statutory  liability.    The  suit 
must  be   in   behalf  of  the   creditors, 
and  the  corporation  and  other  stock- 
holders must  be  made  parties  defend- 
ant,  especially   where  a  suit  is   still 
pending   in   Colorado   to    collect   and 
distribute  the  assets.     Bates  v.  Day, 
198  Pa.  St.  513  (1901).    Even  though 
under  the  laws  of  Nebraska  a  receiver 
may  enforce  the  statutory  liability  of 
stockholders,  yet  such  receiver  cannot 
enforce  that  liability  in  the  Vermont 
courts.     Murtey  v.  Allen,  71  Vt.  377 
(1S99).     A  Wisconsin  court  will  not 
enforce    the   statutory   liability   of    a 
resident   stockholder    in    a   Michigan 
mining  company  for  debts  due  to  la- 
borers   where    the    Michigan    statute 
gives,  as  a  remedy  for  enforcing  such 
liability,  a  joint  action  at  law  against 
both   the   corporation  and  the   stock- 
holder.    May  v.   Black,   77   Wis.    101 
(1890).     A   judgment    in    Minnesota 
fixing  the  statutory   liability   of    the 
various  stockholders  in  a  Minnesota 
corporation  is  not  enforceable  in  Wis- 
consin against  a  Wisconsin  stockhold- 
er,  inasmuch  as  such  stockholder  is 
entitled  to  his  day  in  court.     Finney 
v.  Guy,  106  Wis.  256   (1900).     A  per- 
son residing  in  Wyoming  cannot  be 
held   liable  in   Wyoming  as  a  stock- 
holder  in   a  Utah    corporation    until 
after  a  suit  in  equity  has  determined 
the  amount  of  deficit.    McLaughlin  v. 
O'Neill,  7  Wyo.  187,  215   (1897). 
i  In  a  bill  in  equity  in  the  federal 


591 


§  22;:.] 


STATUTORY   LIABILITY   OF  STOCKHOLDERS. 


[CH.  XII. 


The  supremo  court  of  the  United  States,  however,  in  a  decision 
rendered  in  1900,  reversed  the  supreme  court  of  Rhode  Island,  and 
held  that  a  creditor  of  a  Kansas  corporation  had  a  right  to  hold  a 
Rhode  Island  stockholder  in  Buch  corporation  liable  on  the  statu- 
tory liability  created  by  the  statutes  of  Kansas,  and  that  such  lia- 
bility could  be  enforced  in  the  state  courts  of  Rhode  Island.1  The 
same  question  arose  often  in  the  lower  federal  courts  and  the  right 
to  maintain  such  an   action  sustained,2   and,   notwithstanding   the 


court  in  Pennsylvania,  brought  by  a 
citizen  of  Indiana  to  enforce  the  lia- 
bility of  residents  of  Pennsylvania  as 
stockholders  in  a  Minnesota  corpora- 
tion, also  asking  for  a  receiver  and 
an  accounting,  the  corporation  is  a 
necessary  party  defendant,  and  if  not 
served  the  suit  fails,  inasmuch  as  an 
accounting  may  show  that  the  com- 
pany has  means  to  pay  the  debt.  The 
complainant  had  already  obtained  a 
judgment.  Elkhart  Nat.  Bank  v. 
Northwestern,  etc.  Co.,  84  Fed.  Rep. 
76  (1897).  The  United  States  court 
sitting  in  Massachusetts  will  not  en- 
force the  statutory  liability  of  Massa- 
chusetts stockholders  in  an  Ohio  cor- 
poration. State  Nat.  Bank  v.  Sayward, 
86  Fed.  Rep.  45  (1898).  In  the  case 
of  State  Nat.  Bank  v.  Sayward,  91 
Fed.  Rep.  443  (1S99),  the  federal 
court  in  Massachusetts  refused  to  en- 
force the  statutory  liability  of  Massa- 
chusetts stockholders  in  an  Ohio  cor- 
poration. A  receiver  appointed  by  a 
court  in  Iowa  of  the  assets  of  an  in- 
solvent Iowa  corporation  cannot  main- 
tain a  suit  in  the  federal  court  in 
Pennsylvania  to  enforce  the  liability 
of  a  Pennsylvania  stockholder  in  such 
Iowa  corporation,  especially  where 
the  assessment  was  fixed  by  an  Iowa 
court  in  a  suit  in  which  the  Pennsyl- 
vania stockholder  was  not  a  party  and 
did  not  appear  and  could  not  have 
been  made  to  appear.  Wigton  v.  Bos- 
ler,  102  Fed.  Rep.  70  (1900).  A  suit 
to  enforce  in  the  federal  court  in  New 
York  the  statutory  liability  of  New 
York  stockholders  in  an  Ohio  corpora- 
tion failed  in  Middletown,  etc.  Bank 
v.  Toledo,  etc.  Ry.,  113  Fed.  Rep.  587 


(1901),  on  the  ground  that  all  the 
stockholders  were  not  made  parties 
as  required  by  the  statutes  of  Ohio. 
The  statutory  liability  of  a  Maine 
stockholder  in  a  Minnesota  corpora- 
tion cannot  be  enforced  in  Maine, 
where  the  stockholder  has  died  and 
his  estate  been  distributed  and  the 
suit  was  not  instituted  until  three 
years  after  the  decree  of  insolvency 
in  Minnesota  and  the  one-year  statute 
of  limitations  in  Maine  in  suits 
against  estates  had  run.  Hale  v.  Cof- 
fin, 114  Fed.  Rep.  567  (1902);  aff'd, 
120  Fed.  Rep.  470.  See  also  James  H. 
Rice  Co.  v.  Libbey,  85  Fed.  Rep.  821 
(1S9S);  Schiffer  v.  Trustees,  87  id. 
166  (1898);  Elkhart  Nat.  Bank  v. 
Northwestern,  etc.  Co.,  87  id.  252 
(1S98). 

1  Hancock,  etc.  Bank  v.  Farnum, 
176  U.  S.  640  (1900),  reversing  20 
R.  I.  466.  The  supreme  court  of  the 
United  States  in  the  case  of  Whitman 
v.  Oxford,  etc.  Bank,  176  U.  S.  559 
(1900),  held  that  the  Kansas  liability 
is  a  contractual  liability  and  can  be 
enforced  in  any  court,  federal  or 
state,  and  that  a  Pensylvania  bank, 
as  a  judgment  creditor  of  a  Kansas 
corporation,  could  enforce  in  the 
United  States  court  in  New  York  the 
statutory  liability  of  a  New  York 
stockholder  in  such  Kansas  corpora- 
tion.   The  action  was  at  law. 

2  The  liability  of  an  Illinois  stock- 
holder in  a  Kansas  corporation  for  the 
debts  of  the  corporation  begins  to  run 
from  the  time  he  became  a  stock- 
holder and  expires  in  five  years. 
Hutchings  v.  Lampson,  82  Fed.  Rep. 
960   (1897).     In  Rhodes  v.  U.  S.  Nat. 


592 


en.  xii.] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§    223. 


former  reluctance  of  the  state  courts  to  enforce  these  statutory  lia- 
bilities, incurred  in  other  states,  and  complicated  in  their  nature, 

Bank,   66  Fed.  Rep.   512    (1S95),  the  chusetts  stockholder  in  a  Kansas  cor- 

federal  court  in  Illinois  enforced  the  poration  might  be  held  liable  in  a  suit 

statutory   liability   in   a  Kansas   cor-  instituted  in  Massachusetts.     In  the 

poration  and  followed  the  Kansas  de-  enforcement    of    a    Kansas    liability 

t  i  ions  as  to  the  nature  of  and  rem-  against  a  New  York  stockholder,  the 

edy  for  the  liability.  New   York   statute   of  limitations   of 

The  fact  that  a  Kansas  corporation  two  years,  applicable  to  stockholders' 

is  in  the  hands  of  a  receiver  does  not  liability    in   New   York   corporations 

prevent  a  judgment  creditor    enforc-  does  not  apply.     Piatt   v.   Larter    94 

ing    in    New    York   the    stockholders'  Fed.  Rep.  610   (1899).     The  statutory 

statutory  liability.   American,  etc.  Co.  liability  of   Massachusetts  stockkold- 

v.     Woodworth,     82     Fed.    Rep.     269  ers   in  a  Minnesota  corporation  was 

(1S97).  enforced  in  Hale  v.  Hardon,  95  Fed. 

The  federal  court  in  New  Hanip-  Rep.  717  (1899).  The  statutory  lia- 
shire  sustained  an  action  of  debt  at  bility  of  a  New  Jersey  stockholder  in 
law  to  enforce  the  statutory  liability  a  Kansas  corporation  may  be  en- 
of  a  stockholder  in  a  Kansas  cor-  forced  by  a  suit  at  law  in  a  federal 
poration,  in  the  case  of  McVickar  v.  court  sitting  in  New  Jersey.  West- 
Jones,  70  Fed.  Rep.  754  (1895),  the  era,  etc.  Bank  v.  Reckless,  96  Fed. 
court  following  the  Kansas  decisions  Rep.  70  (1899).  The  New  York  three- 
a3  to  the  remedy  at  law.  years'  statute  of  limitations  relative 

The  statutory  liability  of  directors  to  the  statutory  liability  of  stockhold- 
In  New  York  corporations  may  be  en-  ers  in  certain  corporations  applies  to 
forced  in  the  federal  courts.  Inter-  a  suit  brought  in  the  United  States 
national  Bank  v.  Faber,  79  Fed.  Rep.  circuit  court,  in  the  New  York  dis- 
919  (1897).  In  the  case  of  Howarth  trict,  to  enforce  the  statutory  liability 
v.  Ellwanger,  86  Fed.  Rep.  54  (1898),  of  a  citizen  of  New  York  in  a  Kansas 
the  United  States  court  in  New  York  mortgage  company.  Hobbs  v.  Nation- 
enforced  the  statutory  liability  of  a  al  Bank,  etc.,  96  Fed.  Rep.  396  (1899). 
stockholder  in  a  Washington  bank,  The  United  States  court  in  Minnesota 
such  liability  having  been  fixed  by  a  will  enforce  the  statutory  liability  of 
decree  of  a  court  in  Washington.  An  a  director  in  a  Montana  corporation 
action  at  law,  at  the  instance  of  a  for  failure  to  file  annual  reports, 
judgment  creditor  of  the  corporation,  First  Nat.  Bank,  etc.  v.  Weidenbeck, 
lies  against  a  Pennsylvania  stockhold-  97  Fed.  Rep.  896  (1S99).  The  owner 
er  in  a  Kansas  corporation  to  enforce  of  a  claim  against  a  Montana  cor- 
the  statutory  liability  of  such  stock-  poration  may  enforce  in  Connecticut 
holder.  Mechanics'  Sav.  Bank  v.  Fi-  the  liability  of  directors  for  failure  to 
delity,  etc.  Co.,  87  Fed.  Rep.  113  file  annual  reports.  Davis  v.  Mills, 
(189S).  A  creditor  of  a  Kansas  cor-  99  Fed.  Rep.  39  (1900).  Even  though 
poration  may  enforce  in  the  United  in  a  suit  to  enforce  the  liability  of  a 
States  court  in  Pennsylvania  the  stockholder  in  a  Kansas  corporation 
statutory  liability  of  a  Pennsylvania  it  is  proved  that  the  stockholder  was 
stockholder  therein,  and  the  remedy  liable  only  for  1,500,  yet,  if  the  corn- 
may  be  at  law.  Fidelity,  etc.  Co.  v.  plaint  claimed  $2,200,  the  court  had 
Mechanics'  Sav.  Bank,  97  Fed.  Rep.  jurisdiction.  Kunkel  v.  Brown,  99 
297  (1S99).  In  the  case  of  Kisse-  Fed.  Rep.  593  (1900).  A  Minnesota 
berth  v.  Prescott,  91  Fed.  Rep.  Gil  receiver  may  sue  in  the  federal  court 
(1899),  the  court  held  that  a  Massa-  in  Massachusetts  to  enforce  a  stock- 
(38)                                               593 


§223.]  STATi  LIABILITT    OP  STOCKHOLDERS.  |cil.\II. 

tlio  decisions  in  New  York/  Massachusetts,2  Ohio,8  Michigan,4  New 


holder's  statutory  liability  in  a  Min- 
nesota corporation.    Hale  r.  Tyler,  L04 
Fed  Rep.  757  (1900).    The  Ohio  stat- 
utory liability  may  be  enforced  in  the 
United     States     court     in     Kentucky 
against     a      Kentucky      stockholder, 
where  it  is  shown  that  the  Ohio  stock- 
holders have  been  assessed  to  the  full 
amount    of    their   liability,   and   that 
the  corporation  is  insolvent  and  that 
the  liabilities  of  the  corporation   ex- 
ceed   its    assets,    together    with    the 
stockholders'     liability;     and     where, 
under  the  statutes  of  Ohio,  a  receiver 
may    enforce    the    liability,    such    re- 
ceiver may  maintain  such  suits  in  the 
United   States  courts   in  other  states 
for  that  "purpose.     Kirtley  v.  Holmes, 
107  Fed.  Rep.  1    (1901).     Where,   by 
statute  in  Minnesota,  a  i*eceiver  of  an 
insolvent  Minnesota  corporation  may 
maintain  a  suit  at  law  to  enforce  the 
statutory  liability  of  stockholders,  he 
may  maintain  such  a  suit  in  the  cir- 
cuit court  of  the  United  States  in  an- 
other' district.     Hale  v.  Hilliker,  109 
Fed.  Rep.  273   (1901).     The  statutory 
liability  of  a  stockholder  of  a  Kansas 
corporation  may  be  enforced   in  any 
court  of  competent  jurisdiction,  either 
state  or  federal,  in  or  outside  of  Kan- 
sas.    Whitman  v.  Citizens'  Bank,  110 
Fed.  Rep.  503    (1901).     An  Ohio  re- 
ceiver of  an  insolvent  Ohio  corpora- 
tion   may    bring    suit    in    Indiana    to 
enforce  a  stockholder's  statutory  lia- 
bility, where  the  Ohio  statutes  author- 
ize a  receiver  so  to  do.  Burr  v.  Smith, 
113  Fed.  Rep.   858    (1902). 

i  A  Washington  receiver  of  an  in- 
solvent Washington  bank,  who,  by  the 
statutes  of  Washington,  has  power  to 
enforce  the  statutory  liability  of 
stockholders,  may  bring  suit  in  the 
New  York  courts  to  enforce  the  lia- 
bility of  a  citizen  of  New  York  as 
a  stockholder  in  such  bank,  it  being 
shown  that  the  liability  has  been 
fixed  by  the  decree  of  the  court  in 
Washington   and   that  the   citizen   of 


New  York  had  had  full  opportunity 
to  contest  all  the  essential  facts,  and 
it  being  shown  further  that  no  in- 
justice will  result  from  sustaining 
the  suit.  Howarth  v.  Angle,  102,  X. 
Y.  179  (1900).  In  the  case  of  Brook- 
man  v.  Merchants',  etc.  Bank,  31  N. 
Y.  Misc.  Rep.  191  (1900),  the  court 
refused  to  enforce  the  statutory  lia- 
bility of  a  stockholder  in  a  Kansas 
corporation  where  the  plaintiff  had 
not  taken  any  proceedings  in  Kansas 
to  enforce  the  liability  of  stockhold- 
ers, and  the  receiver  in  Kansas  had 
not  established  in  that  state  the 
amount  of  such  liability,  and  only 
one  stockholder  was  sued  in  the  New 
York  court. 

2  A  judgment  creditor  of  a  Kansas 
corporation  may  enforce  in  Massa- 
chusetts the  statutory  liability  of  a 
Massachusetts  stockholder  in  such 
corporation.  Hancock  Nat.  Bank  v. 
Ellis,  172  Mass.  39  (1898).  Inasmuch 
as  the  statutes  of  the  state  of  Wash- 
ington authorize  a  receiver  of  an 
insolvent  bank  to  enforce  a  stock- 
holder's statutory  liability,  such  re- 
ceiver may  maintain  such  a  suit  in 
Massachusetts  against  a  Massachu- 
setts stockholder  in  such  bank.  How- 
arth v.  Lombard,  175  Mass.  570 
(1900).  The  Kansas  statute  of  lim- 
itations against  stockholders'  statu- 
tory liability  does  not  apply  to  a  suit 
in  Massachusetts  against  a  Massachu- 
setts stockholder  in  a  Kansas  cor- 
poration, where  it  is  shown  that  he 
has  not  been  in  the  state  of  Kansas. 
Broadway,  etc.  Bank  v.  Baker,  176 
Mass.  294   (1900). 

3  The  statutory  liability  of  an  Ohio 
stockholder  in  a  Kansas  corporation 
may  be  enforced  in  the  courts  of 
Ohio.  Kulp  v.  Fleming,  65  Ohio  St. 
321  (1901). 

4  The  Kansas  liability  was  enforced 
in  the  case  of  Western  Nat.  Bank  v. 
Lawrence,  117  Mich.  669   (1898). 


594 


en.  xii.  J 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§  223. 


Hampshire,1  and  other  states  were  to  the  same  effect.2  During  the 
past  five  years,  however,  the  pendulum  seems  to  have  swung-  the  other 
way,  and  such  a  liability  has  been  held,  for  various  reasons,  particu- 
larly when  the  remedy  was  statutory,  not  to  be  enforcible  in  other 
states.    There  have  been  decisions  to  that  effect  in  the  federal  courts,3 


i  An  assessment  in  Iowa  on  stock- 
holders in  an  insolvent  Iowa  bank 
may  be  enforced  in  New  Hampshire 
against  a  New  Hampshire  stockholder 
in  such  bank.  Tompkins  v.  Blakey, 
70  N.  H.   584    (1901). 

2  A  Minnesota  receiver  of  a  Minne- 
sota  corporation   enforced   the   statu- 
tory liability  of  a  Maine  stockholder 
in     such     corporation     in     Childs     v. 
Cleaves,  95  Me.  498   (1901),  the  Min- 
nesota   statutes    providing    for    such 
suits    by    the    receiver   and    the    pro- 
ceeds of  the  suit  to  be  applied  for  the 
benefit    of    all    the    creditors.      The 
court   held   that   the  adjudication    of 
the  Minnesota  courts  was  conclusive 
except  as  to  the  question  of  the  de- 
fendant's individual  liability  and  the 
measure  of  such  liability.     The  statu- 
tory   liability    of    an    Arizona    stock- 
holder   in    a    California    corporation 
may  be  enforced  in  Kansas.    Lanigan 
v.  North,  69  Ark.  62  (1901).     In  Guer- 
ney    v.   Moore,    131    Mo.    650    (1895), 
the   supreme    court   of   Missouri    held 
that     a     Kansas     statutory     liability 
could  be  enforced   in  Missouri.     The 
Kansas  statutory  liability  is  enforce- 
able in  California.    Ferguson  v.  Sher- 
man, 116  Cal.  169   (1S97).     The  statu- 
tory   liability    of    stockholders    in    a 
California    corporation    may    be    en- 
forced by  an  action  at  law  in  Oregon, 
although  the  liability  of  stockholders 
in  an  Oregon  corporation  may  be  en- 
forced only  by  a  suit  in  equity.     Al- 
drich    v.    Anchor    Coal,    etc.    Co.,    24 
Oreg.  32   (1S93).     The  liability  of  an 
Illinois  stockholder  in  a  Kansas  cor- 
poration may  be  enforced  by  an  ac- 
tion at  law   in  Illinois,  inasmuch  as 
the  supreme  court  of  Kansas  has  de- 
cided that  an  action  at  law  will  lie, 
even  though  the  statutory  liability  of 
stockholders    in    an    Illinois   corpora- 


#5 


tion  will  /be  enforced  in  Illinois  by  a 
suit  in  equity  only.     Bell  v.  Farwell 
176  111.  489    (1898).     The  liability  of 
a  Delaware  stockholder  in  a  Kansas 
corporation   may   be   enforced   by   an 
action    of    debt.      Love    v.    Pusey    & 
Jones  Co.,  3  Pen.    (Del.)    577   (1902). 
Kansas  statutory  liability  is  con- 
tractual, and  hence  may  be  enforced 
in  Maine  against  a  Maine  stockholder 
without  joining  other  stockholders  as 
parties  defendant  in  the  suit.     If  the 
Kansas  statute  creating  the  liability 
lies  a  special  limitation  as  an 
enforcement,   such  limitation   applies 
in  Maine,  but  the  general  statute  of 
limitations  of  Kansas  is  not  applica- 
ble.    Pulsifer  v.  Greene,   96  Me.   438 
(1902).    The  statutory  liability  of  va- 
rious   Missouri    stockholders    in    an 
Ohio  corporation  may  be  enforced  in 
Missouri  by  a  suit  in  equity.    Pfaff  v. 
Gruen,  69  S.  W.  Rep.  405   (Mo.  1902).' 
•'•  The  Ohio   statutory  liability  can- 
not be  enforced  in  other  states  until 
after   the   remedy   prescribed   by   the 
Ohio    statutes    has    been    pursued    in 
that  state.    Middletown  Bank  v.  Rail- 
way Co.,  197  U.  S.  394  (1904).  Where 
a  statutory  liability  is  by  the  statute 
to  be  enforced  by  a  suit  in  equity  in 
the   state  by  a  creditor  in  behalf  of 
himself  and  others,  such  liability  can- 
not be  enforced  in  the  courts  of  an- 
other state.    Finney  v.  Guy,  189  U.  S. 
335   (1903).     Where  a  state  court  has 
refused  to  enforce   the  statutory  lia- 
bility   of    stockholders    in    a   foreign 
corporation,   on  the  ground  that  the 
suit  must   be  by  the  creditors   as   a 
whole  against  the  stockholders  as  a 
whole,     the     same    plaintiff     cannot 
maintain  a  similar  suit  in  the  federal 
court.     Eau  Claire  Nat.  Bank  v.  Ben- 
son,   128    Fed.    Rep.    277    (1904).      A 
court  of  equity  in  one  state  has  no 


223.] 


STATUTORY   LIAIUI.ITV   OF  STOCKHOLDERS. 


[ClI.  XII. 


Maine/      Massachusetts,2     New     Jersey,8     New     York,4     Rhode 


jurisdiction  to  enforce  the  statutory 
liability  of  stockholders  in  a  corpo- 
ration organized  in  another  state  on 
the  ground  of  preventing  a  multi- 
plicity of  suits  nor  on  the  ground 
that  it  is  an  ancillary  or  auxiliary 
proceeding  to  enforce  the  equitable 
decree  of  another  court  where  the 
stockholder  sued  was  not  served  in 
the  other  state  in  such  last  men- 
tioned suit  and  the  full  statutory 
limit  of  liability  is  sought  to  be  en- 
forced. Hale  v.  Allison,  188  U.  S. 
56  (1903);  aff'g  106  Fed.  Rep.  25S. 
Where  several  Massachusetts  stock- 
holders in  an  insolvent  Colorado  bank 
are  joined  as  parties  defendant  in  a 
suit  in  equity  in  the  state  court  to 
enforce  their  statutory  liability,  one 
of  them  cannot  remove  the  case  to 
the  United  States  court  on  the  ground 
of  a  separable  controversy.  Miller 
v.  Clifford,  133  Fed.  Rep.  880  (1904). 
The  statutory  liability  of  Pennsyl- 
vania stockholders  in  a  Kansas  cor- 
poration was  enforced  in  Anglo- 
American,  etc.  Co.  v.  Wood,  143  Fed. 
Rep.  683    (1906). 

i  Creditors  of  a  Colorado  corpora- 
tion cannot  maintain  a  bill  in  equity 
in  Maine  against  stockholders  in  such 
corporation  to  hold  them  liable  on 
their  statutory  liability.  The  remedy 
is  a  bill  in  equity  in  Colorado,  with 
the  corporation  as  a  party,  brought 
for  the  benefit  of  all  creditors  and 
against  all  stockholders,  so  that  the 
stockholders  living  in  one  state  may 
be  treated  the  same  as  stockholders 
living  in  another  state.  Abbott  v. 
Goodall,   100   Me.   231    (1905). 

2  The  creditors  of  a  Colorado  cor- 
poration cannot  maintain  a  bill  in 
equity  in  Massachusetts  against  a  sin- 
gle stockholder  to  enforce  his  double 
liability,  where  the  Colorado  statute 
contemplated  only  a  pro  rata  con- 
tribution sufficient  to  pay  the  debts. 
The  suit  should  have  made  the  cor- 
poration a  party  and  should  have  been 
against    all    the    stockholders.      The 


decisions  of  the  state  of  Colorado 
relative  to  stockholders'  liability  in  a 
Colorado  corporation  will  be  fol- 
lowed by  the  Massachusetts  courts  as 
to  the  extent  of  the  liability,  but  will 
not  be  followed  as  to  the  mode  of  pro- 
cedure and  practice.  Clark  v. 
Knowles,  187  Mass.  35  (1904).  Mas- 
sachusetts stockholders  in  a  Nebraska 
state  bank,  being  liable  on  their  stock 
by  statute,  are  bound  by  a  final  de- 
cree of  the  Nebraska  court  that  the 
corporation  has  been  wound  up  and 
has  no  more  property  and  has  unpaid 
judgments  against  it,  and  that  the 
receiver  will  bring  suit  against  the 
stockholders.  Such  a  receiver  may 
on  such  decree  bring  suits  at  law  in 
the  Massachusetts  courts  against 
Massachusetts  stockholders,  even 
though  they  were  not  parties  to  the 
Nebraska  suit,  and  they  cannot  main- 
tain a  bill  in  equity  to  enjoin  such 
suits  at  law.  Francis  v.  Hazlett,  192 
Mass  137  (1906).  See  84  N.E.  Rep.1015. 

3  A  bill  in  equity  does  not  lie  in 
New  Jersey  to  enforce  the  statutory 
liability  of  New  Jersey  stockholders 
in  a  Colorado  bank,  inasmuch  as  the 
different  defendants  may  have  differ- 
ent defenses,  and  there  being  no  case 
made  out  for  accounting  or  discovery 
or  joint  liability  or  breach  of  trust, 
and  it  appearing  that  the  liability 
exceeds  the  debts.  Miller  v.  Willett, 
70  N.  J.  Eq.  396   (1905). 

4  The  statutory  liability  of  a  New 
York  stockholder  in  a  Maryland  cor- 
poration cannot  be  enforced  in  an  ac- 
tion at  law  in  New  York  by  one  cred- 
itor, where  the  Maryland  statute  pro- 
vides for  a  suit  in  equity.  Knicker- 
bocker T.  Co.  v.  Iselin,  185  N.  Y.  54 
(1906).  A  decree  of  a  Minnesota 
court  making  a  statutory  assessment 
on  stockholders,  the  amount  being 
based  on  the  assumption  that  some 
of  the  stockholders  were  insolvent, 
and  the  amount  including  debts,  gen- 
eral expenses,  and  cost  of  collection, 
is    not   conclusive   on   a  non-resident 


596 


CH.  XII.] 


STATUTORY  LIABILITY  OP  STOCKHOLDERS. 


t§  223. 


Island,1  Wisconsin  2  and  England.3  Sometimes  this  difficult  question 
is  complicated  still  further  by  the  question  of  whether  a  foreign  re- 
ceiver may  institute  the  suit.4 

The  supreme  court  of  the  United  States  has  recently  held  that  the 


stockholder,  who  is  sued  in  another 
jurisdiction.  Converse  v.  Stewart, 
105  N.  Y.  App.  Div.  478  (1905).  A 
Minnesota  receiver  of  an  insolvent 
Minnesota  corporation  in  which  by 
statute  the  stockholders  are  liable 
for  the  debts  to  the  amount  of  their 
stock,  may  maintain  a  suit  in  the 
courts  of  Massachusetts  to  enforce 
such  liability  against  a  Massachu- 
setts stockholder,  and  the  judgment 
rendered  against  him  in  a  Minnesota 
court  in  accordance  with  a  statute 
is  conclusive,  even  though  he  was 
not  personally  heard.  Converse  v. 
Ayer,  84  N.  E.  Rep.  98  (Mass.  1908). 
A  demurrer  does  not  lie  to  a  com- 
plaint alleging  that  the  plaintiff  sold 
goods  to  defendants  who  pretended 
to  be  officers  of  a  pretended  corpora- 
tion organized  in  Illinois.  Such  a  suit 
may  be  maintained,  irrespective  of 
the  Illinois  statute  on  that  subject, 
if  the  proof  sustains  the  allegations. 
Worthington  v.  Griesser,  77  N.  Y. 
App.  Div.  203   (1902). 

i  The  Nebraska  constitutional  lia- 
bility of  stockholders  in  banks  is  en- 
forceable only  in  equity  in  which 
every  stockholder  is  made  a  defend- 
ant, and  hence  a  suit  does  not  lie  in 
Rhode-  Island  against  a  stockholder 
who  was  not  made  a  party  defendant 
in  the  suit  in  Nebraska.  Hazlett  v. 
Woodhead,  27  R.  I.  506   (1906). 

2  An  order  of  a  Minnesota  court  as- 
sessing stockholders  in  a  Minnesota 
bank  on  their  statutory  liability  is 
not  a  judgment  which  can  be  en- 
forced as  such  in  Wisconsin.  Hunt 
v.  Whewell,  99  N.  W.  Rep.  599  (Wis. 
1904). 

3  The  California  statutory  liability 
applicable  to  stockholders  in  a  for- 
eign corporation  doing  business  in 
California  will  not  be  enforced  by 
the  English  courts  as  against  an  Eng- 


lish stockholder  in  an  English  cor- 
poration doing  business  in  California. 
Risdon,  etc.  Works  v.  Furness,  93  L. 
T.  Rep.  687  (1905),  the  court  dis-. 
tinguishing  Pinney  v.  Nelson,  183  uA 
S.  144  on  the  ground  that  in  the  lat- 
ter case  a  California  stockholder  in  a 
Colorado  corporation  was  sued. 

■i  See  §  218,  supra.  Where  a  citi- 
zen of  Connecticut  purchases  stock 
in  a  Minnesota  corporation,  after 
Minnesota  has  passed  a  statute 
authorizing  a  receiver  to  enforce  the 
statutory  liability,  and  after  the  Min- 
nesota courts  have  decided  that  the 
expense  of  the  receivership  might  be 
enforced  against  the  stockholders,  the 
liability  of  such  Connecticut  stock- 
holder may  be  enforced  in  the  Con- 
necticut courts,  but  not  to  cover  the 
expense  of  enforcing  such  liability 
of  other  stockholders.  Converse  v. 
JEXxxa.  Nat.  Bank,  64  Atl.  Rep.  341 
(Conn.  1906).  Where  a  Minnesota 
court  has  entered  judgment,  in  be- 
half of  its  receiver  and  of  the  cred- 
itors of  an  insolvent  Minnesota  cor- 
poration, fixing  the  statutory  liabil- 
ity of  a  stockholder  who  then  was  a 
resident  of  Minnesota  and  who  was 
personally  served,  such  judgment  will 
be  enforced  by  the  courts  in  the  state 
of  Washington.  Childs  v.  Blethen,  82 
Pac.  Rep.  405  (Wash.  1905).  A  Ne- 
braska receiver  of  an  insolvent  Ne- 
braska bank  cannot  enforce  in  Rhode 
Island  the  statutory  liability  of  a 
Rhode  Island  stockholder  in  such 
bank,  unless  the  court  allows  such 
suit  to  be  maintained.  Hazlett  v. 
Woodhead,  67  Atl.  Rep.  736  (R.  I. 
1907).  A  receiver  of  a  Nebraska 
bank  may  under  the  Nebraska  law 
enforce  in  another  state  a  stockhold- 
er's statutory  liability.  Goss  v.  Car- 
ter, 156  Fed.  Rep.  746   (1907). 


i97 


S  228.]  STATUTORY  LIABILITY  OF  STOCKHOLDERS.  [CH.  XII. 

Minnesota  statute  authorizing  a  receiver  appointed  in  thai  state  of 

a  Minnesota  corporation  to  collect  the  stockholders'  statutory  lia- 
bility and  to  maintain  actions  within  and  without  the  state  for  that 
purpose  is  constitutional,  and  such  a  suit  may  be  maintained  by  him 
in  another  state.1 

Where  a  suit  is  brought  in  one  state  on  a  statutory  liability 
incurred  in  another  state,  it  is  a  good  defense  that,  enough  of  the 
defendant's  property  in  such  latter  state  has  been  levied  upon  to 
satisfy  the  claim.2 

Generally,  the  statute  creating  the  liability  must  be  pleaded  and 
proved  where  the  action  is  in  another  state.11  The  United  States 
courts,  however,  take  judicial  notice  of  the  statutes  of  all  the  states, 
and  in  those  courts  this  part  of  the  pleading  may  be  omitted.1 
The  courts  of  one  state  will  entertain  a  bill  of  discovery  filed  In- 
corporate creditors  to  obtain  the  names  of  stockholders  in  a  corpo- 
ration in  another  state,  with  a  view  to  enforcing  their  statutory  lia- 
bility in  the  latter  state.5 

It  is  also  a  general  rule  that  while,  before  suit  can  be  brought 
against  a  stockholder,  a  judgment  must  be  obtained  and  execution 
returned  unsatisfied  in  the  state  where  the  corporation  was  organ- 
ized, yet  that  such  judgment  and  execution  need  uot  be  repeated  in 
the  state  where  suit  is  brought.0 

i  Bernheinier    v.    Converse,    206    U.  and   the   liability,  and   to  show   that 

S.  516   (1907).  this  remedy  can  be  employed  in  the 

2  Cushing  v.  Perot,  175  Pa.  St.  66  court  where  suit  is  brought.  Rice  r. 
(1896).  Merrimack  Hosiery  Co.,  56  N.  H.  114 

3  Salt  Lake,  etc.  Bank  v.  Hendrick-  (1875).  As  to  the  advantages  of  a 
son,  40  N.  J.  L.  52  (1878),  holding  suit  in  the  federal  courts,  see  28  Am. 
that      the      foreign      statute,      when  L.  Rev.  518. 

pleaded,    must   be    set    forth    in   sub-  5  Post    v.    Toledo,    etc.    R.    R.,    144 

stance;    and    an   averment    "pursuant  Mass.    341     (1887).      See    also    §222, 

to  the  statute"  is  insufficient.     In_a  supra. 

suit  by  an  alien  corporation  to  collect  o  Hancock,    etc.    Bank    r.    Farnum, 

unpaid  calls  the  statutes  under  which  176  U.   S.  640    (1900).     In  a  suit  in 

the    corporation    is    formed    may    be  Massachusetts    to    enforce   the   statu- 

proved  by  the   testimony  of  an  Eng-  tory  liability  of  a  Massachusetts  stock- 

lish  solicitor  who  produces  copies  of  holder   in   a   Kansas   corporation,   no 

such  statutes.     Nashua,  etc.  Bank  v.  execution   need   be   returned    unsatis- 

Anglo-American,    etc.   Co.,    189    U.    S.  fied  in  Massachusetts,  it  being  proved 

221   (1903).  that    execution     was     unsatisfied     in 

4  Fourth  Nat.  Bank  r.  Francklyn,  Kansas.  Broadway,  etc.  Bank  v.  Ba- 
120  U.  S.  747  (1887);  Newberry  r.  ker,  176  Mass.  294  (1900).  In  the 
Robinson,  36  Fed.  Rep.  841  (1888).  case  of  Dexter  v.  Edmands,  89  Fed. 
In  New  Hampshire  it  is  held  to  be  Rep.  467  (1898),  the  court  enforced 
necessary  to  set  out  in  the  pleading  in  Massachusetts  the  Kansas  liability, 
the  remedy  provided  by  the  laws  of  and  held  that  the  judgment  returned 
the    state    creating    the    corporation,  unsatisfied  in  Kansas  was  sufficient  in 

598 


(11.  XII.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[§  224. 


Where  the  stockholders  in  an  insolvent  California  corporation 
formed  an  Illinois  corporation  and  exchanged  their  stock  for  stock 
in  the  latter,  in  order  to  avoid  the  California  subscription  and 
statutory  liability,  and  then  transferred  the  property  of  the  Cali- 
fornia corporation  to  the  Illinois  corporation,  the  Illinois  court  held 
them  liable  on  the  new  stock  to  the  extent  that  the  actual  value  ot 
the  property  was  less  than  the  par  value  of  the  stock.1 

§  224.  How  far  the  judgment  against  the  corporation  is  conclu- 
sive of  the  creditor's  claim.— In  general,  the  judgment  in  these 
cases  against  the  corporation  is  conclusive  as  to  the  amount  and 
validity" of  the  creditor's  claim.  Consequently,  in  most  of  the  states, 
when  suit  is  brought  to  enforce  the  stockholder's  statutory  liability, 
that  judgment  can  be  impeached  by  him  only  for  fraud  or  want 
of  jurisdiction.2 

Massachusetts,  and  held  also  that  the    v    Marcy    3  Woodb    &  M.  105;   s^C 
statute   of    limitations   in    Massachu-     23   Fed.   Cas.   384    (1847).     See   also 
s^  and   not  the   statute   of   limit*     §200,  supra     The  -e  of  Patterson 
tions  in  Kansas  applied  to  such  a  suit    r.   Lynde,   112   111    196    (1884)     holds 
n   Massachusetts.      It  is   no   defense    that  the  judgment  must  he  obtained 
hat  the  receiver  of  the  Kansas  cor-     in    the    state    where    enforcement    is 
forat  on  has  some  assets  in  his  hands,    sought,  and  that  not  even  a  Judgment 
if  execution  has  been  returned  unsat-     in  the  federal  circuit  court  tor  that 
isfied   in  Kansas,  where  the  corpora-    district  will  suffice, 
t  on  exLed.    Piatt  v.  Larter,  94  Fed.         1  Sprague  v.  Nat.  Bank  of  America, 
Rep     61         1899).      In    McVickar    *.     172    111.    149    (1898).      It   appears   in 
Jones    70   Fed.   Rep.   754    (1895),  no     this    case    that   the    California   stock 
Judgment  against  the  corporation  had    was  not  paid  up  at  the  time  of  the 
been    recovered    in    New    Hampshire,     transfer. 

the   Place   of   suit.     In   enforcing   in         2  Thayer   r.    New   England   Lithog. 
he    federal    court    in    New    York    a    Co.,  108  Mass   523   (1871 >;  Bor  land, 
stockholder's  statutory  liability   in  a     Haven   37  Fed.  ^394  (188 8       Han 
Kansas  corporation,  the  suit  may  be    son  v.  Davison,  73  Minn   4o4  (1898) 
based   upon   a  judgment  against  the     Steffins     v.     Gurney,     61     Kan      292 
coloration      obtained      in      Kansas.     (1900) ;  Came  v.  Brigham,  39  Me.  35 
Amercl etc    Co    ,  Woodworth,  79     (1854);    Milliken   *   Whitehouse    49 
Fed    Rep    951    (1897).     If  the  execu-     Me.     527     (I860)  ;     Wilso, t    *  .Pi  £ 
tion'is  issued   in  the  county  of  the     burgh,   etc.   Coal  Co.,   43   Pa.   St  U 
chief  place  of  business  as  required  by     (1862);    Donworth    v.    Coo  baugh,    5 
tute   it  need  not  be  issued  in  other    Iowa,  300  (1857) ;  State  ^ ,  Union    ete 
counties  to  enforce  stockholders'  lia-    Bank,  103  Iowa    549    (189,  >'   °^d 
bility    for    labor    debts.      Ripley    v.    ft   Minneapolis   Times  Co     65   Minn 
Evans,  87  Mich.  217   (1891).     An  ac     249    (1896);    Ho  land  ,    Duluth      t 
tion  in  New  York,  to  enforce  the  stat-    Co.,  65  Minn.  324   (1896)     Fanium  t. 
utorv  liabUity  of  a  stockholder  in  a    Ballard  Vale  Machine  Shop,  66  Mass 
New   York  corporation,   does   not  lie     507    (1853);    Handrahan  *.   Cheshire 
where  the  only  execution  issued  was     Iron   Works,    86    Mas.    896      186  2) 
in    Colorado      Rocky  Mountain  Bank     Gaskill     v.     Dudley,     47     Mass      b4b 
?m       80  N   Y    338  (1882);  Dean  v.     (1843);    Hampson  v.  Weare    4   Iowa 
Mace    19   Hun,   391    (1879);    Sumner     13     (1856);     Bullock    *    KHgour,    39 

599 


§  224.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[en.  XII. 


In  some  jurisdictions,  however,   this  judgment  against   the  cor- 
poration is  only  prima  facie  evidence  of  the  validity  and  amount 


Ohio  St.  543  (1883).  Cf.  Merrill  v. 
Suffolk  Bank,  31  Me.  57  (1849); 
Holyoke  Bank  v.  Goodman  Paper  Mfg. 
Co.,  63  Mass.  576  (1852);  Bank  of 
Australasia  v.  Nias,  16  Q.  B.  717; 
s.  c,  20  L.  J.  (Q.  B.)  284  (1851), 
and  §  209,  supra.  Judgment  against 
the  corporation  is  conclusive  as  re- 
gards the  affairs  and  liability  of  the 
corporation,  but  not  as  to  questions 
respecting  the  personal  liability  of 
the  stockholder.  In  re  Receivership, 
etc.,  91  Minn.  494  (1904).  The  judg- 
ment against  a  corporation  is  conclu- 
sive. Old  Colony,  etc.  Co.  v.  Parker, 
etc.  Co.,  183  Mass.  557  (1903).  A 
stockholder  cannot  defend  against  the 
statutory  liability  on  the  ground  that 
it  is  being  enforced  to  pay  a  debt 
for  which  he  is  not  liable,  his  liabil- 
ity having  been  fixed  in  a  receiver- 
ship litigation,  even  though  he  was 
not  a  party,  the  statute  providing  for 
collection  by  the  receiver.  Elson  v. 
Wright,  112  N.  W.  Rep.  105  (Iowa 
1907).  Where  by  the  decisions  of  a 
state  court  a  statutory  liability  can- 
not be  enforced  until  such  liability 
has  been  fixed  by  a  suit  in  equity  ad- 
justing all  rights,  the  decree  therein 
is  conclusive,  except  for  fraud  or 
want  of  jurisdiction,  even  as  against 
a  non-resident  stockholder  who  was 
not  personally  served.  Goss  v.  Car- 
ter, 156  Fed.  Rep.  746  (1907).  A 
stockholder  cannot  attack  the  debt 
on  the  ground  of  fraud  where  the 
debt  was  incurred  in  the  adjustment 
of  claims,  and  the  statute  of  limita- 
tions is  a  bar  to  any  fraud  in  the 
settlement.  Railroad  Co.  v.  Smith,  48 
Ohio  St.  219  (1891).  In  Schrader  v. 
Manufacturers'  Nat.  Bank,  133  U.  S. 
67  (1890),  the  supreme  court  al- 
lowed stockholders,  who  had  been 
sued  on  their  statutory  liability  on 
national  bank  stock,  to  go  back  of  the 
judgment  against  the  bank,  such 
judgment  having  been  rendered  after    mit  the  allegations  of  the  complaint, 

600 


the  bank  had  gone  into  liquidation. 
A  stockholder  in  a  national  bank  may 
impeach  a  judgment  against  the  bank 
on  the  ground  that  it  was  for  an 
obligation  incurred  after  the  bank 
had  gone  into  liquidation  and  that 
it  was  obtained  by  collusion,  and  the 
court  intimated  that  the  proper  rem- 
edy was  to  file  a  bill  in  equity  to  en- 
join collection  of  the  assessment.  Moss 
v.  Whitzel,  108  Fed.  Rep.  579  (1901). 
A  judgment  against  the  corporation 
may  be  impeached  by  the  stockholder 
for  fraud.  Ball  v.  Warrington,  108 
Fed.  Rep.  472  (1901).  In  a  suit  in 
the  United  States  court  in  Pennsyl- 
vania to  enforce  the  Kansas  statutory 
liability  of  stockholders,  a  stockholder 
may  set  up  that  the  judgment  against 
the  corporation  was  fraudulent  and 
collusive.  Warrington  v.  Ball,  90 
Fed.  Rep.  464  (1S9S).  Where  a  com- 
prehensive accounting  is  had  in  the 
courts  of  the  state  which  created  the 
corporation  and  the  amount  of  lia- 
bility is  determined,  this  is  binding 
in  a  suit  brought  in  another  state 
to  enforce  a  stockholder's  statutory 
liability,  but  the  decision  of  the  for- 
mer court  as  to  the  liability  of  a  par- 
ticular stockholder  living  in  another 
state,  who  was  not  personally  a  party 
to  the  suit,  is  not  binding  on  him  in 
a  suit  brought  against  him  to  en- 
force his  liability.  Hale  v.  Hardon, 
95  Fed.  Rep.  747  (1899).  In  enforc- 
ing the  statutory  liability  the  effect 
of  a  judgment  against  the  corpora- 
tion is  to  be  determined  by  the  laws 
of  the  state  which  created  the  cor- 
poration. Dexter  v.  Edmands,  89  Fed. 
Rep.  467  (1898).  Stockholders  will 
not  be  allowed  to  intervene  in  a  suit 
brought  by  a  creditor  against  the  cor- 
poration itself,  even  though  they  wish 
to  set  up  the  statute  of  limitations, 
and  even  though  the  directors  had 
directed  the  company's  lawyer  to  ad- 


CH.  XII.]  STATUTORY  LIABILITY  OF  STOCKHOLDERS.  [§  224. 

of  the  creditor's  claim.1  And  in  New  York  judgment  against  the 
corporation  and  the  execution  returned  wholly  or  partially  unsat- 
isfied are  evidence  only  that  the  corporation  cannot  pay  its  debts. 
They  only  serve  to  show  that  the  creditor  has  taken  the  necessary 
precedent  steps  to  collect  his  claim  from  the  corporate  assets.  But 
he  cannot  rely  upon  the  judgment  obtained  against  the  corpora- 
tion to  establish  his  right  to  recover  against  the  stockholder.  It  is 
not  even  prima  facie  evidence  either  of  the  amount  or  validity  of 
his  claim.     Moreover  the  stockholder  may  set  up  any  defense  that 

and  even  though  the  company  is  in-  547    (1905).     A  judgment  against   a 
solvent,  and  the  stockholders  are  lia-  corporation  is  conclusive  of  the  right 
ble    on    the    stock,    no    fraud    being  of  a  creditor  to  have  his  debt  satis- 
shown.      Meyer    v.    Bristol,    etc.    Co.,  tied   out  of  the  corporate  assets.     It 
163    Mo.    59    (1901).     In   enforcing  a  is   not   conclusive   against   the    stock- 
director's  statutory  liability  in  Colo-  holder  when  he  had  no  notice  of  the 
rado  for   failure   to   file  reports,   the  suit   nor   opportunity    to    defend,    al- 
judgment  creditor  of  the  corporation  though  it  is  prima  facie  evidence  as 
may  sue  on  his  judgment,  and  need  to    the    amount    or    validity    of    the 
not  sue  on  his  original  claim.    Tabor  debt,    and    he    may    defend    on    the 
v.    Commercial    Nat.    Bank,    62    Fed.  ground  that  it  was  not  a  valid  debt 
Rep.  383  (1894).    The  complaint  need  against    the    company.      Wheatley   v. 
not  set  out  the  original  cause  of  ac-  Glover,    125    Ga.    710    (1906).       The 
tion.      It   is   sufficient   if   it   sets   out  court    may    investigate    whether    the 
(he  judgment  against  the  corporation,  judgment  of  the  creditor  is  such  as  to 
McVickar  v.  Jones,  70   Fed.  Rep.  754  bind  the  stockholders  in  a  proceeding 
(1895).       In    Whitman    v.    National  to     enforce    their    subscription     and 
Bank,   83   Fed.   Rep.   288    (1897),  the  statutory  liability.     Covell  v.  Fowler, 
creditor,  in  a  suit  to  enforce  the  stat-  144  Fed.  Rep.   535    (1906).     See  also 
utory  liability  of  stockholders,  put  in  Hawes  v.  Anglo-Saxon  Petroleum  Co., 
evidence     not     only     the     judgment  101  Mass.  385   (1869);  Grand  Rapids 
against   the   corporation,    but   proved  Sav.   Bank   v.  Warren,   52  Mich.   557 
the  original  cause  of  action  against  (1884);  Merchants'  Bank  v.  Chandler, 
the      corporation.       The      judgment  19  Wis.  435   (1865).    And  see  Neilson 
against  a  corporation  is  conclusive  as  v.  Crawford,  52  Cal.  248  (1877),  pass- 
to  the   amount  of  the  debt  and   the  ing  also  on  the  admissibility  of  the 
liability  of   the  corporation.     Ball  v.  books  of  the  corporation  to  prove  its 
Reese,  58  Kan.  614  (1897).    Cf.  Grund  indebtedness  to  a  creditor  in  an  ac- 
v.  Tucker,  5  Kan.  70   (1869).  tion    against    a   stockholder.      Stock- 
i  A  judgment  is  not  conclusive  in  holders    may    interpose    any    defense 
a  suit  to   enforce  a  director's  statu-  which    the   corporation    might    inter- 
tory    liability    for    illegal    dividends,  pose.     Zang  v.  Wyant,   25   Colo.   551 
especially   if  it  was  obtained   in   an-  (1898).      A    stockholder    when    sued 
other  state.     Audenreid  v.  East,  etc.  may    attack    the    judgment    on    the 
Co.,    68    N.    J.    Eq.    450    (1904).      A  ground  that  it  was  taken  by  default 
judgment  in  a  suit  between  the  cor-  by   collusion.     Town    of  Hinckley   v. 
poration    and    the    president    which  Kettle    River    R.    R.,    80    Minn.    32 
fixes  his  liability,  is  not  binding  on  (1900).     Stockholders   sued  on  their 
stockholders     in     a     suit     to     adjust  liability  may  show  that  the  judgment 
equities   among  the   stockholders   on  was  obtained  by   default  and   that  a 
winding  up.    Gund  v.  Ballard,  73  Neb.  valid   defense   exists   to   the  original 

601 


§  224. J 


LIABILITY  01  KHOLD] 


[<  il.  XII. 


the  corporation  might  have  set  up.1     T 1 1  i s  means  thai   i 
creditor  is  obliged  to  prove  his  cause  of  action  over  again,  and  re- 
pent what  he  has  already  proved  in  his  action  against  the  corpora- 
tion.    Such,  also,  sinus  to  be  (ho  rule  in  Illinois.2      In   New   5Tork 
a  stockholder  may  attack   the  validity  of  ;i  corporate  note,  even   in 


claim.  Irons  v.  Manufacturers'  Nat. 
Bank,  36  Fed.  Rep.  843  (18SS);  aff'd, 
133  U.  S.  67. 

l  Moss  r.  McCullough,  5  Hill,  131 
(1843).  [This  case  was  reversed  upon 
another  point  in  McCullough  v.  Moss, 
5  Denio,  567  (1846).]  McMahon  v. 
Macy,  51  N.  Y.  155  (1872) ;  Miller  v. 
White,  50  N.  Y.  137  (1872);  Chase  v. 
Curtis,  113  U.  S.  452  (1884);  Esmond 
v.  Bullard,  16  Hun,  65  (187S);  aff'd, 
79  N.  Y.  404;  Conant  v.  Van  Schaick, 
24  Barb.  87  (1857);  Truesdell  v. 
Chumar,  75  Hun,  416  (1894).  But  see 
Slee  v.  Bloom,  20  Johns.  669  (1822); 
Belmont  v.  Coleman,  21  N.  Y.  96 
(1860);  Hastings  v.  Drew,  76  N.  Y. 
9  (1879);  Lawyer  v.  Rosebrook,  48 
Hun,  453  (1888);  Moss  v.  Oakley,  2 
Hill,  265  (1842);  Berridge  v.  Aber- 
nethy,  24  N.  Y.  Week.  Dig.  513  (1886). 
Cf.  §  209,  supra;  also  Stephens  v.  Fox, 
83  N.  Y.  313  (1SS1),  in  which  the 
ground  is  taken  that  the  judgment  in 
these  cases  is  prima  facie  evidence  or 
more,  without,  however,  overruling 
the  earlier  cases.  See  also  Whitney 
Arms  Co.  v.  Barlow,  63  N.  Y.  62 
(1875).  Practically  the  corporate 
creditor  must  bring  his  action  anew 
against  the  stockholder  upon  his 
original  demand.  Bailey  v.  Bancker, 
3  Hill,  188  (1842);  Kincaid  v.  Dwi- 
nelle,  59  N.  Y.  548  (1875);  Moss  v. 
Averell,  10  N.  Y.  449  (1853);  Wither- 
head  v.  Allen,  4  Abb.  App.  Dec.  628 
(1867).  This  judgment  against  the 
corporation  is  admissible  only  as  evi- 
dence that  the  condition  precedent  to 
his  right  to  recover  from  the  stock- 
holder has  been  complied  with. 
Wheeler  v.  Miller,  24  Hun,  541 
(1881);  aff'd,  90  N.  Y.  353  (1882). 
But  cf.  Tyng  v.  Clarke,  9  Hun,  269 
(1876).  The  judgment  may  avail, 
however,    in   these   cases   to   prevent 


the  statute  of  limitations  from  bar- 
ring the  action.  Van  Cott  v.  V 
Brunt,  2  Abb.  N.  Cas.  283,  297  (  1X77)  ; 
reversed  on  other  points,  82  X.  V. 
535  (1880).  A  decree  of  a  Minnesota 
court  making  ;i  statutory  assessment 
on  stockholders,  the  amount  being 
based  on  the  assumption  that  some- 
of  the  stockholders  were  insolvent, 
and  the  amount,  including  debts,  gen- 
eral expenses,  and  cost  of  collection, 
is  not  conclusive  on  a  non-rosiih  at 
stockholder  who  is  sued  in  another 
jurisdiction.  Converse  r.  Stewart,  105 
X.    Y.    App.    Div.    478    (1905). 

2  Chestnut  r.  Pcnnell,  92  111.  55 
(1879),  passing  also  on  the  effort  of 
recitals  in  a  decree  against  the  cor- 
poration. In  Quick  r.  Lemon,  105  111. 
578  (1S83),  where  the  corporation 
had  not  pleaded  a  counter-claim 
against  a  creditor  in  a  suit  at  law, 
a  stockholder  was  permitted  to  file 
a  cross-bill  in  a  chancery  suit  brought 
by  judgment  creditors  against  the 
corporation  and  certain  stockholders. 
Evidence  competent  and  sufficient  to 
establish  a  liability  as  against  the 
corporation  is  sufficient  as  against 
the  stockholder.  McGowan  v.  McDon- 
ald, 111  Cal.  57  (1896).  In  Trippe  v. 
Huncheon,  82  Ind.  307  (1882),  a 
complaint  founded  on  the  judgment 
was  held  bad  on  demurrer  because 
the  liability  of  the  stockholder  was 
looked  upon  as  being  upon  the  orig- 
inal debt  and  not  upon  the  judgment. 
See  also  Southmayd  v.  Russ,  3  Conn. 
52  (1819),  where,  for  the  same  rea- 
son, a  proceeding  by  scire  facias  was 
not  allowed  to  be  maintained.  See 
also  Bissit  v.  Kentucky  River  Nav. 
Co.,  15  Fed.  Rep.  353  (1S82),  and  the 
annotation;  Union  Bank  v.  Wando 
Min.  etc.  Co.,  17  S.  C.  339    (1881). 


602 


CH.  XII.  J 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[§   225. 


bona  fide  hands,  in  a  suit  brought  to  enforce  the  statutory  liability.1 
The  supreme  court  of  the  United  States  has  recently  decided  that 
a  New  Hampshire  stockholder  in  a  Kansas  corporation  may  defend 
against  a  statutory  liability  on  the  stock  on  the  ground  that  the 
plaintiff's  claim  against  the  corporation  is  an  ultra  vires  guarantee, 
even  though  the  state  court  may  have  decided  such  guarantee  to  be 
valid.-  A  judgment  obtained  in  England  against  an  American  stock- 
holder  in  an  English  corporation  for  an  unpaid  call,  the  stockholder 
not  having  been  served  in  England,  is  not  enforcible  in  the  United 
States.3      Where  tl  :kholders  have  not  authorized  the  issue  of 

bonds  as  required  by  statute,  the  statutory  liability  of  the  stock- 
hold!  ■  is  cannot  be  enforced  to  pay  such  bonds.4 

In  any  jurisdiction  where  the  stockholders  are.  by  statute,  made 
liable  for  only  a  certain  class  of  the  corporate  indebtedness,  it  is  plain 
that  they  cannot  be  charged  upon  a  judgment  recovered  against  the 
corporation,  unless  it  be  shown  that  the  claim  in  controversy  comes 
within  the  class  upon  which  they  arc  liable.5 

§  225.  Stockholder's  miscellaneous  defenses  against  his  statutory 
liability. — There  are  two  cl  of  defenses   that   may  occur  to  a 

stockholder  to  defeat  his  statutory  liability.    One  class  is  of  defenses 


i  Close  v.  Potter,  155  X.  Y.  145 
(1898). 

2 Ward  r.  Joslin,  186  U.  S.  112 
(1902),  affg  100  Fed.  Rep.  C76.  A 
judgment  rendered  against  a  corpo- 
ration in  the  state  where  it  is  organ- 
ized, even  though  taken  by  default, 
cannot  be  impeached  except  for  fraud 
or  want  of  jurisdiction,  and  the  stock- 
holder cannot  set  up  the  defense  that 
the  debt  was  really  the  debt  of  an- 
other corporation.  Am.  Nat.  Bank 
v.  Supplee,  115  Fed.  Rep.  657  (1902). 
The  stockholder  may  set  up  that  the 
plaintiff's  claim  grew  out  of  business 
transacted  by  the  corporation  after 
it  had  been  put  into  liquidation  by 
the  court.  Richmond  v.  Irons,  121 
U.   S.  27    (18S7). 

3  Bank  of  China  v.  Morse,  16S  N. 
Y.  458  (1901).  A  judgment  obtained 
in  England  by  the  liquidators  of  an 
English  corporation  against  a  Xew 
York  subscriber  to  the  stock,  no  per- 
sonal service  having  been  made  upon 
such  subscriber,  is  not  enforcible  as 
a  judgment   in   Xew  York,   although 


such  judgment  may  be  legal  in  Eng- 
land under  the  statutes  in  force  at 
the  time  the  iption  was  made. 

Anderson  v.  Haddon,  33  Hun,  435 
(18S4). 

'  Boyd  v.  Heron,  125  Cal.  453 
(1899). 

5  Bohn  v.  Brown,  33  Mich.  257 
(1876);  Wilson  v.  Pittsburgh,  etc. 
Coal  Co.,  43  Pa.  St.  424  (1862);  Co- 
nant  v.  Van  Schaick,  24  Barb.  87 
(1857).  Cf.  Larrabee  v.  Baldwin,  35 
Cal.  155  (1SC8);  Farnsworth  v.  Wood, 
91  X.  Y.  308  (1883).  Where  stock- 
holders are  liable  for  corporate  debts 
existing  on  a  certain  date,  the  ex- 
istence of  a  corporate  creditor's  debt 
en  that  date  may  be  found  by  evi- 
dence other  than  his  judgment 
against  the  corporation.  Congdon  v. 
Winscr,  17  R.  I.  236  (1891).  A  statu- 
tory liability  of  directors  for  debts 
of  the  corporation  does  not  render 
them  liable  on  an  accommodation  in- 
dorsement by  the  corporation — the  in- 
dorsement being  non-enforceable.  Xa- 
tional  Park  Bank  v.  Remsen,  43  Fed. 


C03 


§  225.]  STATUTORY  LIABILITY  OF  STOCKHOLDERS.  [CH.  XII. 

that  the  corporation  itself  might  have  set  up,  or  did  set  up,  against 
the  plaintiff  when  he  sought  to  collect  his  debt  from  the  corporation. 
As  already  explained  herein,  in  some  jurisdictions  particularly  New 
York,  the  stockholder  may  set  up  these  defenses,  although  the  cor- 
poration has  failed  to  establish  them.  In  other  and  most  jurisdic- 
tions ho  cannot. 

A  second  class  of  defenses  includes  those  which  are  personal  to 
the  particular  stockholder,  and  not  such  as  the  corporation  might 
have  set,  up.  They  arc  largely  such  defenses  as  the  stockholder  might 
set  up  against  the  corporation  to  defeal  his  subscription.  They  do 
not  refer  to  the  validity  of  the  creditor's  debt,  bu1  they  deny  that 
that  particular  defendant  is  one  of  those  who  arc  liable  for  the  corpo- 
rate debts.  There  are,  in  addition  to  the  defenses  specified  in  a 
previous  chapter,1  several  defenses  which  are  peculiar  to  this  stat- 
utory liability. 

(a)  Release,  extension,  and  renewal- — A  release  by  the  corporate 
creditor  of  one  stockholder  from  his  proportion  of  the  corporate  in- 
debtedness will  not  operate  to  release  the  other  stockholders.-  Thus, 
where  the  stockholders  are  held  to  be  severally  and  not  jointly  liable 
under  the  statute,  one  may  be  released  without  releasing  tin-  others.3 
Even  though  a  reorganization  under  a  statute  which  releases  the 
stockholders  from  a  part  of  their  liability  may  be  of  doubtful  legal- 
ity, yet  creditors  who  accept  the  benefits  thereof  cannot  afterwards 
complain.4  Although  a  corporation  goes  through  bankruptcy  and  is 
discharged,  this  docs  not  release  stockholders  from  their  statutory 
liability.5  Whether  an  extension  of  time  by  renewal  of  note  or 
otherwise,  given  to  the  corporation  by  a  creditor,  will  not  discharge 
a  stockholder  as  to  his  liability  by   statute  seems    uncertain.6      In 

Rep.  226   (1S90) ;  aff'd,  158  U.  S.  337.  liability    of    stockholders.      Willis    v. 

Where  those   stockholders  are   liable  Mabon,  48  Minn.  140  (1892).     The  as- 

who   were  such   when   the   debt  was  sumption  of  the  corporate  debt  by  a 

incurred,    a    note    given    for    an    old  third  party  may  be  rescinded.     Bor- 

debt  cannot  be  the  basis  of  liability,  land    v.    Haven,    37    Fed.    Rep.    394 

Winona  Wagon  Co.  v.  Bull,  108  Cal.  (1888).     A   release  by  a  creditor  to 

1   (1895).  the  corporation   does  not  necessarily 

i  Ch.  X,  supra.  cancel    the    statutory    liability    of    a 

2  Herries    v.    Piatt,     21     Hun,    132  director.       Old     Colony,     etc.     Co.    v. 

(1880).     See  also  Prince  v.  Lynch,  38  Parker,  etc.  Co.,  183  Mass.  557  (1903). 

Cal.    528     (1S69),    holding    that    the  3  Bank    of    Poughkeepsie   v.    Ibbot- 

other  stockholders  liable  only  propor-  son,  5  Hill,  461    (1843).     Of.  Herries 

tionately    are    released    only    propor-  v.  Piatt,  21  Hun,  132   (1880). 

tionately.     It   has   been   held   that  a  4  Hunt    v.    Roosen,     87     Minn.     68 

release  by  the  creditor  to  the  corpo-  (1902). 

ration,  under  a  statute  requiring  such  5  Elsbree    v.    Burt,    24    R.     I.    322 

release,  in  order  to  share  in  the  as-  (1902). 

sets,  does  not  release  a  constitutional  g  in  Harger  v.  McCullough   2  Denio 

604 


CH.  XII.] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§  225. 


ISTew  York  a  renewal  note  does  not  stop  the  prior  running  of  the 
statute  of  limitations;  and  this  is  the  rule  where  the  facts  are  prac- 


119  (1846),  it  was  held  that  it  would 
not;  while  in  the  later  case  of  Par- 
rott  v.  Colby,  6  Hun,  55  (1875);  s.  c. 
affd,  71  N.  Y.  597  (1877),  without 
expressly  overruling  Harger  v.  Mc- 
Cullough,  it  is  plainly  declared,  in 
making  an  application  cf  the  short 
statute  of  limitations  provided  by  the 
General  Manufacturing  Act  of  New 
York  (N.  Y.  Laws,  1848,  ch.  40,  §  24), 
that  the  liability  of  stockholders  in 
these  cases  cannot  be  revived  or  ex- 
tended by  any  renewal  or  extension 
of  the  indebtedness  which  the  cred- 
itors may  make  with  the  corporation. 
See  also  Jagger  Iron  Co.  v.  Walker, 
76  N.  Y.  521  (1S79);  Hardman  v. 
Sage,  124  N.  Y.  25  (1891);  Stilphen 
v.  Ware,  45  Cal.  110  (1S72) ;  Jones 
v.  Barlow,  62  N.  Y.  202  (1875); 
Bolen  v.  Crosby,  49  N.  Y.  183  (1872). 
In  Aultman's  Appeal,  98  Pa.  St.  505 
(1881),  it  was  held  that,  where  the 
extension  was  granted  at  the  request 
of  the  directors,  the  stockholders  had 
assented,  and  there  was  no  release. 
A  release  of  the  corporation  under 
an  insolvency  statute  was  held  to  be 
a  release  of  the  stockholder's  statu- 
tory liability  in  Mohr  v.  Minnesota 
Elev.  Co.,  40  Minn.  343  (1889).  But 
under  a  later  statute  the  contrary 
was  held.  Willis  v.  Mabon,  48  Minn. 
140  (1892).  In  Hanson  v.  Donkers- 
ley,  37  Mich.  1S4  (1877),  it  was  held 
that  the  Michigan  statute  does  not 
make  stockholders  primarily  liable, 
and  that  the  individual  liability  for 
corporate  debts  is  discharged  by  an 
extension  of  time  and  the  acceptance 
of  a  corporate  note.  A  laborer's 
statutory  right  to  collect  from  the 
stockholders  is  not  waived  by  taking 
the  corporate  note.  Jackson  v. 
Meek,  S7  Tenn.  69  (1888).  A  par- 
tial payment  of  a  creditor's  claim  by 
the  corporation  does  not  release  the 
directors  from  their  statutory  liabil- 
ity.   Fairbanks,  etc.  Co.  v.  Macleod,  8 


Colo.  App.  190  (1896).  A  new  note 
for  an  old  debt  does  not  affect  an 
officer's  statutory  liability  for  the  old 
debt,  unless,  of  course,  the  note  is 
paid.  Novelty  Mfg.  Co.  v.  Connell, 
88  Hun,  254  (1895).  An  extension 
of  a  note  does  not  release  a  director 
from  his  statutory  liability  in  New 
York.  It  merely  delays  his  remedy. 
Providence  Steam,  etc.  Co.  v.  Connell, 
86  Hun,  319  (1895).  The  fact  that  a 
new  note  is  given  for  a  debt  does  not 
affect  the  statutory  liability  of  a 
stockholder  therefor  under  the  Ken- 
tucky statutes.  Hyatt  v.  Anderson's 
Trustee,  74  S.  W.  Rep.  1094  (Ky. 
1903).  An  extension  of  the  time  of 
payment  by  a  creditor  does  not  neces- 
sarily stop  the  running  of  the  statute 
of  limitations  as  against  the  stock- 
holder's liability.  Brigham  v.  Na- 
than, 62  Kan.  243  (1900).  A  renewal 
of  a  note  does  not  extend  the  dura- 
tion of  the  liability  of  officers  under 
the  Arkansas  statute.  Continental, 
etc.  Bank  v.  Buford,  107  Fed.  Rep. 
188  (1901).  The  statutory  liability 
of  the  president  of  a  corporation  in 
Arkansas  for  not  making  any  report 
commences  on  the  maturity  of  the 
note  and  is  not  extended  by  a  re- 
newal of  the  note.  Continental  Nat. 
Bank  v.  Buford,  114  Fed.  Rep.  290 
(1902).  The  liability  in  California 
of  stockholders  by  statute  for  corpo- 
rate debts  begins  when  the  debt  is 
contracted,  and  cannot  be  extended 
by  the  corporation  so  as  to  extend 
this  stockholder's  liability.  Reding- 
ton  v.  Cornwell,  90  Cal.  49  (1891). 
The  stockholder's  liability  under  the 
California  statute  being  a  liability  as 
a  principal  debtor,  the  statute  of  lim- 
itations begins  to  run  as  soon  as  the 
creditor's  right  of  action  against  the 
corporation  commences.  An  exten- 
sion of  the  time  as  to  the  corporation 
by  renewal  notes  does  not  stop  the 
statute  of  limitations  as  regards  the 


605 


§  225.] 


STATUTORY   LIABILITY   ill-'  STOCKHOLDERS. 


foil.   Ml. 


tically  a   renewal,   even   though   by   a   device   the   new   notes   run    to 
another  person  for  the  secrel    benefil   of  the  old  holder.1     A  sto 
holder  may  defend  against  a  statutory  liability  on  the  ground  that 
the  debt  has  been  taken  over  by  a  trust  company  by  the  manager  of 
the  latter  and  that  his  acts  have  nut  been  repudiated.2 

(6)  Liability  already  paid. — It  is  a  <!  to  the  stockholder  to 

prove  that  his  full  statutory  liability  has  already  been  paid  by  him. 
A  stockholder  who  has  voluntarily  paid  corporate  debts  to  the  full 
extent  of  his  corporate  liability  is  entitled  to  set  up  that  fact.  And 
when  such  a  payment  was  bona  fide  it  is  a  bar  to  an  action  to  col- 
lect any  further  amount.3 


stockholder's  liability.  Hyman  r.  (1876);  San  Jose  Saw  Hank  v. 
Coleman,  82  Cal.  650  (1890).  The  Pharis,  58  Cal.  380  (1881).  Cf.  The- 
seven-years  statute  of  limitations  in  bus  v.  Smiley,  110  111.  316  (1884), 
California  applies  to  a  claim  on  notes  where  fraud  was  involved.  As  to  na- 
from  the  date  of  the  original  notes  tional  banks,  see  Delano  v.  Butler, 
and  not  from  the  date  of  renewals.  US  U.  S.  634  (1SSC).  Contra,  Fowler 
Goodall  v.  Jack,  127  Cal.  258  (1899).  v.  Robinson,  31  Me.  189  (1850);  Grose 
The  California  statute  of  limitations  r.  Hilt,  30  Me.  22  (1853).  But 
against  a  stockholder's  liability  be-  when  a  creditor  has  actually  com- 
gins  to  run  when  the  debt  is  con-  menced  a  suit  to  enforce  the  statu- 
tracted  and  is  not  extended  by  the  tory  liability  of  any  individual  stock- 
giving  of  a  corporate  note  subse-  holder,  it  is  then  too  late  for  that 
quently.  O'Neill  r.  Quarnstrom,  92  stockholder  to  defeat  the  action  by 
Pac.  Rep.  391  (Cal.  1907).  As  to  re-  paying  some  other  corporate  cred- 
newal  notes  affecting  a  transferrer's  itor's  claim.  Jones  v.  Wiltberger,  42 
liability,  s«ee  also  §§  225  (/),  259,  Ga.  575  (1871).  See  also  Lane  v. 
infra.  Harris,  16  Ga.  217  (1S54);  Thebus  v. 
i  Close  v.  Potter,  155  N.  Y.  145  Smiley,  110  111.  316  (18S4)  ;  Thomp- 
(1898).  The  extension  of  a  debt  by  son  v.  Meisser,  108  111.  359  (1884). 
taking  a  note  does  not  delay  the  ap-  A  contrary  conclusion  was  reached  in 
plication  of  the  statute  of  limitations  Richards  v.  Brice,  3  N.  Y.  Supp.  941 
so  far  as  a  stockholder's  liability  is  (Com.  PL  1889)  (see  also  Chicago  v. 
concerned.  Hardman  v.  Sage,  124  N.  Hall,  103  111.  342— 1SS2;  State  Sav. 
Y.  25  (1S90);  Blake  v.  Clausen,  10  Assoc,  v.  Kellogg,  63  Mo.  540— 1S76; 
N.  Y.  App.  Div.  223  (1S96);  aff'd,  158  Manville  v.  Roever,  11  Mo.  App.  317 
N.  Y.   727.  —1881);    but   the   plain   injustice  of 

2  First  Nat.  Bank  v.  Littlefield,  67  allowing  the  stockholder  to  defeat  an 
Atl.  Rep.  594   (R.  I.  1907).  action  by  such  a  device  will  not  com- 

3  Quoted  and  approved  in  Hood  v.  mend  such  a  conclusion.  A  stock- 
French,  37  Fla.  117  (1S9C);  Garrison  holder  who  employs  an  agent  to  buy 
v.  Howe,  17  N.  Y.  458  (1S58) ;  Mathez  up  claims  at  a  discount  and  then  con- 
v.  Neidig,  72  N.  Y.  100  (1878);  Lane  f esses  judgment  in  favor  of  that 
v.  Harris,  16  Ga.  217  (1854);  Belcher  agent  will  not  be  permitted  to  plead 
v.  Willcox,  40  Ga.  391  (1869) ;  Rob-  such  a  judgment  in  bar  of  an  action 
inson  r.  Bank  of  Darien,  18  Ga.  65,  by  other  creditors.  Manville  v. 
109  (1855);  Woodruff,  etc.  Iron  Karst,  16  Fed.  Rep.  173  (18S3).  A 
Works  v.  Chittenden,  4  Bosw.  (N.  Y.)  mortgage  by  an  insolvent  stockholder 
406  (1859);  Boyd  v.  Hall,  56  Ga.  563  in   an    insolvent   corporation   to   one 

COG 


CH.  XII.  j 


STxVTUTORY  LIABILITY  OF  STOCKHOLDERS. 


[§  225. 


(c)  Set-off.—  Closely  related  to  the  defense    of  payment  already 
made  is  the  defense  that  the  defendant  stockholder  has  claims  against 


of  the  corporate  creditors  is  a  prefer- 
ence to  the  extent  of  the  stockhold- 
er's    liability     for     corporate     debts. 
Gatch    v.    Fitch,    34    Fed.    Rep.    566 
(1888).     Ingalls   r.  Cole,  47  Me.  530, 
541  (1860),  holds  that  the  mere  pen- 
dency of  suits  is  not  a  defense  for  a 
stockholder  in  a  later  action,  unless 
the   prior   claims    have   been    legally 
established     and     his     liability     ex- 
hausted.   A  stockholder  who  has  paid 
his   statutory   liability   is   not   subro- 
gated to  the  claims  so  paid  and  hence 
cannot   participate  in  any  dividends 
from    the    corporate    assets.      Lacra- 
mento  Eank  v.  Pacific  Bank,  124  Cal. 
147  (1S99).    Even  though  a  corporate 
creditor  has  realized   a  part  of  his 
debt    under    the    stockholder's    statu- 
tory liability,  yet  he  may  participate 
in  the  assets  of  the  corporation   a3 
though  no  part  of  his  debt  had  been 
paid.      Sacramento    Bank    v.    Pacific 
Bank,  124   Cal.   147    (1899).     Even  a 
bona  fide  purchaser  of  what  purports 
to  be  full-paid  stock  in  a  corporation 
is   liable   on   the   double   liability  at- 
tached to  the  stock,  under  the  New 
York  statute,  where  the  stock  was  is- 
sued for  property  taken  at  an  over- 
valuation  and   no   certificate   of  pay- 
ment has  been  filed,  as   required  by 
the   statute.     If,    however,    after   the 
issue  of  the   stock  further  sums  of 
money  were  paid  in  by  the  stockhold- 
ers equal   to   the  difference  between 
the  "par  value  of  the  stock  and   the 
value   of   the  property,   the  liability 
ceases    as    to    subsequent    creditors. 
White,  Corbin  &  Co.  v.  Jones,  167  N. 
Y.    15S    (1901).     If   the   stockholders 
of  an  insolvent  bank  voluntarily  pay 
in  to  the  assignees  of  the  bank,  for 
the     benefit     of     its     creditors,     the 
amounts  of  their  statutory   liability, 
their  liability  is  thereby  discharged. 
Killen  v.  Barnes,  106  Wis.  546  (1900). 
Before  he  is  actually  brought  into  the 
suit  a  stockholder  may  discharge  his 


liability  by  paying  a  creditor  to  the 
amount  of   his   liability.     Munson  v. 
Warren,  63  Kan.  162  (1901).  A  stock- 
holder may  discharge  his  liability  by 
paying  one  of  the  debts  to  an  amount 
equal  to  his  liability.     Sedgwick  City 
Bank  v.   Sedgwick  Milling,   etc.    Co., 
59  Kan.  654  (1898).    A  bona  fide  pay- 
ment  by   a   stockholder   to   a   corpo- 
rate creditor  of  an  amount  equal  to 
his  statutory  liability  is  a  defense  to 
such    liability,    the    payment    having 
been  made  in  good  faith  before  proc- 
ess was  served  upon  him.     Campbell 
v.    Reese,    8    Kan.    App.    518    (1899). 
This  is  the  rule  even  though  payment 
was  made  by  turning  over  property. 
Kendall    v.    Underbill,    8    Kan.    App. 
521    (1899).     The  defendant   is   enti- 
tled to  credit  for  the  amount  of  cor- 
porate debts  voluntarily  paid  by  him 
in  good  faith  or  paid  by  him  on  exe- 
cution.    Musgrave  v.  Glen  Elder,  etc. 
Assoc,  5  Kan.  App.  393   (1897).     As 
against    the    statutory    liability    the 
stockholder  may  set  up  that  he  has 
paid  a  note   for  which  the  company 
was   liable   and   ask  to   have   it   de- 
ducted.   Sargent  v.  Stetson,  181  Mass. 
371    (1902).     Even  though  the  presi- 
dent   has    personally    given    security 
for  a  loan  to  a  corporation  the  lender 
may  obtain   a  judgment  against  the 
corporation,     and     even     though     by 
agreement  the  security   is   sold  and 
the  money  deposited  as  security  for 
the  judgment,   this  does  not  consti- 
tute payment  so  far  as  the  statutory 
liability  of  stockholders  is  concerned. 
Lancaster  v.  Knight,  74  App.  Div.  255 
(1902).  A  stockholder  may  discharge 
his   liability  by  payment  to  the  re- 
ceiver.    Strauss  v.  Denny,  95  Md.  690 
(1902),  holding  also  that  payment  as 
an  indorser  of  the  company's  note  is 
a  good  defense.    Claims  purchased  by 
stockholders  should  be  allowed  to  par- 
ticipate  ratably  in  the  proceeds  col- 
lected   on   a   statutory   liability,   but 
607 


§  225.] 


STATUTORY   LIABILITY   OP  STOCKHOLDERS. 


I'll.  XI!. 


the  corporation,  ami  that  he  is  to  he  credited   t'>  thai   amount  a 
set-oil'. 

It  has  hern   held   that,   where   the  statute  i  a    fund   cut    -I' 

which  the  creditors  arc  to  he  paid  ratably,  then  the  stockholder 
cannot  set  oil*  an  indebtedness  of  the  corporation  to  him.  He  m 
pay  in  what  the  statute  requires,  and  tin  n  prove  his  claim  aj 
(la-  corporation  like  any  other  creditor.1  But  where  the  stork- 
holder's  liability  by  statute  is  immediate  and  personal  and  Beveral, 
and  any  creditor  may  sue  any  stockholder,  then  the  stockholder  may 
set  off  a  debt,  owing  to  him  from  the  corporation,  when  h<  i-  Bued 
by  a  corporate  creditor.2     In  a  suit  at  law  in   the   United  ! 


not  where  the  affairs  of  the  corpo- 
ration were  fraudulently  conducted. 
Covington,  etc.  Co.  v.  Rosedale,  etc., 
76   S.  W.  Rep.  506    (Ky.  1903). 

i  Quoted  and  approved  in  Cahill  v. 
Original,  etc.  Assoc,  94  Md.  353 
(1902);  Re  Empire  City  Bank,  18  N. 
Y.  199,  227  (1858);  Matthews  v.  Al- 
bert, 24  Md.  527  (18G6);  Briggs  v. 
Corn  well,  9  Daly  (N.  Y.),  436  (1881) ; 
Hobart  v.  Gould,  8  Fed.  Rep.  57 
(1881);  Hillier  v.  Allegheny  Mut.  Ins. 
Co.,  3  Pa.  St.  470  (1846);  Lawrence 
v.  Nelson,  21  N.  Y.  158  (1860);  The- 
bus  r.  Smiley,  110  111.  316  (1881); 
Witters  v.  Sowles,  32  Fed.  Rep.  130 
(1887) ;  Ball  Elect.  Light  Co.  v.  Child, 
68  Conn.  522  (1897) ;  Burget  v.  Rob- 
inson, 113  Fed.  Rep.  669  (1902); 
Hale  v.  Calder,  113  Fed.  Rep.  670 
(1902) ;  Parker  v.  Carolina  Sav.  Bank, 
53  S.  C.  5S3  (1898).  No  set-off  is  al- 
lowed against  the  statutory  liability 
where  such  liability  is  enforced  by 
an  action  at  law.  Lauraglenn  Mills 
v.  Ruff,  57  S.  C.  53  (1900).  See  also 
Clapp  v.  Wright,  21  Hun,  240  (1S80)  ; 
Buchanan  v.  Meisser,  105  111.  638 
(1883).  A  holder  of  stock  in  a  na- 
tional bank  is  not  entitled  to  offset 
against  an  assessment  ordered  by  the 
comptroller  upon  his  stock  the 
amount  of  his  deposits  at  the  time 
the  bank  became  insolvent.  Wingate 
v.  Orchard,  75  Fed.  Rep.  241  (1896); 
First  Nat.  Bank  v.  Riggins,  124  N. 
C.  534  (1899).  Set-off  is  not  allowed 
in    a  suit   by   a  receiver   under   the 


Minnesota  statute,  where  it  would  re- 
sult in  giving  a  preference  contrary 
to  the  purpose  of  the  statute.  Robin- 
son v.  Brown,  126  Fed.  Rep.  429 
(1903). 

-Quoted  and  approved  In  Fidelity, 
etc.  Co.  v.  Mechanics'  Sav.  Bank,  97 
Fed.  Rep.  297  (1S99);  Mathez  v. 
Neidig,  72  N.  Y.  100  (1878);  Agate 
r.  Sands,  73  N.  Y.  620  (1878);  Chris- 
tensen  v.  Colby,  43  Hun,  362  (1887); 
Tallmadge  v.  Fishkill  Iron  Co.,  4 
Barb.  382  (184S)  ;  Boyd  v.  Hall,  56 
Ga.  563  (1876);  Hood  v.  French,  37 
Fla.  117  (1S96);  Remington  v.  King, 
11  Abb.  Pr.  278  (1858);  Pierce  v. 
Topeka,  etc.  Co.,  60  Kan.  164  (1899); 
Kendall  v.  Underbill,  8  Kan.  App.  521 
(1899).  Where  the  stockholder  off- 
sets a  debt  due  from  him  to  the  cor- 
poration he  may  be  compelled  to  as- 
sign to  the  judgment  creditor  who 
has  brought  suit  against  him  the  debt 
so  offset  against  the  statutory  liabil- 
ity. Van  Pelt  V.  Strickland,  60  Kan. 
584  (1899).  A  stockholder  may  off- 
set a  debt  due  to  him  from  the  cor- 
poration, and  may  also  show  that  the 
plaintiff  has  collected  his  claim  in 
whole  or  in  part  from  other  stock- 
holders. Ball  v.  Anderson,  196  Pa. 
St.  86  (1900).  Where  the  supreme 
court  of  the  state  in  which  the  com- 
pany is  incorporated  holds  that  a 
stockholder  may  set  off  against  his 
statutory  liability  a  debt  due  to  him 
from  the  corporation,  the  courts  of 
other  states  will  follow  this  decision 


608 


en.  xil] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§   225. 


court  to  enforce  the  statutory  liability  of  New  York  stockholders  in 
a  Kansas  corporation,  an  equitable  set-off  is  not  allowed  under  the 
practice  of  that  court.1  A  stockholder  sued  on  his  statutory  liability 
cannot  offset  judgments  which  he  has  purchased  against  the  corpo- 
ration, except  to  the  extent  of  the  amount  that  he  paid  for  them.2 


in  enforcing  a  statutory  liability  aris- 
ing in  that  state.  Fidelity,  etc.  Co. 
v.  Mechanics'  Sav.  Bank,  97  Fed.  Rep. 
297  (1899).  "The  courts  of  New 
York,  Pennsylvania,  Georgia,  Mis- 
souri, Florida  and  Kansas  hold  the 
doctrine  that  the  stockholder  is  en- 
titled to  the  equitable  set-off,  while, 
on  the  other  hand,  the  courts  of  Vir- 
ginia, West  Virginia,  Illinois  and 
some  other  states  assert  the  very  op- 
posite doctrine."  Cahill  r.  Original, 
etc.  Assoc,  94  Md.  353  (1902),  allow- 
ing set-off.  Cf.  Wheeler  v.  Millar,  90 
N.  Y.  353,  362  (1SS2).  Where  a  stock- 
holder is  liable  by  statute  and  is  also 
a  creditor  of  the  insolvent  corpora- 
tion, the  court  will  order  a  set-off. 
Sowles  v.  Witters,  40  Fed.  Rep.  413 
(1889).  Cf.  s.  c,  39  Fed.  Rep.  403. 
See  also  Boulton  Carbon  Co.  r.  Mills, 
78  Iowa,  4C0  (1SS9),  and  a  criticism 
on  this  case  in  §  193,  n.,  supra.  The 
defendant  may  set  off  a  corporate  in- 
debtedness due  to  himself.  Musgrave 
r.  Glen  Elder,  etc.  Assoc,  5  Kan.  App. 
393    (1S97). 

i  Piatt  v.  Larter,  94  Fed.  Rep.  610 
(1899).  In  the  United  States  court 
a  set-off  in  equity  cannot  be  made  a 
defense  to  a  legal  action.  Crissey  v. 
Morrill,  125  Fed.  Rep.  S7S  (1903).  A 
stockholder  cannot  as  against  a  suit 
at  law  in  the  federal  court  set  off  a 
debt  from  the  corporation  to  him. 
Anglo-American,  etc.  Co.  v.  Lombard, 
132  Fed.  Rep.  721  (1904).  A  stock- 
holder's claim  against  the  corpora- 
tion should  not  be  set  up  as  a  coun- 
ter-claim, but  should  be  filed  in  re- 
sponse to  the  notice  to  file  claims. 
A  guaranty  for  the  corporation  which 
has  been  liquidated  by  the  stockhold- 
er giving  his  own  note  is  not  a  good 
claim  against  the  corporation  on  his 
part,  unless  he  has  paid  such  note 


Helm  v.  Smith-Fee  Co.,  76  Minn.  328 
(1S99). 

2  A  stockholder  cannot  himself  buy 
in  claims  at  a  discount,  and  then  set 
them   off   at  their   face   value   in   an 
a<  Lion  to  enforce  his  statutory  liabil- 
ity to  creditors.     Gauch  v.  Harrison, 
12    111.    App.   457    (1883).      See   also 
Thompson    v.    Meisser,    108    111.    359 
(1884);  Diven  v.  Phelps,  34  Barb.  224 
(1861).     Set-off  by  a  purchased  judg- 
ment was  allowed  in  American,  etc. 
Co.  v.  Brower,  32  S.  Rep.  906    (Miss. 
1902).    A  stockholder  can  defeat  his 
statutory  liability  by  offsetting  judg- 
ments  against  the   corporation,    pur- 
chased  by   himself,   but  only   to   the 
extent   that    he    paid    for    the    judg- 
ments.    Lingle  v.  National   Ins.   Co., 
45  Mo.  109    (1869);    Holland  v.  Hey- 
man,  60  Ga.  174  (1878).    Payment  of 
judgments   at    a   discount    is    no   ex- 
haustion of  the  liability,  though  the 
judgments  at  full  value  would  have 
exhausted  it.     Kunkelman  v.  Rentch- 
ler,    15    111.    App.    271    (1884).      The 
stockholder    cannot    purchase    claims 
against  the  corporation  at  a  discount 
and   set  them  off,  but  can  set  them 
off  for  the  amount  paid  by  him  for 
them,  even  though  they  are  purchased 
in  an  agent's  name.     Abbey  v.  Long, 
44   Kan.   688    (1890).     A  stockholder 
who  is  also  a  director  and  is  sued  on 
his  statutory  liability  as  a  stockhold- 
er cannot  set  off  a  judgment  against 
the   insolvent   company,   which   judg- 
ment   he    purchased    for    a    nominal 
sum.      Bulkley   r.    Whitcomb,    121    N. 
Y.    107     (1890).      The    stockholder's 
right  to  set  off  his  claim  against  the 
corporation   in   defense  to  an   action 
against  him  to  enforce  his  statutory 
liability  may  sometimes  be  a  matter 
of  lona  fides.     Boyd  v.  Hall,  56  Ga. 
563    (1876);    Belcher    v.    Wilcox,    40 


(39) 


609 


§  225.] 


STATUTORY  LIABILITY  OP  STOCKHOLM 


.  XII. 


(d)  Interest. — A  stockholder  is  not  liable  for  interest  on  the 
amount  for  which  the  statute  makes  aim  answerable,  and  when  he 
pays  the  par  of  his  liability  the  whole  liability  is  discharged;1  but 
where  he  contests  the  liability  and  suit  is  brought,  interest  on  the 
amount  of  his  liability  is  collectible  from  the  time  the  suit  to  enforce 
is  commenced.2 


Ga.  391  (1869);  Thompson  r.  Meisser, 
108  111.  359  (1884);  Buchanan  v. 
Meisser,  105  111.  G38  (18S3);  Welles 
v.  Stout,  3S  Fed.  Rep.  807  (1889).  A 
stockholder  may  set  off  obligations 
of  the  corporation  which  he  purchased 
before  it  became  insolvent,  but  not 
after  it  became  insolvent.  Broadway, 
etc.  Bank  v.  Baker,  176  Mass.  294 
(1900).  A  set-off  is  good  only  in 
case  a  stockholder  owned  the  set-off 
at  the  time  of  the  commencement  of 
the  suit.  In  case  the  stockholder 
purchased  a  claim  after  the  in- 
solvency of  the  corporation  he  may 
set  off  only  the  amount  he  paid  for 
the  claim.  Brown  v.  Traill,  S9  Fed. 
Rep.  641  (189S).  While  an  ordinary 
corporate  debtor  may  offset  claims 
against  the  corporation  which  he  has 
purchased,  yet  officers,  stockholders, 
or  persons  occupying  a  trust  relation- 
ship cannot  do  so.  Nix  v.  Ellis,  118 
Ga.  345  (1903).  For  cases  where  the 
stockholder  brings  action  as  a  corpo- 
rate creditor,  see  §§193,  198,  218, 
supra. 

i  Munger  v.  Jacobson,  99  111.  349 
(1SS1);  Sackett's  Harbor  Bank  v. 
Blake,  3  Rich.  E'q.  (S.  C.)  225  (1S49) ; 
Cole  v.  Butler,  43  Me.  401  (1S57). 
There  can  be  no  interest  in  addition 
to  the  full  liability  where  the  statute 
does  not  speak  of  interest.  Adams  v. 
Clark,  36  Colo.  65  (1906).  See  Grand 
Rapids  Sav.  Bank  v.  Warren,  52 
Mich.  557  (1884);  Cleveland  v.  Burn- 
ham,  64  Wis.  347  (18S5);  Mathis  v. 
Pridham,  1  Tex.  Civ.  App.  58  (1892). 
Interest  on  the  judgment  against  the 
corporation  may  be  recovered  from 
the  stockholders.  Whitman  v.  Citi- 
zens' Bank,  110  Fed.  Rep.  503  (1901). 
Interest  on  the  debt  may  be  recov- 
ered.    Zang  v.  Wyant,   25   Colo.   551 


(189S).  Interest  on  the  corporate 
debts  should  be  included  in  an  assess- 
ment against  the  stockholders.  Cum- 
berland, etc.  Co.  v.  Clinton  Hill,  etc. 
Co.,  64  X.  J.  Eq.  521   (1903). 

2  Handy  v.  Draper,  89  N.  Y.  334 
(1882);  Burr  v.  Wilcox,  22  N.  Y.  551 
(1860).  To  same  effect,  Mason  v. 
Alexander,  44  Ohio  St.  318  (1886). 
Cf.  Casey  v.  Galli,  94  U.  S.  673 
(1S76);  Richmond  v.  Irons,  121  U. 
S.  27  (1887).  Where  a  referee  com- 
puted the  interest  on  the  plaintiff's 
claim  from  the  date  on  which  it  be- 
came due  from  the  company  instead 
of  from  the  day  the  suit  against  the 
stockholder  was  commenced,  it  ap- 
pearing that  the  indebtedness  was 
less  than  the  amount  of  the  stock- 
holder's liability,  and  that  the  allow- 
ance of  interest  did  not  swell  it  be- 
yond that  limit,  the  court  of  appeals 
held  such  a  computation  no  error. 
Wheeler  V.  Millar,  90  N.  Y.  353,  362 
(1882).  Interest  on  the  judgment  is 
allowed  in  a  suit  to  enforce  a  stock- 
holder's liability.  Shickle  v.  Watts, 
94  Mo.  410  (18S8).  Interest  may  be 
recovered  from  the  date  of  the  filing 
of  the  suit.  Wheatley  v.  Glover,  125 
Ga.  710  (1906).  Interest  is  allowed 
from  the  day  when  the  referee  as- 
certains and  reports  the  debts  of  the 
corporation.  National  Com.  Bank  v. 
McDonnell,  92  Ala.  387  (1891).  In- 
terest on  a  stockholder's  liability  will 
be  allowed  from  the  commencement 
of  the  action.  Pine  v.  Western,  etc. 
Bank,  63  Kan.  462  (1901).  Interest 
should  be  allowed  from  the  date  of 
the  commencement  of  suit  against 
the  stockholder.  Senn  v.  Levy,  111 
Ky.  318  (1901).  Interest  is  allowed 
on  the  stockholder's  liability  from  the 
time     that     judgment     is     rendered 


610 


en.  xii.] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§    225. 


(e)  Costs. — Where  it  is  a  condition  precedent  to  the  action 
against  the  stockholder  that  a  judgment  be  recovered  against  the 
corporation,  it  would  seem  proper  that  the  stockholder's  statutory 
liability  should  apply  to  the  entire  judgment,  including  the  costs 
of  obtaining  that  judgment,  provided,  of  course,  the  limit  of  his 
liability  is  not  passed.  There  are  decisions  to  the  effect  that  a  judg- 
ment against  the  stockholder  does  not  include  any  part  of  the  costs 
of  the  proceeding  against  the  corporation,1  but  the  weight  of  author- 
ity and  argument  is  to  the  contrary.2 

if)  Statute   of  limitations. — Where  the  liability  of  the  stock- 
holder is  immediate  and  primary,   and  not  contingent  on  the  ob- 


against  him.  Palmer  v.  Bank,  etc., 
72  Minn.  266  (1S9S).  Interest  is  not 
allowed  on  the  par  value  of  the  stock. 
Mahoney  v.  Bernhard,  45  N.  Y.  App. 
Div.  499  (1899);  aff'd,  169  N.  Y.  589. 
The  statutory  liability  on  national 
bank  stock  bears  interest  from  the 
date  of  the  assessment  by  the  comp- 
troller. Davis'  Estate  v.  Watkins,  56 
Neb.  288   (1898). 

i  Bailey  v.  Bancker,  3  Hill,  188 
(1842);  Richmond  v.  Irons,  121  U. 
S.  27  (1887);  Rorke  v.  Thomas,  56 
N.  Y.  559,  565  (1874);  Miller  v. 
White,  50  N.  Y.  137  (1S72).  Cf. 
Veeder  v.  Mudgett,  27  Hun,  519 
(1SS2);   aff'd,  91  N.  Y.  374. 


director  on  his  statutory  liability,  the 
director  cannot  be  held  for  the  costs 
included  in  the  judgment  against  the 
corporation,  the  suit  against  the  cor- 
poration being  unnecessary.  Green  v. 
Easton,  74  Hun,  329  (1893).  The  at- 
torney of  a  creditor  who  intervenes 
in  order  to  enforce  a  stockholder's 
liability  and  then  settles  is  not  en- 
titled to  payment  of  his  fees  out  of 
the  funds  in  the  hands  of  the  re- 
ceiver. Dwinell  v.  Badger,  74  Minn. 
405  (1S98).  A  creditor  who  prose- 
cutes a  suit  to  enforce  the  liability 
is  entitled  to  reimbursement  for  his 
reasonable  expenses  out  of  the  sum 
realized.     Helm  v.  Smith-Fee  Co.,  79 


2  Grand  Rapids  Sav.  Bank  v.  War-    Minn.  297   (1900).     The  costs  of  the 


ren,  52  Mich.  557  (1884),  a  case 
where  the  judgment  is  held  to  be 
conclusive  as  against  the  stockholder. 
A  judgment  for  costs  against  a  cor- 
poration may  be  enforced  against  the 
director's  statutory  liability.  Allen 
v.  Clark,  108  N.  Y.  269  (1SSS).     Costs 


judgment  against  the  corporation  may 
be  included  in  the  amount  collected 
from  the  directors  for  failure  to  file 
a  report  as  required  by  statute,  the 
statute  making  them  liable  for  all 
debts.  Matty  v.  Sampson,  64  N.  Y. 
App.   Div.   1    (1901).     Where   a  citi- 


may  be  collected  against  stockholders  zen  of  Connecticut  purchases  stock  in 

in  suits  to  enforce  this  liability.  Irons  a   Minnesota   corporation,   after  Min- 

v.  Manufacturers'  Nat.  Bank,  36  Fed.  nesota  has  passed  a  statute  authoriz- 

Rep.  843   (1888);   aff'd,  133  U.  S.  67,  ing  a  receiver  to  enforce  the  statu- 

holding  that  a  creditor  enforcing  the  tory  liability,  and  after  the  Minnesota 

stockholders'    liability    in    behalf    of  courts  have  decided  that  the  expense 

himself  and  other  creditors  may  have  of  the  receivership  might  be  enforced 

his    costs.      The    receiver's    expenses  against   the   stockholders,   the   liabil- 


may  also  be  recovered,  except  that 
the  statutory  liability  shall  not  be 
exceeded.  Harper  r.  Carroll,  66  Minn. 
4S7  (1896).  vYhere  the  creditor  sues 
the  corporation  first  without  being 
obliged  so  to  do,  and  then  sues  the 


611 


ity  of  such  Connecticut  stockholder 
may  be  enforced  in  the  Connecticut 
courts,  but  not  to  cover  the  expense 
of  enforcing  such  liability  of  other 
stockholders.  Converse  v.  ^E'tna  Nat. 
Bank,  64  Atl.  Rep.  341  (Conn.  1906). 


§  225.] 


STATUTORY  LIABILITY   OF  STOCKHOLDERS. 


[CH.  XII. 


taining  of  a  judgment  against  the  corporation,  it  is  clear  that  the 
statute  of  limitations  begins  to  run  in  favor  of  the  stockholder  when 
the  debt  matures  against  the  corporation.1 

i  Quoted  and   approved  in  Boyd  v.  ute    of     limitations    begins     to    run 
Mutual    Fire    Assoc,    116    Wis.    155  against  a  stockholder's  statutory  lia- 
(1902);   Davidson  v.  Rankin,  34  Cal.  bility   on   a   bank    account   from    the 
503  (1868) ;  Lindsay  v.  Hyatt,  4  Edw.  time  when  the  deposit  is  made.  Jones 
Cn.    (N.  Y.'),   97    (1842);    Godfrey   v.  v.    Goldtree    Bros.    Co.,    142    Cal.    383 
Terry,  97  U.'  S.  171   (1877);    Conklin  (1904).      The    statutory    liability    of 
v.    Furman,    57    Barb.    484     (1S65) ;  stockholders  in  an  insolvent  bank  ac- 
Schalucky     v.     Field,     124     111.     617  crues  upon  such  insolvency,  and  must 
(1888).    Compare  Carrol  v.  Green,  92  be   enforced   within   six   years   there- 
U.  S.   509    (1875);   Terry  v.  Tubman,  after.     Bennett  v.  Thome,  36  Wash. 
92   TJ.    S.   156    (1875);    Terry   v.   Mc-  253    (1904).     A  proceeding  by  execu- 
Lure,  103  U.  S.  442   (1880) ;  Corning  tion  against  a  stockholder  on  motion 
v.   McCullough,    1   N.   Y.   47    (1847);  is  a  civil  action  to  which  the  statute 
Jagger  Iron  Co.  v.  Walker,  76  N.  Y.  of    limitations    applies.      Crissey    v. 
521    (1879).     See   also  Terry  v.   Cal-  Morrill,    125    Fed.    Rep.    878    (1903). 
nan    13   S.  C.  220    (1879);   Lawler  v.  The  state  statute  of  limitations  as  to 
Burt,  7  Ohio  St.  340   (1857);  King  v.  executors  and  estates  will  be  applied 
Duncan,    38    Hun,    461    (1886);    Stil-  by   the  federal  courts  to   suits   by   a 
phen   v.    Ware,    45    Cal.    110    (1872),  receiver    for    the    enforcement    of    a 
holding    that,    under    the    California  stockholder's    liability   in   a   national 
statute  of  limitations,  the  three  years  bank.     Butler  v.  Poole,  44  Fed.  Rep. 
begin  to  run  from  the  time  the  debt  586   (1890).     The  stockholder's  statu- 
was   due,  and   is   not  extended  by   a  tory  liability  dates  from  and  is  based 
judgment   obtained    against   the    cor-  upon  the  original  debt  created  by  the 
poration.     The  statute  of  limitations  corporation    and    not    from    or   upon 
begins  to  run  against  a  bank  stock-  the  judgment  against  the  corporation, 
holder's  statutory   liability  from  the  Newberry  v.  Robinson,   41  Fed.  Rep. 
closing  of  the  doors  of  the  bank.     It  458    (1890).     The   statute   of   limita- 
begins  to  run  against  the  corporation  tions  begins  to  run  under  the  Kansas 
and   stockholders   at  the   same  time,  statute  a  year  after  the  company  sus- 
Mitchell    v.    Beckman,    64    Cal.    117  pends   business.     First,   etc.   Bank  v. 
(1883).     Where   the  statute  of   limi-  King,  60  Kan.  733    (1899).     Where  a 
tations  runs  from  the  creation  of  the  stockholder's     statutory     liability     is 
liability,  it  commences  when   a  note  practically  that  of  a  surety,  the  stat- 
is   given   and    not   when   it    becomes  ute  of  limitations   begins   to  run   in 
due.       Hunt    v.    Ward,    99    Cal.    612  behalf   of    the   stockholders   when    it 
(1893).     Where  the  suit  against  the  begins  to  run  in  behalf  of  the  corpo- 
stockholders  must  be  brought  within  ration.     Pacific,  etc.  Co.  v.  Whitbeck, 
three  years  after  the  liability  is  ere-  63  Kan.  102   (1901).     A  statutory  11a- 
ated,    the    date    of    a    note    governs,  bility   of    directors   for   debts    in   ex- 
Bank  of  San  Luis  Obispo  v.  Pacific,  cess    of    a    certain    amount    attaches 
etc.    Co.,   103    Cal.   594    (1894).     The  when   such   a   debt   is   incurred,   and 
statute  of  limitations  begins  to  run  the  statute  of  limitations  then  begins 
from  the   date  of  the  payment  by  a  to  run.    Such  liability  exists  although 
surety  for  a  corporate  debt  and  not  the  creditor  knew  that  his  debt  was 
from  the  date  of  the  original  obliga-  in  excess  of  the  statutory  limit.  Swan 
tion.      Ryland    v.    Commercial,     etc.  v.  Burnham,  70  N.  H.  580  (1901).   An 
Bank   127  Cal.  525  (1900).    The  stat-  action  based  on  the  notes  is  not  on 

612 


CH.  XII.] 


STATUTORY  LIABILITY  OP  STOCKHOLDERS. 


T§   225. 


But  when  the  creditor  must  first  obtain  a  judgment  against  the 
corporation  and  sue  out  an  execution,  which  must  be  duly  returned 
wholly  or  partially  unsatisfied  before  the  cause  of  action  arises 
against  the  stockholder  on  his  statutory  liability,  then  the  statute 
of  limitations  commences  to  run  upon  the  return  of  the  execution.1 


the  debt  for  which  the  notes  were 
given.  Griffith  v.  Green,  13  N.  Y. 
Supp.  470  (1891);  aff'd,  129  N.  Y. 
517.  The  statute  of  limitations  un- 
der the  Ohio  law  begins  to  run 
against  the  stockholder's  liability 
from  the  time  when  the  corporation 
makes  an  assignment  for  the  benefit 
of  creditors,  even  though  no  judgment 
has  been  obtained  by  the  creditor. 
Barrick  v.  Gifford,  47  Ohio  St.  180 
(1890).  The  statute  of  limitations 
does  not  begin  to  run  until  the  execu- 
tion is  returned  unsatisfied  or  the  cor- 
porate property  is  put  in  process  of 
application  to  the  payment  of  the  cor- 
porate debts,  as  upon  dissolution,  or 
bankruptcy,  or  appointment  of  a  re- 
ceiver, or  assignment  for  the  benefit 
of  creditors.  Bronson  v.  Schneider, 
49  Ohio  St.  438  (1892) ;  King  v.  Arm- 
strong, 50  Ohio  St.  222  (1893); 
Younglove  v.  Lime  Co.,  49  Ohio  St. 
663  (1892),  the  latter  case  holding 
also  that  the  appointment  of  a  re- 
ceiver for  the  purpose  of  carrying  on 
the  business  did  not  set  the  statute 
running.  In  a  suit  by  one  creditor 
for  the  benefit  of  all,  other  creditors 
may  come  in,  although  the  statute  of 
limitations  would  be  a  bar  against 
a  separate  suit  by  them.  Barrick  v. 
Gifford,  47  Ohio  St.  180  (1890).  See 
also  §§  223,  225  (a),  supra,  and  §  259, 
notes,  infra. 

i  Handy  v.  Draper,  89  N.  Y.  334 
(1882);  Merritt  v.  Reid,  13  N.  Y. 
Week.  Dig.  453  (1882);  Longley  v. 
Little,  26  Me.  162  (1846).  The  statute 
of  limitations  does  not  begin  to  run 
against  the  claim  until  the  return  of 
the  execution  unsatisfied  in  Kansas. 
Bank  of  North  America  v.  Rindge, 
57  Fed.  Rep.  279  (1893).  In  Terry 
v.  Tubman,  92  U.  S.  156  (1875), 
where    the    charter    of    a    bank    con- 


613 


tained  a  provision  making  the  stock- 
holders   individually    liable    for    the 
ultimate  redemption  of  its  bills,  the 
liability  of  the  stockholders  was  held 
to  arise,  and  hence  the  statute  of  limi- 
tations to  commence  to  run  in  their 
favor,   upon  the  open   and   notorious 
insolvency  of  the  bank.     So,  likewise, 
where  stockholders  were  made   indi- 
vidually  liable   "upon  the   failure  of 
the  bank,"  it  was  held  that,  the  lia- 
bility  arising   upon  the   failure,    the 
statute   of   limitations   began   to   run 
at  that  time.     Carroll  v.  Green,  92  U. 
S.  509,  511   (1S75).     To  the  same  ef- 
fect is  Baker  v.  Atlas  Bank,  50  Mass. 
182     (1845);     Terry    v.    McLure,    103 
U.   S.  442    (1880);    Godfrey  v.   Terry, 
97   U.    S.    171    (1877).     The   case   of 
Terry    v.    Anderson,     95    U.    S.     628 
(1877)    sustains  the  constitutionality 
of   a   statute   shortening   the    statute 
of  limitations   herein.     The  case  Re 
Bank    of    Sing    Sing,    32    Hun,    462 
(1884) ;  affirmed  in  96  N.  Y.  672,  held 
that  twenty  years'  delay  by  receiver 
in  making  report  bars  any  assessment 
on  stockholders.    A  statute  of  limita- 
tions running  from  the  time  of  dis- 
solution  of   the   company   is   not   set 
running  by  corporate  insolvency  and 
cessation     of     business.       Sleeper    v. 
Goodwin,    67    Wis.    577    (1887).      Of. 
§  195,  supra.     The  statute  of  limita- 
tions   begins   to    run   only   from    the 
time  when  the  creditor's  right  to  sua 
the  stockholders  begins.     McDonell  v. 
Alabama,   etc.   Ins.    Co.,   85   Ala.    401 
(1888);   Powell  v.  Oregonian  Ry.,  38 
Fed.   Rep.    187    (1889).      The   statute 
of  limitations   runs  from  dissolution, 
even    though    judgment    against    the 
corporation  is  obtained  subsequently. 
Cottrell    v.    Manlove,     58    Kan.     405 
(1897).     As  to  the  statute  of  limita- 
tions,  see   also   28   Am.   L.  Reg.   518. 


§  225.] 


STATUTORY  LIABILITY  OF   STOCKHOLDERS. 


[OH.  XII. 


As  to  national  banks,  the  statute  of  limitations  does  nol  run  againsl 
t ho  statutory  liability  of  a  stockholder  until  the  comptroller  lias 
Levied  the  assessment.1  The  liability  of  a  citizen  of  Nebraska  as  a 
stockholder  in  a  national  bank  Located  in  Nebraska  is  barred  by  the 
four-years  statute  of  limitations  of  Nebraska  applicable  to  con- 
tracts not  in  writing  an<l  to  a  liability  created  by  statute.2 

Where  suit  is  broughl  in  one  state  to  enforce  the  statutory  liabil- 
ity of  stockholders  in  a  corporation  organized  in  another  state,  the 


Where  the  statute  of  limitations  be- 
gins to  run  from  the  time  when  an 
execution  is  issued  against  the  cor- 
poration, it  begins  to  run  when  such 
execution  could  have  been  Issued. 
Fox  v.  First,  etc.  Bank,  9  Kan.  App. 
18  (1899).  The  statutory  liability  of 
stockholders  in  manufacturing  corpo- 
rations in  Rhode  Island  is  contrac- 
tual, and  the  statute  of  limitations 
applicable  to  penalties  does  not  apply. 
Such  statute  begins  to  run  only  after 
a  creditor  has  exhausted  his  remedy 
against  the  corporation.  A  distribu- 
tion of  the  corporate  assets  by  a  com- 
mittee of  the  stockholders  does  not 
start  the  statute  of  limitations  run- 
ning afresh.  Kilton  v.  Providence, 
etc.  Co.,  22  R.  I.  605  (1901).  Where 
by  statute  no  judgment  need  be  ob- 
tained against  the  corporation,  a  suit 
to  obtain  such  judgment  does  not  stop 
the  running  of  the  statute  of  limita- 
tions. Whitman  v.  Atkinson,  130  Fed. 
Rep. 759  (1904).  See  6S  Atl.  Rep.  765. 
l  De  Weese  v.  Smith,  97  Fed.  Rep. 
309  (1899) ;  Aldrich  v.  Yates,  95  Fed. 
Rep.  78  (1899).  The  principle  of 
law  that  the  statute  of  limitations 
commences  to  run  on  an  assessment 
by  the  comptroller  of  the  currency 
on  national  bank  stock  only  from  the 
time  the  assessment  is  actually  made, 
applies  to  a  second  assessment  as  well 
as  the  first,  and  the  fact  that  four 
years  elapsed  between  the  first  and 
second  assessment  does  not  change 
this  principle  of  law.  Rankin  v.  Bar- 
ton, 199  U.  S.  228  (1905),  rev'g  69 
Kan.  629  (1904).  The  liability  of  a 
stockholder    in    a    national    bank    in 


process  of  voluntary  liquidation  does 
not  accrue  until  the  court  ascertains 
the  necessity  of  enforcing  it  and  de- 
termines the  amount  which  the  share- 
holder must  pay  and  fixes  the  time 
of  payment,  so  far  as  the  statute  of 
limitations  is  concerned.  King  r. 
Pomeroy,  121  Fed.  Rep.  2S7  (1903). 

2  McDonald  v.  Thompson,  184  U.  S. 
71  (1902),  aff'g  101  Fed.  Rep.  183 
(1900).  A  state  statute  of  limita- 
tions relative  to  unwritten  contracts 
applies  to  a  stockholder's  statutory 
liability  in  a  national  bank.  Aldrich 
v.  McClaine,  106  Fed.  Rep.  791  (1901). 
The  liability  of  a  stockholder  in  a 
national  bank  is  governed  by  the  stat- 
ute of  limitations  in  the  state  where 
suit  is  brought,  and  such  right  does 
not  accrue  until  the  receiver  is  au- 
thorized to  bring  suit  by  the  receiver 
fixing  the  time  of  payment  and  the 
expiration  of  such  time.  Such  a  lia- 
bility is  not  contractual,  but  is  cre- 
ated by  law,  and  hence  a  statute  spe- 
cially applicable  to  causes  of  action 
created  by  law  applies.  Aldrich  v. 
Skinner,  98  Fed.  Rep.  375  (1899); 
Aldrich  v.  McClaine,  98  Fed.  Rep.  378 
(1899.)  The  statute  of  limitations  ap- 
plicable to  the  liability  of  stockhold- 
ers in  national  banks  is  that  pre- 
scribed by  the  statutes  of  the  state 
in  which  the  bank  is  located.  It  does 
not  begin  to  run  until  the  Comptrol- 
ler of  the  currency  has  made  an  as- 
sessment. If  there  is  a  statute  appli- 
cable to  statutory  liability  it  applies 
instead  of  the  statute  relative  to 
breach  of  contract.  McClaine  v.  Ran- 
kin, 197   U.   S.   154    (1905). 


614 


CH.  XII.] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[§  225. 


statute  of  limitations  of  the  state  wherein  suit  is  broughl  applies,1 
unless  there  was  a  special  statute  applicable  to  thai  liability  in  the 
state  that  created  it.-  But  the  New  York  statute  limiting  the  time 
within  which  a  stockholder  may  be  held  liable  far  corporate  debt 
does  not  apply  to  a  suit  brought  in  the  United  States  court  in   New 


i  The  New  York  statute  of  limita- 
tions applicable  to  the  liability  of 
stockholders  in  a  domestic  corpora- 
tion applies  to  a  suit  brought  in  New 
York  on  a  similar  liability  against 
stockholders  in  a  foreign  corporation. 
Piatt  v.  Wilmot,  193  U.  S.  602  (1904). 

The  New  York  statute  of  limita- 
tions as  to  suits  against  stockholders' 
statutory  liability  applies  to  a  suit 
to  enforce  the  statutory  liability  of 
a  New  York  stockholder  in  a  for- 
eign corporation.  Ramsden  v.  Gately, 
142  Fed.  Rep.  912   (190G). 

In  a  suit  in  Massachusetts  to  en- 
force a  stockholder's  liability  In  a 
Kansas  corporation,  the  Massachu- 
setts statute  of  limitations  controls. 
Ramsdi  a  v.  Knowles,  151  Fed.  Hep. 
718  (1906).  The  statute  of  limita- 
tions of  the  state  wherein  the  suit 
is  brought  may  be  applied  to  the 
statutory  liability  of  stockholders  in 
a  Kansas  corporation.  Schiffer  v. 
Trustees,  87  Fed.  Rep.  166  (1898). 
In  a  suit  In  New  York  to  enforce 
the  statutory  liability  of  a  New  York 
stockholder  in  a  Kansas  corporation 
the  New  York  three-years  statute  of 
limitations  applies.  Seattle,  etc.  Bank 
v.  Pratt,  111  Fed.  Rep.  841  (1901). 
Tne  New  York  three-years  statute  of 
limitations  relative  to  the  statutory 
liability  of  stockholders  in  certain 
corporations  applies  to  a  suit  brought 
in  the  United  States  circuit  court, 
in  the  New  York  district,  to  enforce 
the  statutory  liability  of  a  citizen  of 
New  York  in  a  Kansas  mortgage  com- 
pany. Hobbs  v.  National  Bank,  etc., 
96  Fed.  Rep.  396  (1S99).  In  the  en- 
forcement of  a  Kansas  liability 
against  a  New  York  stockholder  the 
New  York  statute  of  limitations  of 
two  years,  applicable  to  stockhold- 
ers'   liability   in    New   York   corpora- 


tions, does  not  apply.  Piatt  v.  bar- 
ter, 94  Fed.  Rep.  610  (1S99).  Where 
there  is  no  special  statute  of  limita- 
tions applicable  to  a  statutory  lia- 
bility the  law  of  the  forum  governs. 
Whitman  v.  Citizens'  Bank,  110  Fed. 
Rep.  503  (1901).  In  the  case  of  Dex- 
ter v.  Edmands,  89  Fed.  Rep.  467 
(1S9S),  the  court  enforced  in  Massa- 
chusetts the  Kansas  liability,  and  held 
that  the  judgment  returned  unsatis- 
fied in  Kansas  was  sufficient  in  Mas- 
husetts,  and  held  also  that  the 
statute    of    limitations    in    Massachu- 

tts,  and  not  (be  statute  of  limita- 
tions in  Kansas,  applied  to  such  a 
suit  in  Massachusetts.  In  a  suit  to 
i  □  force  in  Maryland  the  statutory 
liability  of  a  stockholder  in  a  Georgia 
eniporation  the  Maryland  statute  of 
limitations  does  not  apply  if  the  char- 
ter creating  liability  prescribed  a 
different  statute  of  limitations. 
Brunswick,  etc.  Co.  v.  National  Bank, 
etc.,  99  Fed.  Rep.  635  (1900),  rev'g 
88  Fed.  Rep.  607.  In  a  suit  in  the 
federal  court  in  New  York  state  to 
enforce  the  statutory  liability  of  a 
New  York  stockholder  in  a  Kansas 
corporation,  the  New  York  statute 
of  limitations  applicable  to  a  statu- 
tory liability  applies.  Piatt  v.  Hun- 
gerford,  116  Fed.  Rep.  771  (1902). 
See  also  §  223,  notes,  supra. 

2  The  Kansas  statutory  liability  is 
contractual,  and  hence  may  be  en- 
forced in  Maine  against  a  Maine 
stockholder  without  joining  other 
stockholders  as  parties  defendant  in 
the  suit.  If  the  Kansas  statute  cre- 
ating the  liability  prescribes  a  special 
limitation  as  an  enforcement,  such 
limitation  applies  in  Maine,  but  the 
general  statute  of  limitations  of  Kan- 
sas is  not  applicable.  Pulsifer  v. 
Greene,  96  Me.  438  (1902). 


615 


§  225.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[cn.  XII. 


York  by  a  receiver  to  enforce  the  statutory  liability  of  a  citizen  of 
Isfew  York  in  a  Minnesota  corporation.1  It  is  a  general  rule  of 
law  that  the  statute  of  limitations  applicable  to  any  ordinary  acti<  n 
to  enforce  a  contract  is  the  one  applicable  to  the  action  to  enforce 
the  statutory  liability  of  stockholders  in  incorporated  companies.2 

Accordingly,  the  suit  must  usually  be  commenced  within  six  years 
after  the  cause  of  action  has  accrued.3     Where  suit  may  bo  brought 


i  Bernheimer  v.  Converse,  206  U.  S. 
516'  (1907). 

2  Green  v.  Beckman,  59  Cal.  545 
(1881);  Corning  v.  McCullough,  1  N. 
Y.  47  (1847);  Wiles  v.  Suydam,  64 
N.  Y.  173,  176  (1876);  Baker  v.  Atlas 
Bank,  50  Mass.  182  (1845);  Common- 
wealth v.  Coehituate  Bank,  85  Mass. 
42  (1861);,  N.  Y.  Code  Civ.  Proc, 
§  382.  The  ten-years  statute  of  limi- 
tation applies  in  Illinois  on  certifi- 
cates of  deposit  or  bank  pass-books. 
Palmer  v.  Woods,  149  111.  146  (1894). 
The  liability  of  an  Illinois  stock- 
holder in  a  Kansas  corporation  for 
the  debts  of  the  corporation  begins 
to  run  from  the  time  he  became  a 
stockholder  and  expires  in  five  years. 
Hutchings  v.  Lampson,  82  Fed.  Rep. 
960    (1897). 

3  See  citations  in  the  preceding 
note;  also  Phillips  v.  Therasson,  11 
Hun,  141  (1877),  holding  that  where 
by  statute  the  capital  must  be  paid 
in  within  two  years  upon  pain  of  dis- 
solution, and  imposes  liability  upon 
stockholders  for  the  debts  of  the  cor- 
poration until  the  capital  is  fully 
paid,  the  statute  of  limitations  begins 
to  run  at  the  expiration  of  the  two 
years  allowed  for  paying  the  capital. 
Under  the  New  York  Manufacturing 
Act  relative  to  the  two-years  statute 
of  limitations  to  a  stockholder's  stat- 
utory liability,  it  begins  to  run  upon 
the  dissolution  of  the  corporation. 
The  creditor  must  sue  within  that 
time.  Hollingshead  v.  Woodward,  107 
N.  Y.  96  (1887);  King  v.  Duncan,  38 
Hun,  461  (1886),  holding  that  under 
that  statute  the  creditor  is  not  re- 
quired to  delay  his  suit  until  the  two 
years  has  expired;  Knox  v.  Baldwin, 


80  N.  Y.  610  (1880);  Hawkins  v. 
Furnace  Co.,  40  Ohio  St.  507  (1884). 
In  Georgia  the  twenty-years  statute 
of  limitations  applies  because  it  is  a 
right  of  action  accruing  under  a  stat- 
ute or  act  of  incorporation,  and  be- 
gins to  run  in  favor  of  stockholders 
only  after  suit  has  been  commenced 
against  the  corporation.  Wheatley  v. 
Glover,  125  Ga.  710  (1906).  In  South 
Carolina,  under  the  statute  of  limita- 
tions in  that  state,  such  an  action 
must  be  begun  within  four  years. 
Carrol  v.  Green,  92  U.  S.  509  (1S75); 
Terry  v.  McLure,  103  U.  S.  442 
(1S80).  In  some  of  the  older  cases 
it  is  held  that  an  obligation,  such  as 
this,  to  pay  money,  arising  under  a 
statute,  is  a  debt  by  specialty,  and  ac- 
cordingly that  it  is  barred  only  by  a 
lapse  of  twenty  years.  Bullard  v. 
Bell,  1  Mason,  243,  289  (1817,  by 
Judge  Story) ;  s.  c,  4  Fed.  Cas.  625; 
Thornton  r.  Lane,  11  Ga.  459  (1852); 
Lane  v.  Morris,  10  Ga.  162  (1851). 
But  see  this  view  condemned  in  Car- 
rol v.  Green,  92  U.  S.  509,  515  (1875), 
in  an  opinion  by  Justice  Swayne, 
construing  the  South  Carolina  stat- 
ute of  1712.  Cf.  Green  v.  Beckman, 
59  Cal.  545  (1881),  construing  Cal. 
Code  Civ.  Proc,  §  359;  Andrews  v. 
Bacon,  38  Fed.  Rep.  777  (1889). 
Sometimes  there  is  a  provision  that 
the  action  must  have  been  com- 
menced by  the  creditor  against  the 
corporation  within  a  given  limited 
time  after  the  maturity  of  the  debt, 
in  order  to  hold  the  stockholder  on 
his  statutory  liability.  Shellington 
v.  Howland,  53  N.  Y.  371  (1873); 
Birmingham  Nat.  Bank  v.  Mosser, 
14     Hun,     605     (1878);     Lindsley    v. 


616 


CH.  XII.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[§  225. 


against  a  stockholder  at  any  time  after  the  corporation  has  been 
adjudged  insolvent,  the  statute  of  limitation  commences  to  run  from 
that  date.1  Where  the  statutory  liability  cannot  be  enforced  until 
the  corporate  aifairs  have  been  liquidated  by  a  bill  in  equity,  the 
statute  of  limitations  does  not  commence  to  run  until  the  decree  there- 
in.2 Where  the  transferrer  is  liable  for  one  year  after  a  transfer, 
this  liability  applies  only  to  debts  created  before  the  transfer.  An 
action  to  enforce  a  liability  against  him  may  be  brought  within  six 
years  after  the  debt  against  the  corporation  matures.3  The  giving  of 
renewal  notes  by  the  corporation  does  not  operate  to  prevent  the  run- 
ning of  the  statutory  limitation  upon  stockholders'  liability  for  the 
original  indebtedness.4  It  has  been  held  that  the  stockholder  will 
not  be  allowed  to  intervene  in  the  suit  against  the  corporation,  in 
order  to  set  up  the  defense  of  the  statute  of  limitations.5  Where 
there  are  two  methods  of  enforcing  a  stockholder's  statutory  lia- 


Simonds,  2  Abb.  Pr.  (N.  S.)  69  (1866). 
Cf.  State  Sav.  Assoc,  v.  Kellogg,  52 
Mo.  583  (1873).  See  also  Freeland 
v.  McCullough,  1  Denio,  414,  422 
(1845);  Merchants'  Bank  v.  Bliss,  21 
How.  Pr.  3C6  (1861);  aff'd,  35  N.  Y. 
412  (1866);  Lewis  v.  Ryder,  13  Abb. 
Pr.  1  (1861);  Cuykendall  v.  Douglas, 
19  Hun,  577  (1880);  Moore  v.  Boyd, 
74  Cal.  167  (1887).  Frequently,  also, 
there  is  a  limitation  applicable  par- 
ticularly to  transfers  of  stock.  Paine 
t;.  Stewart,  33  Conn.  516  (1882).  In 
this  case  a  statute  of  Minnesota  im- 
posing liability  upon  stockholders 
while  they  were  such,  and  for  one 
year  thereafter,  was  held,  in  an  action 
in  Connecticut,  not  to  be  operative 
against  one  who  had  not  been  a  stock- 
holder for  more  than  a  year  before 
the  action  was  brought.  In  New 
York  this  limitation  is  two  years. 
See  Handy  v.  Draper,  89  N.  Y.  334 
(1882),  and  ch.  XV,  infra.  See  also 
Schiffer  v.  Trustees,  87  Fed.  Rep.  166 
(1898). 

i  Hilliker  v.  Hale,  117  Fed.  Rep.  220 
(1902);  aff'd,  188  U.  S.  70.  Under 
the  Minnesota  statute,  the  statute  of 
limitations  does  not  begin  to  run  in 
behalf  of  stockholders  until  the  court 
has  adjudicated  the  deficiency  to  be 
paid  by  the  stockholders.  Hale  v. 
Cushman,    96   Me.    148    (1902).     The 


statute  of  limitations  begins  to  run 
against  the  stockholder's  liability 
upon  the  insolvency  of  a  Kansas  cor- 
poration, even  though  its  outstanding 
bonds  do  not  become  due  for  many 
years  thereafter.  Ramsden  v. 
Knowles,  151  Fed.  Rep.  721  (1907). 

2Goss  v.  Carter,  156  Fed.  Rep.  746 
(1907). 

3  Harper  v.  Carroll,  62  Minn.  152 
(1895);  s.  c,  66  Minn.  487.  If  the 
creditor's  claim  is  not  barred  at  the 
time  he  commences  suit  against  the 
corporation  it  is  not  barred  as  against 
stockholders  who  were  subsequently 
assessed  to  pay  his  judgment.  Po.tts 
v.  St.  Paul,  etc.  Assoc,  84  Minn.  217 
(1901). 

4  Close  v.  Potter,  155  N.  Y.  145 
(1898).     See  also  §  225  (a),  supra. 

5  Stockholders  will  not  be  allowed 
to  intervene  in  a  suit  brought  by  a 
creditor  against  the  corporation  itself, 
even  though  they  wish  to  set  up  the 
statute  of  limitations,  and  even 
though  the  directors  had  directed  the 
company's  lawyer  to  admit  the  alle- 
gations of  the  complaint,  and  even 
though  the  company  is  insolvent,  and 
the  stockholders  are  liable  on  the 
stock,  no  fraud  being  shown.  Meyer 
v.  Bristol,  etc.  Co.,  163  Mo.  59  (1901). 
Cf.  §  750,  infra. 


617 


225.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[cn.  xii. 


bility,  the  statute  of  limitations  begins  to  run  when  either  one  might 
be  adopted.1 

If  a  statutory  liability  be  held  to  be  a  penalty,  then  of  course  it. 
will  be  held  to  come  within  that  provision  of  the  statute  of  limita- 
tions which  provides  for  actions  to  enforce  penalties.2 

Where  the  corporation  is  merely  a  guarantor,  the  statute  of  limita- 
tions against  the  liability  of  stockholders  applies  only  when  such 
guarantee  becomes  fixed  by  the  default  of  the  principal  debtor.8  Bonds 
of  an  insolvent  corporation  become  due  on  its  dissolution,  and  accord- 
ingly the  stockholders'  statutory  liability  thereon  commences  at  that 
date.4  The  statute  of  limitations  ceases  to  run  upon  the  commence- 
ment of  a  judgment  creditor's  suit,  at  least  as  against  creditors  who 
afterwards  come  into  that  suit.5  But  a  receiver  of  an  insolvent  bank 
has  no  right  to  continue  a  suit  brought  by  a  creditor  to  enforce  the 
statutory  Liability  of  stockholders  where  such  creditor  has  made  a 
sett  lenient  and  agreed  to  discontinue  the  suit,  even  though  the  re- 
ceiver was  a  party  to  the  action  and  even  though  by  such  discon- 
tinuance the  statute  of  limitations  is  a  bar  to  other  suits.0 


i  Willius  v.  Albrecht,  111  N.  W. 
Rep.  387  (Minn.  1907). 

•2  As  to  whether  the  liability  is  a 
penalty,  see  §  223,  supra.  An  action 
against  a  director  in  a  national  bank 
for  violating  the  national  bank  act  is 
in  tort,  being  an  action  on  the  case, 
and  the  state  statute  of  limitations 
applies.  Cockrill  v.  Butler,  7S  Fed. 
Rep.  G79  (1S97).  Where  the  directors 
default  for  two  successive  years  in  fil- 
ing a  required  report,  a  liability 
therefor  on  a  claim  existing  before 
the  first  default  arises  the  first  year, 
and  the  statute  runs  against  it  from 
that  time.  Colorado,  etc.  Co.  v.  Len- 
hart,  6  Colo.  App.  511  (1S95). 

3  Crissey  v.  Morrill,  125  Fed.  Rep. 
878    (1903). 

4  Ramsden  v.  Knowles,  151  Fed. 
Rep.   718    (190G). 

5  Richmond  r.  Irons,  121  U.  S.  27 
(1SS7);  Brinckerhoff  v.  Bostwick,  99 
N.  Y.  185,  194  (1SS5);  Barrick  v. 
Gifford,  47  Ohio  St.  ISO  (1890).  Even 
though  the  receiver  does  not  file  a 
bill  to  enforce  the  statutory  liability 
until  more  than  six  years  after  his 
appointment,  yet  the  statute  of  limita- 
tions may  not  be  a  bar.     Andrews  v. 


Bacon,  38  Fed.  Rep.  777  (1SS9).  After 
one  creditor  has  filed  a  bill  for  a  re- 
ceiver and  to  collect  unpaid  subscrip- 
tions, etc.,  the  statute  of  limitations 
ceases  to  run  from  that  date  as 
against  other  creditors  who  subse- 
quently come  into  the  suit.  Dunne 
v.  Portland,  etc.  Ry.,  40  Oreg.  295 
(1901).  The  state  statute  of  limita- 
tions runs  against  the  stockholder's 
liability  in  a  national  bank  from  the 
day  when  the  assessment  levied  by 
the  comptroller  becomes  payable,  and 
this  statute  is  a  bar  both  in  law  and 
in  equity.  Thompson  v.  German  Ins. 
Co.,  76  Fed.  Rep.  892  (1896). 

Under  the  Kansas  statute,  a  pro- 
ceeding instituted  by  one  judgment 
creditor  does  not  stop  the  statute  of 
limitations  as  against  another.  Mc- 
Glinchy  v.  Bowles,  68  Kan.  190  (1904). 

Even  though  a  creditor  sues  for  the 
benefit  of  himself  and  other  creditors, 
yet  if  no  order  to  that  effect  is  made 
before  the  statute  of  limitations  has 
run  against  the  claims  of  other  cred- 
itors, the  stockholders  are  not  liable 
to  them.  Hyatt  v.  Anderson's  Trus- 
tee, 74  S.  W.  Rep.  1094  (Ky.  1903). 

g  Hirshfeld  v.  Fitzgerald,  157  N.  Y. 


61S 


CS.  XII.]  STATUTORY  LIABILITY  OF  STOCKHOLDERS.  [§  225. 

In  general,  whatever  the  statute  may  be,  it  is  the  rule  that  a  lapse 
of  time  sufficient  to  constitute  a  bar  at  law  will  in  equity  be  given  the 
same  effect;  in  other  words,  in  these  cases  there  is  the  same  statute 
of  1  nutations  both  at  law  and  in  equity.'     The  legislature  cannot 
after  a  statutory  liability  has  been  incurred,  extend  the  period  of 
the  statute  of  limitations  applicable  to  it*     A  ^"«! 
the  statute  of  limitations  applicable  to  the  common-  aw .  ^|  °f 
directors  is  unconstitutional  as  to  existing  liabilities  if  the  short 
ned  period  does  not  give  a  reasonable  time  after  rt  takes  effect  for 
the  commencement  of  suits  on  existing  causes  of  action.      A  change 
n  the  statute  of  limitations,  applicable  to  a  director's  statutory  habl- 
tV  applies  to  such  liability  already  incurred    a  reasonable    ime  to 
sue  being  given.*    A  stockholder  may  waive  the  defense  of  the  stat- 

iite  of  limitations.0  .,    n        .         . 

ia)  Other  d^es.-The  liability  of  solvent  stockholders  is  not 

ox  ended  beyond  the  limit  fixed  by  statute,  even  though  other  stock- 

hoUers  are  insolvent'     A  petition  in  bankrupt^  by  a  stockholder 

t  no  bm  to  the  enforcement  of  his  liability  unless  the  corporate 

ire     f  18981       As    to    discontinuance  three-years     statute     o£    "^u'»'s- 

of  a  ITL/tae'statate  .,  *»-  gnu  Rosa  etc.  BaoK  ,  Baraett,  m 

tioas  has  run  against  other  creditors,  ^mam  K^^    ^    „_   y 

see  also  §§  222,  748.  msqqi 

i  Bank  of  Poughkeepsie  v.  Ibbotson,  118   (1899). 
24     Wend.     4,3      (1840)        Carrol       .  ^   &  ^.^   as   ^ 

Green,  92  U.  S^  509   (1875)     Bake    t  (       ^      ^  ^  may  ^^ 

Atlas    Bank^    50    Mass     18-    (0845)  ^^    ^.^    &    credUor 

-s^e^r^^  rrr  su,  «.!*« 

3  Paige,  409    (1832);    Commonweals  ^•^^^  of  the  president  of 

„.     Cochituate    Bank      85    Mass     4Z  ^.^  charge  Qf 

(1861);    Terry  v.  McLure,  103  U.   S.  a  °an*                                                   ^ 

442    (1880).     When   the   statute  pre-  t bank  >  tba^  a  ^    enforce   the 

scribes    the    limitation,    there    is    of  sue   for   s  x    mo*           &  ^^ 

course     no     ^tiwersy.       Baker    ^  liability  o                  ^         ^  ^^ 

Backus,    32    111.  J9^^^^^     0f   limitations,   is   legal.     Wells,   etc. 

13   "   ^TnJf  The   statai    of     Co.  *   Enright,  127   Cal.   669    (1900). 
49    S.   C.   7    (1890-     The   statute  t      has  no   power  to  waive 

limitations  applicable  t0  a  suit  at  law     An  ex  *nl£  ^    ^^    &p 

applies   to    a   suit   m    equity   to   en  statutory  liability  on 

force    the    liability       Hale    ^Coffin  ^^  a  Kansas  corporation.     Steb- 

114  Fed.  Rep.   567    (1902),    att  a,  ^  ?    ^^  m  MasS-  356  (1899). 

Fed.  Rep.   470^  reage   y    BaDCOck>   51   Mass.   525 

2  Close    v.    Potter,    155    IN.    x.    x»o  under  the  National 

fornia    may    be    made    subject    to    aj.  B.  422  (1880). 


§  225.] 


STATUTORY  LIABILITY  OP  STOCKHOLDERS. 


[CH.  XTI. 


creditor  was  a  party  to  the  bankruptcy  proceeding.1  Bankruptcy  is 
a  discharge,  even  though  the  corporate  creditors,  instead  of  the  re- 
ceiver are  named  in  the  schedule.2  The  admissions  of  one  stock- 
holder cannot  bind  another  stockholder  herein.3  Various  other  de- 
fenses are  considered  in  the  notes  below.4 


i  Birmingham  Nat.  Bank  v.  Mosser, 
14  Hun,  605  (1878).  Cf.  §197,  notes, 
supra. 

2  Longfield  v.  Minnesota,  etc.  Bank, 
95  Minn.  54  (1905).  A  bankrupt  di- 
rector is  released  from  his  statutory 
liability  in  a  corporation  under  the 
Massachusetts  statute  for  loaning 
money  to  a  stockholder  by  a  dis- 
charge in  bankruptcy.  Old  Colony, 
etc.  v.  Parker,  etc.  Co.,  183  Mass.  557 
(1903).  A  bankrupt  is  released  on 
the  statutory  liability  on  stock  in  an- 
other state  where  such  liability  has 
been  adjudicated,  even  though  be  was 
not  a  party  thereto.  Dight  v.  Chap- 
man, 14  Oreg.  265  (1904). 

3  Simmons  v.  Sisson,  26  N.  Y.  264 
(1863). 

■i  The  court  will  not  authorize  the 
receiver  of  a  national  bank  to  com- 
promise with  the  stockholders  on 
their  liability,  even  though  more  can 
be  realized  thereby,  the  stockholders 
having  fraudulently  conveyed  away 
their  property  in  order  to  avoid  lia- 
bility. Re  California  Nat.  Bank,  53 
Fed.  Rep.  38  (1892).  The  defendant 
cannot  set  up  that  he  intended  his 
subscription  as  a  gift,  where  he  re- 
ceived and  retained  the  certificate. 
McDowall  v.  Sheehan,  13  N.  Y.  Supp. 
386  (1891)  (reversed  on  another 
point,  129  N.  Y.  200).  Under  the 
California  statute  it  seems  that  a 
mere  subscriber  for  stock  is  not  lia- 
ble where  he  did  not  fulfill  the  sub- 
scription. Bank  of  Yolo  v.  Weaver, 
31  Pac.  Rep.  160  (Cal.  1892).  It  is 
no  defense  that  the  stockholder  was 
fraudulently  induced  by  another 
party  to  purchase  his  stock  from  that 
party.  Olson  v.  State  Bank,  67  Minn. 
267  (1897).  Where  the  judgment 
against  stockholders  on  their  statu- 
tory  liability   states   the   amount   of 


stock  held  by  each,  the  enforcement 
of  such  judgment  cannot  be  carried 
out  so  as  to  impose  upon  any  stock- 
holder more  than  on  the  amount  of 
stock  held  by  him  as  specified  in  such 
judgment.  Baltimore,  etc.  R.  R.  v. 
Smith,  54  Ohio  St.  562  (1896).  Fraud 
in  the  purchase  of  the  stock  is  no 
defense.  See  §  261,  infra.  A  de  facto 
director  cannot  defend  against  a 
statutory  liability  of  directors  on  the 
ground  that  he  did  not  hold  sufficient 
stock  to  qualify  himself  to  be  a  di- 
rector. Donnelly  v.  Pancoast,  15  N. 
Y.  App.  Div.  323  (1897).  In  assess- 
ing stock  to  raise  a  fixed  amount  of 
money,  no  assessment  is  levied  upon 
stock  held  by  the  corporation  itself. 
Western  Imp.  Co.  v.  Des  Moines  Nat. 
Bank,  103  Iowa,  455  (1897).  A 
stockholder  connot  avoid  a  statutory 
liability  on  the  ground  that  the  stock 
was  given  to  him  for  nothing  by  the 
corporation.  Hallett  v.  Metropolitan, 
etc.  Co.,  35  N.  Y.  Misc.  Rep.  659 
(1901);  s.  c,  69  N.  Y.  App.  Div. 
258.  The  expiration  of  the  charter  of 
the  corporation  does  not  put  an  end 
to  an  existing  statutory  liability  of 
the  stockholder.  Wheatley  v.  Glover, 
125  Ga.  710  (1906).  Where  a  reor- 
ganization is  had  under  a  statute 
without  foreclosure  and  some  of  the 
old  stockholders  do  not  take  part  and 
the  reorganized  company  becomes  in- 
solvent, the  statutory  liability  of  the 
old  stockholders  continues  only  after 
the  liability  of  the  new  stockholders 
is  exhausted.  In  re  Receivership,  etc. 
91  Minn.  494  (1904).  It  is  no  de- 
fense that  the  corporation  has  not 
paid  a  statutory  incorporation  fee  to 
the  state.  Murphy  v.  Wheatley,  102 
Md.  501  (1906).  It  is  no  defense  that 
the  creditor  is  secured  by  a  mortgage. 
Knowles  v.  Sandercock,  107  Cal.  629 


620 


CH.  XII.  J 


STATUTORY  LIABILITY  OP  STOCKHOLDERS. 


[§   225. 


In  a  suit  at  law  brought  by  the  receiver  of  a  national  bank  against 
a  stockholder  on  his  statutory  liability,  he  cannot  set  up  fraud  on 
the  part  of  the  bank  in  inducing  him  to  subscribe.  That  defense, 
if  good  at  all,  is  available  only  by  a  suit  in  equity.  Neither  can 
the  defendant  set  up  a  counter-claim  for  the  money  so  paid  by  him 
for  the  stock.1 

Where  a  guaranty  by  a  loan  and  trust  company  is  ultra  vires,  the 
statutory  liability  of  stockholders  cannot  be  enforced  to  pay  such 
guaranty,  even  though  the  courts  of  the  state  where  the  corporation 
existed  have  held  that  ultra  vires  is  no  defense  where  the  benefit  of 
the  guaranty  has  been  received.2 


(1S95).      In    Tennessee    a    corporate 
creditor  having  security  for  his  debt 
cannot      enforce      the      stockholder's 
statutory     liability.       Albitztiqui     v. 
Guadalupe,    etc.    Co.,    92    Tenn.    598 
(1S93).    Where  the  stockholders  per- 
sonally guaranty  the  debts  of  the  cor- 
poration, they  are  liable  on  the  guar- 
anty and   also  on  any  statutory   lia- 
bility  attached   to   their   stock.    Lon- 
don,  etc.   Bank   v.    Parrott,    125    Cal. 
472    (1899).      An   agreement   by    the 
stockholders    of    an    insolvent    bank 
that  they  will  pay  to  the  bank  cer- 
tain amounts  to  make  good  any  de- 
ficiency  in   the    assets    of   the   bank, 
such  payments  to  be  applied  on  their 
statutory  liability,  is  valid  and  may 
be  enforced  by  the  receiver.     Thomp- 
son r.  Gross,  106  Wis.  34   (1900).     A 
stockholder  in  an  insolvent  national 
bank     cannot     defend     against     the 
double   liability   on   the   ground   that 
the  original  stock  was  not  fully  paid. 
Wallace    v.    Hood,    89    Fed.    Rep.    11 
(1898);  affd,  182  U.  S.  55.    A  holder 
of  over-issued  stock  is  not  liable  on 
the  statutory  liability.     Lyon  v.  Bos- 
ton,   etc.    R.    R.,    107    Fed.   Rep.    386 
(1901).     The  charter  of  a  stock  cor- 
poration organized  under  the  general 
act    in    Minnesota    may     limit     the 
stockholders   to   Norwegians;    but    if 
the  corporation  allows  other  persons 
to  become  members,  such  other  per- 
sons  cannot  avoid   the  statutory   lia- 
bility by  that  defense.    Blien  v.  Rand, 
77  Minn.   110    (1899).     Even  though 


two  persons  signed  the  articles  of 
incorporation  as  incorporators  and  as 
subscribers  of  stock,  on  condition 
that  the  articles  would  not  be  used 
unless  a  certain  other  party  signed, 
and  even  though  the  latter  party  did 
not  sign  and  the  articles  were  filed 
and  the  stock  subsequently  tendered 
to  such  signers,  which  they  refused, 
yet,  if  they  took  no  steps  to  remove 
their  names  as  subscribers  from  the 
books,  they  are  liable  as  stockholders 
to  corporate  creditors  on  a  statu- 
tory liability.  Rehbein  v.  Rahr,  109 
Wis.   136    (1901). 

i  Lantry  v.  Wallace,  182  U.  S. 
536  (1901).  See  also  §§163,  164, 
supra. 

2  A  New  Hampshire  stockholder  in 
a  Kansas  corporation  may  defend 
against  a  statutory  liability  on  the 
stock  on  the  ground  that  the  plain- 
tiff's claim  against  the  corporation 
is  an  ultra  vires  guaranty,  even 
though  the  state  court  may  have  de- 
cided such  guaranty  to  be  valid. 
Ward  v.  Joslin,  186  U.  S.  142  (1902), 
aff'g  100  Fed.  Rep.  676.  Where  the 
stockholders  have  not  authorized  the 
issue  of  bonds  as  required  by  statute, 
the  statutory  liability  of  the  stock- 
holders cannot  be  enforced  to  pay 
such  bonds.  Boyd  v.  Heron,  125  Cal. 
453  (1899).  The  statutory  liability 
of  stockholders  in  a  Kansas  corpora- 
tion does  not  apply  to  a  guarantee 
made  by  the  officers  of  the  corpora- 
tion  without  authority  and   without 


621 


§  225.] 


STATUTORY   LIABILITY  OF  STOCKHOLDERS. 


[OH.  XII. 


Where  a  corporate  creditor  agrees  with  some  of  the  stockholders 
that  a  judgment  obtained  in  a  suit  against  contesting  stockholders 
shall  be  a  judgment  ;is  to  stockholders  net  contesting,  ;i  judgment 
of  the  supreme  courl  holding  ih<*  stockholders  no1  liable  is  within 
the  terms  of  such  agreement,  although  the  lower  court  held  the 
stockholders  Liable.1 

The  invalidity  <<!'  the  incorporation  is  no  defense.-'  A  stockholder 
may  defend  en  the  ground  thai  the  corporation  was  di  3olved  when 
the  judgment  was  rendered  against  it."' 

A  holder  of  increased  capital  stock  of  a  national  bank  cannot  de- 
feat the  statutory  liability  en  the  ground  that  the  increase  was 
irregularly  made  and  was  fraudulently  made,  in  that  the  directors 
issued  it  to  themselves  without  paying  therefor.4 

A  director  who  acts  as  such  cannot  defend  against  his  statutory 
liability  on  the  ground  that  he  was  irregularly  elected.5 

Where  by  statute  a  receiver  may  compromise  doubtful  debts  upon 
the  approval  of  the  court,  he  may  compromise  the  statutory  liability 

the  knowledge  of  the  stockholders.  McDonnell,  92  Ala.  387  (1891).  A 
Ward  v.  Joslin,  100  Fed.  Rep.  676  corporation  is  not  liable  on  a  contract 
(1000).  It  is  no  defense  that  the  cor-  of  its  promoters  to  pay  for  draw- 
poration  had  committed  an  ultra  ings,  plans,  etc.  Hence,  although  by 
vires  act  in  buying  out  another  cor-  statute  stockholders  are  personally 
poration;  nor  that  other  stockholders  liable  on  corporate  contracts  if  the 
had  not  paid  for  their  stock  in  full,  corporation  commences  business  be- 
such  unpaid  portion  being  insufficient  fore  one-half  of  its  capital  is  sub- 
to  pay  the  debts;  nor  that  no  certifl-  scribed  and  twenty  per  cent,  is  paid 
cates  of  stock  had  been  issued,  in,  they  are  not  liable  on  such  a  con- 
Mitchell  v.  Beckman,  64  Cal.  117  tract.  Buffington  v.  Bardon,  80  Wis. 
(1883).  635   (1891).     See  also   §§183-186,  su- 

i  Perry  v.   Johnston,  95   Fed.   Rep.  pra. 
322   (1899).  3  Crossman    v.    Vivienda,    etc.    Co., 

2  Davis'  Estate  v.  Watkins,  56  Neb.  89  Pac.  Rep.  335  (Cal.  1907). 
288   (1S98).     It  is  no  defense  that  the         4  Latimer  r.  Bard,  76  Fed.  Rep.  536 

corporation   commenced   business   be-  (1896).      Increased    capital    stock    is 

fore  one-half  of  its  capital  stock  had  legal,    although    it    was    issued    to   a 

been  paid  in  according  to  the  charter,  person   who  was   treasurer  of  a  city 

Maine,  etc.  Co.  v.  Southern,  etc.  Co.,  and    paid    for   the   stock   out   of   the 

92   Me.   444    (1899).     Stockholders  of  city  funds,  the  corporation  not  know- 

a  corporation   cannot  avoid   a  statu-  ing  thereof.     Olson  v.  State  Bank,  67 

tory  liability  on  the  ground  that  the  Minn.    267     (1897).      A    person    who 

charter    was    unconstitutional,    such  subscribes  for  increased  capital  stock, 

charter  being  an  act  of  consolidation,  but  receives  original  stock  and  holds 

Gardner  v.  Minneapolis,  etc.  Ry.  Co.,  it    for    several    years,    cannot    then 

73    Minn.    517    (1S9S).     Stockholders  avoid    an   assessment   levied    thereon 

cannot  set  up  that  their  corporation  by  the  comptroller.     Rand  v.  Colum- 

was  not  authorized  by  law.     McDon-  bia    Nat.    Bank,    87    Fed.    Rep.    520 

nell  v.  Alabama,  etc.  Ins.  Co.,  85  Ala.  (1S98). 

401    (1888)-    National   Com.   Bank   v.        s  Union,  etc.  Bank  v.  Scott,  53  N.  Y. 

622 


CH.  XII.] 


STATUTORY   LIABILITY   OF  STOCKHOLDERS. 


[§  226. 


of  stockholders.1  A  judgment  against  a  stockholder  on  one  claim  is 
no  bar  to  a  subsequent  suit  by  the  same  creditor  against  the  same 
stockholder  on  another  claim.2  A  stockholder  in  a  national  bank  who 
is  sued  on  the  statutory  liability  cannot  set  up  the  defense  that  the 
money  is  to  be  used  to  pay  a  liability  of  such  bank  as  a  stockholder 
in  another  insolvent  national  bank.3 

§  226.  Priority  among  creditors. — When  the  creditor  is  entitled 
to  maintain  an  action  at  law  against  an  individual  stockholder  for 
the  enforcement  of  a  statutory  liability,  in  order  to  collect  a  claim 
against  the  corporation,  it  has  been  held  that  the  creditor  first 
suing  any  stockholder  is  entitled  to  priority  in  enforcing  his  claim 
as  against  that  particular  stockholder.  The  diligent  creditor  is 
entitled  to  the  payment  of  his  claim,  although  other  creditors  are 
thereby  deprived  of  payment.4  The  right  to  a  priority,  however, 
in  these  cases,  is  in  general  one  of  questionable  propriety,  and  the 
courts  are  not  inclined  to  favor  ii.r'  And  one  creditor  may,  at  the 
instance  of  the  rest,  bo  restrained  from  the  prosecution  of  his  in- 
dividual suit  where  it  is  in  prejudice  of  the  equal  rights  of  all  the 
other.-.1''     A  creditor  of  an  insolvent  bank  who  has  received  from  the 


App.  Div.  65  (1900).  A  hold-over 
director  is  liable  on  a  statutory  lia- 
bility, and  the  fact  tht  he  was  a  di- 
rector may  be  proved  by  the  corporate 
books.  St.  George,  etc.  Co.  v.  Fritz, 
48  N.  Y.  App.  Div.  233  (1900). 
Where  a  director  must  be  a  stock- 
holder, and  there  is  a  statutory  lia- 
bility attached  to  the  directorship, 
the  director  may  transfer  his  stock 
in  order  to  cease  to  be  a  director  and 
in  order  to  avoid  such  liability.  Sin- 
clair v.  Fuller,  15S  N.  Y.  607   (1899). 

1  State  v.  German  Sav.  Bank,  65 
Neb.  416  (1902).  As  to  compromise, 
see  also  §§171,  208. 

2  ? unky  v.  Park,  6S  Kan.  400 
(1904). 

3  Martin  v.  Wilson,  120  Fed.  Rep. 
202    (1903). 

i  Cole  v.  Butler,  43  Me.  401  (1857), 
holding,  also,  that  the  rights  of  a 
creditor  who  mcves  first  cannot  be 
affected  by  the  fact  that  another 
creditor,  pursuing  a  shorter  remedy, 
obtains  judgment  before  him.  In- 
galls  v.  Cole,  47  Me.  530,  541  (I860); 
Jones     v.     Wiltberger,     42     Ga.     575 

623 


(1871);  Robinson  v.  Bank  of  Darien, 
IS  Ga.  65,  108  (1S55);  Thebus  v. 
Smiley,  110  111.  316  (1884).  Cf. 
Weeks  v.  Love,  50  N.  Y.  568  (1S72); 
Miers  v.  Zanesville,  etc.  Turnp.  Co., 
13  Ohio,  197  (1844).  See  also 
§  225  (&),  supra. 

■<  Wright  v.  McCormack,  17  Ohio  St. 
86  (1866),  holding  that,  if  part  of 
the  creditors  institute  an  action  to  en- 
force the  liability  of  all,  no  creditor 
can  acquire  priority  or  institute  a 
separate  suit  on  his  own  behalf. 
Smith  v.  Huckabee,  53  Ala.  191 
(1875);  Chicago  v.  Hall,  103  111.  342 
(1882),  holding  that  if  a  suit  at  law 
by  a  creditor  against  a  stockholder 
be  enjoined  by  other  creditors  who 
seek  to  enforce  the  liability  for  the 
benefit  of  all  the  creditors,  and  the 
stockholders  discharge  their  liability, 
the  creditor  so  enjoined  has  no  prior 
lien  upon  the  fund. 

6  Eames  v.  Doris,  102  111.  350 
(1SS2)  ;  Pfohl  r.  Simpson,  74  N.  Y. 
137  (1878).  Cf.  Garrison  v.  Howe, 
17  N.  Y.  458  (1858).  See  also  §222, 
supra. 


§§  227~  229.]         STATUTORY  LIABILITY  OF  STOCKHOLDERS. 


[CII.  XII. 


receiver  a  dividend  from  the  general  assets  of  the  bank  is  entitled 
to  share  in  a  sum  subsequently  collected  on  the  stockholders'  liabil- 
ity, even  though  she  failed  to  prove  her  claim  a  second  time  within 
the  period  prescribed  by  the  order  of  distribution  of  such  latter 
fund.1 

A  preferred  claim  may  be  preferred  as  to  general  assets  and  yet 
not  preferred  as  to  moneys  collected  from  statutory  liabilities  of  the 
stockholders.2 

§§  227-229.  Contribution  among  stockholders.  — Upon  general 
principles  of  equity,  where  a  stockholder  has  been  held  liable,  under 
the  provisions  of  a  statute,  for  a  debt  of  the  corporation  of  which 
he  is  a  member,  he  may  maintain  an  action  against  his  co-stock- 
holders for  contribution.3      Where  the  stockholders'   statutory   lia- 


i  Matter  of  Ziegler,  98  N.  Y.  App. 
Div.  117    (1904). 

2  Sioux   City,    etc.  Co.  v.   Fribourg, 
121  Iowa  230   (1903). 

3  Quoted  and  approved  in  Hinshaw 
v.  Austin,  64  Kan.  460  (1902);  As- 
pinwall  v.  Sacchi,  57  N.  Y.  331 
(1874);  Stewart  v.  Lay,  45  Iowa,  604 
(1877);  Umsted  v.  Buskirk,  17  Ohio 
St.  113  (1866);  Matthews  v.  Albert, 
24  Md.  527  (1866) ;  Hadley  v.  Russell, 
40  N.  H.  109,  112  (1860);  Erickson 
v.  Nesmith,  46  N.  H.  371  (1866); 
Gray  v.  Coffin,  63  Mass.  192  (1852); 
Middletown  Bank  v.  Magill,  5  Conn. 
28,  61  (1823);  Brinham  v.  Wellers- 
burg  Coal  Co.,  47  Pa.  St.  43  (1864); 
Masters  v.  Rossie  Lead  Min.  Co.,  2 
Sandf.  Ch.  301  (1845);  Farrow  v. 
Bivings,  13  Rich.  Eq.  (S.  C.)  25 
(1866);  Clark  v.  Myers,  11  Hun,  608 
(1877),  holding  that  the  action  can- 
not be  against  one  only;  O'Reilly  v. 
Bard,  105  Pa.  St.  569  (1884),  holding 
that  a  stockholder  who  pays  a  judg- 
ment against  the  corporation  is  con- 
fined to  the  remedy  provided  in  the 
act,  and  in  this  case  could  not  main- 
tain assumpsit  for  contribution 
against  other  stockholders  who  were 
not  parties  to  the  judgment.  A  stock- 
holder may  file  a  bill  for  contribution 
against  all  other  resident  and  solvent 
stockholders.  Merrill  v.  Prescott,  67 
Kan.  767  (1903).  As  to  the  Pennsyl- 
vania statutory  method  of  obtaining 


contribution,  see  also  Brinham  v.  Wel- 
lersburg  Coal  Co.,  47  Pa.  St.  43 
(1864).  Stockholders  seeking  to  en- 
force contribution  from  a  co-stock- 
holder in  a  foreign  corporation  must 
show  that  he,  the  plaintiff,  is  legally 
liable.  Eastman  v.  Crosby,  90  Mass. 
206  (1864).  See  also  Ladd  v.  Cart- 
wright,  7  Oreg.  329  (1879);  Patter- 
son v.  Lynde,  106  U.  S.  519  (1882).  A 
stockholder,  it  is  said,  being  also  a 
creditor  of  the  corporation,  may  make 
use  of  whatever  advantage  his  posi- 
tion as  stockholder  gives  him  to  se- 
cure the  payment  of  his  claim,  even 
to  the  exclusion  of  other  creditors 
who  are  not  stockholders.  Whitwell 
v.  Warner,  20  Vt.  425,  444  (1848); 
Reichwald  v.  Commercial  Hotel  Co., 
106  111.  439  (1883),  holding  that  the 
securing  of  a  large  debt  to  a  stock- 
holder for  money  advanced,  by  means 
of  a  deed  of  real  property,  with  agree- 
ment that  it  should  be  considered  se- 
curity, was  not  fraudulent.  See  also 
Bristol  Milling,  etc.  Co.  v.  Probasco, 
64  Ind.  406  (1878);  Terry  v.  Bank 
of  Cape  Fear,  20  Fed.  Rep.  777  (1884). 
See  also  §  226,  supra,  to  the  effect  that 
a  stockholder  sued  at  law  may  en- 
join the  suit  and  bring  all  parties 
into  a  suit  in  equity.  An  officer  pay- 
ing the  statutory  liability  may  have 
contribution.  Nickerson  v.  Wheeler, 
118  Mass.  295  (1875).  Cf.  Ray  v. 
Powers,  134  Mass.  22   (1883);    Hart- 


624 


CH.  XII.] 


STATUTORY  LIABILITY  OF  STOCKHOLDERS.       [§§  227-229. 


bility  is  enforced  by  a  suit  in  equity,  contribution  is  of  course 
enforced,  in  that  suit,  so  far  as  the  parties  can  be  found  within  the 
jurisdiction.1  Where  the  constitution  of  an  unincorporated  associa- 
tion limits  the  debts,  and  the  directors  incur  a  larger  amount  of 
debts,  the  directors  cannot  obtain  contribution  from  the  stockhold- 
ers.2 Even  though  the  trustees  of  a  club  have  been  obliged  to  pay 
the  debts  of  the  club,  yet  they  cannot  collect  from  the  members.3 


man  v.  Valley  Ins.  Co.,  32  Gratt.  (Va.) 
242  (1879);  Chandler  v.  Brown,  77 
111.  333  (1875);  Bronson  v.  Wilming- 
ton, etc.  Ins.  Co.,  85  N.  C.  411  (1881) ; 
Perry  v.  Turner,  55  Mo.  418  (1874). 
A  stockholder  and  director  who  pays 
his  liability  under  the  California 
statute  may  have  contribution  from 
other  stockholders.  Redington  v. 
Cornwell,  90  Cal.  49  (1891).  As  to 
the  mode  of  enforcing  contribution 
under  the  California  statutes,  see 
Myers  v.  Sierra  Val.  etc.  Assoc,  122 
Cal.  669  (1898).  A  stockholder  who 
has  been  compelled  to  pay  a  statutory 
liability  may  have  contribution  from 
other  stockholders.  But  where  he 
pays  before  the  creditor  obtained 
judgment  against  the  company,  then, 
in  order  to  obtain  contribution,  he 
must  show  that  the  company  was 
insolvent  and  had  no  assets.  Ewing 
v.  Stultz,  9  Ind.  App.  1  (1894).  The 
United  States  statute  making  every 
person  interested  in  a  still  of  liquors 
liable  for  the  tax  thereon  renders  the 
stockholders  of  the  distilling  corpora- 
tion liable,  and  one  who  pays  the  tax 
may  have  contribution  from  the 
others.  Richter  v.  Henningsan,  110 
Cal.  530  (1895);  Wolters  v.  Hen- 
ningsan, 114  Cal.  433  (1S96).  Where 
the  vendors  of  stock  guarantee  that 
the  stock  shall  be  non-assessable  un- 
til they  have  advanced  $30,000,  a  stock- 
holder who  is  held  liable  on  a  statu- 
tory liability  may  hold  the  guaran- 
tors liable  if  they  have  not  paid  the 
$30,000.  Omo  v.  Bernart,  108  Mich. 
43   (1S95).  See  95  Pac.  Rep.  1045. 

i  Harpold   v.   Stobart,   46    Ohio    St. 

397  (1889).    In  Guerney  v.  Moore,  131 

Mo.   650   (1895),   it  was  held  that  a 

(40)  6 


stockholder  who  has  paid  more  than 
his  debt  need  not  file  a  bill  for  con- 
tribution, but  may  pursue  any  or  all 
of  the  remedies  that  are  open  to 
the  other  creditors.  Contribution  may 
be  enforced  in  the  suit  in  equity  by 
which  the  liability  is  enforced.  Har- 
per v.  Carroll,  66  Minn.  487  (1896). 

2  McFadden  v.  Leeka,  48  Ohio  St. 
513  (1891).  Where  the  articles  of  in- 
corporation provide  that  the  indebt- 
edness shall  not  exceed  a  certain  sum, 
but  debts  are  contracted  in  excess  of 
the  limit,  and,  the  corporation  being 
insolvent,  the  officer  who  contracted 
the  debt  pays  it  off  out  of  his  own  in- 
dividual funds,  he  cannot  claim  con- 
tribution unless  the  debt  in  excess  of 
the  limit  was  contracted  by  the  unani- 
mous assent  of  the  stockholders. 
Haldeman  v.  Ainslie,  82  Ky.  395 
(1884). 

3  Wise  v.  Perpetual,  etc.  Co.,  [1903] 
A.  C.  139,  the  court  saying:  "Clubs 
are  associations  of  a  peculiar  nature. 
They  are  societies  the  members  of 
which  are  perpetually  changing. 
They  are  not  partnerships;  they  are 
not  associations  for  gain;  and  the 
feature  which  distinguishes  them 
from  other  societies  is  that  no  mem- 
ber as  such  becomes  liable  to  pay  to 
the  funds  of  the  society  or  to  any  one 
else  any  money  beyond  the  subscrip- 
tions required  by  the  rules  of  the 
club  to  be  paid  so  long  as  he  remains 
a  member.  It  is  upon  this  funda- 
mental condition  not  usually  ex- 
pressed, but  understood  by  every  one, 
that  clubs  are  formed;  and  this  dis- 
tinguishing feature  has  been  often 
judicially  recognized." 


za 


§§  227-229.]         STATUTORY  LIABILITY  OF  STOCKHOLDERS.  [CII.  XII. 

In  assessing  stock  to  raise  a  fixed  amount  of  money,  no  assessment 
is  levied  upon  stock  held  by  the  corporation  itself.1  Directors  who 
have  been  obliged  to  repay  money  which  they  and  others  received 
for  turning  over  the  assets  of  the  company  to  another  company,  they 
having  no  interest  which  could  legally  be  the  subject  of  such  sale, 
cannot  recover  back  from  such  other  persons  the  amount  paid  by  the 
latter.     There  can  be  no  contribution  among  joint  tort  feasors.2 

i  Western   Imp.   Co.  v.   Des  Moines        2  Gilbert   v.   Finch,    173    N.   Y.    455 
Nat.  Bank,  103  Iowa,  455  (1897).  (1903). 

62G 


CHAPTEK  XIII. 

LIABILITY  OF  STOCKHOLDERS  WHERE  THE  SUPPOSED  INCORPORA- 
TION DOES  NOT  PROTECT  THEM,  AND  FOR  ASSESSMENTS  BE- 
YOND THE  PAR  VALUE  OF  THE  STOCK. 


230.  Different  liabilities  of  a  stock- 
holder. 

231-234.  Liability  as  partners  by 
reason  of  defective  incorpo- 
ration. 

235.  Extent  of  the  liability. 

236.  Liability  as  partners  by  reason 

of    unauthorized    incorpora- 
tion. 


§§  237-240.  Liability  as  partners  by 
reason  of  the  fact  that  the 
corporation  is  incorporated 
in  one  state  but  does  all  its 
business  in  another  state. 
241,    242.  Assessments    in   excess   of 

par  value  of  stock. 
243.  Miscellaneous  cases  of  liability. 


§  230.  Different  liabilities  of  a  stockholder  on  his  stock. — A 
stockholder  may  be  said  to  be  liable  on  his  stock  in  three  different 
ways.  First,  he  is  liable  to  the  corporation  and  corporate  creditors 
until  the  full  par  value  of  his  stock  has  been  paid.1  Second,  he  may 
have  an  additional  liability  imposed  upon  him  by  statute.2  Third, 
it  may  happen  that  by  some  accident,  mistake,  or  neglect  the  supposed 
corporation  was  never  duly  incorporated,  or  for  some  other  reason 
the  members  become  liable  as  partners  in  a  copartnership;  or  it 
may  be  within  the  power  of  the  corporation  to  assess  the  stock- 
holder for  sums  over  and  above  and  in  addition  to  the  par  value 
of  the  stock.  This  third  kind  of  liability  is  unusual  in  its  charac- 
ter, and  is  the  subject  of  this  chapter. 

§  231.  Liability  as  partners  by  reason  of  material  defects  in 
becoming  incorporated. — The  general  incorporating  statutes  under 
which  a  corporation  is  usually  formed  provide  for  the  taking  of 
certain  steps,  generally  the  making  and  filing  with  the  state,  and 
also  with  the  local  authorities,  a  certificate  signed  by  the  corpora- 
tors, and  containing  a  statement  of  the  business,  of  the  capital  stock, 
and  other  facts  material  to  the  organization  of  the  corporation. 

Occasionally  it  happens  that  this  certificate  is  not  fully  made 
out,  as  required  by  the  statute,  or  is  not  filed,  or  some  other  step 
prescribed  by  law  is  not  complied  with.  The  corporation  is  then  not 
duly  incorporated,  and  the  state,  by  quo  warranto,  may  oust  it  from 
its  user  of  corporate  franchises.  But  it  is  a  very  different  question 
as  to  whether  a  private  individual  may  take  advantage  of  such  facts, 


i  See  chs.  XI  and  III,  supra. 


2  See  ch.  XII,  supra. 


627 


§  2 


PARTNERSHIP    LIABILITY    OF   STOCKHOLDERS. 


[CH.  XIII. 


and  claim  that  the  supposed  corporation  is  not  a  corporation,  but 
only  a  partnership. 

§  232.  Who  may  question  the  regularity  of  acts  in  becoming  in- 
corporated.— As  already  explained,1  a  subscriber  for  stock  in  a 
corporation  cannot,  when  sued  for  calls  on  his  stock,  set  up  that 
the  corporation  was  not  duly  incorporated.2  He  is  estopped  from 
so  doing.  Nor  can  a  stockholder,  who  has  funds  of  the  corpo- 
ration in  his  hands,  defeat  an  action  by  the  corporation  therefor  by 
setting  up  that  the  corporation  wTas  not  duly  incorporated.3  A  stock- 
holder cannot  maintain  a  bill  in  equity  to  have  a  dc  facto  corpora- 
tion declared  to  be  a  partnership  on  the  ground  that  it  was  not 
legally  organized.4  And,  in  general,  a  party  contracting  to  pay 
money  to  a  corporation,  or  to  transfer  property  to  it  as  a  corporation, 
cannot  avoid  the  obligation  of  that  contract  by  alleging  the  fact  that 
the  corporation  was  not  duly  incorporated,  if  it  be  proved  that  such 
a  corporation  might  have  been  organized  under  the  statutes,  and 
that  the  supposed  corporation  attempted  to  so  organize  and  pro- 
ceeded to  transact  business.5  The  corporation  itself  cannot  set  up 
the  defense  that  it  was  irregularly  incorporated,0  not  even  though 
it  is  a  foreign  corporation.7     A  corporation  is  not  allowed  to  avoid 


i  See  §§  183-186,  supra. 

2  Buffalo,  etc.  R.  R.  v.  Cary,  26  N. 
Y.  75  (1862).  A  member  of  a  mutual 
insurance  company  cannot,  when  sued 
for  an  assessment,  set  up  that  the  ar- 
ticles of  incorporation  did  not  com- 
ply with  the  statute.  Gilman  v. 
Druse,  111  Wis.  400  (1901).  Where 
a  creamery  company's  certificate  of 
incorporation  is  not  properly  recorded 
and  contains  no  provision  for  the  pay- 
ment of  the  capital  stock,  a  person 
who  subscribed  to  it,  but  who  re- 
fuses to  deliver  cream  in  accordance 
with  his  contract,  can  defeat  a  suit 
for  breach  of  such  contract.  Byron- 
ville,  etc.  Ass'n  v.  Ivers,  93  Minn.  8 
(1904).  As  against  a  receiver  it  is 
no  defense  that  the  corporation 
agreed  that  the  subscriber  need  pay 
only  fifty  per  cent,  of  the  par  value 
of  the  stock,  or  that  fraudulent  rep- 
resentations induced  him  to  subscribe, 
or  that  the  full  capital  stock  was  not 
subscribed,  or  that  the  company  was 
defectively  organized,  or  that  the 
name  of  the  company  was  different 


from   the  one   contemplated.     Cox   v. 
Dickie,  93  Pac.  Rep.  523  (Wash.  1908). 

3  See  Krutz  v.  Paola  Town  Co.,  20 
Kan.  397  (1878).  See  also  §  637,  in- 
fra. 

4  Lincoln  Park,  etc.  v.  Swatek,  204 
111.  228  (1903).  Even  though  two 
corporations  are  neither  of  .them  le- 
gally incorporated,  yet,  if  they  are 
consolidated,  a  stockholder  in  the 
consolidated  company  cannot  claim 
that  the  stockholders  are  partners, 
although  the  consolidated  company  is 
not  a  legal  corporation;  neither  are 
the  officers  of  the  consolidated  com- 
pany merely  agents  for  the  stock- 
holders, no  partnership  being  in- 
tended. Hence  any  question  of  fraud 
on  the  part  of  the  majority  stock- 
holders will  be  determined  by  the 
principles  of  corporation  law.  Can- 
non v.  Brush,  etc.  Co.,  96  Md.  446 
(1903). 

5  See  §  637,  infra. 

6  See  §  637,  infra. 

i  Liter  v.  Ozokerite  Min.  Co.,  7 
Utah,  487  (1891). 


62S 


CH.  XIII.]  PARTNERSHIP    LIABILITY   OF    STOCKHOLDERS. 


[8  233. 


its  contracts  on  such  grounds.1  The  question  of  who  may  attack  the 
legality  of  the  organization  of  a  corporation  arises  often  where 
a  corporation  sues  upon  a  note  or  other  obligation,  or  brings  suit  to 
foreclose  a  mortgage  or  has  suit  brought  against  it  on  its  notes,  or 
for  a  foreclosure.  In  such  cases  the  established  rule  is  that  the 
legality  of  the  corporation  cannot  be  called  in  question.2 

§  233.  Corporate  creditors  cannot  hold  stockholders  liable  as 
partners  by  reason  of  irregidarities,  mistakes,  or  omissions  in  the 
incorporation  of  a  de  facto  corporation. — There  are  many  cases  to- 
the  effect  that  a  corporate  creditor  seeking  to  enforce  the  payment 
of  his  debt  may  ignore  the  existence  of  the  corporation,  and  may 
proceed  against  the  supposed  stockholders  as  partners,  by  prov- 
ing that  the  prescribed  method  of  becoming  incorporated  was  not 
complied  with  by  the  company  in  question.  For  instance,  it  has 
been  held  that  where  the  articles  of  association  were  signed,  but 
not  filed  until  some  time  subsequently,  debts  contracted  in  the 
interim  might  be  collected  from  the  stockholders  as  partners.3  So, 
also,  a  total  failure  to  file  or  record  the  certificate  or  articles  of 
incorporation  has  been  held  to  render  the  members  liable  as  part- 
ners ;  4  as  also  an  omission  of  the  members  to  sign  and  publish  the 


i  See  §  637,  infra. 

2  See  §  637,  infra. 

3  Bigelow  v.  Gregory,  73  111.  197 
(1874);  McVicker  v.  Cone,  21  Orog. 
353  (1891).  Contra,  Whitney  v.  Wy- 
man,  101  U.  S.  392  (1879);  Corey  v. 
Morrill,  61  Vt.  598   (1889). 

4  Field  v.  Cooks,  16  La.  Ann.  153 
(1861);  Abbott  v.  Omaha  Smelting 
Co.,  4  Neb.  416  (1876);  Garnett  v. 
Richardson,  35  Ark.  144  (1879);  Fer- 
ris v.  Thaw,  72  Mo.  446  (1880);  Cole- 
man V,  Coleman,  78  Ind.  344  (1S81); 
Martin  v.  Fewell,  79  Mo.  401,  410 
(1883).  Failure  to  record  the  certifi- 
cate in  the  county  recorder's  office  as 
required  by  statute  renders  the  stock- 
holders liable  as  partners,  even  to  per- 
sons who  did  not  know  of  the  incor- 
poration. Such  persons  are  not  given 
notice  by  the  fact  that  their  note 
was  signed  by  the  company  by  a  cer- 
tain person  as  treasurer.  New  York, 
etc.  Bank  v.  Crowell,  177  Pa.  St.  313 
(1896).  Failure  to  file  the  certificate 
of  organization  with  the  county  re- 
corder, as  required  by  statute,  is  fatal, 


even  though  the  charter  has  been  is- 
sued by  the  state.  The  stockholders 
are  liable  as  partners  to  one  who  did 
work,  even  though  after  the  work  was 
finished  he  took  a  corporate  note 
therefor.  Guckert  v.  Hacke,  159  Pa. 
St.  303  (1893).  A  creditor  who  seeks 
to  hold  stockholders  liable  as  partners 
on  the  ground  that  no  corporation  ex- 
ists must  prove  that  the  apparent  cor- 
poration is  not  a  corporation.  He 
must  prove  the  manner  of  organization 
by  means  of  the  partnership  agree- 
ment, or  whatever  agreement  exists, 
or  that  the  concern  held  itself  out  as 
a  partnership.  Re  Gibb's  Estate,  157 
Pa.  St.  59  (1893).  Failure  in  the  ar- 
ticles to  state  the  number  of  shares 
taken,  and  failure  to  publish  as  re- 
quired by  statute,  render  the  stock- 
holders liable  as  partners.  Williams 
v.  Hewitt,  47  La.  Ann.  1076  (1895). 
In  Hurt  v.  Salisbury,  55  Mo.  310 
(1874),  corporate  officers  were  held 
personally  liable  on  a  promissory  note 
signed  by  them  as  officers,  where  the 
certificate  was  not  filed  as  required. 
29 


§  233.] 


PARTNERSHIP    LIABILITY    OF   STOCKHOLDERS.  [CII.  XIII. 


articles  of  association;1    or   an   indefinite  statement  of  where   the 
principal  place  of  business  of  the  corporation  is  to  be.2     In  Iowa, 


In  Richardson  v.  Pitts,  71  Mo.  128 
(1879),  the  same  officers  were  held 
to  be  entitled  to  contribution  from 
other  members  of  the  supposed  corpo- 
ration. Cf.  Blanchard  v.  Kaull,  44 
Cal.  44o  (1872);  Western  Union  Tel. 
Co.  v.  Union  Pacific  Ry.,  3  Fed.  Rep. 
721,  729  (1880).  In  Garnett  V.  Rich- 
ardson, 35  Ark.  144  (1879),  the  court 
held  stockholders  liable  as  partners 
until  the  certificate  was  filed  with 
the  secretary  of  state.  Cf.  Harrod  v. 
Hamer,  32  Wis.  162  (1873),  where  the 
statute  effected  an  incorporation  with- 


though  the  articles  of  incorporation 
were  filed.  Bergeron  v.  Hobbs,  96 
Wis.  641  (1897).  The  directors  of  a 
company  not  legally  organized  are 
personally  liable  for  its  debt  to  a  cred- 
itor, even  though  the  latter  has  ob- 
tained judgment  on  a  mechanic's  lien 
as  against  the  supposed  corporation. 
Kruse  r.  Humpert,  53  S.  W.  Rep.  657 
(Ky.  1899). 

l  Unity  Ins.  Co.  v.  Cram,  43  N.  H. 
636  (1862);  Kaiser  v.  Lawrence  Sav. 
Bank,  56  Iowa,  104  (1881),  where  the 
articles  were  not  properly  signed  and 


out  filing,  but  prohibited  organization    acknowledged.     This  case  also  disap 


until    after    the    articles    were    filed. 
The    filing   of    the   certificate    in    the 
county   clerk's   office,   as  required   by 
statute,  is  essential  to  incorporation. 
Childs  v.  Hurd,  32  W.  Va.  66   (1889). 
In    Bigelow    v.    Gregory,    73    111.    197 
(1874),  the  court  held  that  there  was 
no    corporation    until    the    certificate 
was  filed,  and  that  a  creditor  might 
recover  from  a  stockholder  as  a  part- 
ner.  In  Indianapolis  Furnace,  etc.  Co. 
v.  Herkimer,  46  Ind.  142   (1874),  the 
court  held  that  there  was  no  corpora- 
tion until  the  certificate  was  filed,  and 
that  a  subscriber  to  the  articles  who 
had  agreed  to  pay  the  corporation  his 
dues  when  it  was  organized  could  suc- 
cessfully resist  its  suit  until  the  cer- 
tificate was  filed.    In  State  v.  Central, 
etc.  Assoc,  29  Ohio  St.  399  (1876),  the 
court  ousted  an  association  whose  no- 
tice of  acceptance  to  the  state  was  in 
definite   and  ambiguous.     Where  the 
articles  must  be  filed  with  the  secre- 
tary of  state  and  a  fee  paid  in  order 
to  form  a  corporation,  a  transfer  of 
property  before  this  is  done  does  not 
convey  title  to  the  corporation.     The 
transferrer's  creditors  may  attach  the 
property.     Jones  v.  Aspen  Hardware 
Co.,  21  Colo.  263   (1895).     Failure  to 
file  a   copy  of  the  constitution  of  a 
society  as  required  by  statute  renders 
the   members  liable  personally,   even 


proves  the  decision  in  Humphreys  v. 
Mooney,  5  Colo.  282  (1880).  In  en- 
forcing this  partnership  liability,  the 
assumed  corporation  is  not  to  be  made 
a  party  defendant  with  the  members 
thereof.  Smith  v.  Colorado  F.  Ins. 
Co.,  14  Fed.  Rep.  399   (1882). 

2  Harris   v.   McGregor,    29    Cal.    124 
(1865).     The  case  of  Chaffe  v.  Lude- 
ling,   27   La.  Ann.   607    (1875),  says: 
"Obligors  are  bound,  not  by  the  style 
which  they  give  to  themselves,  but  by 
the  consequences  which  they  incur  by 
reason  of  their  acts.     It  matters  not 
what  they  choose  to  call  themselves." 
In  Louisiana  it  is  held  that  a  creditor, 
who   is  contracting  with  a  company 
which  holds  itself  out  as  a  corpora- 
tion, may  nevertheless  hold  the  par- 
ties liable  as  partners,  if  the  statutes 
have  not  been   complied   with   in  in- 
corporation, and  the  capital  stock  has 
not  been  subscribed,  nor  paid  for,  nor 
intended  to  be.    Provident,  etc.  Co.  v. 
Saxon,  116  La.  408  (1906);  Louisiana, 
etc.  Bank  v.  Henderson,  116  La.  413 
(1906).       See    also    National     Union 
BanK   v.   Landon,   45   N.   Y.   410,   414 
(1871) ;    Ridenour   v.   Mayo,   40   Ohio 
St.  9    (1883).     Cf.  Wentz  v.  Lowe,   3 
Atl.   Rep.   878    (Pa.    1886).     An   indi- 
vidual may  enforce  a  contract  which 
he  makes  for  himself  but  in  the  name 
"The      National      Associated      Press, 


630 


CH.  XIII.]  PARTNERSHIP    LIABILITY   OF   STOCKHOLDERS. 


[§   233. 


Florida  and  Xebraska  statutes  make  the  stockholders  liable  if  the 
incorporation  was  irregular,1  while  in  Illinois  the  directors  are  made 


James  H.  Goodsell,  President."  Good- 
sell  v.  Western  Union  Tel.  Co.,  130 
N.  Y.  430  (1892).  Corporate  cred- 
itors may  attack  the  validity  of  the 
corporate  organization.  Empire  Mills 
v.  Alston  Grocery  Co.,  15  S.  W.  Rep. 
505  (Tex.  1891).  An  insufficient  state- 
ment in  the  papers  to  be  filed  as  to 
the  property  which  is  turned  in  for 
stock  renders  the  stockholders  liable 
as  partners.  Vanhorn  v.  Corcoran, 
127  Pa.  St.   255    (1889). 

i  In  Clegg  v.  Hamilton,  etc.  Co.,  61 
Iowa,  121  (1883),  the  court  held  that 
publishing  the  articles  which  did  not 
contain  all  the  requirements  of  the 
statutory  notice  was  insufficient,  and 
stockholders  were  liable  as  partners. 
In  Iowa  stockholders  are  liable  as 
partners,  by  statute,  if  the  incorpora- 
tion is  not  regular.  Eisfeld  v.  Ken- 
worth,  50  Iowa,  389  (1879).  In  First 
Nat.  Bank  v.  Davies,  43  Iowa,  424 
(1876),  the  court  held  that,  where  the 
state  waived  notice  by  permitting  the 
filing  to  be  made  with  its  secretary 
within  ninety  days,  vested  rights  ac- 
crued which  would  not  be  affected  by 
failure  to  file  within  that  time.  See 
also  Jessup  v.  Carnegie,  80  N.  Y.  441 
(1880).  Under  the  Iowa  statutes  the 
stockholders  are  liable  as  partners 
where  the  certificate  of  incorporation 
failed  to  state  the  highest  amount  of 
indebtedness  which  the  company 
might  incur.  Heuer  v.  Carmichael,  82 
Iowa,  288  (1891).  Although  the  arti- 
cles are  not  recorded,  as  required  by 
statute,  yet  as  between  themselves  the 
parties  are  stockholders  and  not  part- 
ners. Heald  v.  Owen,  79  Iowa,  23 
(1890).  Under  the  Iowa  statutes  an 
insufficient  incorporation  of  the  plain- 
tiff foreign  corporation  is  not  put  in 
issue  by  a  denial  of  incorporation.  The 
deficiency  must  be  specifically  alleged. 
Wardner,  etc.  Co.  v.  Jack,  82  Iowa, 
435  (1891).  In  an  action  against  in- 
dividual stockholders  to  charge  their 


property  with  a  judgment  rendered 
against  the  corporation,  the  plaintiff 
is  not  estopped  to  allege  defects  in 
the  organization  by  reason  of  having 
recognized  the  corporation  in  dealing 
with  it  and  in  bringing  suit  against 
it  as  such.  Heuer  v.  Carmichael,  82 
Iowa,  288  (1891).  Failure  to  com- 
plete the  publication  as  required  by 
statute  does  not  render  the  stockhold- 
ers liable  under  the  Iowa  statute  to 
a  creditor  who  entered  into  his  con- 
tract before  the  time  allowed  for  pub- 
lication had  expired.  Thornton  v. 
Balcom,  85  Iowa,  198  (1892).  Al- 
though the  statute  requires  the  arti- 
cles to  state  the  amount  of  indebted- 
ness which  may  be  incurred,  the  arti- 
cles may  fix  the  amount,  with  the 
right  to  the  stockholders  to  increase 
it  up  to  the  statutory  limit.  Thorn- 
ton v.  Balcom,  85  Iowa,  198  (1892). 
The  fact  that  the  whole  capital  stock 
is  not  subscribed  is  not  a  failure  to 
comply  with  the  law  relative  to  or- 
ganizations so  as  to  render  the  stock- 
holders liable  as  partners  under  the 
Iowa  statute.  Sweney  v.  Talcott,  85 
Iowa,  103  (1892).  Where  a  de  facto 
corporation  incurs  debts,  and  subse- 
quently a  new  corporation,  legally  or- 
ganized, takes  over  the  business  and 
assumes  the  debts,  the  creditors  of  the 
de  facto  corporation  may  hold  the  lat- 
ter corporation  liable.  Calumet  Paper 
Co.  v.  Stotts  Inv.  Co.,  96  Iowa,  147 
(1895).  Even  though  a  statute  makes 
the  stockholders  personally  liable  for 
failure  to  comply  with  the  formali- 
ties of  incorporation,  yet  creditors 
who  are  incorporators  are  estopped 
from  enforcing  this  liability.  Seaton 
v.  Grimm,  110  Iowa,  145  (1899).  Stock- 
holders are  liable  personally  under 
the  Iowa  statute  where  the  certificate 
of  incorporation  is  published  in  a 
weekly  newspaper  in  a  small  town 
sixty  miles  distant  from  the  place 
of  business  of  the  corporation,  which 


631 


§  233.] 


PARTNERSHIP    LIABILITY    OF    PTOCKHOLD!  [cH.  XIII. 


liable.1     The  question  of  whether  a  person,  dealing  with  what  he 
reasonably  supposed  to  be  a  copartnership,  but  which  really  was  a 

corporation,   may   hold  the  parties   liable  personally,   is  considered 

is  in  a  city  having  daily  papers,  the    the    corporation   on   the    notes. 


statute  prescribing  that  the  publica- 
tion shall  be  as  convenient  as  practi- 
cable to  the  principal  place  of  busi- 
ness. Berkson  r.  Anderson,  115  Ic 
674  (1901).  Under  the  Iowa  statute 
a  stockholder  is  liable  for  corporate 
debts  where  the  notice  of  incorpora- 
tion was  not  published  as  required  by 
statute,  it  appearing  that  he  became  a 
stockholder  during  the  time  allowed 
for  the  publication.  Clinton,  etc. 
Works  v.  Neiting,  111  N.  W.  Rep. 
974  (Iowa  1907).  The  Iowa  provision 
that  the  stockholder  shall  be  liable 
for  the  debts  unless  there  is  published 
a  statement  of  the  time  and  conditions 
on  which  the  capital  stock  so  paid 
will  be  strictly  construed,  and  the 
further  provision  that  they  shall  be 
liable  if  there  are  defects  in  the  or- 
ganization does  not  apply  to  errors 
after  incorporation.  Brinkley,  etc. 
Co.  p.  Curfman,  114  N.  W.  Rep.  12 
(Iowa  1907).  Although  the  statute 
renders  stockholders  liable  as  part- 
ners unless  there  has  been  a  substan- 
tial compliance  with  the  statute  rela- 
tive to  organization,  yet  the  courts 
are  not  inclined  to  liberally  construe 
and  apply  such  liability.  Porter  p. 
Sherman,  etc.  Co.,  36  Neb.  271  (1S93). 
Failure  to  publish  the  charter  as  re- 
quired by  statute  does  not  render 
the  stockholders  individually  liable. 
Kleckner  p.  Turk,  45  Neb.  176  (1895). 
Failure  to  file  the  articles  of  incor- 
poration with  the  secretary  of  state, 
and  the  fact  that  the  debts  exceed 
the  amount  specified  in  the  charter, 
and  failure  to  publish  notice  of  the 
debts  of  the  corporation  as  required 
by  law,  do  not  render  the  stockhold- 
ers personally  liable  on  notes  which 
were  given  by  the  corporation  in  the 
corporate  name,  especially  where 
judgment  was  first  obtained  against 


braska  Nat.  Bank  p.  Ferguson,  49 
Neb.  109  (1896).  A  person  contract- 
ing with  a  corporation  as  such  can- 
not hold  the  stockholders  personally 
liable  on  the  ground  that  the  com- 
pany did  not  publish  notice  of  its  in- 
corporation as  required  by  statute,  nor 
have  its  capital  stock  subscribed  at 
a  certain  time  nor  paid  for,  and  on 
the  ground  that  it  failed  to  post  a 
copy  of  its  by-laws  and  to  make  state- 
ments as  required  by  statute,  and  to 
keep  a  record  book  or  stock  book. 
Hogue  r.  Capital  Nat.  Bank,  47  Neb. 
929  (1S96).  In  Florida,  by  statute, 
the  stockholders  are  liable  for  the 
debts  the  same  as  partners  where  the 
statute  relative  to  incorporation  is 
not  complied  with.  Heinberg  Bros. 
r.  Thompson,  47  Fla.  163    (1904). 

l  Under  the  Illinois  statute  making 
directors  liable  for  debts  before  the 
statute  is  complied  with  as  to  incor- 
poration, and  the  issue,  by  the  secre- 
tary of  state,  of  a  certificate  of  com- 
pleted organization  and  recording  of 
the  same  in  the  county  where  the 
principal  office  is,  the  directors  are 
liable  if  such  certificate  is  not  so  re- 
corded. The  liability  may  be  en- 
forced even  by  a  corporate  creditor 
who  has  filed  his  claim  with  an  as- 
signee of  the  corporation  for  the  bene- 
fit of  its  creditors.  Loverin  v.  Mc- 
Laughlin, 161  111.  417  (1S96).  Where 
incorporators  under  the  Illinois  stat- 
ute have  not  recorded  the  certificate 
of  incorporation  in  the  county  where 
the  principal  office  is,  as  required  by 
statute,  a  suit  against  the  incorpora- 
tors to  enjoin  unfair  competition  will 
lie,  inasmuch  as  the  alleged  corpora- 
tion never  had  a  legal  existence.  El- 
gin, etc.  Co.  P.  Loveland,  132  Fed. 
Rep.  41  (1904).  The  Illinois  statute 
rendering  a  director  personally  liable 


632 


CH.  XIII.]  PARTNERSHIP    LIABILITY    OF    STOCKHOLDERS. 


[§   233. 


elsewhere.1  The  mere  assumption  of  corporate  powers,  without  any 
attempt  at  incorporation,  cannot,  of  course,  exempt  the  members 
from  full  liability  as  partners.2  '"And  a  mere  feigned  compliance 
with  the  laws  of  the  state  of  which  it  is  claimed  a  corporation  is  a 
citizen"  is  not  sufficient.3  Yet,  even  though  the  stockholders  are 
liable  as  partners  because  the  articles  were  not  properly  acknowl- 
edged, the  legislature  may  cure  the  defect  and  thus  destroy  any 
cause  of  action  then  existing.4  Questions  relative  to  the  liability  of 
promoters  for  purchases  or  work  prior  to  incorporation  are  consid- 
ered elsewhere.5 

for  the  debts  of  a  corporation  where  gations.  Worthington  r.  Griesser, 
the  incorporating  act  is  not  complied  77  N.  Y.  App.  Div.  203  (1902.. 
with  in  certain  particulars  was  ap-  Where  the  incorporators'  subscrip- 
ted in  Edwards  r.  Armour,  etc.  Co.,  tions  were  never  paid  and  the  di- 
190  111    467   (1901.  E.  Rep.  496.    rectors  never  met  and  the  money  to 

1  See  §  243,  infra.  transact  the  business   was   furnished 

2  Pettis  v  Atkins,  GO  111.  454  by  one  person,  the  lower  court  in 
(1871)-  Fuller  r.  Rowe,  57  N.  Y.  23  Missouri  held  that  it  was  a  fraud  on 
(1S74)'  Where  the  incorporators  the  persons  dealing  with  the  supposed 
never  organize  and  neither  subscribe  corporation  and  that  the  parties  were 
for  nor  pav  for  anv  capital  stock,  but  liable  as  parte-  Hyatt  r.  Van 
merely  do"  business  in  the  corporate  Riper,  105  Mo.  App.  664  (1904).  Where 
name  thev  may  be  held  liable  as  no  effort  has  been  made  to  incorpo- 
partners.  'Brooke  r.  Day,  59  S.  E.  rate,  all  are  liable  as  partners.  Me- 
Rep    769   (Ga.  19  '                                      Lennan  *  Hopkins,  2  Kan.  App.  260 

3  Owen    r.    Shepard,   59   Fed.    Rep.     (1895),  a  case  where  it  was  supposed 
746    (1894),  holding  that,  where  the    by    all    that    a    corporation    existed, 
stockholders  are  sued  as  individuals    Where  no  certificate  is  filed  with  the 
for  the  debts  of  the  company,   it  is    secretary  of  state,  no  stock  issued,  no 
for  them  to  prove  that  the  corpora-    record  book,  and  no  real  effort  to  per- 
tion  existed      The  testimony  of  two    feet  a  corporation,  the  members  are 
persons  that  they  complied  with  the    liable  individually.    Queen i.  etc.  Ca  a 
laws  and  got  a  charter  is  insufficient,    Crawford,   127   Mo.   356    (189o).    Per- 
il appearing  that  the  law  required  at    sons  seeking  to  organize  under  a  cer- 
least  three  incorporators.    The  char-    tificate  of  incorporation,  having  a  cap- 
ter  itself  is  the  best  evidence.     Per-    ital   less  than  required  by  law,   are 
cons  •transacting  business  without  in-    liable   as   partners,   especially   where 
corporation    are    liable    as    partners,    they   have   abandoned   such   incorpo- 
even  though  they  do  so  in  the  name    ration.    In  re  Browne,  etc.  Co.,  106  La. 
of  a  corporation  which  has  assigned    486  (1901). 

all   its  propertv  to   them.     Forbes   r.        4  Shields  r.   Clifton  Hill  Land  Co., 
Whittemore.   62  Ark.   229    (1896).     A  94  Tenn.  123    (1894). 
demurrer  does  not  lie  to  a  complaint        5  See    §§  705-70,    xnfra.     The    pro- 
alleging  that  the  plaintiff  sold  goods  moters  are  not  liable  personally  for 
to    defendants    who    pretended   to   be  goods  purchased  for  and  in  the  name 
officers  of  a  pretended  corporation  or-  of  the  corporation  before  the  final  in- 
ganized  in  Illinois.    Such  a  suit  may  corporation  papers  7*™^**** 
be    maintained,    irrespective    of    the  ern,  etc.  Co.  r.  Davis.  104  S.  W.  Rep. 
Illinois     statute     on     that     subject,  573  (Ind.  Ter.  190, ). 
if     the     proof     sustains     the     alle- 

633 


§  234.] 


PARTNERSHIP    LIABILITY    OF   STOCKHOLDERS.  [eii.xill. 


§234.  Notwithstanding  the  above  decisions,  the  great  weight  of 
authority  has  clearly  established  the  rule  that,  where  a  supposed 
corporation  is  doing  business  as  a  de  facto  corporation,  the  stock- 
holders cannot  be  held  liable  as  partners,  although  there  have  been 
irregularities,  omissions,  or  mistakes  in  incorporating  or  organizing 
the  company.  The  corporation  is  a  de  facto  corporation  where 
there  is  a  law  authorizing  such  a  corporation  and  where  the  com- 
pany has  made  an  effort  to  organize  under  the  law  and  is  transact- 
ing business  in  a  corporate  name.1  This  rule  applies  to  claims  based 
on  tort  the  same  as  to  those  based  on  contract.8 

This  conclusion  of  the  law  is  reasonable  and  just.  There  is  no 
reason  why  parties  who  have  dealt  with  a  corporation  as  a  corpora- 
tion should  afterwards  be  allowed  to  claim  more  than  they  originally 
bargained  for,  and  to  hold  the  stockholders  personally  liable.  Such  is 
the  established  rule  beyond  reasonable  doubt.3 


1  See  cases  in  notes  below;  also 
§  185,  supra,  note. 

2  Demarest  v.  Flack,  32  N.  Y.  St. 
Rep.  675;   aff'd,  128  N.  Y.  205   (1891). 

3  Whitney  v.  Wyman,  101  U.  S.  392 
(1879).  Even  though  a  corporation 
is  not  legally  organized,  a  person 
selling  goods  to  it  cannot  hold  the 
stockholders  personally  liable  there- 
for. Love  v.  Ramsey,  139  Mich.  47 
(1905).  Even  though  the  statute  re- 
quires ten  days'  notice  of  the  organ- 
ization meeting  to  the  subscribers  to 
the  capital  stock,  and  that  a  copy  of 
such  notice  be  included  in  the  re- 
port to  the  secretary  of  state,  yet  the 
stockholders  may  unanimously  waive 
this  provision.  Butler,  etc.  Co.  v. 
Cleveland,  220  111.  128  (1906).  A 
false  statement  in  the  articles  of  in- 
corporation that  a  certain  amount  of 
stock  had  been  subscribed  and  paid 
for  does  not  render  the  incorporators 
liable  as  partners.  Webb  v.  Rockefel- 
ler, 195  Mo.  57  (1906).  Incorpora- 
tors are  not  personally  liable  for  the 
debts,  even  though  the  articles  of  in- 
corporation were  not  acknowledged 
and  the  stock  not  paid  for  as  re- 
quired by  statute,  it  appearing  that 
the  articles  had  been  regularly  filed 
and  a  certificate  issued  by  the  secre- 
tary of  state.  First  Nat.  Bank  v. 
Rockefeller,  195  Mo.  15  (1906).    A  re- 


quirement that  the  articles  of  incor- 
poration be  signed  by  the  president 
and  directors  does  not  require  them 
in  signing  to  add  their  official  posi- 
tions. St.  Louis,  etc.  R.  R.  v.  South- 
western, etc.  Co.,  121  Fed.  Rep.  276 
(1903).  A  person  who  sells  goods  to 
a  supposed  corporation  cannot  hold 
the  stockholders  liable  as  partners  on 
the  ground  that  there  were  but  three 
incorporators  when  the  statute  re- 
quired five,  and  on  the  ground  that  a 
copy  of  the  certificate  of  incorporation 
was  not  filed  with  the  secretary  of 
state,  and  10  per  cent,  was  not  paid 
in  as  required  by  statute,  especially 
where  it  is  not  proved  that  the  de- 
fendants had  anything  to  do  with  such 
a  corporation.  Mitchell  v.  Jensen,  29 
Utah,  346  (1905).  Even  though  an 
original  certificate  of  incorporation  is 
void  by  reason  of  an  uncertified 
check  having  been  given  in  payment 
of  the  amount  required  by  statute,  yet, 
if  after  the  check  is  cashed  a  so- 
called  amended  certificate  is  filed,  the 
latter  stands  as  an  original  certificate 
of  incorporation.  People  v.  Comrs., 
81  N.  Y.  App.  Div.  242  (1903);  aff'd, 
175  N.  Y.  516.  As  regards  the  juris- 
diction of  the  federal  courts  the  in- 
corporation of  a  company  cannot  be 
questioned  on  the  ground  that  the 
charter  required  a  certain  amount  of 


634 


CH.  XIII.]  PARTNERSHIP   LIABILITY   OP   STOCKHOLDERS. 


[§  234. 


In  England  the  remarkable  conclusion  was  reached  in  the  lower 
courts  that  where  the  owner  of  a  business  incorporates  a  company 


money  to  be  paid  in  before  business 
was  commenced,  and  that  business 
had  been  commenced  without  that 
amount  being  paid.  Wells  Co.  v.  Gas- 
tonia  Co.,  198  U.  S.  177  (1905).  The 
members  of  a  supposed  corporation 
are  not  liable  individually  on  a  loan 
of  money  made  to  it,  even  though  it 
was  irregularly  incorporated.  Larned 
v.  Beal,  65  N.  H.  1S4  (1889).  A 
stockholder  who  is  also  a  creditor  of 
a  supposed  corporation  cannot  hold 
the  other  stockholders  liable  as  part- 
ners on  the  ground  that  the  articles 
of  incorporation  were  not  properly 
acknowledged  and  executed  in  dupli- 
cate and  filed  in  the  office  of  the  sec- 
retary of  state,  in  addition  to  filing 
In  the  county  clerk's  office  as  required 
by  statute.  Doty  r.  Patterson,  155 
Ind.  60  (1900).  "Where  there  is  a 
statute  authorizing  the  creation  of  a 
corporation,  an  attempt  to  comply 
with  the  statute,  and  an  actual  exer- 
cise of  corporate  functions,  the  ex- 
istence of  the  corporation  can  only  be 
destroyed  by  a  direct  proceeding." 
Crowder  v.  Sullivan,  128  Ind.  486 
(1891).  After  a  party  has  recovered 
judgment  against  a  corporation,  as 
such,  and  obtained  the  appointment 
of  a  receiver  therefor,  he  cannot  in 
the  same  suit  deny  its  corporate  en- 
tity, and  seek  to  hold  the  stockhold- 
ers thereof  liable  as  partners.  First 
Nat.  Bank  v.  Dovetail,  etc.  Co.,  143 
Ind.  534  (1896).  Where  a  man  has 
acted  as  director  of  a  company  he 
cannot  afterwards  sue  the  stockhold- 
ers to  hold  them  liable  as  partners  on 
the  ground  that  the  certificate  of  or- 
ganization was  not  filed  for  record  as 
required  by  statute,  and  he  cannot 
hold  them  liable,  although  the  statute 
renders  them  liable  where  the  pro- 
visions of  the  statute  are  not  complied 
with.  Curtis  v.  Meeker,  62  111.  App. 
49  (1895);  aff'd,  169  111.  233  (1897). 
In  the  case  of  Johnson  v.  Okerstrom, 


635 


70  Minn.  303  (1897),  the  court  held 
that  the  individual  defendants  were 
not  liable  as  partners,  although  they 
were  doing  business  under  the  name 
of  "Schulin,  Linden,  Lindberg,  &  Co.," 
and  although  the  articles  of  incorpo- 
ration were  signed  by  only  five  mem- 
bers, whereas  the  statute  required 
seven,  and  although  the  certificate  of 
incorporation  was  not  recorded,  al- 
though it  was  filed.  It  seems,  how- 
ever, that  the  plaintiffs  knew  that  the 
defendants  were  acting  as  a  corpora- 
tion. Where  the  articles  were  filed 
with  the  county  clerk  on  November 
9,  18S6,  and  goods  were  purchased  of 
plaintiff  soon  after,  and  the  articles 
were  not  filed  with  the  secretary  of 
state  until  August  17,  1887,  the  plain- 
tiff cannot  ignore  the  corporation  and 
hold  the  parties  liable  as  partners. 
The  plaintiff  made  tho  contract  sup- 
posing he  was  dealing  with  a  corpora- 
tion. Vanneman  v.  Young,  52  N.  J. 
L.  403  (1890).  Where  the  statute 
authorizes  seven  or  more  "persons"  to 
incorporate  a  railroad  company,  the 
word  "persons"  does  not  require  the 
incorporators  to  be  residents.  The 
incorporation  is  legal  although  three 
of  the  seven  incorporators  are  non- 
residents. Central  R.  R.  v.  Pennsyl- 
vania R.  R.,  31  N.  J.  Eq.  475  (1879). 
Under  the  Colorado  statute  requiring 
the  certificate  to  set  forth  by  whom 
the  corporate  affairs  shall  be  con- 
ducted, a  provision  that  they  shall  be 
conducted  by  the  president,  vice-presi- 
dent, and  attorney,  instead  of  provid- 
ing for  directors,  is  insufficient.  The 
corporation  is  only  de  facto,  but  an 
incorporator  and  a  vendor  of  property 
to  it  cannot  question  the  incorpora- 
tion. Bates  v.  Wilson,  14  Colo.  140 
(1890).  Though  the  provision  in  the 
Kentucky  statutes  requiring  publica- 
tion of  the  charter  is  not  complied 
with,  yet  the  corporation  is  valid  and 
complete,  except  that  the  state  may 


§  234.] 


PARTNERSHIP   LIABILITY    OF   STOCKHOLDERS.  [CH.  XIII. 


for  the  purpose  of  carrying  on  the  business,  the  incorporator-;  being 
merely  the  nominees  of  the  owner  of  the  business,   which  is  to  be 


proceed  to  annul  the  charter.  No 
other  party  can  raise  the  objection. 
Stutz  v.  Handley,  41  Fed.  Rep.  531 
(1890)  (reversed  on  other  grounds, 
139  U.  S.  417);  Walton  v.  Riley,  85 
Ky.  413,  421  (1887),  overruling  Heinig 
v.  Adams,  etc.  Mfg.  Co.,  81  Ky.  300 
(1883).  Failure  to  file  the  articles 
with  the  secretary  of  state  is  not  fa- 
tal. Portland,  etc  Turnp.  Co.  v.  Bolib, 
88  Ky.  226  (1889).  Incorporators  are 
not  personally  liable,  even  though 
they  do  not  publish  the  articles  as 
required  by  statute.  Clark  v.  Rich- 
ardson, 31  S.  W.  Rep.  878  (Ky.  1S95). 
In  proving  incorporation  it  is  not 
necessary  to  prove  publication  as  re- 
quired by  statute.  Brown  v.  Corbin, 
40  Minn.  508  (1889).  Although  there 
are  less  stockholders  and  less  direc- 
tors than  the  statute  or  charter  re- 
quire, yet  the  acts  of  these  are  suf- 
ficient to  sustain  obligations  incurred 
by  the  corporation  with  third  persons. 
Welch  v.  Importers',  etc.  Bank,  122 
N.  Y.  177  (1890).  The  grantor  of 
land  cannot  claim  that  the  grantee  was 
unincorporated  and  not  qualified  to 
hold  land,  the  incorporation  being 
only  partially  completed.  Reinhard 
v.  Virginia,  etc.  Co.,  107  Mo.  616 
(1891).  The  failure  to  specify  the 
term  of  existence  is  not  fatal  where 
the  general  act  limits  the  time.  Al- 
bright v.  Lafayette,  etc.  Assoc,  102 
Pa.  St.  411,  423  (1883);  Becket  v. 
Uniontown,  etc.  Assoc,  88  Pa.  St.  211 
(1878). 

In  Seacord  v.  Pendleton,  55  Hun, 
579  (1890),  there  was  no  pretense  of 
any  attempt  to  incorporate  the  bank, 
and  yet  the  stockholders  were  held 
not  liable.  See  s.  c,  sub  nom.  Mer- 
chants' Nat.  Bank  v.  Pendleton,  9  N. 
Y.  Supp.  46  (1890).  In  Christian  v. 
Bowman,  49  Minn.  99  (1892),  where 
there  was  a  failure  to  file  the  proper 
affidavit  of  publication,  the  directors 
were  held  personally  liable  for  debts, 


but  the  court  stated  that  if  the  case 
had  been  properly  tried  a  different 
conclusion  might  have  been  reached. 
One  who  takes  part  in  organizing  the 
company  cannot  hold  its  members  lia- 
ble as  partners  on  the  ground  that  it 
was  irregularly  organized.  Allegheny 
Nat.  Hank  r.  Bailey,  147  Pa.  St.  Ill 
(1892).  Nor  can  one  to  whom  he  as- 
signs a  leasehold.  Egbert  v.  Kimber- 
ly,  146  Pa.  St.  96  (1892).  Where  a 
creditor  of  a  bank  sues  the  stock- 
holders as  partners,  the  burden  of 
proof  is  on  him  to  prove  that  no  cor- 
poration existed,  it  being  shown  that 
the  bank  always  acted  as  a  corpora- 
tion and  held  itself  out  as  such  and 
was  supposed  so  to  be  by  the  stock* 
holders.  Hallstead  v.  Coleman,  143 
Pa.  St.  352  (1891).  Although  a  ma- 
jority of  the  incorporators  assume  to 
be  residents,  but  are  not,  and  the 
charter  is  forfeited,  yet  stockholders 
who  become  such  after  incorporation 
and  without  knowledge  of  the  fraud 
cannot  be  held  liable  as  partners. 
American  Salt  Co.  v.  Heidenheimer, 
80  Tex.  344  (1891).  A  stockholder 
cannot  sustain  a  bill  in  equity  to  have 
the  de  facto  going  corporation  wound 
up  as  a  partnership  by  proving  that 
the  articles  were  not  filed  in  the  of- 
fice of  the  recorder  of  deeds  for  the 
county,  nor  by  proof  that  his  subscrip- 
tion was  not  in  good  faith.  "The  gen- 
eral rule  is  that  one  who  deals  with  a 
corporation  as  existing  de  facto  is  es- 
topped to  deny  that,  as  against  it,  it 
has  been  legally  organized."  Bushnell 
v.  Consolidated,  etc  Co.,  138  111.  67 
(1891).  Cf.  notes  in  §233,  supra. 
Stockholders  of  a  de  facto  corporation 
are  not  liable  as  partners  merely 
because  the  probate  judge  has  not  re- 
corded the  certificate  of  incorporation, 
and  the  subscription  to  the  stock  and 
issued  the  certificate  of  incorporation 
as  required  by  statute.  Owensboro, 
etc  Co.  v.  Bliss,  132  Ala.  253   (1901). 


636 


CH.  XIII.]              PARTNERSHIP    LIABILITY    OF    STOCKHOLDERS.  [§   234. 

sold  to  the  corporation,  the  business  being  transferred  to  the  cor- 
poration in  payment  for  its  stock,  the  corporate  entity  would  be 

A  failure  to  organize  does  not  render  poration,  knowing  that  it  claims  to  be 

the    stockholders    liable    as   partners,  a  corporation,  and  knowing  that  there 

business  having  been  carried  on  with-  was  a  stipulation  for  a  limited  liabil- 

out   organization    after   the   filing   of  ity,  cannot  hold  the  parties  liable  as 

the  papers.     Cory  v.  Lee,  93  Ala.  4G8  partners.     Sentell   v.   Hewitt,   50   La. 

(1891).     The  failure  to  insert  in  the  Ann.  3    (1898).     A  promoter  and  or- 

certificate  a  provision  as  to  the  resi-  ganizer  of  a  corporation  cannot  sue 

dences  of  the  persons  does  not  render  a  stockholder  on  the  ground  that  tbe 

the    stockholders    liable    as    partners,  incorporation  was  not  in  compliance 

The    defendant    in    this   case   alleged  with  the  statute  and  hence  that  it  is 

that   it   was   a   corporation    de   facto,  a  partnership.     Anderson   v.   Thomp- 

and  that  plaintiff  sold  goods  to  and  son,  51  La.  Ann.  727   (1899).    Where 

contracted   with   defendant  as  a  cor-  the  certificate   or   articles   are   to   be 

poration,  knowing  that  it  was  doing  filed  both  with  the  state  and  the  local 

business  as  such.     The  contract  was  authorities,  a  failure  as  to  the  former 

made  with  it  in   its  corporate  name  does  not  render  the  stockholders  lia- 

and   capacity.      Snider's    Sons   Co.   v.  ble  as  partners,  provided  the  articles 

Troy,  91  Ala.  224   (1890).  or  certificate  are  filed  with  the  local 

In    Alabama    the    stockholders    are  authorities.    Mokelumne  Hill  Min.  Co. 

not   liable  for   the  debts,   merely   be-  v.    Woodbury,    14    Cal.    424     (1859); 

cause  the  articles  of  incorporation  do  Raisbeck  v.   Oesterricher,   4  Abb.   N. 

not  specify  the  instalments  by  which  Cas.  444    (1878);    Cross  v.  Pinckney- 

the  unpaid  capital  stock  shall  be  paid  ville  Mill  Co.,  17  111.  54   (1855).     The 

in.     Boiling  r.  Le  Grand,  S7  Ala.  482  creditor  cannot  sue  the  directors  for 

(1889).  Where  a  corporation  has  been  damages  for  a  fraudulent  conspiracy 

authorized  by  a  judge  as  provided  by  herein,    especially    when    he    was   in- 

statute,    but   no   certificate   has   been  formed  that  the  corporation  had  been 

issued,  the  corporation  is  sufficiently  irregularly    incorporated.      Nelson    v. 

formed  to  defeat  the  plea  of  nul  tiel  Luling,  62  N.  Y.  645  (1875).    A  state- 

corporation.      Sparks    v.    Woodstock,  ment  of  the  location  of  the  "place  of 

etc.  Co.,  87  Ala.  294  (1889).     If  proof  business"  is  a  sufficient  statement  of 

is  given  by  plaintiff  that  a  copartner-  the  "principal  place  of  business."    Re 

ship  existed  and  the  defense  is  that  Spring   Valley   Water-works,    17    Cal. 

it  was   a   corporation,   the  defendant  132  (1860).    That  a  failure  to  file  the 

mus^  prove  that  fact.     Although  the  certificate  with  the  secretary  of  state 

company   had  a  president  and  secre-  does   not  invalidate   the  corporation, 

tary,  this  in   itself  does  not  raise  a  see  Tarbell  v.  Page,  24  111.  46   (1860). 

presumption  of  a  corporation.     Clark  See,    also,    to   same    effect,    Planters', 

v.   Jones,   87   Ala.   474    (1S89).     Fail-  etc.    Bank    v.    Padgett,    69    Ga.    159 

ure  to  file  the  articles  of  association  (1S82);     Humphreys    v.    Mooney,     5 

with  the  county  clerk,  as  required  by  Colo.   282    (1880);    Gartside  Coal  Co. 

statute,    does    not    render    the    stock-  v.  Maxwell,  22  Fed.  Rep.  197   (1884); 

holders   liable   as   partners.     Granby,  Merriman    v.    Magiveney,    12    Heisk. 

etc.  Co.  v.  Richards,  95  Mo.  106  (1888).  (Tenn.)   494   (1873);   Merchants',  etc. 

A  private  citizen  cannot  contest  the  Bank  v.  Stone,  38  Mich.  779   (1878); 

validity    of   a   grant   by   a   city   to   a  Jessup    v.    Carnegie,    80    N.    Y.    441 

water-works    company.      Stedman    v.  (1880),  applying  an  Iowa  decision  to 

City   of  Berlin,   97   Wis.   505    (1897).  an  Iowa  case.    First  Nat.  Bank  v.  Da- 

A  person  who  contracts  with  a  cor-  vies,  43  Iowa,  424  (1876).    In  Holmes 

637 


§  234.] 


PARTNERSHIP    LIABILITY    OF   STOCKHOLDERS.  [<  II.  XIII. 


disregarded  in  case  of  the  insolvency  of  the  corporation,   and  the 
party  so  selling  his  business  to  the  corporation  and  carrying  it  on 


v.  Gilliland,  41  Barb.  568  (1864),  the 
court  held  that  failure  to  give  notice 
to  the  community  by  publication  does 
not  make  the  stockholders  partners. 
In  De  Witt  v.  Hastings,  69  N.  Y. 
518  (1877),  where  no  certificate  was 
filed  owing  to  an  abandonment  of  the 
enterprise,  it  was  held  that  a  subse- 
quent filing  of  it  could  not  render  lia- 
ble one  of  the  original  promoters  who 
took  no  part  in  the  filing  of  the  arti- 
cles of  association,  although  his  name 
was  attached  thereto.  Stockholders 
are  not  personally  liable  on  the 
ground  that  the  certificate  of  incor- 
poration was  not  properly  executed 
and  acknowledged.  Tennessee,  etc.  Co. 
v.  Massey,  56  S.  W.  Rep.  35  (Tenn. 
1899),  the  court  holding  that  a  per- 
son who  contracts  with  a  de  facto 
corporation  is  estopped  from  denying 
its  existence  and  from  holding  the 
incorporators  liable  as  partners  on 
the  contract.  A  charter  is  valid,  even 
though  the  register  of  deeds  in  copy- 
ing the  charter,  as  required  by  stat- 
ute, did  not  accurately  copy  the  seal 
of  the  state  attached  thereto.  Car- 
penter v.  Frazer,  102  Tenn.  462  (1899). 
The  general  rule  is  that  stockholders 
are  not  personally  liable  for  informali- 
ties, etc.  Seaton  v.  Grimm,  110  Iowa, 
145  (1899).  A  creditor  who  has  filed 
his  claim  with  the  assignee  of  a  cor- 
poration cannot  afterwards  claim  that 
it  was  not  a  corporation  and  that  the 
stockholders  are  individually  liable, 
even  though  the  court  has  decided 
that  it  was  not  a  corporation.  Clausen 
v.  Head,  110  Wis.  405  (1901).  A  per- 
son who  sells  land  to  a  supposed  cor- 
poration and  takes  a  purchase-money 
mortgage  in  partial  payment  cannot 
enforce  the  statutory  liability  of 
stockholders,  where  the  corporation 
was  never  substantially  organized, 
such  mortgagee  being  fully  cognizant 
of  all  the  facts.  Cole  v.  Great  Bend, 
etc.  Co.,  54  Pac.  Rep.  920  (Kan.  1898). 


Where  a  certificate  of  incorporation 
is  prepared  and  filed  and  the  company 
is  organized  and  for  eleven  years 
transacts  business,  one  of  the  stock- 
holders cannot  maintain  a  suit  to  have 
the  corporation  adjudged  not  to  be  a 
corporation  on  the  ground  that  the 
certificate  of  incorporation  did  not 
contain  all  the  statements  required 
by  the  statute.  Marsh  v.  Mathias,  19 
Utah,  350  (1899).  Where  the  char- 
ter requires  a  statement  of  the  limit 
of  debts  not  exceeding  two-thirds  of 
the  capital  stock,  it  suffices  to  state 
that  the  debt  shall  not  exceed  such  two- 
thirds.  Park  v.  Zwart,  92  Iowa,  37 
(1894).  The  articles  of  incorporation 
are  legal  even  though  the  subscrib- 
ers designate  their  Christian  names 
by  initials  instead  of  full  name.  State 
v.  Beck,  81  Ind.  500  (1882).  Where 
the  statute  authorizes  incorporation 
by  "any  number  of  persons,"  one 
alone  cannot  organize  a  company. 
Louisville  Bkg.  Co.  v.  Eisenman,  94 
Ky.  83  (1893).  Where  the  statute 
requires  the  charter  to  state  the  in- 
itial terminus  and  the  end  of  the  ter- 
minus, and  general  route,  the  charter 
cannot  definitely  describe  one  route 
and  conclude  with  a  general  state- 
ment that  it  covers  "all  the  streets 
of  the  city,  then  or  thereafter  to  be 
established."  Knoxville  v.  Africa,  77 
Fed.  Rep.  501  (1896).  The  omission 
of  an  immaterial  part  of  the  acknowl- 
edgment by  an  incorporator,  and  the 
omission  of  a  certificate  of  notaryship, 
do  not  render  the  incorporators  lia- 
ble as  partners.  Stout  v.  Zulick,  48 
N.  J.  L.  599  (1886).  An  incorporator 
may  sign  by  making  his  mark.  Board, 
etc.  Church  v.  Campbell,  48  La.  Ann. 
1543  (1896).  An  infant  cannot  be 
an  incorporator.  Hamilton,  etc.  Co.  v. 
Townsend,  13  Ont.  App.  Rep.  (Can.) 
534  (1886).  Stockholders  cannot  be 
held  liable  as  partners  on  the  ground 
of  illegal  incorporation,  where  there 


638 


CH.  XIII.]  PARTNERSHIP   LIABILITY   OF   STOCKHOLDERS. 


[§  234. 


would  be  held  personally  responsible  for  all  the  debts  of  the  cor- 
poration, on  the  theory  that  the  corporation  was  merely  his  agent. 
This  decision  was  severely  criticised,  and  an  appeal  was  taken  to 
the  House  of  Lords,  where  the  judgment  of  the  lower  courts  was 
unanimously  reversed.1 


is  a  law  authorizing  incorporation  for 
that  purpose,  and  an  attempt  was 
made  to  organize  thereunder,  and 
there  was  user.  Finnegan  v.  Noeren- 
berg,  52  Minn.  239  (1893).  Although 
the  statutes  require  the  directors  to 
be  residents  of  the  state,  nevertheless, 
even  though  the  directors  are  non- 
residents, the  incorporation  is  valid, 
and  the  corporation  is  not  dissolved, 
nor  are  the  stockholders  liable  as 
partners.  Demarest  v.  Flack,  128  N. 
Y.  205  (1891).  The  fact  that  a  corpo- 
ration has  not  filed  its  certificate  of 
incorporation  in  the  proper  county 
slerk's  office  does  not  prevent  its 
bringing  suit,  its  certificate  having 
been  properly  filed  with  the  secretary 
of  state.  Young,  etc.  Co.  v.  Young,  etc. 
Co.,  72  Fed.  Rep.  62  (1896).  Failure 
to  insert  in  the  articles  of  incorpora- 
tion the  number  of  shares  taken  by 
each  does  not  render  the  stockholders 
liable.  Wilson  Cotton  Mills  v.  C.  C. 
Randleman,  etc.  Mills,  115  N.  C.  475 
(1894).  Irregularities  in  the  organiza- 
tion of  a  New  Jersey  corporation  can- 
not be  inquired  into  in  the  courts  of 
another  state,  a  charter  having  been 
issued  to  the  company  in  the  state 
where  it  was  organized.  Lancaster  v. 
Amsterdam  Imp.  Co.,  140  N.  Y.  576 
(1894).  A  director  is  not  personally 
liable  "in  damages  to  a  property  owner 
over  whose  premises  the  company's 
road  runs  without  warrant.  Lamming 
p.  Galusha,  81  Hun,  247  (1894);  aff'd, 
151  N.  Y.  648,  where  it  was  also 
claimed  that  the  incorporation  had 
been  insufficient.  For  a  detailed  di- 
gest of  the  decisions  on  what  may  and 
what  must  be  stated  in  certificates  of 
incorporation,  and  what  informalities 
will  be  fatal,  and  what  meaning  is 
given  to  the  usual  provisions  of  gen- 


eral statutes  for  incorporation,  see  12 
Am.  R.  R.  &  Corp.  Cases,  pp.  474-522. 
The  assignee  of  a  corporation  cannot 
sue  its  incorporators  for  ten  per  cent, 
of  the  capital  stock,  on  the  ground 
that  they  had  sworn  that  ten  per  cent, 
had  been  paid  in  in  order  to  obtain 
the  charter,  when  in  fact  it  had  not 
been  paid  in.  Patterson  v.  Franklin, 
176  Pa.  St.  612  (1896).  A  creditor 
who  deals  with  a  corporation  as  a 
corporation  cannot  hold  the  stock- 
holders liable  as  partners.  American, 
etc.  Co.  v.  Bulkley,  107  Mich.  447 
(1895).  A  creditor  who  deals  with  a 
corporation  as  such  cannot  hold  its 
stockholders  liable  as  partners  on  the 
ground  that  its  organization  was  a 
fraudulent  device  to  obtain  credit  for 
a  copartnership,  especially  in  a  suit 
for  the  foreclosure  of  a  corporate 
mortgage.  Gow  v.  Collin,  etc.  Co.,  109 
Mich.  45  (1896).  As  to  irregularities 
in  the  organization  meetings  of  the 
stockholders  and  directors,  see  §  243, 
infra. 

i  Salomon  v.  Salomon,  etc.  Co., 
[1897]  A.  C.  22,  rev'g  Broderip  v.  Salo- 
mon, etc.  Co.,  [1895]  2  Ch.  323.  See 
also  Munkittrick  v.  Perryman,  74  L. 
T.  Rep.  149  (1896),  where  the  court 
held  that  two  partners  might  incor- 
porate and  that  they  would  not  there- 
after be  personally  liable  on  the  con- 
tracts of  the  company.  The  court, 
however,  intimated  that  if  both  of  the 
partners  and  the  corporation  had  been 
before  the  court  a  different  conclu- 
sion might  have  been  reached.  The 
supreme  court  of  Louisiana  has  held 
that  in  such  a  case  the  corporate  ex- 
istence will  be  ignored.  Samuel,  etc. 
Co.  v.  Illinois,  etc.  Co.,  51  La.  Ann. 
64    (1898). 


639 


§§    235,  236.]  PARTNERSHIP    LIABILITY    OP    STOCKHOLDERS.  [CH.  XIII. 


§  235.  Extent  of  the  liability  by  reason  of  deficient  incorpora- 
tion.— Even  in  those  cases  where  stockholders  have  been  held  person- 
ally liable  on  account  of  deficient  incorporation,  the  mere  fact  that 
an  attempted  incorporation  has  failed  does  not  necessarily  render  all 
tht'  participants  therein  liable  absolutely  for  all  the  debts  of  the 
concern.  At  the  most,  each  is  liable  only  in  case  he  would  be  liable 
if  the  original  plan  had  been  to  form  a  partnership.  If  he  was  not 
a  member  when  the  debt  was  contracted,  he  cannot  be  held  liable 
on  that  particular  debt.1  One  case  goes  still  further,  and  holds 
that  one  who  becomes  a  member  subsequently  to  the  attempted  in- 
corporation, but  takes  no  part  in  the  organization  or  management 
of  the  company,  cannot  be  held  liable  for  its  debts.2 

§  236.  Liability  as  partners  by  reason  of  fact  that  corporations 
cannot  be  organized  for  the  business  involved.  — The  general  incor- 
porating  acts  common  to  most  of  the  states  usually  specify  the  par- 
ticular kinds  of  business  for  the  prosecution  of  which  corporations 
may  be  formed  thereunder.  It  follows  that  no  business  can  be  carried 
on  by  persons,  as  a  corporation,  under  the  incorporating  act,  unless 
that  particular  business  is  specified  therein.  Many  decisions  on 
what  kinds  of  business  are  included  in  the  words  used  in  various 
statutes  of  the  different  states  are  given  in  the  notes  below.3     Thus, 

i  Fuller  v.  Rowe,  57  N.  Y.  23  (1874).  ufacturing  electricity,  a  company  may 
See  also  §  508,  infra.  In  a  suit  against 
stockholders  as  partners,  the  defend- 
ants may  require  the  joinder  of  their 
associates.  De  Witt  v.  Hastings,  69 
N.  Y.  518   (1877). 

2  Stafford  Nat.  Bank  v.  Palmer,  47 
Conn.  443  (1880).  Cf.  Richardson  v. 
Pitts,  71  Mo.  128   (1879). 

3  Thus,  where  a  rifle  club  attempted 
incorporation  under  the  statute  al- 
lowing incorporation  for  "literary, 
scientific,  and  charitable  purposes," 
the  members  were  held  individually 
liable  for  damages  to  the  widow  of  a 
man  who  was  killed  by  a  bear  which 
the  club  was  keeping.  Vredenburg 
v.  Behan,  33  La.  Ann.  627  (1881).  See 
also  Glen  v.  Breard,  35  La.  Ann.  875 
(1883).  Many  business  purposes  may 
be  specified  in  one  charter.  Bird  v. 
Daggett,  97  Mass.  494  (1867).  Sev- 
eral objects  may  be  included  in  the 
same  articles  of  incorporation.  "West 
v.  Crawford,  80  Cal.  19  (1889).  Where 
the  general  act  authorizes  incorpora- 
tion for  manufacturing  gas  "or"  man- 


be  organized  for  both  of  these  pur- 
poses. People  v.  Rice,  138  N.  Y.  151 
(1893).  Even  though  the  certificate 
of  incorporation  recites  several  pur- 
poses where  the  statute  allows  but 
one  purpose,  yet  a  corporation  exists 
and  may  be  held  liable  as  such. 
Marion  Bond  Co.  v.  Mexican,  etc. 
Co.,  160  Ind.  558  (1902).  Under  a 
statute  authorizing  incorporation  for 
purposes  mentioned  in  several  suc- 
ceeding sections,  a  corporation  cannot 
be  organized  for  purposes  in  two  of 
those  sections.  Ramsey  v.  Tod,  95 
Tex.   614    (1902). 

Where  the  charter  authorizes  in- 
corporation to  improve  and  sell  lands, 
a  company  may  be  organized  to  buy, 
sell  and  improve  land.  Lancaster  v. 
Amsterdam  Imp.  Co.,  140  N.  Y.  570 
(1894).  Where  corporations  may  be 
formed  for  any  legal  purposes  they 
may  be  formed  to  buy  and  sell  stocks 
or  land.  Market  St.  Ry.  v.  Hellman, 
109  Cal.  571  (1895).  A  bank  cannot 
incorporate    under   an   act   for   "any 


640 


CH.  XIII.]  PARTNERSHIP    LLVBILITY    OP    STOCKHOLDERS. 


[§  236. 


where   a   New   Jersey   corporation   illegally   practices    dentistry    in 
Pennsylvania,  and  one  of  its  employees  does  negligent  dental  work, 


species  of  trade  or  commerce."    Bank    any  rate  the  stockholders  in  suck  cor- 


of  California  v.   Collins,    7   Hun,   336 

(1876).  Where  the  statutes  of  a  state 
or  territory  do  not  provide  for  the  in- 
corporation of  banks,  an  attempted  in- 
corporation of  a  bank  thereunder  is 
void,  and  the  incorporators  are  liable 
as  partners  for  the  debts.  Davis  v. 
Stevens,  104  Fed.  Rep.  235  (1900).  A 
statute  authorizing  incorporation  for 
"other  lawful  business"  will  be  lib- 
erally construed,  and  includes  the 
business  of  booming  logs.  Lindsay, 
etc.    Co.    v.    Mullen,    176    U.    S.    126 

(1900).  Under  a  statute  authorizing 
incorporation  for  the  promotion  of 
"trade  and  commerce,"  a  company 
may  be  organized  to  promote  the  wel- 
fare and  interests  of  persons  engaged 
in  metal  working.  In  re  Roofing,  etc. 
Assoc,  200  Pa.  St.  Ill  (1901).  Where 
the  statute  prescribes  that  companies 
organized  for  profit  must  be  organ- 
ized under  a  certain  statute,  a  com- 
pany organized  for  the  purpose  of 
dealing  in  real  estate  must  be  organ- 
ized under  that  statute.  State  v. 
Home,  etc.  Union,  63  Ohio  St.  547 
(1900).  So,  also,  as  to  a  corporation 
organized  for  business  purposes.  Peo- 
ple v.  Rose,  188  111.  268  (1900).  The 
general  incorporating  law  of  Massa- 
chusetts, which  does  not  allow  incor- 
poration for  manufacturing  liquor, 
does  not  prevent  incorporation  for 
selling  liquor,  and  hence  a  foreign 
corporation  may  sell  liquor  in  that 
state.  Enterprise,  etc.  Co.  v.  Grimes, 
173  Mass.  252  (1899).  Under  a  stat- 
ute authorizing  incorporation  of  rail- 
roads to  carry  freight  and  passengers, 
a  railroad  to  carry  passengers  only 
cannot  be  organized.  Chicago,  etc.  Ry. 
v.    Oshkosh,    etc.    Ry.,    107    Wis.    192 

(1900).  Under  the  statute  author- 
izing corporations  for  any  lawful 
"business"  or  "pursuit,"  a  corporation 
may  be  formed  to  guaranty  the  bonds 
of  an  educational  institution,  and  at 


poration  cannot  question  the  power 
of  the  corporation  to  make  such  guar- 
anty. Maxwell  v.  Akin,  89  Fed.  Rep. 
178  (1898).  Even  though  a  charter 
has  been  taken  out  for  water-works 
and  also  electric  light  purposes,  al- 
though the  statutes  do  not  authorize 
the  combining  of  those  two  businesses 
in  one  corporation,  yet  a  contract 
made  by  the  city  with  such  corpora- 
tion to  pay  certain  hydrant  and  elec- 
tric-light rentals  may  be  enforced,  in- 
asmuch as  the  contract  is  valid,  even 
if  the  corporation  be  considered  but 
a  partnership.  Cunningham  v.  City 
of  Cleveland,  98  Fed.  Rep.  657  (1899). 
A  provision  inserted  in  a  certificate 
of  incorporation  under  the  Nebraska 
statutes  limiting  the  liability  of  the 
stockholders  so  that  they  are  not  even 
liable  for  the  subscription  price  is 
void.  Van  Pelt  v.  Gardner,  54  Neb. 
712  (1898).  See  also  §4,  supra.  The 
business  of  selling  instalment  bonds 
is  authorized  under  a  statute  allowing 
incorporation  for  any  lawful  business. 
Vokes  v.  Eaton,  119  Ky.  913  (1905). 
Under  a  statute  authorizing  incorpo- 
ration for  any  enterprise  or  busi- 
ness, a  company  may  be  organized 
with  a  capital  stock  to  maintain  a 
home  for  indigent  and  infirm  women. 
Jordan's  Adm'x  v.  Richmond,  etc.,  106 
Va.  710  (1907).  Where  the  statute 
authorizes  incorporation  to  conduct 
business,  a  corporation  may  be  organ- 
ized to  act  as  an  agent.  State  v. 
Michel,  36  S.  Rep.  869  (La.  1904). 
Where  by  its  charter  a  corporation 
may  sell  all  its  property  and  deal  in 
stocks,  it  may  sell  all  its  property  for 
stock.  Traer  v.  Lucas,  etc.  Co.,  124 
Iowa,  107  (1904).  A  company  organ- 
ized to  plant,  manufacture  and  sell 
chicory  is  a  manufacturing  corpora- 
tion. Bolton  v.  Nebraska  Chicory  Co., 
69  Neb.  681  (1903).  A  corporation  to 
deal  in  bonds  cannot  be  organized  un- 


(41) 


641 


§    236.  ]                 PARTNERSHIP    LIABILITY    OF    STOCKHOLDERS.  [CH.  XIII. 

the  directors  and  officers  are  personally  liable  for  the  damage,   it 
appearing  that  they  knew  and  assented  to  the  company  doing  busi- 

der  a  statute  authorizing  the  forma-  such  stockholders.  His  remedy  is 
tion  of  corporations  to  deal  in  mer-  other  than  this.  Perry  v.  Hale,  143 
chandise  and  conduct  mercantile  oper-  Mass.  540  (1887).  An  application  for 
ations.  Such  a  corporation  is  not  a  charter  for  "the  mining  for  and 
even  a  de  facto  corporation,  inasmuch  manufacturing  of  oil  and  gas"  is  too 
as  such  a  de  jure  corporation  is  im-  general  and  indefinite  to  be  granted, 
possible  under  such  a  statute.  Hence  An  application  should  express  single- 
such  a  corporation  cannot  bring  suit  ness  of  purpose,  but  two  pursuits  may 
as  a  corporation.  Indiana,  etc.  Co.  v.  be  combined  when  kindred  and  cog- 
Ogle,  22  Ind.  App.  593  (1899).  Un-  nate.  Op.  Atty.  Gen.,  Re  Newton  Ham- 
der  the  Indiana  statute  authorizing  a  ilton  Oil,  etc.  Co.,  10  Pa.  Co.  Ct.  Rep. 
corporation  for  manufacturing  or  va-  452.  A  mercantile  business  may  be  in- 
rious  other  purposes,  a  corporation  corporated  under  a  statute  authoriz- 
cannot  be  formed  for  several  of  these  ing  the  incorporation  of  "industrial 
purposes,  and  hence  a  subscription  business."  Bashford,  etc.  Co.  v.  Agua, 
made  before  incorporation  cannot  be  etc.  Co.,  35  Pac.  Rep.  983  (Ariz.  1894). 
enforced  by  a  company  organized  for  Under  the  words  "or  other  lawful 
several  objects.  Williams  v.  Citizens',  business,"  in  the  general  incorporat- 
etc.  Co.,  25  Ind.  App.  351  (1900).  A  ing  statute,  a  company  may  be  organ- 
laundry  business  is  not  a  mechanical  ized  to  buy  and  sell  real  estate, 
business.  In  re  Fuller  Co.,  79  Minn.  Brown  v.  Corbin,  40  Minn.  508  (1889). 
414  (1900).  Under  the  Mississippi  Indefiniteness  in  the  statement  of  the 
statutes  a  corporation  cannot  be  or-  object  of  incorporation  is  no  defense, 
ganized  to  deal  in  the  stock  of  other  Owenton,  etc.  Turnp.  Co.  v.  Smith, 
corporations.  Woodbury  v.  McClurg,  13  S.  W.  Rep.  426  (Ky.  1890).  A 
78  Miss.  831  (1901).  Even  though  the  company  may  incorporate  to  buy,  sell, 
statutes  do  not  authorize  the  forma-  and  deal  "in  real  estate,  live-stock, 
tion  of  a  corporation  for  banking  pur-  bonds,  securities,  and  other  properties 
poses,  yet  if  a  subsequent  statute  does  of  all  kinds,  on  its  own  account  and 
so  authorize  and  legalizes  prior  at-  for  commission,  in  the  United  States 
tempted  incorporations  upon  their  fil-  and  elsewhere,"  under  the  Texas  stat- 
ing a  certificate,  the  stockholders  are  ute  authorizing  incorporation  for  pur- 
not  liable  as  partners,  even  though  poses  of  "mutual  profit  or  benefit." 
such  certificate  has  not  been  filed.  Jefferson  Nat.  Bank  v.  Texas  Inv.  Co., 
Mason  v.  Stevens,  16  S.  D.  320  (1902).  74  Tex.  421  (1889).  A  constitutional 
A  statement  in  the  articles  of  incor-  prohibition  against  the  incorporation 
poration  that  the  company  may  carry  of  any  church  does  not  prevent  the  in- 
on  such  busines  as  it  thinks  to  be  corporation  of  the  "General  Assembly 
for  the  benefit  of  the  stockholders  is  of  the  Presbyterian  Church  in  the 
void.  Re  Crown  Bank,  L.  R.  44  Ch.  United  States."  Guthrie  r.  Guthrie, 
D.  634  (1890).  Charters  for  enumer-  10  S.  E.  Rep.  327  (Va.  1889).  A  cor- 
ated  objects  "and  other  purposes"  will  poration  for  mining  and  trading  can- 
be  rejected.  Re  Journalists'  Fund,  8  not  be  organized  under  an  act  for  min- 
Phila.  272  (1871).  So  as  to  mining  ing.  Isle  Royale  Land  Corp.  v.  Os- 
for  "minerals."  Re  Glenwood  Co.,  6  man,  76  Mich.  162  (1889).  A  medical 
Pa.  Co.  Ct.  Rep.  575  (1889).  A  pur-  college  cannot  be  incorporated  under 
chaser  of  stock  from  one  of  the  sup-  an  act  to  incorporate  benevolent, 
posed  stockholders  cannot  recover  charitable,  scientific,  and  missionary 
back  the  purchase  price  from  all  of  societies.     People  v.   Gunn,   96   N.   Y. 

642 


CH.XIII.]  PARTNERSHIP    LIABILITY    OF    STOCKHOLDERS. 


[§    236. 


ness  in  Pennsylvania.1     The  fact  that  a  certificate  of  incorporation 
includes  a  purpose  for  which  incorporation  is  not  provided  for  by  the 


317  (1884).  A  mutual  reliance  so- 
ciety cannot  be  incorporated  under  an 
act  for  incorporating  benevolent,  char- 
itable, scientific,  and  missionary  socie- 
ties. People  v.  Nelson,  46  N.  Y.  477 
(1871).  "Where  the  statute  authorizes 
incorporation  for  producing  and  sell- 
ing electricity,  and  the  certificate  of 
incorporation  includes  this  as  well  as 
manufacturing  and  selling  electrical 
appliances,  apparatus  and  supplies, 
the  corporation  is  not  a  de  jure  cor- 
poration, and  hence  insufficient  to  sup- 
port an  action  by  one  promoter 
against  another  on  a  contract  of  the 
latter  to  convey  land  to  a  corporation 
to  be  formed  and  to  take  stock  in 
payment,  especially  where  the  full 
capital  stock  of  such  corporation  ha  1 
not  been  subscribed  for.  Burk  o. 
Mead,  159  Ind.  252  (1902).  The  sec- 
retary of  state  cannot  be  compelled  to 
accept  the  certificate  of  incorporation 
for  growing,  selling  and  purchasing 
rice  and  other  agricultural  products 
under  a  statute  organizing  a  corpora- 
tion for  growing,  selling  and  purchas- 
ing seeds,  plants,  etc.,  for  agricultural 
purposes.  Miller  v.  Tod,  95  Tex.  404 
(1902).  After  the  state  has  caused 
a  charter  to  be  declared  illegal,  the 
duty  of  the  state  is  finished,  and  a 
receiver  will  not  be  appointed,  all  the 
debts  having  been  paid  and  all  the 
parties  in  interest  being  satisfied,  the 
stockholders  having  been  declared  per- 
sonally liable  the  same  as  in  a  co- 
partnership. State  v.  New  Orleans, 
etc.  Co.,  107  La.  562  (1902).  The  va- 
lidity of  the  charter  of  a  school  incor- 


porated as  a  joint-stock  incorporation 
cannot  be  tested  in  quo  warranto  pro- 
ceedings brought  to  determine  the 
rights  of  parties  claiming  to  be  trus- 
tees. Commonwealth  v.  Yetter,  190 
Pa.  St.  488  (1899).  Under  a  general 
act  authorizing  incorporation  for  pur- 
poses other  than  profit,  a  cemetery 
cannot  be  organized  for  profit,  and 
hence  the  incorporators  are  not  en- 
titled to  moneys  received  from  the 
sale  of  lots,  but  are  bound  to  use 
such  moneys  to  improve  the  property. 
Brown  v.  Maplewood,  etc.  Assoc,  85 
Minn.  498  (1902).  A  stock  corpora- 
tion cannot  be  formed  under  the  laws 
of  West  Virginia  to  promote  religion 
by  aiding  in  the  support  of  Baptist 
ministers  and  in  the  erection  of 
churches,  etc.  Powell  v.  Dawson,  45 
"W.  Va.  780  (1899).  "Any  other  law- 
ful purpose"  does  not  include  mutual 
contribution  and  aid,  and  the  encour- 
agement of  frugality,  etc.  State  v. 
International  Inv.  Co.,  88  Wis.  512 
(1894).  A  trust  company  is  not  a 
bank  within  the  meaning  of  a  crim- 
inal statute.  State  v.  Reid,  125  Mo. 
43    (1894). 

Express  business  is  an  "industrial 
pursuit,"  as  used  in  the  federal  stat- 
ute allowing  incorporation  in  terri- 
tories. Wells,  etc.  Co.  v.  Northern 
Pac.  Ry.,  23  Fed.  Rep.  469  (1881).  A 
mercantile  enterprise  may  be  incor- 
porated under  an  act  authorizing  in- 
corporation for  any  "industrial  or 
productive  interest."  Carver  Merc. 
Co.  v.  Hulme,  7  Mont.  566  (1888), 
An  elevator  company  cannot  incorpo- 


i  Mandeville  v.  Courtright,  142  Fed. 
Rep.  97  (1905).  A  corporation  can- 
not take  out  a  license  to  practice 
medicine.  State,  etc.  Inst  v.  State,  103 
N.  W.  Rep.  1078  (Neb.  1905);  but 
may  contract  to  furnish  medical  as- 
sistance. State,  etc.  Inst.  v.  Plat- 
ner,  103  N.  W.  Rep.  1079  (Neb.  1905). 


An  application  for  a  charter  for  a 
place  of  public  worship  to  preach 
Christian  Science  was  denied  in  In  re 
First  Church,  etc.,  205  Pa.  St.  543 
(1903),  on  the  ground  that  it  inter- 
fered with  the  proper  treatment  of 
disease. 


643 


236.] 


PARTNERSHIP    LIABILITY    OF    STOCKHOLDERS.  [ciI.  XIII. 


statute  does  not  invalidate  the  charter  nor  render  the  stockholders 
personally  liable,  there  being  other  purposes  in  the  certificate  which 
are  authorized.1  If  a  general  incorporating  act  is  unconstitutional, 
all  supposed  corporations  formed  thereunder  are  merely  partner- 
ships and  the  members  are  liable  as  partners.2  If  the  business  itself, 
for  which  a  corporation  is  attempted,  is  illegal,  the  charter  is  no  pro- 
tection.3    Frequently  certain  kinds  of  business  are  not  mentioned 


rate  under  a  manufacturing  company 
act.  Mohr  v.  Minnesota  Elev.  Co.,  40 
Minn.  343  (1889).  Printing  and  pub- 
lishing a  newspaper  is  not  a  manu- 
facturing business.  Press  Printing  Co. 
v.  State  Board  of  Assessors,  51  N.  J. 
L.  75  (1888).  Under  an  act  authoriz- 
ing incorporations  for  "trade,"  an  in- 
corporation for  buying  and  selling 
land  will  be  sustained.  Finnegan  v. 
Noerenberg,  52  Minn.  239   (1893). 

Where  the  general  incorporating 
act  does  not  provide  for  the  incorpo- 
ration of  railroad  or  banking  corpo- 
rations under  it,  a  corporation  organ- 
ized under  it  to  buy  and  sell  railroad 
stock  and  bonds  and  to  lease  railroads 
and  operate  and  aid  them  is  void. 
Clarke  v.  Central  R.  R.,  50  Fed.  Rep. 
338  (1892).  But  see  s.  c.  sub  nom. 
Clarke  v.  Richmond,  etc.  Ry.,  62  Fed. 
Rep.   328    (1S94). 

i  Tennessee,  etc.  Co.  v.  Massey,  56 
S.  W.  Rep.  35  (Tenn.  1899).  Even 
though  the  certificate  of  incorporation 
includes  powers  which  the  statute 
does  not  authorize,  yet  this  does  not 
render  the  corporation  void  and  the 
stockholders  liable  as  partners,  espe- 
cially where  the  creditor  had  obtained 
a  judgment  against  the  corporation  as 
a  corporation.  Shoun  v.  Armstrong, 
59  S.  W.  Rep.  790  (Tenn.  1900).  See 
also  §  4,  supra.  If  a  charter  contains 
purposes,  some  of  which  are  legal  and 
some  illegal,  it  is  good  to  the  extent 
of  the  former.  Galveston  Land  & 
Imp.  Co.  v.  Perkins,  26  S.  W.  Rep. 
256   (Tex.  1894). 

2  Eaton  v.  Walker,  76  Mich.  579 
(1889).  There  may  be  a  question  as 
to  the  validity  of  the  law  itself  allow- 
ing  the   incorporation.     Williams   v. 


644 


Bank  of  Michigan,  7  Wend.  539 
(1831);  State  v.  How,  1  Mich.  512 
(1846);  Chenango  Bridge  Co.  v.  Paige, 
83  N.  Y.  178,  190  (1880).  As  to  a 
corporation  incorporated  by  a  state 
as  a  state,  before  it  was  admitted  to 
the  Union,  see  Mayers  v.  Manhattan 
Bank,  20  Ohio,  283  (1851).  Persons 
acting  as  agents  for  a  corporation 
which  does  not  exist  are  personally 
liable,  even  though  they  acted  in  good 
faith.  Lagrone  v.  Timmerman,  46  S. 
C.  372  (1895),  a  case  where  one  cor- 
poration undertook  to  grant  a  charter 
to  another  corporation.  Contra,  Scott 
v.  Detroit,  etc.  Soc,  1  Doug.  (Mich.) 
119  (1843).  A  stockholder  who  has 
given  a  mortgage  to  the  corporation 
cannot  defeat  the  same  on  the  ground 
that  the  charter  was  unconstitutional. 
Building,  etc.  Assoc,  v.  Chamberlain, 
4  S.  D.  271  (1893).  A  creditor  who 
has  dealt  with  a  bank  as  a  corpora- 
tion cannot  afterwards  claim  that  the 
stockholders  are  liable  as  partners  by 
reason  of  the  charter  being  unconsti- 
tutional. Richards  v.  Minn.  Sav. 
Bank,  75  Minn.  196  (1899).  See  also 
§  637,  infra.  It  is  no  defense  to  a 
mortgage  given  to  a  corporation  that 
the  statute  under  which  it  was  organ- 
ized was  unconstitutional.  Crete,  etc. 
Ass'n  v.  Patz,  95  N.  W.  Rep.  793 
(Neb.  1901).  Where  a  statute  ex- 
tending the  existence  of  a  corporation 
was  unconstituional,  the  corporation 
cannot  maintain  a  suit  to  enjoin  its 
grantee  Of  land  from  violating  a  re- 
striction in  the  deed.  Clark  v.  Ameri- 
can, etc.  Co.,  165  Ind.  213    (1905). 

3  Edwards  v.  Mich.  etc.  Co.,  132 
Mich.  1  (1902).  Notes  given  in  the 
purchase    of   stock   in  a   corporation 


CH.  XIII.  ]  PARTNERSHIP    LIABILITY    OP    STOCKHOLDERS. 


[§  236. 


in  the  act,  for  the  reason  that  it  is  not  deemed  wise  public  policy 
to  allow  a  limited  liability  in  that  class  of  business,  such  as  con- 
struction companies  for  the  building  of  railroads.1  Accordingly, 
where  the  business  for  which  incorporation  is  sought  is  not  within 


whose   sole   business   is   to   carry   on 
an  infringing  telephone  business  are 
without  consideration  and  void.  Clem- 
shire  v.  Boone  County  Bank,  53  Ark. 
512   (1890).     Where  a  scheme  involv- 
ing a  lapse  of  membership  and  rights 
is  organized  under  the  act  authoriz- 
ing   the    organization    of    benevolent 
and    charitable    institutions,    a   court 
of  equity  will  enjoin  the  continuance 
of  business  and  will  wind  it  up,  the 
officers    being    guilty    of    illegal    con- 
duct.    Peltz  v.   Supreme,   etc.   Union, 
19  Atl.  Rep.  668  (N.  J.  1890).    Where 
a  company  is  organized  for  an  illegal 
purpose,  i.  e.,  a  lottery,  and  its  capi- 
tal stock  is  issued  without  considera- 
tion, a  person  buying  stock  with  no- 
tice  of  the   facts  cannot  maintain   a 
bill  for  an  injunction  against  the  is- 
sue of  preferred  stock  and  for  a  re- 
ceiver.    Le  Warne  v.  Meyer,  38  Fed. 
Rep.  ,191    (1889).      The   organization 
of   a    company   to   carry   on   the   lot- 
tery business  in  foreign  countries  was 
held  legal  in  Macnee  v.  Persian  Inv. 
Corp.,  L.  R.  44  Ch.  D.  306  (1S90).    Cf. 
Le  Warne  v.  Meyer,  38  Fed.  Rep.  191 
(1889).     The  secretary  of  state  will 
not   be   compelled    to    accept   articles 
of    incorporation    for    bookmaking, — 
i.  e.,  gambling  on  races, — even  though 
the    statute    legalizes    and    regulates 
race  tracks.     Re  New  York  Booking 
Co.,  "N.  Y.    L.   J.,   April   29,   1892.     It 
is   no   defense   to   a   subscription   for 
stock  as  against  a  receiver  that  the 
real  object  of  the  corporation  was  to 
promote  selling  pools  on  horse  racing 
and    gambling.      Augir    v.    Ryan,    63 
Minn.   373    (1896).     Under  a   statute 
authorizing  incorporation  "for  pecun- 
iary profit  or  gain,"  persons  may  in- 
corporate to  issue   bonds  to  be  paid 
for  by  purchasers  thereof  in  monthly 
instalments   and    to   be   redeemed   as 

645 


might  be  prescribed  and  to  sell  and 
dispose  of  such  bonds.     State  v.  Cor- 
kins,  123  Mo.  56   (1894).     The  courts 
will   refuse  a  charter  to   a  company 
whose  business  is  to  be  "to  promote 
the  business  of  such  retail  coal  dealers 
as   become   members   thereof   and   to 
protect  them,"  etc.,  the   intent  being 
to  combine  the  retail  coal  dealers.    Re 
Richmond,  etc.  Coal  Co.,  9  Ry.  &  Corp. 
L.   J.   31    (Phila.   1890).     Persons   in- 
corporated for  the  purpose  of  doing 
a  grain-gambling  business  have  been 
held  jointly  and  severally  liable  for 
money  obtained  from  a  customer.   The 
corporate  character  does  not  protect 
them.     McGrew  v.  City  Produce  Ex- 
change, 85  Tenn.  572   (1887).    A  sub- 
scriber who  is  sued  by  a  receiver  of 
the  corporation  on  a  subscription  can- 
not set  up  the  defense  that  the  pur- 
pose  of   the  corporation  was   illegal, 
in  that  it  involved  a  drawing  for  dis- 
tribution among  the  stockholders   of 
lots   of   unequal    value.      Cardwell   v. 
Kelly,  95  Va.  570  (1898). 

i  It  has  been  held,  however,  that, 
under  the  general  act  for  the  incor- 
poration of  companies  for  construct- 
ing and  operating  a  railroad,  a  com- 
pany for  the  construction  alone  of  the 
road  may  be  incorporated.  "That 
there  can  be  a  railroad  company 
which  does  nothing  but  construct  the 
road,  and  a  railroad  company  which 
does  nothing  but  operate  the  con- 
structed road,  cannot  be  doubted.  It 
is  not  essential  to  the  idea  of  a  rail- 
road company  that  it  should  both  con- 
struct and  operate  a  railway."  First 
Nat.  Bank  of  Davenport  v.  Davies, 
43  Iowa,  424  (1876),  followed  in  Jes- 
sup  v.  Carnegie,  80  N.  Y.  441  (1880)  ; 
Langan  v.  Iowa,  etc.  Constr.  Co.,  49 
Iowa,  317   (1878). 


§  237.] 


PARTNERSHIP   LIABILITY    OP   STOCKHOLDERS.  \cil.  fclft 


the  classes  of  business  mentioned  in  the  act  itself,  the  attempted  in- 
corporation is  void  and  the  participants  are  liable  as  copartners. 

§  237.  Liability  as  partners  by  reason  of  the  fact  that  the  corpo* 
ration  is  incorporated  in  one  state,  but  does  all  its  business  in  an- 
other state. — By  the  comity  of  states  the  rule  is  as  become  well  es- 
tablished that  a  corporation  organized  tinder  the  laws  of  a  state 
may  transact  business  beyond  the  borders  of  that  state.1 

A  broad  and  liberal  view  of  this  comity  of  states  and  the  interests 
of  business  was  taken  by  the  New  York  court  of  appeals  in  the  cases 
of  Demarest  v.  Flack,2  and  Merrick  v.  Van  Santvoord,3  where  the 
court  refused  to  hold  the  stockholders  liable  as  partners,  although 
the  companies  were  clearly  organized  for  the  purpose  of  doing  all 


i  "It  is  very  true  that  a  corporation 
can  have  no  legal  existence  out  of  the 
boundaries  of  the  sovereignty  by 
which  it  is  created.  .  .  .  But  al- 
though it  must  live  and  have  its  being 
in  that  state  only,  yet  it  does  not  by 
any  means  follow  that  its  existence 
there  will  not  be  recognized  in  other 
places;  and  its  residence  in  one  state 
creates  no  insuperable  objection  to  its 
power  of  contracting  in  another." 
Taney,  Ch.  J.,  in  Bank  of  Augusta 
v.  Earle,  13  Pet.  519,  588  (1839). 

2  It  is  legal  for  citizens  of  New 
York  to  take  out  a  charter  in  West 
Virginia,  even  though  all  the  corpo- 
rate business  is  to  be  transacted  in 
New  York.  The  stockholders  are  not 
liable  as  partners.  Demarest  v.  Flack, 
128  N.  Y.  205  (1891).  The  court  said 
(p.  217):  "If  in  any  particular  case 
it  is  thought  by  those  interested  in 
the  matter  that  the  business  can  be 
done  in  our  own  state  and  by  our  own 
citizens  with  greater  facility  under 
the  form  of  a  foreign  corporation  than 
under  that  of  a  domestic  one,  there 
is  no  public  policy  which  forbids  its 
transaction  under  such  form."  Af- 
firming Demarest  v.  Flack,  11  N.  Y. 
Supp.  83    (1890). 

3  Merrick  v.  Van  Santvoord,  34  N. 
Y.  208  (1866),  reversing  Merrick  v. 
Brainard,  38  Barb.  574  (1860),  where, 
although  a  Connecticut  corporation 
did  all  its  corporate  business  and  per- 
formed all  its  corporate  acts  in  New 


York  except  the  holding  of  elections, 
yet  the  court,  in  a  well-considered  andi 
ably-written  opinion,  held  that  the  cor- 
poration did  not  thereby  lose  its  cor- 
porate character,  and  that  its  mem- 
bers were  not  liable  as  partners,  say- 
ing: "We  think  the  recognition,  in 
our  state,  of  the  rights  hitherto  con- 
ceded in  our  courts  to  foreign  cor- 
porations is  neither  injurious  to  our 
interests,  repugnant  to  our  policy,  nor 
opposed  to  the  spirit  of  our  legisla- 
tion. ...  It  would  be  neither 
provident  nor  just  to  inaugurate  a 
rule  which  would  unsettle  the  security 
of  corporate  property  and  rights,  and 
exclude  others  from  the  enjoyment 
here  of  privileges  which  have  alwaya 
been  accorded  to  us  abroad.  .  .  . 
A  corporation  is  an  artificial  being, 
and  has  no  dwelling,  either  in  its 
office,  its  warehouses,  its  depots,  or 
its  ships.  .  .  .  The  grant  of 
franchises  without  restriction  is 
equivalent  to  a  specific  authority  to 
exercise  them  wherever  the  company 
might  find  it  convenient  or  profitable, 
whether  within  or  without  the  limits 
of  the  state  of  Connecticut."  A  New 
Jersey  corporation  is  legally  organized 
even  though  all  of  its  incorporators* 
with  one  exception,  are  citizens  and 
residents  of  New  York  state.  Lancas- 
ter v.  Amsterdam  Imp.  Co.,  140  N-. 
Y.  576    (1894). 

An    Australian    corporation    which 
has    offices    in    London    and    weekly 


646 


CH.  XIII.]  PARTNERSHIP    LLVBILITY    OP    STOCKHOLDERS. 


[§  237. 


of  their  business  outside  of  the  state  wherein  they  took  out  their 
charters.  This  rule  of  law  has  been  sustained  by  the  courts  of  Ohio 
also,  and  is  established  by  the  great  weight  of  authority.1     A  foreign 


directors'  meetings  and  stockholders' 
meetings  in  London  where  its  general 
accounts  are  kept,  may  be  subject  to 
the  English  income  tax  levied  on  per- 
sons residing  therein.  De  Beers,  etc. 
v.  Howe,  [1905]  2  K.  B.  612. 

A  Montana  corporation  cannot  le- 
gally maintain  its  chief  office  outside 
of  the  state  and  keep  all  its  books 
there  and  hold  all  its  directors'  meet- 
ings there.  McConnell  v.  Combination, 
etc.  Co.,  30  Mont.  239  (1904);  s.  c, 
31    Mont.    563    (1905). 

i  Although  parties  incorporate  in 
Kentucky,  by  reason  of  the  greater 
liberality  of  the  Kentucky  corporation 
statutes,  and  although  the  corporation 
does  all  its  business  in  Ohio,  never- 
theless its  corporate  charter  is  recog- 
nized, and  the  stockholders  are  not 
liable  as  partners  on  a  corporate  note. 
Second  Nat.  Bank  v.  Lovell,  2  Cin. 
(Ohio),  397  (1873);  Second  Nat.  Bank 
v.  Hall,  35  Ohio  St.  158  (1878),  the 
court  holding  it  to  be  no  fraud  on  the 
Ohio  laws  for  a  corporation  organ- 
ized under  the  laws  of  Kentucky  to 
do  all  its  business  in  Ohio,  even 
though  thereby  the  stockholders  es- 
cape a  personal  liability.  A  party 
contracting  with  a  foreign  corporation 
to  pay  it  in  oil  from  land  assigned 
by  it  to  him  cannot  defeat  the  suit 
of  the  corporation  by  alleging  that 
it  was-  incorporated  in  another  state 
to  do  all  its  business  in  the  state, 
and  thereby  was  guilty  of  a  fraud. 
Newburg  Petroleum  Co.  v.  Weare,  27 
Ohio  St.  343  (1875).  A  corporation 
may  be  organized  in  one  state  and  do 
all  of  its  business  in  another  state. 
Missouri  Lead,  etc.  Co.  v.  Reinhard, 
114  Mo.  218  (1893).  Citizens  of 
Rhode  Island  may  incorporate  a  com- 
pany in  Kentucky  for  the  purpose  of 
doing  business  in  Rhode  Island.  Oak- 
dale  Mfg.  Co.  r.  Garst,  18  R.  I.  484 
(1894).  In  People  v.  Fidelity,  etc.  Co., 


153  111.  25  (1894),  it  was  held  that,  in 
the  absence  of  an  express  prohibitory 
statute,  a  corporation  legally  organ- 
ized under  the  laws  of  another  state 
to  do  a  multiform  insurance  business 
may  do  such  business  in  Illinois,  al- 
though such  a  corporation  could  not 
be  organized  under  the  laws  of  Illi- 
nois. See  also  Danforth  v.  Penny,  44 
Mass.  564  (1842).  A  judgment  against 
a  West  Virginia  corporation  cannot  be 
enforced  against  the  president,  even 
though  it  is  alleged  that  the  corpora- 
tion was  a  myth  and  did  not  exist, 
and  that  its  organization  had  not  been 
kept  up  and  that  the  president  was 
the  real  owner  and  carried  on  the 
business.  The  remedy  is  an  original 
suit  against  him.  Tilley  v.  Coykendall, 
172  N.  Y.  587  (1902).  A  subscriber 
to  stock  in  a  West  Virginia  corpora- 
tion doing  all  its  business  in  Minne- 
sota cannot  set  up  that  the  company 
was  not  legally  incorporated,  and  can- 
not set  up  that  the  plaintiff  is  not  a 
corporation,  he  having  participated  in 
its  incorporation.  Minnesota,  etc.  Co. 
v.  Denslow,  46  Minn.  171  (1891).  In 
Wright  v.  Lee,  2  S.  D.  596  (1892),  s. 
c,  4  S.  D.  237,  it  appears  that  a  Min- 
nesota corporation  did  all  its  business 
in  South  Dakota.  The  court  held  this 
to  be  legal.  See  also  Atchison,  etc. 
R.  R.  v.  Fletcher,  35  Kan.  236,  242, 
244  (1886).  Concerning  the  legality, 
purpose,  and  effect  of  persons  incor- 
porating in  one  state  with  the  inten- 
tion of  doing  all  of  the  corporate  busi- 
ness in  another  state,  see  an  article 
in  25  Am.  Law  Rev.  352,  criticising 
the  law  as  laid  down  above,  and  an- 
other article  in  26  Am.  Law  Rev.  342, 
commending  the  law  as  laid  down 
above.  Bateman  v.  Service,  L.  R.  6 
App.  Cas.  396  (1881) ;  Stevens  v. 
Phoenix  Ins.  Co.,  41  N.  Y.  149  (1869). 
A  charter  will  not  be  forfeited  merely 
because   the    corporation    was    incor- 


647 


237.] 


PARTNERSHIP    LIABILITY    OF    STOCKHOLDERS. 


[CH.  XIII. 


corporation  authorized  by  its  charter  to  do  certain  business,  may 
transact  that  business  in  another  state,  even  though  the  statutes  of 


porated  in  one  state  and  all  its  offl-    ing  among  the  states  composing  the 


cers  and  stockholders  reside  in  an- 
other state;  nor  because  it  keeps  its 
books  out  of  the  state  in  violation  of 
a  statute.  North,  etc.  Stock  Co.  v. 
People,  147  111.  234  (1893).  A  cor- 
poration of  one  state  "lawfully  may, 
as  they  often  actually  do,  remove 
their  officers,  agents,  offices,  and  ef- 
fects into  another  sovereignty,  and 
there  exercise  their  functions  and 
franchises."  Pennsylvania  Co.  v. 
Sloan,  1  111.  App.  364  (1878).  A  Con- 
necticut corporation  may  hold  land  in 
New  Hampshire,  although  it  does  lit- 
tle or  no  business  in  Connecticut. 
New  Hampshire  Land  Oo.  v.  Tilton, 
19  Fed.  Rep.  73  (1884).  A  corpora- 
tion may  sell  its  products  in  any  state 
and  collect  notes  given  in  payment. 
Hall  v.  Tanner,  etc.  Co.,  91  Ala. 
363  (1890).  "Comity  between  the 
states  authorizes  a  corporation  to 
exercise  its  charter  powers  within  an- 
other state,  but  it  does  not  permit  the 
exercise  of  a  power  where  the  policy 
of  that  state,  distinctly  marked  by 
legislative  enactments  or  constitu- 
tional provision,  forbids  it."  In  this 
case  the  consolidation  of  competing 
lines  of  railway  was  involved.  Clarke 
v.  Central  R.  R.,  50  Fed.  Rep.  338 
(1892).  See  s.  c.  sub  nom.  Clarke  v. 
Richmond,  etc.  Ry.,  62  Fed.  Rep.  328 
(1894).  A  limited  partnership  formed 
under  the  laws  of  Spain  will  be  recog- 
nized and  upheld  by  our  courts.  King 
v.  Sarria,  69  N.  Y.  24  (1877),  where 
the  court  discusses  the  comity  of 
states.  See  also  Missouri  Lead  Min. 
Co.  v.  Reinhard,  114  Mo.  218  (1893), 
where  a  Missouri  corporation  sold  all 
its  property  to  an  English  corpora- 
tion. In  Christian  Union  v.  Yount, 
101  U.  S.  352  (1879),  involving  the 
question  whether  a  foreign  corpora- 
tion could,  by  bequest,  take  land  in 
Illinois,  the  court  said:  "In  harmony 
with  the  general  law  of  comity  obtain- 


Union,  the  presumption  should  be  in- 
dulged that  a  corporation  of  one  state, 
not  forbiden  by  the  law  of  its  being, 
may  exercise  within  any  other  state 
the  general  powers  conferred  by  its 
own  charter,  unless  it  is  prohibited 
from  so  doing,  either  in  the  direct  en- 
actments of  the  latter  state,  or  by  its 
public  policy,  to  be  deduced  from  the 
general  course  of  legislation  or  from 
the  settled  adjudications  of  its  highest 
court."  See  also  Oregonian  Ry.  v. 
Oregon  Ry.  &  Nav.  Co.,  23  Fed.  Rep. 
232  (1885),  where  the  plaintiff,  an 
English  corporation,  did  all  its  busi- 
ness in  Oregon;  reversed  on  another 
point,  130  U.  S.  1  (1889).  A  cor- 
poration "may  do  business  in  all 
places  where  its  charter  allows  and 
tne  local  laws  do  not  forbid."  Canada 
Southern  Ry.  v.  Gebhard,  109  U.  S. 
527  (1883).  See  also  Cowell  v. 
Springs  Co.,  100  U.  S.  55  (1879),  hold- 
ing that  a  Pennsylvania  corporation 
authorized  to  purchase  land  in  states 
and  territories  west  of  the  Mississippi 
may  purchase  land  in  Colorado,  and 
such  purchase  is  valid,  where  no  stat- 
ute of  Colorado  prohibits  it.  And  see 
Stockton  v.  Baltimore,  etc.  R.  R„  32 
Fed.  Rep.  9  (1887).  Even  though  a 
corporation  has  its  real  and  actual 
place  of  business  outside  of  the  state 
for  portions  of  the  year,  yet  this  does 
not  invalidate  its  incorporation.  Hast- 
ings v.  Anacortes,  etc.  Co.,  29  Wash. 
224  (1902).  Even  though  a  corpora- 
tion intends  to  do  all  its  business 
in  one  county,  it  may  fix  its  principal 
place  of  business  in  its  charter  in  an- 
other county.  McCandless  v.  Inland, 
etc.  Co.,  115  Ga.  968  (1902).  In  Hollis 
v.  Drew  Theol.  Sem.,  95  N.  Y.  166 
(1884),  the  court  said,  as  to  foreign 
corporations,  that  the  courts  could  not 
exclude  them  from  doing  business  in 
the  state.  "Unless  the  legislature  for- 
bids, they  can  come  here  as  freely  as 


648 


CH.  XIII.  J  PARTNERSHIP   LIABILITY   OF   STOCKHOLDERS. 


[§  237. 


such  state  do  not  authorize  incorporation  for  that  purpose,  the  pur- 
pose itself  being  legal.1 

A  New  Jersey  corporation  may  do  business  in  Missouri  even 
though  all  of  its  stock  excepting  one  share  is  held  by  citizens  of 
Missouri,  and  even  though  the  statutes  of  Missouri  forbid  foreign 
corporations  doing  business  in  that  state  where  they  were  organized 
for  the  purpose  of  avoiding  the  laws  of  that  state.2  Although  a  bill 
in  equity  sets  forth  that  a  corporation  is  merely  a  pretended  corpora- 
tion as  a  part  of  a  fraudulent  scheme,  and  is  really  nothing  but 
a  partnership,  nevertheless,  if  such  corporation  has  an  existing 
charter,  it  exists  as  a  corporation,  sufficiently  at  least  to  determine  the 
right  of  the  federal  courts  to  entertain  jurisdiction  of  a  case.3  But 
where  property  is  transferred  to  a  non-resident  corporation  for  the 

natural  persons  and  exercise  here  all  policy  is  demanded  by  comity,  since 

the  powers  conferred   upon  them  by  otherwise  they  might  say:  "What  race 

their   charters,   subject   to   the   same  of  men  is  this,  from  whose  shores  we 

limitations  imposed  upon  natural  per-  are  excluded?"     See  46  S.  Rep.  185. 

sons;  that  is,  they  can  do  no  acts  in  i  Haskins  v.  Kelly,  93  Pac.  Rep.  605 

violation  of  our  laws  or  of  our  policy.  (Kan.  1908). 

But,   unless  prohibited  by  law,  they  2  State  v.  Cook,  181  Mo.  596  (1904). 
can  do  here,  within  the  limits  of  their  Where  a  corporation  endorses  a  note 
chartered  powers,  precisely  what  do-  in  the  corporate  name  the  endorsee 
mestic  corporations   could   do."     See  of   the   note   cannot   hold   the   stock- 
also    Bard    v.    Poole,    12    N.    Y.    495  holders  of  the  corporation  personally 
(1855);   Mumford  v.  American  Life,  liable  on  the  ground  that  the  corpora- 
etc.  Co.,  4  N.  Y.  463,  482  (1851);  Re  tion  was   organized   by  non-residents 
New  York,  L.  &  W.  R.  R.,  35  Hun,  to  do  all  its  business  outside  the  state 
220    (1885);    aff'd,   99   N.  Y.   12.     In  Boatmen's  Bank  v.   Gillespie,  108   s! 
People  v.  Fire  Assoc,  92  N.  Y.  311  W.  Rep.  74  (Mo.  1908).    Even  though 
(1883),  the  court,  in  holding  that  the  a  telephone  company  is  incorporated 
state  may   prohibit  a   foreign  insur-  in  Delaware  for  the  purpose  of  build- 
ance    company    from    doing   business  ing  and  operating  a  telephone  system 
within    its   borders    unless   a   certain  in  Louisville,  Kentucky,  yet  this  does 
tax   was  paid,   said:      "The   right  of  not   prevent   such  corporation   bring- 
a  state  to  exclude  foreign  corporations  ing  suit  to  protect  its  rights  in  Ken- 
is  perfectly  settled  and  not  open  to  tucky.    Cumberland,  etc.  Co.  v.  Louis- 
debate.     Out  of   comity  between   the  ville,  etc.  Co.,  114  Ky.  892    (1903). 
states  has  grown  a  right  founded  upon  3  Empire   Coal,   etc.   Co.   v.  Empire 
implied  consent.     Where  a  state  does  Min.,  etc.  Co.,  150  U.  S.  159    (1893). 
not   forbid,   or   its   public   policy,   as  In  Irvine  Co.  v.  Bond,  74  Fed.  Rep. 
evidenced  by  its  statutes,  is  not  in-  849  (1896),  an  owner  of  land  in  Cali- 
fringed,    a    foreign    corporation    may  fornia  incorporated  a  company  under 
transact  business  within  its  bounda-  the  laws  of  West  Virginia  and  trans- 
ries,  and  be  entitled  to  the  protection  ferred  to  it,  in  payment  for  stock,  cer- 
of  its  laws."     As  was  said  by  Chan-  tain  portions  of  his  land.     He  owned 
cellor   Kent   in   Silver  Lake  Bank  v.  all   the  stock,   and  caused  one  share 
North,  4  Johns.  Ch.  370  (1820),  in  ref-  each  to  be  issued  to  his  lawyer,  his 
erence    to    allowing   foreign    corpora-  wife,  and  three  employees.    The  court 
tlons  to   sue   in   our  courts,   such   a  held  that  the  corporation  was  legal 

649 


§  238.] 


PARTNERSHIP    LIABILITY    OF   STOCKHOLDERS. 


[CII.  XIII. 


sole  purpose  of  enabling  the  parties  to  litigate  a  claim  in  the  United 
States  courts,  the  United  States  courts  will  refuse  to  take  juris- 
diction.1 

§  238.  There  are  a  few  decisions  refusing  to  recognize  such  incor- 
porations. In  Massachusetts  it  has  been  held  that  where  a  citizen 
of  Massachusetts  incorporates  a  company  in  New  Hampshire,  and 
states  in  the  certificate  of  incorporation  that  the  chief  place  of  busi- 
ness is  in  a  city  in  New  Hampshire,  and  that  he  and  his  associates 
are  jointly  interested,  the  corporation  is  to  be  held  fraudulent  and 
void  upon  proof  being  given  that  all  the  business  was  carried  on  in 
Massachusetts,  and  that  the  associates  were  "dummies,"  having  one 
share  of  stock  each.2 

In  New  Jersey,  at  an  early  day,  it  was  held  that  a  corporation 
could  not  become  incorporated  under  the  laws  of  New  York  for  the 
purpose  of  carrying  on  all  its  corporate  transactions  in  the  state 
of  New  Jersey.3  The  stockholders  were  held  to  be  merely  partners. 
Likewise  it  was  held  that  where  a  corporation  was  incorporated  to 
do  business  in  a  certain  city  in  the  state,  but  actually  did  all  its 
business  in  another  city  of  that  state,  the  incorporation  was  a  fraud 
upon  the  law,  and  the  company  was  the  same  as  though  unincor- 
porated.4 


so    far    as    the    jurisdiction    of    the 
United  States  court  was  concerned. 

i  Lehigh,   etc.   Co.  v.  Kelly,   160   U. 
S.  327  (1895). 

2  Montgomery  v.  Forbes,  148  Mass. 
249  (1889).  In  this  case  the  holder 
of  a  note  signed  in  the  corporate 
name,  and  given  for  goods  sold,  sued 
a  stockholder  for  the  price  of  the 
goods.  The  court  sustained  the  suit 
and  said:  "The  apparent  corporation 
was  not  a  corporation.  .  .  .  The 
defendant's  pretended  associates  were 
associates  only  in  name;  he  alone  was 
interested  in  the  enterprise.  The  ar- 
ticles of  agreement  were  recorded  in 
Nashua  [N.  H.],  and  stated  that  the 
business  was  to  be  carried  on  there; 
but  it  was  not  in  fact  carried  on 
there,  and  was  not  intended  to  be. 
This  is  not  a  case  where  there  has 
been  a  defective  organization  of  a 
corporation  which  has  a  legal  exis- 
tence under  a  valid  charter.  Here 
there  was  no  corporation. 
The  business   was    [defendant's]    per- 


sonal business,  which  he  transacted 
under  that  name."  Cf.  Saltmarsh  v. 
Spaulding,  147  Mass.  224  (1888). 

3  The  corporation  "cannot  be  recog- 
nized by  any  court  in  New  Jersey  as 
a  legally  constituted  corporation,  nor 
be  dealt  with  as  such.  If  it  can  be, 
what  need  is  there  of  any  general  or 
special  law  in  our  state?  Individuals 
desirous  of  carrying  on  any  manufac- 
turing business  may  go  into  the  city 
of  New  York,  organize  under  the 
general  laws  of  that  state,  erect  all 
their  manufacturing  establishments 
here,  and,  under  their  assumed  name, 
transact  their  business,  not  only  free 
from  all  personal  responsibility,  but 
under  cover  of  a  corporation  not 
amenable  to  our  laws."  Hill  v.  Beach, 
12  N.  J.  Eq.  31   (1858). 

4  The  corporation  was  incorporated 
to  do  business  in  Trenton,  but  actually 
transacted  all  its  business  in  Jersey 
City.  The  court  said:  "The  doctrine 
that  the  organization  cannot  be  in- 
quired into  collaterally  has  no  appli- 


650 


CH.  XIII.  ]  PARTNERSHIP  LIABILITY   OF   STOCKHOLDERS. 


[§    238. 


In  these  days,  however,  when  New  Jersey  is  the  favorite  resort 
for  the  class  of  corporations  now  under  consideration,  the  laws  of  that 
state  having  been  framed  especially  for  the  purpose  of  attracting 
them,  it  is  not  at  all  probable  that  the  old  decisions  in  that  state  on 
this  subject  would  be  adhered  to.1  A  stockholder  in  a  New  Jersey 
corporation  cannot  maintain  a  suit  in  equity  to  require  the  corpo- 
ration to  bring  its  books  into  the  state  merely  that  he  may  have 
access  to  them.2 

In  Texas  it  has  been  held  that  its  citizens  are  liable  as  partners 
where  they  incorporate  in  another  state  to  carry  on  a  mercantile 
business  in  Texas,  the  legislature  of  Texas  having  substantially  for- 
bidden incorporation  for  that  purpose.3 


cation  as  the  case  stands,  because  the 
charter  does  not  fit  this  company,  and 
was  not  intended  for  it."  Wonderly  v. 
Booth,  36  N.  J.  L.  250  (1873).  This 
doctrine  was  followed  in  a  New  York 
case  in  a  lower  court,  the  facts  being 
that  a  New  Jersey  corporation  had 
no  office  or  place  of  business  in  New 
Jersey,  and  did  no  business  there,  but 
transacted  its  business  in  New  York. 
"It  was  not  an  existing  corporation 
within  the  meaning  of  the  statute  of 
New  Jersey,  under  which  it  purports 
to  have  been  incorporated. 
It  was  a  fraud  upon  the  laws  of  New 
Jersey  and  cannot  screen  defendants 
and  its  organizers  from  personal  re- 
sponsibility as  partners  for  contracts 
made  in  New  York  under  the  assumed 
name."  Kruse  v.  Dusenbury,  19  N.  Y. 
Week.  Dig.  (N.  Y.  Com.  PI.)  201 
(1884).  This  last  case  seems  to  have 
been  "decided  without  noticing  Mer- 
rick v.  Van  Santvoord,  34  N.  Y.  208 
(1866),  and  the  case  certainly  is  not 
the  law  of  New  York.  A  contract 
between  an  author  and  a  New  Jersey 
corporation  for  the  publication  of  his 
books  cannot  be  assigned  by  the  New 
Jersey  corporation  to  an  Arizona  cor- 
poration, even  though  the  stockhold- 
ers and  directors  are  the  same,  the 
author  being  entitled  to  the  protec- 
tion of  the  New  Jersey  corporation 
laws.  Wooster  v.  Crane,  66  Atl.  Rep. 
1093   (N.  J.  1907). 

i  An  injunction  does  not  lie  at  the 


instance  of  the  state  against  a  cor- 
poration doing  business  on  the  ground 
that  its  stock  was  not  properly  issued 
and  that  there  was  no  intent  to  do  any 
business  within  the  state  or  to  have 
an  office  therein.  Stockton  v.  Ameri- 
can, etc.  Co.,  55  N.  J.  Eq.  352  (1897). 
Chief  Justice  Beasley,  in  Erie  Ry.  v. 
State,  31  N.  J.  L.  531,  544  (1864), 
said:  "A  statute  that  should  abolish 
the  rule  of  comity,  and  should  refuse 
a  recognition  of  foreign  corporations, 
would,  it  is  conceived,  have  this  effect 
and  no  more,  i.  e.,  to  convert  the  for- 
eign corporators,  as  to  the  state  en- 
acting the  supposed  law,  into  a  part- 
nership of  individuals." 

2Maeder  v.  Buffalo,  etc.  Co.,  132 
Fed.  Rep.  280   (1904). 

3  Stockholders  are  liable  as  partners 
in  Texas,  on  business  done  in  Texas, 
where  they  organized  a  corporation  in 
Iowa  to  do  a  mercantile  business,  the 
laws  of  Texas  not  authorizing  incor- 
poration for  that  purpose.  Empire 
Mills  v.  Alston  Grocery  Co.,  15  S. 
W.  Rep.  200  (Tex.  1891).  It  appeared 
in  this  case,  however,  that  the  legis- 
lature had  expressly  declared  the 
policy  of  the  state  by  repealing  a  stat- 
ute that  authorized  incorporation  for 
mercantile  purposes.  See  s.  c,  15  S. 
W.  Rep.  505,  on  rehearing.  The  fact 
that  the  company  is  doing  all  its  busi- 
ness in  another  state  does  not  re- 
lease the  company  from  its  obligation 
to   issue   certificates   of   stock   to    its 


651 


§§   239,  240.]  PARTNERSHIP    LIABILITY    OF    STOCKHOLDERS.  [cil.  XIII. 

In  Canada  also,  at  an  early  day,  the  same  rule  seems  to  have  been 
laid  down.1 

§§  239,  240.  There  certainly  is  a  limit  beyond  which  the  courts 
will  not  go.  In  order  that  contracts  may  be  upheld  and  the  cor- 
porate character  be  sustained,  it  is  necessary  that  both  the  state 
creating  the  corporation  and  the  corporation  so  created  shall  have 
acted  in  good  faith  in  conferring  and  taking  the  corporate  privi- 
leges.2 Thus,  where  a  corporation  was  incorporated  by  the  legis- 
lature of  Pennsylvania,  and  authorized  to  do  business  anywhere  but 


stockholders.  Rio  Grande  Cattle  Co. 
v.  Burns,  82  Tex.  50  (1891).  Where 
a  Colorado  corporation  has  power, 
among  other  things,  to  deal  in  real 
estate,  its  purchases  of  land  in  Texas 
cannot  be  questioned  by  any  one  ex- 
cept the  state,  even  though  Texas  did 
not  allow  incorporation  for  that  pur- 
pose. Galveston,  etc.  Co.  r.  Perkins, 
26  S.  W.  Rep.  256  (1894).  Where  the 
charter  need  not  state  the  principal 
place  of  business  within  the  state  the 
charter  is  legal,  although  it  states 
that  the  business  is  to  be  carried  on 
in  certain  other  states.  Beattie  v. 
Hardy,  93  Tex.  131  (1899).  Because 
a  corporation  does  business  outside 
of  the  state  wherein  it  is  incorporated 
it  will  not  be  presumed  that  it  does 
no  business  within  such  state.  La- 
sater  v.  Purcell,  etc.  Co.,  22  Tex.  Civ. 
App.  33    (1899). 

i  In  Canada  it  has  been  held  that 
no  state  can  validly  authorize  a  body 
corporate  to  transact  business  out  of 
its  own  territory.  Bank  of  Montreal 
v.  Bathune,  4  Up.  Can.  (Q.  B.)  (O. 
S.)  341  (1832);  Genesee  Mut.  Ins. 
Co.  v.  Westman,  8  Up.  Can.  (Q.  B.) 
487  (1852);  Union  Rubber  Co.  v.  Hib- 
bard,  6  Up.  Can.  (C.  P.)  77  (1855). 
If  carefully  examined,  these  cases  de- 
cide that  a  corporation  formed  to 
carry  on  a  particular  business  in  one 
country  exceeds  its  powers  if  it  car- 
ries on  a  similar  business  out  of  that 
country.  At  the  same  time  the  judges 
who  decided  those  cases  based  their 
judgments  on  supposed  grounds  of  in- 
ternational law.     The  first  case  men- 


tioned above  held  that  a  bank  char- 
tered in  Lower  Canada  has  no  power 
to  discount  a  note  in  Upper  Canada 
and  sue  upon  the  same,  but  may  re- 
cover for  money  had  and  received. 
In  the  case  of  Genesee  Mut.  Ins.  Co. 
v.  Westman,  8  Up.  Can.  (Q.  B.)  487 
(1852),  the  court  held  that  a  New 
York  corporation  had  no  right  or 
power  to  enter  into  any  contract  at 
all  or  transact  any  business  in  a  cor- 
porate capacity  in  that  province.  In 
Reynolds  v.  Gallihar,  etc.  Co.,  19  Nova 
Scotia  Rep.  466  (1886),  it  appears  that 
a  Massachusetts  corporation  owned  a 
mine  in  Nova  Scotia.  The  decision 
was  concerning  an  attachment,  and 
the  legality  of  the  company's  acts 
was  not  questioned.  A  foreign  cor- 
poration may  hold  personal  property 
in  Ontario.  Commercial,  etc.  Bank  v. 
Concoran,  6  Ont.  Rep.  (Can.)  527 
(1884). 

2  Where  a  Texas  corporation  is  to 
do  business  only  in  certain  counties 
of  that  state,  and  it  proceeds  to  trans- 
act business  in  Louisiana  under  an- 
other name,  the  parties  doing  the  busi- 
ness may  be  held  liable  as  partners. 
Campbell  v.  Campbell  Co.,  117  La. 
402  (1906).  The  reason  for  doing 
business  in  this  way  was  stated  in 
the  testimony  as  follows:  "Some- 
times they  do  it  for  a  blind,  they  do 
not  want  people  to  know  who  owns 
the  business;  and  sometimes  the 
farmers  are  prejudiced  against  cor- 
porations, and  they  just  use  a  local 
name,  putting  a  local  man  in  there  as 
manager." 


652 


CH.  XIII.]  PARTNERSHIP    LIABILITY    OP    STOCKHOLDERS.   [§§   239,240. 


in  that  state,  the  courts  of  Kansas  refused  to  recognize  its  corporate 
character.1  The  comity  of  states  does  not  prevail  to  that  extent.  So 
also,  where  parties  take  out  a  charter  in  Tennessee,  but,  instead  of 
holding  their  organization  meetings  in  Tennessee,  hold  them  in 
Florida,  where  they  do  all  their  business,  they  are  liable  in  Florida 
as  partners.2  In  Minnesota  it  is  held  that  it  may  be  good 
ground  for  the  forfeiture  of  the  charter  that  the  corporation  is  in- 
tended solely  for  business  in  another  state.3     Where  a  dummy  cor- 


1  Land  Grant  Ry.  v.  Coffey  County, 
6    Kan.    245    (1870),    the    court    say- 
ing:     "No  rule  of  comity  will  allow 
one  state  to  spawn  corporations,  and 
send  them  forth  into  other  states  to 
be   nurtured   and   do   business   there, 
when   said   first-mentioned   state  will 
not  allow  them  to  do  business  within 
its  own  boundaries."     A  New  Jersey 
corporation  organized  under  the  gen- 
eral act  to  manufacture  and  sell  gas 
cannot  do  so  in  New  Jersey,  inasmuch 
as  such  charters  must  be  taken  out 
under  the  gas  company  act,  and  hence 
such  a  company  cannot  exercise  such 
powers   in  another  state   and  cannot 
prevent   its   plant   in   the   streets   be- 
ing treated  as  a  nuisance  by  a  party 
suffering  special  injury  thereby.    Seat- 
tle, etc.  Co.  v.  Citizens',  etc.  Co.,  123 
Fed.   Rep.    588    (1903).     In   the   case 
Myatt    v.    Ponca    City,    etc.    Co.,    14 
Okl.    189,    220    (1903),    where    a    co- 
partnership in  Oklahoma  transferred 
all  their  real  estate  in  Oklahoma  to 
a  Kansas  corporation  formed  by  them 
for  that  purpose,  such  corporation  by 
its   charter   not   being   authorized   to 
do  business  in  Kansas,  but  only  to  do 
business  in  Oklahoma,  a  claimant  of 
land    from   the   copartnership   filed   a 
bill  to  establish  title  as  against  the 
corporation,  and  the  court  held  that 
the  title  to  the  corporation  was  not 
good  for  the  reason  that  the  corpora- 
tion itself  was  not  legally  organized. 
A  corporation  organized  in  Kansas  to 
buy   and   sell   land    in   Oklahoma  ex- 
clusively will  not  be  recognized  as  a 
corporation  in  Oklahoma  and  cannot 
enforce   a  purchase  money   mortgage 
which  it  has  received  in  payment  for 


land.  Lafferty  v.  Evans,  17  Okla.  247 
(1906).  And  see  Opinion  of  Attorney- 
General  of  Texas  (1887),  2  Ry.  & 
Corp.  L.  J.  433,  to  the  effect  that  a 
Scotch  corporation,  authorized  to  pur- 
chase land  anywhere  excepting  at 
home,  cannot  hold  lands  in  Texas. 

2  Taylor  v.  Branham,  35  Fla.  297 
(1895).  The  dicta  in  this  decision  as 
to  the  liability  of  stockholders  in 
foreign  corporations  doing  business 
in  Florida  are  startling,  to  say  the 
least.  Where  a  charter  is  taken  out 
in  one  state  and  the  organization 
meetings  are  held  in  another  state, 
the  presumption  is  that  no  corpora- 
tion is  organized,  and  unless  proof 
is  given  that  the  statutes  of  the  first- 
named  state  authorized  the  holding 
of  the  organization  meeting  in  an- 
other state,  the  stockholders  are  liable 
as  partners.  Duke  v.  Taylor,  37  Fla. 
64  (1896).  See  also  §589,  infra.  See 
46  S.  Rep.  185. 

3  In  State  v.  Park,  etc.  Co.,  58  Minn. 
330  (1894),  the  court  forfeited  the 
charter  of  a  company  that  had  been 
incorporated  in  Minnesota  for  the  pur- 
pose evidently  of  doing  all  its  busi- 
ness in  Wisconsin.  The  charter  was 
forfeited  on  the  ground  that  the  com- 
pany had  not  complied  with  the  stat- 
ute, in  having  its  place  of  business, 
and  keeping  its  books,  within  the 
state.  The  court  also  approved  of 
a  decision  in  Wisconsin  to  the  ef- 
fect that  at  common  law  a  charter 
may  be  forfeited  where  the  corpora- 
tion keeps  its  principal  office,  books, 
and  records  out  of  the  state  to  such 
an  extent  that  it  is  impossible  for  the 
state  and  its  courts  to  have  full  juris- 

153 


§   241.]  PARTNERSHIP   LIABILITY  OF  STOCK  HOLDERS.  [cil.  XIII. 

poration  is  solely  to  avoid  making  a  deposit  required  by  statute,  a 
subscriber  may  refuse  to  pay  his  subscription.1 

§  241.  Assessments  by  the  corporation  in  excess  of  the  par  value 
<ofthe  stock— Stockholders  are  not  Uuble  therefor. — It  is  a  principle 
'of  law,  coeval  with  tbe  existence  of  corporations  having  a  capital 
stock,  that,  unless  the  corporate  charter  or  a  constitutional  statute 
provides  otherwise,  a  stockholder,  the  full  par  value  of  whose  stock 
has  been  paid  in,  is  not  liable  for  and  cannot  be  made  to  pay  any  sums 
in  addition  thereto.2     Tne  mere  legislative  act  of  creating  a  corpo- 

diction  and  visitoriat  power  over  the  v.  Coffin,  63  Mass.  192,  199  (1852); 
corporation.  Where  a  corporation  re-  French  *\  Teschemaker,  24  Cal.  518, 
moves  all  its  offices  from  the  state,  540  (1564);  Norton  v.  Hodges,  100 
a  stockholder  may  apply,  under  the  Mass,  241  (1868);  Buenz  v.  Cook,  15 
statute,  for  a  dissolution  on  the  Colo.  38  (1890).  "The  personal  lia- 
ground  -of  an  abuse  of  powers.  Sim-  bility  of  stockholders  for  the  debts 
jrowms  &  Norfolk,  etc.  Steamboat  Co.,  of  the  corporation  arises  only  from 
113  N.  C.  147  (1893).  In  Kansas  the  statute."  United  States  v.  Stanford, 
tcharter  of  a  corporation  may  be  for-  161  U.  S.  412,  429  (1896).  Stock- 
Set'ted  at  the  instance  of  the  state,  holders  are  not  liable  at  common  law 
iif  the  corporation  fails  to  keep  its  over  and  above  the  stock  itself, 
•general  office  and  the  office  of  its  Wells  v.  Green  Bay,  etc.  Co.,  90  Wis. 
treasurer  within  the  state,  in  accord-  442  (1895).  "The  creation  of  the  cor- 
ance  with  the  terms  of  the  statute,  poration  necessarily  destroys  the  corn- 
State  v.  Top.  W.  Co.,  59  Kan.  151(1898).  mon-law    liability    of    the    individual 

i  Money  paid  on  a  subscription  to  members  for  its  debts."  People  v. 
the  stock  of  a  New  Jersey  corporation  Coleman,  133  N.  Y.  279  (1892). 
may  be  recovered  back,  it  being  sbown  "After  the  full  par  value  of  the  stock 
that  such  New  Jersey  corporation  subscribed  for  has  been  paid,  the  corn- 
was  merely  a  dummy  corporation  to  mon-law  liability  of  the  stockholder, 
enable  a  New  York  corporation  to  both  as  respects  the  corporation  and 
do  business  in  New  Jersey  without  its  creditors,  is  at  an  end."  Toner 
making  a  deposit  required  by  the  stat-  v.  Fulkerson,  125  Ind.  224  (1890). 
nates  of  New  Jersey,  and  it  being  Stockholders  are  not  personally  liable 
also  shown  that  it  was  falsely  repre-  for  corporate  debts.  Gorder  v.  Con- 
sented that  the  New  Jersey  was  a  nor,  56  Neb.  781  (1898).  The  chief 
ftona  fide  corporation.  Seeber  v.  Peo-  stockholders  cannot  be  held  liable  for 
pie's,  etc.  Assoc,  36  N.  Y.  App.  Div.  the  corporate  debts  on  the  theory  of 
312  (1899).  a  "general  understanding"  that  they 

2  Quoted  and  approved  in  Nelson  would  be  responsible.  The  corpora- 
«».  Keith,  etc.  Co.,  91  Pac.  Rep.  30  tion  alone  is  liable.  Circulars,  bill- 
(Utah  1907);  Great  Falls,  etc.  R.  R.  heads,  letters,  etc.,  used  in  the  busi- 
er. Copp,  38  N.  H.  124  (1859);  State  ness  and  containing  the  corporation's 
v.  Morristown  Fire  Assoc,  23  N.  J.  name  are  admissible  to  show  that  the 
L.  195  (1851);  Morley  v.  Thayer,  3  business  was  conducted  in  the  cor* 
Fed.  Rep.  737  (1880);  Chase  v.  Lord,  porate  name  and  on  the  corporate  re> 
77  N.  Y.  1  (1879);  Slee  v.  Bloom,  sponsibility.  Butte  Hardware  Co.  v, 
19  Johns.  456,  473  (1822);  Shaw  v.  Wallace,  59  Conn.  336  (1890).  The 
Boylan,  16  Ind.  384  (1861) ;  Coffin  v.  individual  stockholders  of  a  corpora? 
Rich,  45  Me.  507,  511    (1858);    Gray  tion  are  not  liable  for  the  debts  of, 

654 


CH.  XIII.]  PARTNERSHIP    LIABILITY    OF    STOCKHOLDERS.  [§    241. 

ration  produces  by  implication  this  limited  liability  of  its  members. 
For  this  reason  the  statutes  regulating  joint-stock  companies  are  fre- 

the   corporation,   and    an   attachment    ers  in  a  corporation  is  always  a  crea- 
against  it  cannot  be  levied  on  their    ture  of  statute.     It  does  not  exist  at 
property.     Owen  v.  Marshall,  69  Wis.    common  law;"  Smith  v.  Huckabee,  53 
486   (1891).     The  holders  of  full-paid    Ala.  191  (1875),  where  the  court  said: 
stock    cannot    be    assessed    on    such    "Immunity  from  such  liability  is  one 
stock,    eveD    under    a    reorganization    of  the  inducements  which  has  led  to 
agreement  of  a  majority  of  the  stock-    the  multiplication  of  private  corpora- 
holders.      Where,    however,    for    four    tions,  and  caused  them  to  supersede, 
years  the  stockholder  does  not  object,    to  a  great  extent,  in  hazardous  enter- 
and  then  applies  for  a  transfer  of  his    prises,  or  enterprises  requiring  large 
stock,  a  court  of  equity  may  refuse  to    capital,  partnerships;"  Spense  v.  Iowa 
grant  the  transfer  and  may  give  him    Valley     Constr.     Co.,     36     Iowa,     407 
damages  for  the  value  of  his  stock  at     (1873),  the  court  saying:    "It  is  one 
the  time  of  the  demand  of  transfer,    of  the  distinguishing  features  of  in- 
together   with    interest.     Gresham   v.    corporations  that  the  individual  prop- 
Island   City   Sav.   Bank,   2   Tex.   Civ.    erty  of  its  members  may  be  exempt 
App.  52  (1893).    Stockholders  are  not    from    liability    for    corporate    debts, 
liable    for    services    rendered    to    the    Herein  consists  the  great  superiority 
company,  even  though  they  induce  the    of   a  corporation  over   a  partnership 
party   to   render   such   services.     Da-    or  an  unincorporated  joint-stock  com- 
vidson  r.  Westchester,  etc.  Co.,  99  N.    pany;"   Salt  Lake  City  Nat.  Bank  v. 
Y.    558    (1885);    Oliver   v.    Liverpool,     Hendrickson,  40  N.  J.  L.   52    (1878); 
etc.     Ins.    Co.,    100    Mass.     531,    539    Van  Sandau  v.  Moore,  1  Russ.  Ch.  441, 
(1868),  holding  that,  in  order  to  pre-    457    (1826);   Atwood  v.  Rhode  Island 
vent   this  limited   liability,   the  Eng-    Agric.  Bank,  1  R.  I.  376   (1850),  the 
lish     parliament    expressly     declared    court   saying:    "At   common   law   the 
joint-stock  companies  not  to  be  incor-    stockholders  in  a  corporation  are  not 
porations.     Moore  v.  New  Jersey,  etc.    liable   individually   for  the   corporate 
Co.,     5     N.     Y.     Supp.     192     (1889);     debts.     The  capital  stock  is  the  fund 
Myers  r.   Irwin,   2   Serg.   &  R.    (Pa.)     to  which  alone  the  creditors  must  re- 
368,    371     (1816),    the    court   saying:     sort,  unless  in  cases  of  fraud."     The 
"The    personal    responsibility    of   the    case    of    Atlantic    De    Laine    Co.    v. 
stockholder   is   inconsistent   with   the    Mason,  5  R.  I.  463   (1858),  holds  that 
nature   of  a  body  corporate;"  Liver-    the    payment    of    one    invalid    assess- 
pool    Ins.    Co.    r.    Massachusetts,    10    ment   is   no   waiver   of   the   right   to 
Wall.  565,  576   (1879);   New  England    object  to  another.    Cf.  Field  v.  Pierce, 
Com..  Bank  v.  Newport  Steam  Factory,    102  Mass.   253    (1869).     If  the  stock- 
6  R.I.  188   (1859);  Walker  v.  Lewis,    holders  voluntarily  contribute  to  the 
49   Tex.   123    (1878);    Green  v.  Beck-    corporate  treasury  in  order  to  make 
man,    59    Cal.    545    (1881);    Jones   r.    it  a  success,  such  gifts  are  not  cor- 
Jarman,   34   Ark.   323    (1879);    Wind-    porate  debts  and  cannot  be  recovered 
ham   Prov.    Inst.   v.    Sprague,    43   Vt.    back.    Bidwell  v.  Pittsburgh,  etc.  Ry., 
502    (1871);    Woods  v.  Wicks,  7   Lea    114  Pa.  St.  535  (1887);  Leavitt  v.  Ox- 
(Tenn.),    40    (18S1),    on    the    ground     ford,  etc.  Co.,  3  Utah,  265    (1883).     A 
that  the  corporate  creditor  contracts    corporation  has  no  power  to  levy  an 
not  with  the   stockholders,  but   with    assessment.     Duluth   Club  v.  McDon- 
the  corporation;    Terry  v.  Little,  101    aid,  74  Minn.  254  (1898).    Although  a 
U.   S.   216    (1879),  the   court  saying:     law  library  corporation  has  a  capital 
"The  individual  liability  of  stockhold-    stock  which  is  fully  paid,  yet  a  by- 

655 


§  242.] 


PARTNERSHIP    LIABILITY    OF    STOCKHOLDERS. 


[CH.  XIII. 


qucntly  careful  to  state  that  nothing  therein  contained  shall  give 
such  companies  the  character  of  corporations.1  The  older  text-books 
and  the  earlier  reports  did  not  fully  appreciate  the  importance  of 
this  principle  of  law.  Of  such  importance  is  it  that  it  would  seem 
to  be  the  great  and  distinguishing  characteristic  of  corporations,  and 
not  a  subsidiary  or  unimportant  one.2  For  many  years  it  seems 
to  have  been  assumed  rather  than  adjudicated.3  In  the  early  turn- 
pike company  cases  of  New  England  a  contrary  rule  appears  to 
have  been  assumed,  and  the  subscriber  appears  to  have  been  open  to 
assessments  indefinitely,  except  that  ho  might  refuse  to  pay,  and  thus 
enable  the  company  to  forfeit  his  stock.4  Such  companies,  however, 
had  no  fixed  par  value  of  their  stock.  At  present  the  rule  of  non- 
liability at  common  law,  beyond  the  par  value  of  the  stock,  is  estab- 
lished beyond  question,  and  forms  the  chief  inducement  in  the  forma- 
tion of  the  many  corporations  of  the  day.  The  question  of  what  the 
legal  effect  is  where  all  the  stockholders  voluntarily  assess  themselv<  s 
is  considered  elsewhere.5 

§  242.  Attempts  have  been  made  in  various  ways  to  authorize 
the  assessment  of  stockholders  for  amounts  after  the  par  value  of 
their  stock  has  been  paid  in.     Such  efforts  have  generally  failed.     It 


law  may  assess  annual  dues  upon  the 
members.  Omaha  L.  L.  Assoc,  v.  Con- 
nell,  55  Neb.  396  (1898).  Even  though 
the  by-laws  provide  for  annual  dues, 
yet  this  does  not  enable  a  creditor 
to  file  a  bill  to  compel  the  directors 
to  levy  annual  dues  sufficient  to  pay 
his  debt,  the  capital  stock  having 
been  fully  paid  in.  Johnston,  etc.  Co. 
v.  Detroit,  etc.,  124  Mich.  115  (1900). 
Even  though  the  by-laws  of  a  natural- 
gas  company  provide  that  stockhold- 
ers shall  have  gas  free,  yet  such  by- 
law may  be  changed  so  as  to  authorize 
the  company  to  charge  a  uniform 
price  to  the  stockholders  for  gas.  Red- 
key,  etc.  Co.  v.  Orr,  27  Ind.  App.  1 
(1901).  A  by-law  of  a  corporation, 
organized  to  own  and  maintain  a 
hunting  park,  may  authorize  assess- 
ments on  the  stock  to  pay  any  annual 
deficiency,  and  such  by-law  is  binding 
on  stockholders,  who  accept  the  cer- 
tificate of  stock  which  on  its  face  re- 
fers to  the  by-law.  The  by-law  is  valid 
as  a  contract,  even  though  it  is  not 
valid  as  a  by-law.  Blue  Mountain,  etc. 


Assoc,  v.  Borrowe,  71  N.  H.  69  (1901). 
See  also  §  4a,  supra. 

i  Oliver  v.  Liverpool,  etc.  Ins.  Co., 
100  Mass.  531,  539  (1868).  And  see 
ch.  XXIX,  infra.  Cf.  Omaha,  etc. 
Assoc,  v.  Connell,  55  Neb.  396  (1898). 

2  See  §  3,  supra,  note. 

3  In  the  case  of  Carr  v.  Iglehart,  3 
Ohio  St.  457  (1854),  the  court  took 
counsel  to  task  for  questioning  this 
principle  of  law.  For  an  opinion  that 
at  common  law  the  stockholders  were 
liable  for  all  corporate  debts,  see  Har- 
vard Law  Rev.,  Nov.  1888,  p.  160. 

4  Middlesex  Turnp.  Co.  v.  Swan,  10 
Mass.  384  (1813). 

5  See  §  76,  supra.  "Where  stockhold- 
ers voluntarily  assess  themselves,  to 
relieve  the  corporation  from  pecuni- 
ary embarrassment,  or  for  the  better- 
ment of  their  stock,  whatever  may  be 
the  occasion  of  the  assessment,  the 
advances  thus  made  are  not  debts 
against,  but  assets  of,  the  corpora- 
tion." Brodrick  v.  Brown,  69  Fed. 
Rep.  497   (1895). 


656 


CH.  XIII.]  PARTNERSHIP    LIABILITY   OF    STOCKHOLDERS. 


[§    242. 


cannot  be  done  by  a  majority  vote  of  the  stockholders,  nor  of  the 
directors,  nor  by  a  by-law.1  The  liability  is  sometimes  provided 
for  in  the  statutes  under  which  the  corporation  was  originally  or- 
ganized.2     Often  the   statutes   authorize  either   a  limited   liability 

i  Quoted  and  approved  in  Redkey,    may  assess  its  members  to  any  extent 

"for  the  purpose  of  paying  expenses, 
conducting  business,  or  paying  debts." 
Santa  Cruz  R.  R.  v.  Spreckles,  65  Cal. 
193  (1884).  In  California  all  shares  of 
stock  are  assessable,  even  though 
they  have  once  been  fully  paid.  Green 
v.  Abietine  Med.  Co.,  96  Cal.  322 
(1892).  Under  the  California  statute 
which  renders  stockholders  personally 
liable  for  an  assessment  on  their 
stock  after  the  stock  has  been  adver- 
tised for  sale,  the  stockholders  are 
not  liable  before  such  stock  has  been 
advertised  for  sale.  Shively  v.  Eu- 
reka, etc.  Co.,  129  Cal.  293  (1900). 
For  a  further  decision  under  the  Cali- 
fornia statute  that  an  asessment  may 
be  made  on  stock  for  "paying  ex- 
penses, conducting  business  or  pay- 
ing debts,"  see  Younglove  v.  Steinman, 
80  Cal.  375  (1889),  and  95  Pac.  Rep.  39 
In  Utah,  by  statute,  stockholders  may 
be  assessed  on  their  stock,  even  after 
the  stock  has  been  paid  up,  the  assess- 
ment being  for  working  expenses. 
Gary  v.  York  Min.  Co.,  9  Utah,  464 
(1894).     In  Vermont  it  is  held  that 


etc.  Co.  v.  Orr,  27  Ind.  App.  1  (1901), 
holding  also  that  a  stockholder  may 
enjoin  the  corporation  from  enforc- 
ing any  such  assessment.  Flint  v. 
Pierce,  99  Mass.  68  (1868);  Andover 
Free  Schools  v.  Flint,  54  Mass.  539 
(1847);  Kennebec,  etc.  R.  R.  r.  Ken- 
dall, 31  Me.  470  (1850);  Reid  v.  Ea- 
tonton  Mfg.  Co.,  40  Ga.  98  (1869). 
In  the  first-mentioned  case  the  defend- 
ant subscribed  to  such  a  by-law, 
among  other  by-laws,  when  he  sub- 
scribed for  stock.  Placing  the  words 
"individual  property  of  stockholders 
liable"  on  the  face  of  corporate  obli- 
gations has  no  effect  in  itself.  Stock- 
holders are  liable  only  as  prescribed 
by  law.  Lowry  v.  Inman,  46  N.  Y. 
119  (1871).  An  agreement  of  a  vendee 
of  stock  with  the  vendor  to  pay  the 
corporate  debts  is  not  enforceable  by 
corporate  creditors.  Andover  Free 
Schools  v.  Flint,  54  Mass.  539,  543 
(1847).  But  the  agreement  is  en- 
forceable if  made  directly  with  cred- 
itors. Maxwell's  Case,  L.  R.  20  Eq. 
585   (1S74).    By  consent  of  the  stock- 


holders each  share  may  be  subject  to    under  a  charter  provision  that  "if  at 


further  assessment;  and,  when  this 
agreement  is  printed  on  the  certifi- 
cates, the  purchaser  is  bound  by  it. 
Weeks  v.  Silver,  etc.  Co.,  55  N.  Y. 
Super.  Ct.  1   (1887).     The  case,  how- 


any  time  the  capital  stock  paid  into 
said  corporation  shall  be  impaired  by 
losses  or  otherwise,  the  directors  shall 
forthwith  repair  the  same  by  assess- 
ment," a  receiver  was  not  allowed  to 


ever,  of  Hume  v.  Winyah,  etc.  Canal    assess,  since  the  provision  is  only  to 


Co.,  Carolina  L.  Jour.  217,  held,  at  an 
early  day,  that  where  a  corporation, 
not  professing  to  have  any  fixed  capi- 
tal, made  a  by-law  by  which  each  of 
the  corporators  was  bound  to  contrib- 
ute equally  or  ratably  to  all  expenses 
incurred,  the  corporators  were  liable 
personally.  See  Gresham  v.  Island 
City  Sav.  Bank,  2  Tex.  Civ.  App.  52 
(1893). 

2  In  California,  under  sections  331, 
333  of  the  Civil  Code,  a  corporation 


prevent  a  continuance  of  business 
with  an  impaired  capital.  Dewey  v. 
St.  Albans  Trust  Co.,  57  Vt.  332 
(1885).  In  Pennsylvania  it  is  held 
that,  though  the  corporation  has  pow- 
er to  assess  beyond  the  par  value  of 
the  stock,  yet  such  power  may  be 
restricted  by  by-law.  Price's  Appeal, 
106  Pa.  St.  421  (1884).  In  Texas  it 
is  possible  to  form  a  corporation 
wherein  assessments  may  be  made  on 
members  ratably  to  any  amount  for 


(42) 


C37 


§  242.]  PARTNERSHIP    LIABILITY    OF    STOCKHOLDERS.  [CH.  XIII. 

corporation  or  one  with  unlimited  liability,  as  the  incorporators  may 
desire.    Such  is  the  case  in  New  York x  and  in  England.2 

An  American  stockholder  in  an  English  corporation  is  liable  to 
assessments  upon  his  stock  where  such  assessment  has  been  levied 
in  accordance  with  the  English  statutes,  even  though  the  stock  origi- 
nally was  fully  paid.3 

A   statute  which    authorizes   an   additional   assessment  upon   ex- 
isting paid-up  stock  is  unconstitutional.4     But  where  the  state  has 
reserved  the  power  to  alter,   repeal,  or  amend   the  charter,   it  may 
authorize  the  corporation  to  levy  assessments  on  its  stockholders,  in 
addition  to  the  subscription  of  their  stock.     The  reasoning  of  this 
rule   is   clear.      The   limited   liability   is   a   part  of   the  corporate 
privileges  conferred.     A  right  to  repeal  the  franchises  includes  the 
right  to  repeal  in  part  or  altogether  the  franchise  or  privilege  of 
limited  liability.     On  such  grounds,  laws  of  this  character,  however 
harsh  in  their  operation,  are  upheld  as  constitutional.5     It  is  to  be 
borne  in  mind,  however,  that  there  is  a  limit  to  the  power  of  the 
legislature  to  amend  a  charter,  even  under  this  reserved  right;0  and 
it  has  been  contended  with  great  force  that  even  though  the  legis- 
lature has  reserved  the  right  to  amend  a  charter,  yet  it  cannot  author- 
ize the  corporation  to  assess  stock  which  was  issued  as  being  full- 
paid  and  non-assessable  and  that  a  minority  stockholder  may  enjoin 

corporate   purposes.     Guadalupe,   etc.  a  shareholder  will   be  liable  to   con- 

Assoc.  v.  West,  70  Tex.  391    (1888)—  tribute,      respectively,      the      unpaid 

a  live-stock-protecting  corporation.  In  amount  on  his  shares,  or  to  the  extent 

Idaho   it   is   held   that   the   statutory  of  the  company's  guaranty,  or  indefi- 

provisions      rendering      stockholders  nitely."     Cavanagh,  Money  Securities 

jointly  and  severally  liable  for  debts  (2d   ed.),   494,   citing  Lion,    etc.    Ins. 

authorize  the  directors  to  levy  assess-  Assoc,  v.  Tucker,   L.  R.   12  Q.  B.  D. 

ments   to   pay   for   improvements   al-  176    (1883);    Re   Norwich    Ins.    Soc, 

ready  made.     Sparks  v.   Lower   Pay-  L.  R.  13  Ch.  D.  693   (1880);   Re  City 

ette  Ditch  Co.,  2  Idaho,  1030    (1892).  of  Glasgow  Bank,  L.  R.  4  App.  Cas. 

1  L  1892,  ch.  691.  Under  the  Utah  337,  550,  567,  581,  583,  598,  607,  615, 
statutes  a  certificate  of  incorporation  624,  632  (1879);  Houldsworth  v.  City 
may  authorize  assessments  on  full  of  Glasgow  Bank,  L.  R.  5  App.  Cas. 
paid  stock.     Nelson  v.  Keith,  etc.  Co.,  317   (1880). 

91  Pac    Rep.  30   (Utah  1907).  3  Giesen  v.  London,  etc.  Mortg.  Co., 

2  In  England  "the  liability  of  a  102  Fed.  Rep.  584  (1900).  Cf.  Bank 
shareholder  in  a  corporate  body  is  de-  of  China  v.  Morse,  168  N.  Y.  458 
termined  by  the  conditions  of  incor-  (1901). 

poration.     Without  express  prevision,  4  Enterprise,  etc.   Co.  v.  Moffitt,   58 

no  member  of  a  corporate  body  is  in-  Neb.  642   (1899). 

dividually    liable    for    the    corporate  5  Gardner  v.  Hope  Ins.  Co.,  9  R.  I. 

debts     A  company  may  be  registered  194    (1869);    South   Bay,    etc.    Co.   v. 

under  the  Companies  Act,  18G2,  with  Gray,   30   Me.   547    (1849).     See   also 

limited  or  unlimited  liability;  accord-  §§  280,  497,  infra. 

ing  to  the  nature  of  such  registration  6  See  §  501,  infra. 

658 


CH.  XIII.  ]  PARTNERSHIP   LIABILITY   OF   STOCKHOLDERS. 


[§  243. 


the  sale  of  the  stock  for  non-payment  of  such  an  assessment.1  Where 
certificates  of  full-paid  stock  recite  that  further  assessments  may  be 
made,  a  director  who  takes  part  in  levying  such  an  assessment  cannot 
defend  against  it  as  being  illegal.2  A  person  who  by  proxy  votes  for 
assessments  and  afterwards  pays  some  of  them  cannot  defend  against 
others  on  the  ground  that  all  of  them  were  illegal,  the  stock  being 
fully  paid.3 

§  243.  Miscellaneous  cases  of  liability  or  non-liability. — It  has 
been  held,  on  grounds  of  public  policy,  that  although  a  corporation 
is  advertised  as  having  a  capital  stock  of  a  fixed  amount,  the  stock- 
holders and  directors  are  not  liable  personally,  even  though  sub- 
scriptions have  not  been  taken  to  that  amount.  They  are  not  liable 
either  for  the  untaken  stock,  or  on  the  ground  of  false  representations, 
since  the  capital  stock  is  understood  to  represent  what  the  corpora- 
tion hopes  to  obtain  in  subscriptions.4     Even  though  the  directors 


1  Garey  v.  St.  Joe  Mining  Company, 
91  Pac.  Rep.  369   (Utah  1907). 

2  Mirage  Irr.  Co.  v .  Sturgeon,  108 
N.  W.  Rep.  977   (Neb.  1906). 

3  Callahan  v.  Chilcott,  etc.  Co.,  37 
Colo.  331    (1906).  See  69  Atl.  Rep.  788. 

4  First  Nat.  Bank  v.  Almy,  117  Mass. 
476  (1875);  Wakeman  v.  Dalley,  51 
N.  Y.  27,  30  (1872);  Evans  v.  Coven- 
try,  25  L.  J.  (Ch.)  489  (1856);  Crease 
v.  Babcock,  51  Mass.  525,  557  (1846). 
Contra,  Haslett  v.  Wotherspoon,  1 
Strobh.  Eq.  (S.  C.)  209,  229  (1847). 
In  Illinois  there  is  a  statutory  liability 
in  a  case  like  this.  Stat,  of  111.,  ch. 
32,  §  18.  Stockholders  are  not  liable 
as  partners  by  reason  of  the  fact  that 
the  full  capital  stock  was  never  sub- 
scribed. Coalter  v.  Bargamin,  99  Va. 
65  (1901).  Where  a  receiver  sues  to 
recover  back  property  which  an  in- 
solvent corporation  has  illegally  trans- 
ferred to  prefer  a  debt,  the  party  re- 
ceiving such  preference  cannot  set  up 
that  the  corporation  had  never  re- 
ceived any  subscriptions  for  stock,  it 
being  shown  that  the  company  had 
filed  articles  of  incorporation  and  had 
acted  as  a  corporation.  Carroll  v. 
Pacific  Bank,  19  Wash.  639  (1898). 
In  the  case  of  Burnham  v.  Lutz,  8 
Kan.  App.  361  (1898),  where  a  mer- 
cantile  corporation   had   been   organ- 


ized and  twenty-six  shares  of  stock 
only  were  issued  to  supply  a  board 
of  directors,  but  not  paid  for,  the 
court  held  that  a  vendor  of  goods  to 
the  corporation  might  show  that  such 
an  organization  of  the  corporation 
was  fraudulent  and  hence  that  the 
parties  interested  were  liable  as  part- 
ners. A  corporation  may  commence 
business  before  any  stock  is  subscribed 
unless  the  charter  forbids.  Johnson 
v.  Kessler,  76  Iowa,  411  (1888). 
Where,  by  the  charter,  a  certain 
amount  of  the  capital  stock  must  be 
paid  in  before  business  is  commenced, 
it  is  sufficient  that  that  amount  was 
paid  in  by  a  few  stockholders  paying 
their  subscriptions  in  full.  Lauder 
v.  Logan,  123  Pa.  St.  34  (1889).  See 
also  §  180,  supra.  A  stockholder  is 
not  liable  for  the  debts  merely  be- 
cause the  corporation  did  business  be- 
fore the  full  capital  stock  was  sub- 
scribed. American,  etc.  Co.  v.  Bulkley, 
107  Mich.  447  (1895).  Even  though 
a  corporation  incurs  debts  before  any 
stock  is  subscribed  for,  and  even 
though  no  stock  is  ever  subscribed 
for,  yet  the  incorporators  are  not 
liable  for  such  debts.  Singer,  etc.  Co. 
v.  Peck,  9  S.  Dak.  29  (1896).  Where 
the  proposed  corporation  is  aban- 
doned before  being  incorporated,  the 


659 


243.] 


PARTNERSHIP    LIABILITY    OP    STOCKHOLDERS. 


[CII.  XIII. 


certify  that  one-half  of  the  capital  stock  has  been  paid  in  in  cash, 
when  in  fact  it  has  not  been,  yet  the  assignee  of  the  corporation  for 
the  benefit  of  its  creditors  cannot  hold  them  liable  for  the  part  not 
so  paid  in.1 


parties  who  subscribe  and  then  with- 
draw their  money  are  not  liable  for 
subsequent  debts.  Gorman  v.  Davis, 
etc.  Co.,  118  N.  C.  370  (1896).  Sub- 
scribers for  stock  are  not  liable  for 
such  part  of  the  capital  stock  as  has 
not  been  subscribed  for  by  any  one, 
no  fraud  being  involved.  Sweney  v. 
Talcott,  85  Iowa,  103  (1892).  Stock- 
holders are  not  liable  as  partners 
merely  because  the  whole  capital 
stock  has  not  been  subscribed.  Thorn- 
ton v.  Balcom,  85  Iowa,  198  (1892); 
National  Bank  v.  Texas  Inv.  Co.,  74 
Tex.  421  (1899).  It  is  not  actionable 
negligence  in  directors  to  proceed  to 
business  where  only  a  small  part  of 
the  capital  is  subscribed.  Re  Liverpool, 
etc.  Assoc,  62  L.  T.  Rep.  873  (1890). 
Paying  in  half  of  the  subscription 
with  a  view  to  incorporation,  and 
then  abandonment  of  incorporation, 
does  not  render  a  subscriber  liable 
as  a  partner.  Hudson  v.  Spaulding,  6 
N.  Y.  Supp.  877  (1889).  The  directors 
are  not  liable  for  coporate  debts 
merely  because  they  commence  busi- 
ness before  the  capital  stock  is  sub- 
scribed. The  incorporation  was  legal 
without  it.  Jefferson  Nat.  Bank  v. 
Texas  Inv.  Co.,  74  Tex.  421  (1889). 
A  corporate  creditor  may  hold  the 
stockholders  personally  liable  on  the 
ground  of  fraud  where  they  incor- 
porate with  a  capital  stock  of  $200,- 
000,  and  subscribe  for  one  share  each, 
and  then  incur  large  debts.  Detroit, 
etc.  Works  v.  Riverside  St.  Ry.,  29 
S.  W.  Rep.  412  (Tex.  1895).  Where, 
upon  incorporation,  the  capital  stock 
is  fixed  at  $25,000,  and  is  subscribed, 
but  no  part  thereof  is  paid  in,  and 
business  is  commenced,  the  participa- 
tors are  liable  as  partners  under  the 
Pennsylvania  statute.  It  is  a  fraud. 
Hill,  etc.  Co.  v.  Stetler,  127  Pa.  St. 
145  (1888).    Where  stockholders  pro- 


ceed to  business  before  the  minimum 
capital  prescribed  by  statute  is  sub- 
scribed, they  are  liable  to  corporate 
creditors  for  such  minimum  capital. 
The  creditors  may  sue  them  and  the 
corporation  in  the  same  action.  Burns 
v.  Beck,  etc.  Co.,  83  Ga.  471  (1889). 
In  the  case  of  State  v.  New  Orleans, 
etc.  Co.,  51  La.  Ann.  1827  (1899), 
the  subscribers  to  the  stock  of  a  de- 
benture company  paid  ninety-five  per 
cent,  of  their  subscription  by  borrow- 
ing that  amount  from  the  company 
on  their  notes,  and  thereupon  full- 
paid  stock  was  issued  to  them,  al- 
though the  statute  prohibited  the  is- 
sue of  stock  until  paid  for.  The  state 
brought  suit  to  set  aside  the  charter 
and  liquidate  the  company.  The 
court  held  that  under  the  constitution 
of  Louisiana  the  incorporation  was 
illegal.  The  court  held  also  that  the 
charter  was  illegal,  in  that  the  deben- 
tures issued  were  forfeited  if  deferred 
payments  were  not  made,  and  that 
they  provided  for  cancellation  at  fifty 
per  cent,  on  the  amount  paid,  and 
that  they  were  redeemable  in  numer- 
ical order  in  six  years,  and  that  it 
would  be  impossible  for  the  company 
to  pay  them.  The  same  conclusion 
was  reached  in  State  v.  Louisiana, 
etc.  Co.,  51  La.  Ann.  1795  (1899). 
Where  several  persons  organized  a 
corporation  with  a  capital  stock  of 
$100  to  buy  and  sell  oil  lands,  etc., 
and  it  incurred  debts  to  the  amount 
of  nearly  $20,000,  the  highest  court 
in  Kentucky  held  that  it  was  not  a 
complete  corporation  but  a  mere  pre- 
liminary step  and  the  promoters  were 
liable  as  partners  for  the  debts.  San- 
ders, etc.  v.  Herndon,  108  S.  W.  Rep. 
908    (Ky.   1908). 

i  Hequembourg  v.  Edwards,  155  Mo. 
514  (1900).  The  assignee  of  a  corpora- 
tion cannot  sue  its  incorporators  for 


660 


CH.  XIII.]  PARTNERSHIP   LIABILITY   OP   STOCKHOLDERS. 


[§  243. 


In  Illinois  by  statute  the  directors  are  personally  liable  for  debts 
incurred  before  all  "stock  named  in  the  articles  of  incorporation 
shall  be  subscribed  in  good  faith."  *  Where  articles  of  incorporation 
have  been  duly  filed,  but  no  capital  stock  is  subscribed  for,  and  the 
incorporation  is  practically  abandoned,  and  a  part  of  the  incorpo- 
rators go  on  and  incur  debts  in  the  corporate  name  with  the  knowl- 
edge of  the  others,  all  are  liable  as  partners.2 


ten  per  cent,  of  the  capital  stock,  on 
the  ground  that  they  had  sworn  that 
ten  per  cent,  had  been  paid  in  in 
order  to  obtain  the  charter,  when  in 
fact  it  had  not  been  paid  in.  Patter- 
son v.  Franklin,  176  Pa.  St.  612 
(1896).  Even  though  a  national  bank 
transacts  business  before  it  is  au- 
thorized to  do  so  by  the  comptroller, 
the  officers  and  stockholders  are  not 
liable  therefor  as  partners,  but  the 
officers  may  be  liable  on  an  implied 
warranty  of  their  authority  to  act 
for  the  corporation.  Seeberger  v.  Mc- 
Cormick,  178  111.  404    (1899). 

i  Kent  v.  Clark,  181  111.  237  (1899). 

2  Wechselberg  v.  Flour  City  Nat. 
Bank,  64  Fed.  Rep.  90  (1894).  Where 
the  incorporation  is  not  completed  but 
is  abandoned  and  no  property  is  con- 
veyed to  it,  but  it  contracts  debts, 
persons  who  hold  themselves  out  as 
stockholders  in  it  are  liable  for  such 
debts.  Schaub  r.  Coffin,  135  Mich. 
435  (1904).  If  a  corporation  is 
abandoned  and  its  stockholders 
move  its  assets  into  another  state 
and  there  do  business  under  a 
new  name,  they  may  be  liable 
as  partners.  Robinson  t\*First  Nat. 
Bank,  98  Tex.  184  (1904).  Where  the 
incorporators  never  organize  and 
neither  subscribe  for  nor  pay  for  any 
capital  stock,  but  merely  do  business 
in  the  corporate  name,  they  may  be 
held  liable  as  partners.  Brooke  v. 
Day,  59  S.  E.  Rep.  769  (Ga.  1907). 
Where  the  alleged  directors  of  an 
athletic  association  enter  into  con- 
tracts in  its  name  after  the  charter  is 
ackowledged  and  filed  with  the  secre- 
tary of  state,  but  no  capital  stock  is 
subscribed  and  no  steps  taken  to  com- 


plete the  organization  or  comply  with 
the  law,  the  directors  are  personally 
liable  on  such  contracts.  Walton  v. 
Oliver,  49  Kan.  107  (1892).  In  Con- 
solidated, etc.  Co.  v.  Kansas  City,  etc. 
Co.,  45  Fed.  Rep.  7  (1891),  the  court 
said:  "It  is  true,  as  contended  by 
counsel,  that  the  statute  did  not  re- 
quire that  this  increment  of  stock 
should  be  actually  paid  up.  Yet  the 
public  deals  with  such  concerns  on 
the  faith  of  such  capital  in  esse,  and 
it  is  that  which  chiefly  gives  it  credit. 
It  is  to  be  imputed  to  these  directors 
and  stockholders  that  they  pretended 
and  claimed  all  along  that  the  stock 
subscribed  by  them  was  paid  up." 
Where  no  stock  is  subscribed  for,  but 
an  organization  meeting  is  held  and 
officers  elected  and  debts  incurred, 
the  officers  are  liable  for  such  debts. 
Whetstone  v.  Crane,  etc.  Co.,  1  Kan. 
App.  320  (1895),  the  ground  of  the 
decision  being  that  such  officers  are 
merely  promoters.  Where  a  stock 
corporation  has  received  no  stock  sub- 
scription and  issued  no  stock  it  can- 
not maintain  a  suit.  Aspen  Water, 
etc.  Co.  v.  Aspen,  5  Colo.  App.  12 
(1894).  Where  the  directors  com- 
mence business  before  ten  per  cent,  of 
the  capital  is  paid  in,  as  required  by 
statute,  the  directors  are  personally 
liable  as  agents  transacting  business 
without  authority  from  the  principal. 
Trust,  etc.  Co.  v.  Floyd,  47  Ohio 
St.  525  (1890).  Where  the  articles  of 
incorporation  are  signed  and  filed,  but 
no  organization  is  ever  had,  a  part 
of  the  subscribers  are  not  liable  for 
debts  contracted  in  the  corporate 
name  by  another  party.  Rutherford 
r.  Hill,  22  Oreg.  218  (1892).    Although 


661 


§   243.]  PARTNERSHIP    LIABILITY    OF   STOCKHOLDERS.  [CU.  XIII. 

Difficult  questions  of  law  arise  where  a  person  supposes  lie  is  deal- 
ing with  a  partnership,  but  afterwards  finds  ho  was  dealing  with 
a  corporation.  While  it  is  clear  that  even  though  a  partnership 
becomes  incorporated,  yet  a  party  who  has  dealt  with  the  partner- 
ship and  supposes  that  he  is  still  dealing  with  it  may  hold  the  part- 
ners liable  for  goods  furnished  after  the  incorporation,1  yet  it  has 


the  corporation  is  apparently  aban-  even  though  the  goods  were  delivered 
doned  and  an  agreement  as  to  contri-  to  the  corporation  and  even  though 
butions  is  signed,  yet  the  courts  are  the  partnership  name  was  R.  A.  Mil- 
Inclined  to  hold  that  the  business  is  ler  &  Co.,  while  the  corporation  name 


still  that  of  the  corporation.  Rio 
Grande  Cattle  Co.  v.  Burns,  82  Tex. 
50  (1891).  A  failure  to  commence 
the  principal  business  does  not  in- 
validate the  incorporation.  Trow- 
bridge v.  Scudder,  65  Mass.  83  (1853). 
Nor  does  an  ultra  vires  act  or  fraud 
of  the  corporation  have  that  effect. 
Langan  v.  Iowa,  etc.  Constr.  Co.,  49 
Iowa,  317  (1878);  Second  Nat.  Bank 
v.  Hall,  35  Ohio  St.  158  (1878).  Where 
a  copartnership  in  Connecticut  pro- 
ceeds to  incorporate  in  that  state,  but 
fails  to  file  the  certificate  with  the 
secretary  of  state,  as  required  by  char- 
ter, and  it  appears  that  the  intent  to 
incorporate  was  abandoned,  one  part- 
ner, upon  the  death  of  the  other,  may 
claim  possession  of  the  assets  as 
against  the  corporation.  Card  v. 
Moore,  68  N.  Y.  App.  Div.  327  (1902); 
aff'd,  173  N.  Y.  598. 

i  Reid  v.  Kreling's  Sons'  Co.,  125 
Cal.  117  (1899).  Where  an  unincor- 
porated association  becomes  incorpo- 
rated, a  person  who  does  not  know 
of  that  fact  may  hold  the  trustees  per 


was  R.  A.  Miller  Company.  Perkins 
v.  Rouss,  78  Miss.  343  (1901).  Where 
a  person  sells  goods  to  a  concern 
which  is  represented  to  him  to  be  a 
partnership  and  he  sues  the  members 
as  partners,  the  defense  that  it  is  a 
corporation  is  not  good,  if  it  is  shown 
that  the  incorporation  was  fraudu- 
lent in  that  the  affidavits  as  to  sub- 
scription were  false  and  in  that  no 
property  was  ever  conveyed  to  it,  and 
no  corporate  functions  ever  per- 
formed, except  to  elect  officers.  Chris- 
tian, etc.  Co.  v.  Fruitdale,  etc.  Co.,  121 
Ala.  340  (1899).  A  person  having 
notice  of  the  change  of  a  partnership 
into  a  corporation  cannot  hold  the 
partners  individually  liable  for  debts 
thereafter  created.  Edwards  v. 
Wheeler's  Estate,  130  Mich.  219 
(1902).     See  also  §15,  supra. 

Where  a  person  deposits  money  in 
a  concern  which  she  supposes  is  a 
copartnership  doing  business  under 
the  name  of  "Dan  Head  &  Co.,"  the 
defense  that  the  concern  is  a  corpo- 
ration is  not  good  if  it  be  shown  that 


sonally   liable    on   a   note   signed   by    the  articles  of  incorporation  were  not 


them,  although  the  word  "trustees" 
precedes  their  signature.  Vliet  v. 
Simanton,  63  N.  J.  L.  458  (1899). 
Where  a  copartnership  becomes  incor- 
porated, but  does  not  notify  parties 
with    whom    it   has   been    dealing   of 


recorded,  as  required  by  statute.  The 
question  of  whether  the  depositor 
supposed  that  she  was  dealing  with  a 
corporation  is  to  be  submitted  to  a 
jury.  Slocum  v.  Head,  105  Wis.  431 
(1900).     A  creditor  cannot  maintain 


that  fact  and  does  not  record  its  char-  a  bill  for  accounting  against  persons 
ter  as  required  by  the  statutes  in  the  as  copartners,  where  a  corporation 
county  where  the  business  is  done,  a  was  doing  the  business,  even  though 
person  selling  goods,  supposing  that  the  books  were  kept  as  though  they 
the  partnership  still  continued,  may  were  partners.  Nightingale  v.  Mil- 
hold   the   parties  liable   as   partners,  waukee  Furn.  Co.,  71  Fed.  Rep.  234 

662 


CH.  XIII.]  PARTNERSHIP   LIABILITY   OF   STOCKHOLDERS. 


[§  243. 


been  held  that  the  fact  that  the  name  signed  to  a  bond  begins  with  the 
word  "The"  and  ends  with  the  word  "Company"  raises  a  presump- 
tion and  is  notice  that  it  is  a  corporation.1  But  it  is  to  be  borne  in 
mind  that  at  common  law  parties  may  carry  on  business  under  any 
name  they  may  choose.2 

In  Xew  York  the  logical  rule  has  been  laid  down  that  a  vendor 
of  property  to  a  concern  which  he  supposed  was  a  partnership,  but 
turns  out  to  be  a  corporation,  may  repudiate  the  contract  on  dis- 
covering that  fact,  inasmuch  as  the  minds  of  the  parties  never  met.3 
A  suit  against  a  supposed  corporation,  which  is  but  merely  a  part- 
nership, does  not  stop  the  running  of  the  statute  of  limitations.4 

Even  though  the  organization  meetings  of  the  incorporators  and 
directors  are  not  held  regularly  or  not  held  at  all,  yet,  if  the  incor- 
poration papers  were  duly  executed  and  filed  and  the  corporation 
proceeded  to  act  as  a  corporation,  the  stockholders  are  not  person- 
ally liable  for  its  debts.5 


(1895).  A  contractor,  who  has  as- 
signed his  contract  to  a  corporation, 
which  latter  then  proceeds  to  carry  it 
out,  is  not  personally  liable  to  the 
employees,  even  though  the  assign- 
ment was  prohibited  by  law  and  the 
employees  may  not  have  known  for 
whom  they  were  working.  Patton  v. 
McDonald,  204  Pa.  St.  517  (1903).  A 
partnership  cannot  avoid  liability  on 
the  ground  that  it  subsequently  be- 
came incorporated.  Michael  Bros.  Co. 
v.  Davidson,  etc.,  60  S.  E.  Rep.  362 
(Ga.  1908).  A  person  who  has  dealt 
with  a  copartnership  is  not  chargeable 
with  constructive  notice  that  it  has  be- 
come incorporated,  and  hence  he  may 
hold  the  partners  liable  as  partners. 
Rice'  v.  Patterson,  46  S.  Rep.  255 
(Miss.  1908). 

i  Allen  v.  Hopkins,  62  Kan.  175 
(1900). 

2  Lauferty  v.  Wheeler,  11  Abb.  N. 
Cas.  223  (1882);  Lindley,  Partn., 
*182.  The  name  "Walsh  Boiler  and 
Iron  Works"  may  be  used  by  a  cor- 
poration, joint  stock  company,  part- 
nership or  individual,  in  the  transac- 
tion of  business.  Anderson  v.  Walsh, 
189  N.  Y.  159  (1907).  It  is  legal  for 
an  unincorporated  association  to  use 
what  apparently  is  a  corporate  name. 


People  v.  Rose,  219  111.  46  (1905). 

3  Consumers'  Ice  Co.  v.  Webster,  etc. 
Co.,  32  N.  Y.  App.  Div.  592  (1898). 
In  South  Dakota  it  has  been  held 
that  a  party  selling  merchandise  to 
what  he  supposed  was  a  copartner- 
ship, but  which  actually  was  a  corpo- 
ration, may  hold  personally  liable  the 
individuals  with  whom  he  dealt.  The 
fact  that  the  vendor  knew  that  the 
vendees  were  dealing  in  a  name  that 
indicated  a  corporation  may  not 
charge  him  with  notice  thereof.  Rust- 
Owen  L.  Co.  v.  Wellman,  10  S.  Dak. 
122  (1897). 

4  Geneva,  etc.  Co.  v.  Brown,  98  S.  W. 
Rep.  279  (Ky.  1906).  A  judgment 
against  a  partnership  sued  as  a  cor- 
poration cannot  be  enforced  against 
copartners.  Pittsburg,  etc.  Co.  v. 
Beale,  204  Pa.  St.  85  (1902). 

5  A  failure  to  organize  does  not  ren- 
der the  stockholders  liable  as  part- 
ners, business  having  been  carried  on 
without  organization  after  the  filing 
of  the  papers.  Cory  v.  Lee,  93  Ala. 
468  (1891).  Statutory  provisions  as 
to  notice  of  the  first  meeting  are  di- 
rectory. They  need  not  be  observed 
if  the  stockholders  acquiesce.  Brain- 
tree,  etc.  Co.  v.  Braintree,  146  Mass. 
482    (1881).     The    incorporators   are 


663 


§   243. 


PARTNERSHIP   LIABILITY   OF   STOCKHOLDERS.  [CH.  XIII. 


The  incorporators  may  be  liable  on  a  note  indorsed  in  the  name 
of  the  corporation  prior  to  the  certificate  of  incorporation  being  filed 
with  the  secretary  of  state  in  Missouri,  but  the  allegations  must  be 
clear  as  to  the  exact  dates.1  An  oral  promise  to  pay  corporate 
debts  is  void  by  the  statute  of  frauds.2  Partners,  by  becoming  incor- 
porated, do  not  thereby  cease  to  be  partners  as  to  all  the  debts  of  the 
former  partnership.3  A  stockholder  is  not  liable  as  a  partner  by  rea- 
son of  misrepresentations  that  the  corporation  is  solvent,  though  he 
may  be  liable  in  damages  for  false  representations.4  Upon  the  disso- 
lution of  the  corporation  the  liability  of  the  stockholder  as  to  any 
further  business  ceases.  If  the  business  is  carried  on  thereafter  by 
the  agents,  no  liability  therefor  attaches  to  the  former  stockholders,5 
unless  they  expressly  authorize  it.6  Persons  who  purchase  a  rail- 
road at  an  execution  sale  thereof  cannot  continue  to  run  it  in  the 
name  of  the  old  railroad  corporation,  and  thereby  bo  protected  from 
liability  as  partners.7  They  do  not  succeed  to  its  corporate  character, 
although  they  purchase  its  property.     In  some  cases  in  which  the 


not  liable  for  goods  purchased  after 
the  incorporation  papers  are  filed, 
but  before  the  organization  meeting, 
where  the  company  accepted  the 
goods.  Badger  Paper  Co.  v.  Rose,  95 
Wis.  145  (1897).  A  failure  to  notify 
each  member  of  the  meeting  to  or- 
ganize is  immaterial.  McClinch  v. 
Sturgis,  72  Me.  288  (1881).  See  also 
Judah  v.  America,  etc.  Co.,  4  Ind.  333 
(1853);  Russell  v.  MeLellan,  31  Mass. 
63  (1833) ;  Newcomb  v.  Reed,  94  Mass. 
362  (1866).  A  failure  to  give  the 
statutory  notice  of  the  first  meeting 
is  immaterial  where  all  but  one  stock- 
holder was  present  and  he  afterwards 
ratified  all  that  was  done.  Babbitt  v. 
East,  etc.  Co.  (N.  J.  1876),  Stew.  Dig., 
p.  208,  §  13.  See  also  §§  590,  593,  599, 
infra.  In  People  v.  Selfridge,  52  Cal. 
331  (1877),  an  action  was  brought  on 
the  ground  that  the  certificate  filed 
did  not  show,  as  required,  that  a  ma- 
jority of  the  stockholders  were  pres- 
ent at  the  meeting  to  organize.  The 
defendant  offered  to  prove  that  a  ma- 
jority were  in  fact  present,  but  the 
court  refused  to  receive  the  evidence 
and  rendered  judgment  of  ouster, 
l  Ryland  v.  Hollinger,  117  Fed.  Rep. 


216    (1902).      See    also    §705,    infra. 

2  Andover  Free  Schools  v.  Flint,  54 
Mass.  539  (1847).     See  also  §  76,  supra. 

3  Broyles  v.  McCoy,  5  Sneed 
(Tenn.),  602  (1858).  The  case  of 
Martin  v.  Fewell,  79  Mo.  401,  412 
(1SS3),  holds  also  that,  "for  the  debts 
incurred  after  they  become  a  corpora- 
tion, their  liability  will  depend  upon 
the  fact  of  actual  notice  of  their  in- 
corporation to  the  plaintiffs  at  the 
time  such  deles  were  incurred."  See 
also  §  672,  infra. 

4  Searight  v.  Payne,  2  Tenn.  Ch.  175 
(1874);  aff'd,  6  Lea  (Tenn.)   283. 

5  Central  City  Sav.  Bank  v.  Walker, 
66  N.  Y.  424  (1876),  aff'g  5  Hun,  34. 
A  contract  made  by  the  officers  after 
the  charter  has  been  forfeited  does  not 
bind  the  stockholders.  Wilson  v.  Tes- 
son,  12  Ind.  285  (1859).  The  stock- 
holders are  not  individually  liable  for 
damages  due  to  the  negligence  of  the 
corporation,  even  though  it  has  been 
dissolved.  Hudson  v.  Limestone,  etc. 
Co.,  132  Fed.  Rep.  410   (1904). 

6  National  Union  Bank  v.  Landon, 
45  N.  Y.  410    (1871). 

7  Chaffe  v.  Ludeling,  27  La.  Ann. 
607  (1875).    See  also  §  823,  infra. 


664 


CH.  XIII.]  PARTNERSHIP   LIABILITY   OF   STOCKHOLDERS. 


[§    243. 


members  of  an  association  might  have  been  held  liable  as  partners, 
the  right  of  the  creditor  to  enforce  that  liability  may  be  barred  by 
his  bringing  suit  and  obtaining  judgment  against  the  supposed  cor- 
poration.1     Solvent  subscribers  are  not  liable  on  the  subscriptions 
of  subscribers  whom  the  former  knew  to  be  insolvent.2     A  subscrip- 
tion by  various  parties  to  a  cheese  factory  to  be  incorporated,  the 
number  of  shares  being  placed  opposite  the  names,  binds  the  sub- 
scribers only  to  the  extent  of  the  shares  so  placed  opposite  their 
names.3     In  Louisiana  it  is  held  that  where  a  corporation  organ- 
ized to  build  railroads  and  carry  on  a  plantation  business  carries  on 
a  store  to  supply  its  employees  with  merchandise,  its  stockholders 
are  personally  liable  as  to  the  merchandise  business — that  being 
ultra  vires.4"     The  directors  of  an  amusement  company  are  not  per- 
sonally liable,  although  they  are  a  committee  having  charge  of  the 
construction  of  a  grand  stand  that  falls  and  injures  a  person.5     A 
stockholder  is  not  personally  liable  for  a  tort  of  the  corporation  in 
diverting  water.6     Where  the  corporation  is  conducting  an  illegal 
and  ultra  vires  business,  its  stockholders  are  liable  as  partners  for 


i  Cresswell  v.  Oberly,  17  111.  App. 
281  (1885);  Pochelu  v.  Kemper,  14 
La.  Ann.  308  (1859).  The  partners 
herein  cannot  bring  an  action  at  law 
against  each  other.  Their  remedy  is 
in  equity.  Crow  v.  Green,  111  Pa.  St. 
637  (1886).  See  also  ch.  XXIX,  intra, 
on  Joint-stock  Companies. 

2  Wilson  Cotton  Mills  r.  C.  C.  Ran- 
dleman,  etc.  Mills,  115  N.  C.  475 
(1894). 

3  Davis,  etc.  Co.  v.  Jones,  66  Fed. 
Rep.  124  (1895).  A  subscription  con- 
tract prior  to  incorporation  may  be 
such  that  the  subscribers  are  liable 
severally  to  the  amount  of  their  sub- 
scriptions. Davis  v.  Ravenna  Cream- 
ery Co.;  48  Neb.  471  (1896).  A  sub- 
scription prior  to  incorporation  will 
not  be  construed  as  rendering  each 
subscriber  liable  for  the  whole,  even 
though  the  subscriptions  speak  of  a 
joint  liability,  it  being  clear  that  such 
was  not  the  intent  of  the  subscribers. 
Chicago,  etc.  Co.  v.  Graham,  78  Fed. 
Rep.  83  (1896).  A  subscriber  who 
places  opposite  his  signature  the  fig- 
ures $1,000  is  bound,  although  he  does 
not  write  the  number  of  shares  taken. 


Columbus   Land  Co.  v.  McNally,   172 
Pa.  St.  158  (1895). 

4  Lehman    v.    Knapp,    48    La.    Ann. 
1148  (1896).     In  the  case  of  Medill  v. 
Collier,  16  Ohio  St.  599,   613    (1866), 
the   court   said:      "Where   the   entire 
business  carried  on  by  persons  in  the 
name  of  a  corporation  is  such  as  the 
corporation  is  prohibited  by  law  from 
doing,  they  cannot  interpose  the  cor- 
porate  privileges   between   them   and 
the  liabilities  which  the  law  imposes 
upon  individuals  in  the  transaction  of 
similar  business   without  the  use   of 
the  corporate  name."     But  see  §  682, 
infra.     Stockholders  are  not   person- 
ally liable  on  ultra  vires  acts.     Ten- 
nessee, etc.  Co.   v.  Massey,  56   S.  W. 
Rep.  35  (Tenn.  1899). 

5  Van  Antwerp  v.  Linton,  89  Hun, 
417   (1895);  aff'd,  157  N.  Y.   'HZ. 

6  Poley  v.  Lacert,  35  Oreg.  166 
(1899).  A  majority  stockholder  who 
purchases  property  from  a  corpora- 
tion is  not  liable  on  a  claim  that  the 
corporation  acquired  such  property  by 
conversion,  he  having  no  knowledge  of 
such  conversion.  Liebhardt  v.  Wilson, 
38  Col.  1  (1906). 


665 


§   243.]  PARTNERSHIP    LIABILITY   OF  STOCKHOLDERS.  [CH.  XIII. 

torts  committed  in  such  business.1  Where  a  corporation  organized  to 
do  a  jewelry  business  is  really  a  scheme  to  carry  on  an  illegal  and 
fraudulent  investment  business,  a  person  defrauded  may  file  a  hill 
in  equity  to  hold  the  corporation  and  its  officers  and  stockhold<  rs 
personally  liable  and  enjoin  them  from  disposing  oi  the  ass 
and  for  discovery.2  Even  though  the  stockholders  of  a  aews- 
paper  company  may  be  held  liable  criminally  for  its  publication 
of  an  illega]  liquor  advertisement,  it'  they  knew  of  the  publi- 
cation, yet  it  must  !><•  shown  that  they  were  stockholders  at  the 
time.3  Even  though  a  corporation  purchases  shares  of  its  own  stock, 
which  are  but  partially  paid,  this  due-;  not  render  the  remaining 
stockholders  liable  for  the  balance  due  on  such  unpaid  -hares  so  pur- 
chased.4 Although  the  statute  declares  that  the  word  "limited"  shall 
bo  a  part  of  the  name,  and  that  the  stockholders  should  he  liable  if 
not  used,  yet  a  single  instance  of  failure  to  use  it  does  not  render  the 
stockholders  liable.5  The  United  States  statute  making  every  per- 
son interested  in  a  still  of  liquors  liable  for  the  tax  thereon  renders 
the  stockholders  of  the  distilling  corporation  liable,  and  one  who 
pays  the  tax  may  have  contribution  from  the  others.8  Stockholders 
are  not  liable  as  partners  on  the  ground  that  the  stock  was  watered.7 
A  person  advancing  money  to  an  insolvent  corporation  to  continue 
its  business  dors  nut  thereby  become  personally  liable  to  a  person 
furnishing  material  to  the  corporation.8  In  Kentucky  it  was  held 
that,  where  a  corporation  changed  its  uame  and  used  the  new  name 
without  complying  with  the  statute,  the  stockholders  were  liable 
as  partners,9  and  it  was  also  held  that,  if  a  person  buys  all  the 
stock  of  a  company,  the  latter  thereby  becomes  dormant,  and  he  is 
liable  for  the  debts  incurred  thereafter,  except  as  to  those  debts  which 

1  Mandeville  v.  Courtwright,  142  530  (1895).  A  stockholder  who  is 
Fed.  Rep.  97  (1905),  rev'g  126  Fed.  compelled  to  pay  a  tax  levied  by  the 
Rep.  1007.  government  on  liquor  distilled  by  the 

2  Edwards  v.  Michigan,  etc.  Co.,  132  corporation  may  have  contribution 
Mich.  1  (1902).  from  the  other  stockholders.    Wolters 

3  State  v.  Bass,  101  Me.  481   (1906).  v.  Henningsan,   114   Cal.   433    (1896). 

4  Crawford  v.  Roney,  126  Ga.  763  A  tax  against  the  property  of  the 
(1906).  company  cannot  be  enforced  against 

5  Staver,  etc.  Co.  v.  Blake,  111  Mich,  a  stockholder.  State  v.  Catron,  118 
282    ^C"S).     A   statute   may   require  Mo.  280  (1893). 

the   word   "limited"   to   be   a   part   of  7  Louisville  Bkg.   Co.   v.  Eisenman, 

the  corporate  name,  and  may  render  94  Ky.  83    (1893). 

the  stockholders  personally  liable  for  8  Perkins  v.   Huntington,   19   N.   Y. 

omitting  the  same.    Lehman  v.  Knapp,  Supp.  71  (1892).  See  96  Pac.  Rep.  178. 

48  La.  Ann.  1148   (1896).  9  Cincinnati  Cooperage  Co.  v.  Bate, 

eRichter   v.   Henningsan,   110   Cal.  96  Ky.  356   (1894). 

666 


CH.  XIII.]  PARTNERSHIP   LIABILITY   OP    STOCKHOLDERS.  [§  243. 

were  incurred  on  the  credit  of  the  company  only.1  In  Vermont 
at  an  early  day  it  was  held  that  where  an  incorporated  society  used 
all  its  funds  to  contest  a  debt,  the  members  would  be  compelled  to 
replace  the  money  so  used.2  These  decisions,  however,  can  hardly  be 
said  to  be  sound  law. 

Although  there  are  less  stockholders  and  less  directors  than  the 
statute  or  charter  requires,  yet  the  acts  of  these  are  sufficient  to 
sustain  obligations  incurred  by  the  corporation  with  third  persons.3 

Questions  relative  to  the  mode  of  organizing  under  a  special 
charter  are  considered  elsewhere.4  Stockholders  sometimes  guar- 
antee the  liabilities  of  the  company.  This  class  of  contracts  is  con- 
sidered elsewhere.5  Where  a  corporation  is  a  mere  "dummy,"  the 
courts  will  sometimes  ignore  its  existence  and  reach  the  stockholders 
and  officers.  This  class  of  cases  also  is  considered  elsewhere.6  Where 
stockholders  are  sued  on  a  corporate  liability  they  need  not  plead  the 
incorporation.  They  may  merely  deny  liability.7  Where  the  trustees 
are  sued  personally  on  a  note  which  they  claim  is  a  note  of  the  corpo- 
ration, they  must  prove  the  taking  of  steps  towards  incorporation.8 
Where  the  defendant  represented  in  a  letter  that  it  was  a  corpora- 
tion, its  incorporation  need  not  be  proved.9  The  subject  of  a  waiver 
of  liability  in  an  incorporated  association  is  considered  elsewhere.10 

1  Louisville,    etc.    Co.    v.   Eisenman,  defense  that  the  defendant  is  merely 
94  Ky.  83   (1893).  a  stockholder  in  the  party  who  really 

2  Bigelow  v.  Congregational  Soc.,  11  is  liable  should  be  set  up  by  the  gen- 
Vt.  283   (1839).  eral   issue  and  not  by  a  plea.     Dade 

3  Welch  v.  Importers',  etc.  Bank,  122  Coal  Co.  v.  Haslett,  83  Ga.  549  (1889). 
N.  Y.  177  (1890).  Where  persons  sued  as  partners  deny 

4  See  §  590,  infra.  the    partnership,    the    plaintiff    may 
c  See  §  76,  supra.  have  an  examination  before  trial  in 

6  See  §  6,  supra,  and  §§  663,  664,  in-    order  to   ascertain   where  they   were 
fra.  incorporated.     Clark  v.  Wilcklow,  75 

7  Where    suit    is    brought    against    Hun,  290  (1894). 

stockholders   to   hold   them   liable   as  8  The  minutes  of  the  first  meeting 

partners  they  may  deny  liability,  and  are     not     sufficient.       McKenney     v. 

need  not  set  up  the  affirmative  defense  Bowie,  94  Me.  397   (1900). 

that  the  corporation   alone   is   liable.  o  Marx  v.  Raley  &  Co.,  92  Pac.  Rep. 

Demarest    v.    Flack,    128    N.    Y.    205  519    (Cal.  1907). 

(1891).  In  an  action  for  damages  the  io  See  §  508,  infra,  and  §  216,  supra. 

667 


CHAPTER  XIV. 


LIABILITY  OF  PLEDGEES,  TRUSTEES,  EXECUTORS,  AGENTS,  ETC. 


244.  The  subject. 

245,  246.  The    liability    of    trustees 

and  cestui  que  trust. 

247.  The   liability    of   a    pledgee    of 

shares — Pledge    of    stock    by 
the  corporation  itself. 

248.  The  liability  of  an  executor  or 

administrator  and  the  estate. 

249.  The   liability   of   principal   and 

agent   on    stock   standing   in 
the   agent's   name. 

250.  Liability    where    stock    is    sub- 

scribed for  or  held  by  or  in 


the    names    of    infants    and 
married  women. 
§  251.  The  liability  of  the  corporation 
itself  as  a  stockholder. 
252.  The    liability    of    legatees,    as- 
signees   in    insolvency,    joint 
owners,  and  of  a  corporation 
owning  stock  in  another  cor- 
poration. 
The     use     of    "dummies"   and 
transfers  to  nominal  and  fic- 
titious persons. 


:.'■>. 


§  244.  The  subject. — Where  the  apparent  owner  of  shares  is  not 
the  real  owner,  the  registered  title  to  the  stock  being  in  one  person 
and  the  equitable  or  real  ownership  being  in  another,  various  in- 
tricate questions  have  arisen  involving  the  matter  of  liability  for 
unpaid  subscriptions  and  liability  under  the  statute.  The  cases  pre- 
sent every  variety  of  ownership  and  every  phase  of  liability,  includ- 
ing many  instances  of  transfer  for  the  purpose  of  avoiding  liability. 
The  principles  and  rules  of  law  governing  this  branch  of  the  sub- 
ject are  somewhat  numerous  and  complicated.  Nevertheless  they 
are  comparatively  well  settled. 

§§  245,  246.  The  liability  of  trustees  and  cestui  que  trust— A 
trustee  of  stock  who  is  recorded  on  the  corporate  books  as  a  stock- 
holder is,  at  common  law,  liable  on  such  stock  as  though  he  were 
the  absolute  owner  of  the  same.  This  is  the  rule  even  though  he 
is  recorded  on  the  corporate  books  not  as  an  absolute  owner,  but  as 
a  trustee  of  the  stock.1     And  the  liability  of  the  trustee  is  not  lim- 


l  Quoted  and  approved  in  Adams  v. 
Clark,  36  Col.  65  (1906).  Chapman's 
Case,  L.  R.  3  Eq.  361  (1866);  Davis 
v.  Essex  Baptist  Soc,  44  Conn.  582 
(1877);  Ex  parte  Bugg,  2  Dr.  &  Sm. 
452  (1865);  Muir  v.  City  of  Glasgow 
Bank,  L.  R.  4  App.  Cas.  337  (1879); 
Holt's  Case,  1  Sim.  (N.  S.)  389 
(1851);  Mitchell's  Case,  L.  R.  9  Eq. 
363  (1870);  King's  Case,  L.  R.  6  Ch. 


App.  196  (1871);  Grew  v.  Breed,  51 
Mass.  569  (1846);  Leifchild's  Case,  L. 
R.  1  Eq.  231  (1865);  Hemming  v. 
Maddick,  L.  R.  9  Eq.  175  (1870) ;  aff'd, 
L.  R.  7  Ch.  App.  395;  Re  National 
Fin.  Co.,  L.  R.  3  Ch.  App.  791  (1868) ; 
Ind's  Case,  L.  R.  7  Ch.  App.  485 
(1872).  But  see  Sayles  v.  Bates,  15 
R.  I.  342  (1886);  Saunders's  Case,  2 
De  G.,  J.  &  S.  101  (1864).    A  person 


C68 


CH.  XIV.] 


LIABILITY  OF  PLEDGEES,  AGENTS,  ETC.  [§§    245,  246. 


ited  by  the  amount  of  the  trust  property.1  Each  trustee  is  liable 
not  merely  Igv  his  proportion,  but  for  the  whole  amount  due  upon 
the  stock.2  Sometimes  by  statute  the  trustee  is  liable  only  to  the 
extent  of  the  trust  estate.3  Under  the  National  Banking  Act  a 
person  holding  stock  as  trustee  is  not  liable  on  such  stock,  even 
though  the  cestui  que  trust  is  insolvent  or  a  minor,  where  the  trus- 
teeship appears  upon  the  bank  books  and  the  certificate  of  stock.4 
Where  stock  stands  in  the  name  of  a  person  as  "trustee,"  he  is  lia- 
ble thereon,  even  though  he  is  acting  merely  as  the  agent  of  another 
person.5  A  trustee  is  liable  on  stock  issued  to  him  individually, 
even  though  he  actually  held  it  as  trustee,  and  the  same  rule  ap- 
plies even  though  stock  is  issued  to  him  as  trustee.6  The  trust  estate 
cannot  be  reached  by  an  action  at  law  against  the  trustee.7 

The  cestui  que  (rust  is  not  liable  on  the  stock  held  by  the  trustees. 
The  corporation  cannot  hold  him  liable ;  neither  can  the  corporate 
creditors.     The  cestui  que  trust  cannot  be  held  either  on  the  unpaid 


who  subscribes  for  stock  as  trustee  for 
another  is  liable  on  the  subscrip- 
tion, although  such  other  person 
is  named  in  the  subscription. 
Union,  etc.  Bank  v.  Willard,  88  Pac. 
Rep.  1098  (Cal.  1907).  A  trustee  is 
liable  on  the  statutory  liability  on 
national  bank  stock  if  the  stock  stands 
in  his  name  personally.  Kerr  v. 
Urie,  86  Md.  72  (1897).  A  person 
who  allows  stock  to  stand  in  his  name 
on  the  books  of  a  national  bank  is 
liable  on  the  statutory  liability  there- 
for, even  though  he  held  the  stock 
as  trustee  for  the  bank  itself.  Lewis 
v.  Switz,  74  Fed.  Rep.  381  (1896). 
See  also  §251,  infra..  On  this  sub- 
ject of  the  liability  of  trustees,  see 
also-  §  503c,  infra.  Further,  on  the 
respective  liabilities  of  promoters,  see 
§  705;  of  officers  of  unincorporated  as- 
sociations, §508;  of  committeemen, 
§  888;  and  of  persons  who  sign  their 
names  and  add  an  official  title,  §  724, 
infra.  See  69  Atl.  Rep.  765. 

1  Hoare's   Case,   2   John.   &  H.   229 
(1862). 

2  Cunninghame  v.  City  of  Glasgow 
Bank,  L.  R.  4  App.  Cas.  607  (1879). 

3  In  New  York,  by  statute,  trustees 
holding  stock  in  railroad  or  manufac- 


turing corporations  are  exempt  from 
liability.  Laws  of  1892,  ch.  688,  sec. 
54.  By  the  statutes  of  the  United 
States  a  similar  provision  applies  to 
national  banks.  R.  S.,  §  5152.  But 
this  exemption  does  not  protect  the 
trustee  unless  the  stock  registered  in 
his  name  is  registered  to  him  as  "trus- 
tee." Davis  v.  Essex  Baptist  Soc,  44 
Conn.  582  (1877). 

4  Lucas  v.  Coe,  86  Fed.  Rep.  972 
(1898);  Welles  v.  Larrabee,  36  Fed. 
Rep.  866    (1888). 

5  Wadsworth  v.  Laurie,  164  111.  42 
(1896).  A  corporation  cannot  sub- 
scribe for  its  own  stock,  even  though 
such  subscription  is  made  in  the  name 
of  a  trustee  for  the  corporation.  The 
trustee  is  personally  liable  in  such 
case  to  corporate  creditors.  Johnston 
v.  Allis,  71  Conn.  207  (1898). 

6  Sherwood  v.  Illinois,  etc.  Bank, 
195  111.  112   (1902). 

7  In  a  suit  at  law  in  Massachusetts 
by  a  bank  receiver  to  hold  a  trustee 
liable  on  stock  purchased  by  him  as 
trustee,  the  trust  estate  cannot  be 
held  liable.  The  suit  must  be  in 
equity.  Hampton  v.  Foster,  127  Fed. 
Rep.  468   (1904). 


669 


§§   245,246.]         LIABILITY  OF   PLEDGEES,    A  M.MS,   ETC. 


|>   II.  XIV. 


subscription  or  on   tlio  statutory   liability  of  the  stock.      lie    is   a 
stranger  to  the  corporation  and  its  creditors.1 

But  hi  re  the  exemption  of  the  cestui  <///<■  trust  ceases.  He  does 
not  entirely  escape  liability.  His  exemption  from  Liability  to  the 
creditors  <>f  the  trust  does  aot  protect  him  from  liability  to  the 
trustee.  Ele  is  bound  to  indemnify  the  trustee  and  to  repay  to  him 
any  debts  which  the.  hitter  may  have  paid  in  the  administration  of 
the  trust.-  The  indemnity  which  the  trustee  may  claim  from  him 
cannot  bo  denied  on   the  ground  that    the   trustee  is  irresponsible, 


1  Mitchell's  Case,  L.  R.  9  Eq.  363 
(1870);  Ex  parte  Bugg,  2  Dr.  &  Sm. 
452  (1865);  Williams's  Case,  L.  R.  1 
Ch.  D.  576  (1875);  King's  Case,  L.  R. 
6  Ch.  App.  196  (1871);  Fenwick's 
Case,  1  De  G.  &  Sm.  557  (1849); 
Newry,  etc.  Ry.  v.  Moss,  14  Beav.  64 
(1851). 

2  Butler  v.  Cumpston,  L.  R.  7  Eq.  16 
(1868);  James  v.  May,  L.  R.  6  H.  L. 
328  (1873);  Chapman's  Case,  L.  R.  3 
Eq.  361  (1866);  Re  National  Fin.  Co., 
L.  R.  3  Ch.  App.  791  (1868);  Perry, 
Trusts,  §§  485,  486.  In  the  case  of 
Jervis  v.  Wolferstan,  L.  R.  18  Eq.  18 
(1874),  the  court  said,  in  enforcing 
indemnity  to  the  trustees  of  stock: 
"I  take  it  to  be  a  general  rule  that 
where  persons  accept  a  trust  at  the 
request  of  another,  and  that  other  is 
a  cestui  que  trust,  he  is  personally 
liable  to  indemnify  the  trustees  for 
any  loss  accruing  in  the  due  execution 
of  the  trust;  and  under  that  doctrine 
I  shall  hold  that  the  estate  of  the 
testator  became  liable  to  indemnify 
the  trustees  against  the  payment  of 
this  large  sum  of  money."  Hemming 
v.  Maddick,  L.  R.  7  Ch.  App.  395 
(1872),  aff'g  L.  R.  9  Eq.  175,  where 
the  court  held  also  that  the  trustee 
might  authorize  the  corporation  to 
use  the  trustee's  name  and  collect 
from  the  cestui  que  trust.  In  Hughes- 
Hallett  v.  Indian,  etc.  Co.,  L.  R.  22 
Ch.  D.  561  (1882),  it  is  held  that  the 
trustees  cannot  sue  for  indemnity 
before  the  corporation  has  demanded 
payment.  See  also  Phene  v.  Gillan,  5 
Hare,  1  (1845),  where  a  mortgagor  of 


stock   was   held   liable   to    indemnify 
the  mortgagee,  who  had  been  held  lia- 
ble on  the  stock.     The  court  said  the 
mortgagor  was   liable  the   same  as  a 
"trustee  of  leasebold   property  under 
covenants  for  the  benefit  of  a  cestui 
que  trust:'     In  Balsh  v.  Hyham,  2  P. 
Wms.  453   (1728),  the  lord  chancellor 
said  that  "it  is  a  rule  that  the  cestui 
que  trust   ought  to  save  the  trustee 
harmless  as  to  all   damages  relating 
to  the  trust,"  and  consequently  that 
the  cestui  que  trust  must  repay  to  the 
trustees  money  borrowed  by  the  lat- 
ter and  given  to  the  cestui  que  trust, 
the    trust   consisting   of   stock   which 
was  pledged  to  secure  the  loan.     Ap- 
proved   in    Ex   parte    Chippendale,    4 
De  G.,  M.  &  G.,  19,  54   (1854).     Lind- 
Iey,  Partn.  373,  374    (Ewell's  2d  Am. 
Ed.),  says:     "The  right  of  a  trustee 
to  indemnity  from  his  cestui  que  trust 
very  closely  resembles  the  right  of  an 
agent  to   indemnity  from   his  princi- 
pal.  A  trustee  is  clearly  entitled  to  be 
indemnified  out  of  the  trust  property 
against  all  costs,  charges,  and  expenses 
properly    incurred,    and    against    all 
losses  sustained  by  him  in  the  execu- 
tion  of   his   trust;     and    if   the   trust 
property  is  not  sufficient  for  the  pur- 
pose of  indemnifying  him  in  respect 
of  such  matters,  his  cestui  que  trust, 
if  under  no   disability,   is   personally 
liable  to  indemnify  him,  unless  such 
liability  is  excluded  by  some  special 
circumstance.     ...     If  there  is  an 
express    covenant    to    indemnify,    the 
obligation  will  be  limited  by  the  cove- 
nant." 


670 


CH.  XIV.] 


LIABILITY  OF  PLEDGEES,  AGENTS,  ETC. 


[§   247. 


and  consequently  that  the  corporation  cannot  get  anything  from  him.1 
But  until  the  trustee  is  actually  called  on  by  the  corporation  to  pay, 
he  cannot  compel  the  cestui  que  trust  to  give  indemnity.2 

This  liability,  however,  of  the  cestui  que  trust  may  be  avoided. 
If  the  trustees  are  willing  to  provide  in  the  trust  instrument  that 
the  cestui  que  trust  shall  not  be  liable,  such  a  provision  is  legal  and 
effectual.  The  cestui  que  trust  then  escapes  liability  absolutely  and 
completely.3  This  rule  does  not  apply  to  a  transaction  where  the 
registered  stockholder  is  merely  the  nominal  holder,  or  agent  for 
another  person.4  A  guardian  is  not  liable  on  national  bank  stock, 
nor  is  his  ward,  but  the  estate  only  is  liable  under  the  acts  of  con- 
gress.5 

§  247.  The  liability  of  a  pledgee  of  shares—Pledge  of  stock  by 
the  corporation  itself. — A  pledgee  of  stock,  that  is,  one  to  whom 
the  stock  has  been  transferred  in  pledge  or  as  collateral  security 
and  who  has  had  the  stock  transferred  into  his  own  name  on  the 
corporate  books,  is  liable  to  the  creditors  of  the  corporation  as 
though  he  were  the  absolute  owner  of  the  stock.6     This  rule  has 

i  Re  National  Fin.  Co.,  L.  R.  3  Ch.  66  Minn.  487    (1896);   State  v.  Bank, 

App.  791    (1868);   Cruse  v.  Paine,  L.  etc.,   70   Minn.  398    (1897);    Chatham 

R.   6  Eq.  641   (1868).  Bank  v.  Brobston,  99  Ga.  801  (1896); 

2  Hughes-Hallett  v.  Indian,  etc.  Co..  Ball  Elec.  Light  Co.  v.  Child,  68  Conn 
L.  R.  22  Ch.  D.  561   (1882).  522  (1897);   National  Comm.  Bank  v. 

3  Thus,  in  Ex  parte  Chippendale,  4  McDonnell,  92  Ala.  387  (1891); 
De  G.,  M.  &  G.  19,  52  (1854),  the  court  Moore  v.  Jones,  3  Woods,  53  (1877); 
says,  in  a  dictum:  "No  doubt  a  com-  s.  c,  17  Fed.  Cas.  690;  Pullman  v. 
pany's  deed,  or  any  other  deed,  may  Upton,  96  U.  S.  328  (1877);  Ault- 
be  so  framed  as  to  deprive  directors  man's  Appeal,  98  Pa.  St.  505  (1881); 
or  trustees  of  the  right  to  indemnity;  Crease  v.  Babcock,  51  Mass.  525 
and,  if  parties  think  proper  to  accept  (1846);  Holyoke  Bank  v.  Burnham, 
directorships  or  trusts  under  deeds  so  65  Mass.  183  (1853);  Sleeper  v.  Good- 
framed,  they  must  abide  by  the  con-  win,  67  Wis.  577  (1887);  Rosevelt  v. 
sequences."  See  also  Gillan  v.  Morri-  Brown,  11  N.  Y.  148  (1854);  U.  S. 
son,  1  De  G.  &  Sm.  421  (1847),  hold-  Trust  Co.  v.  U.  S.  F.  Ins.  Co.,  18  N.  Y. 
ing  that  an  expres  agreement  that  the  199  (1858) ;  Grew  v.  Breed,  51  Mass. 
cestui  que  trust  shall  be  liable  to  the  569  (1846);  Royal  Bank  of  India's 
trustee    to   a    certain    extent   and    no  Case,  L.  R.  7  Eq.  91   (1868);  s.  c,  L. 

R.  4  Ch.  App.  252  (1869);  Weiker- 
sheim's  Case,  L.  R.  8  Ch.  App.  831 
(1873);  Price  &  Brown's  Case,  3  De 
G.  &  Sm.  146  (1850),  in  which  the 
holders  of  shares  taken  as  security, 
who  had   new  shares  issued  in  their 


more  is  binding  on  the  trustee. 

4  See  §§  249,  253,  infra. 

5  Clark    v.    Ogilvie,     111    Ky.     181 
(1901). 

c  Pauly  v.  State  L.  &  T.  Co.,  165  U. 
S.  606  (1897);  National  Foundry,  etc. 
Works  p.  Oconto  Water  Co.,  68  Fed.  own  names  in  exchange  for  the  old 
Rep.  1006  (1895);  Tuthill  Spring  Co.  shares  which  had  been  called  in,  were 
v.  Smith,  90  Iowa,  331  (1894);  Calu-  declared  to  be  contributories,  though 
met  Paper  Co.  v.  Stotts  Inv.  Co.,  96  the  directors  knew  the  nature  of  their 
Iowa,  147    (1895);   Harper  v.  Carroll,    holding;  Richardson  v.  Abendroth,  43 

671 


§   247.]  LIABILITY  OF   PLEDGEES,   AGENTS,   ETC.  [cil.  XIV. 

frequently  been  enforced  in  the  case  of  a  pledge  of  shares  of  stock  in 
a  national  bank.1  A  pledgee  of  certificates  of  stock  may  legally 
cause  the  stock  to  be  transferred  on  the  corporate  books  into  the 
name  of  an  irresponsible  agent  or  representative  of  the  pledgee. 
When  this  is  done  the  pledgee  is  not  liable  on  the  stock.2  A  pl<  d 
of  national  bank  stock  is  not  liable  thereon,  the  stock  having  been 
transferred  into  the  name  of  an  appointee  of  the  pledgee,  yet  the 
question  of  whether  the  pledgee  had  become  the  absolute  owner  of  the 
stock  or  had  held  itself  out  as  the  owner  by  a  sale  to  itself,  may  be 

Barb.  162  (1864).    And  the  pledgee  is  Terminal  Co.  v.   National  Bank,   112 

liable  upon  the  stock  even  after  his  Fed.  Rep.  813  (1901).    A  pledgee  who 

debt  has  been  paid  and  the  certificate  causes  the  stock  to  be  transferred  to 

handed  back  to  the  pledgor,  if  the  re-  himself    absolutely    on    the    books    is 

transfer   is   not    properly   entered    on  liable    thereon    for    the    subscription 

the  corporate  books.     Bowden   [Bow-  price.       Fouche    v.    Merchants',     etc. 

dell]   v.  Farmers',  etc.  Nat.  Bank,  25  B'k,  110  Ga.827(1900),  69  Atl.Rep.  765. 

Int.   Rev.   Rec.   405    (1877);    s.   c,    3  l  Pauly  v.  State  L.  &  T.  Co.,  165  U. 

Fed.  Cas.  1029;  Johnson??.  Somerville  S.   606    (1897);    Magruder  v.  Colston, 

Dyeing,  etc.  Co.,  81  Mass.  216  (1860) ;  44  Md.  349  (1876) ;  Wheelock  v.  Kost, 

Adderly  v.  Storm,  6  Hill,  624   (1844).  77  111.  296  (1875);  Hale  v.  Walker,  31 

A    pledgee    who    transfers    the    stock  Iowa,   344    (1871);    Barre   Nat.   Bank 

into   his  own  name   is  liable  on  the  v.   Hingham  Mfg.   Co.,   127  Mass.   563 

unpaid    subscription.       People's,    etc.  (1879);  National  Bank  v.  Case,  99  U. 

Bank  v.  Rauer,  2  Cal.  App.  445  (1906).  S.  628    (1878). 

A   pledgee  who  has  the  stock  trans-  2  Quoted  and  approved  in  Adams  v. 

ferred   to   himself   absolutely   on    the  Clark,  85  Pac.  Rep.  642    (Col.   1906). 

books  is  liable  thereon  on  the  statu-  Pauly  v.  State  L.  &  T.  Co.,  165  U.  S. 

tory  liability.    Hurlburt  v.  Arthur,  140  606  (1897) ;  Henkle  v.  Salem  Mfg.  Co., 

Cal.  103  (1903).  A  bank  holding  stock  39    Ohio    St.    547    (1883);    Welles    v. 

in  its  own  name  in  another  bank  is  Larrabee,   36   Fed.   Rep.   866    (1888). 

liable  thereon  as  a  stockholder,  even  The   pledgee   is   not   liable   when   he 

though   in  fact  it  held  it  only  as  a  causes  the  stock  to  be  transferred  into 

pledge.     Adams  v.  Clark,   36   Col.   65  the  name  of  a  third  person.     Hayes 

(1906).     Where  the  pledgee  has  the  v.  Fidelity,  etc.  Co.,  105  Fed.  Rep.  160 

stock  transferred  into  his  own  name  (1900).     A  pledgee  of  stock  in  a  na- 

absolutely,   he   is   liable   to  corporate  tional    bank    is    not    liable    thereon 

creditors  for  the  unpaid  subscription  where  he  has  caused  the  stock  to  be 

price.     Fisher  v.  Seligman,  75  Mo.  13  placed  in  the  name  of  an  employee, 

(1881),  rev'g  7  Mo.  App.  383.    In  this  even  though  the  original  pledge  was 

case  the  stock  had  been  pledged  by  stock  in  a  national  bank  which  was 

the  corporation   itself  to  the   defend-  consolidated    with    another    national 

ant.    Even  though  stock  stands  in  the  bank  and  the  pledgee  took  stock  in 

name  of  a  pledgee  for  a  short  time  the    consolidated    bank    in    the    em- 

and  is  then  transferred  back  to  the  ployee's  name  in  place  of  the  original 

owner,  yet  the  pledgee   is  not  liable  stock.    Wilson  v.  Merchants',  etc.  Co., 

on  a  statutory  liability  for  subsequent  98  Fed.  Rep.  688  (1900) ;  aff'd,  183  U. 

debts,  even  though  he  has  not  given  S.  121.    A  trust  company  holding  na- 

public  notice  of  the  transfer  by  him  tional    bank    stock    as    pledgee    may 

as   required   by    statute.     Brunswick  have  the  stock  transferred   into  the 

672 


CH.  XIV.] 


LIABILITY  OF  PLEDGEES,  AGENTS,  ETC. 


[§    247. 


for  a  jury.1      A  statute  frequently  relieves  the  pledgee  from  his 
liability.2 

A  pledgee  of  stock  may  protect  his  interest  in  the  stock  and  may 
at  the  same  time  avoid  liability  as  a  stockholder  by  having  the 
stock  transferred  into  his  name  as  "pledgee ;"  in  other  words,  by 
having  the  certificate  made  out  to  him  in  his  own  name,  adding 
thereto  the  word  "pledgee."  "Where  the  transfer  is  made  in  this 
manner,  the  pledgee  is  not  liable  on  the  statutory  or  subscription 


name  of  one  of  its  employees,  and 
the  trust  company  is  not  liable  on 
such  stock  on  the  failure  of  the  bank, 
even  though  it  paid  an  assessment 
levied  on  the  stock  by  the  comptroller. 
Higgins  v.  Fidelity,  etc.  Co.,  108  Fed. 
Rep.  475  (1901);  aff'd,  189  U.  S.  242. 
Where  the  pledgee  of  national  bank 
stock  causes  new  certificates  to  be 
issued  in  the  name  of  one  of  his  em- 
ployees, the  former  is  not  liable  on 
the  stock.  National,  etc.  Bank  v.  Har- 
mon, 79  Fed.  Rep.  891  (1897).  In  An- 
derson v.  Philadelphia  Warehouse  Co., 
Ill  U.  S.  479  (1884),  it  is  held  that 
a  pledgee  of  shares  of  stock  in  a  na- 
tional bank,  who  takes  the  security 
for  his  benefit  in  the  name  of  an  irre- 
sponsible person,  as  trustee,  for  the 
avowed  purpose  of  avoiding  individual 
liability  as  a  stockholder,  incurs  no 
liability  which  can  be  enforced  by 
creditors  of  the  bank  in  case  of  its 
failure.  To  same  effect,  Newry,  etc. 
Ry.  v.  Moss,  14  Beav.  64  (1851).  Cf. 
Addison's  Case,  L.  R.  5  Ch.  App.  294 
(1870).  A  transfer  of  shares  by  one 
who  holds  them  as  collateral  security, 
for  the. purpose  of  avoiding  liability 
thereon,  is  not  a  conversion.  Heath  v. 
Griswold,  5  Fed.  Rep.  573  (1881).  See 
also  §§466,  470,  and  cf.  §253,  infra. 
l  Rankin  v.  Fidelity,  etc.  Co.,  189  U. 
S.  242  (1903).  Where  after  the  death 
of  the  pledgor  the  pledgee  files  a  claim 


Hulitt   v.   Ohio,   etc.    Bank,   137   Fed. 
Rep.  461  (1905) ;  aff'd,  204  U.  S.  162. 

2  N.  Y.  Laws,  1892,  ch.  688,  §  54.  See 
McMahon  v.  Macy,  51  N.  Y.  155 
(1872).  A  similar  provision  is  found 
in  the  old  New  York  Manufacturing 
Companies  Act  of  1848  (N.  Y.  Laws, 
1848,  ch.  40,  §16).  See  Stover  v. 
Flack,  30  N.  Y.  64  (1864);  s.  c,  41 
Barb.  162.  Cf.  Re  Reciprocity  Bank, 
22  N.  Y.  9,  17  (1860).  And  a  similar 
provision  has  been  enacted  in  Mary- 
land. Matthews  v.  Albert,  24  Md.  527 
(1866).  In  the  case  Adams  v.  Clark, 
36  Col.  65  (1906),  the  court  held  that 
the  usual  statute  relieving  a  pledgee 
from  the  liability  on  stock  applies 
only  to  cases  where  either  the  corpo- 
rate books  or  the  certificate  of  stock 
shows  that  the  stock  is  held  in  pledge, 
and  the  court  examined  the  various 
decisions  on  that  subject  and  stated 
that  the  only  decision  to  the  contrary 
was  McMahon  v.  Macy,  51  N.  Y.  155, 
and  that  in  that  case  it  was  a  dictum. 
By  statute  in  Iowa  a  pledgee  of  stock 
is  not  liable  for  assessments  thereon. 
Iowa  Nat.  Bank  v.  Cooper,  101  N.  W. 
Rep.  459  (Iowa  1904).  In  Burgess 
v.  Seligman,  107  U.  S.  20  (1882),  the 
supreme  court  of  the  United  States 
construed  the  Missouri  statute  and 
held  that  the  pledgees  were  not  liable 
to  corporate  creditors  upon  the  shares 
so  held  by  them,  and  such  also  is  the 


against  his  estate,  and  practically  be-  the  rule  now  in  Missouri.    Union  Sav. 

comes   the    owner   of    the    stock,    the  Assoc,  v.  Seligman,  92  Mo.  635  (1887), 

pledgee  may  be  liable  thereon,   even  overruling   Griswold   v.   Seligman,   72 

though    it    caused    the    stock    to     be  Mo.   110    (1880).     See  also  Melvin  v. 

transferred  into  the  name  of  one  of  Lamar  Ins.  Co.,  80  111.  446  (1875).    In 

its  irresponsible  employees,  the  stock  England,  Chapman's,  etc.  Case,  L.  R. 

in  this  case  being  national  bank  stock.  3  Eq.  361    (1867);   Re  Anglesea  Col- 
(43)                                               673 


§  247.] 


LIABILITY   OF   PLEDGEES,   AGENTS,   ETC. 


[(II.  XIV. 


liability,  even  though  the  corporation  becomes  insolvent.1      Where 

a  bank  has  no  power  to  hold  stock  in  other  bunks,  it  seems  that  the 
former  is  not  liable  on  stock  of  the  latter,  which  the  former  holds 

liery  Co.,  L.  R.  2  Eq.  379  (1866);  made  out  against  the  latter,  especial- 
Ind's  Case,  L.  R.  7  Ch.  485  (1872),  ly  where  the  certificate  book  merely 
were  under  the  Companies  Act.  In  shows  that  the  new  certificate  was 
Re  City  Terminus  Hotel  Co.,  L.  R.  14  issued  in  lieu  of  the  old  one.  Tour- 
Eq.  10  (1872),  a  hotel  company  bor-  telot  v.  Stolteben,  101  Fed.  Rep.  362 
rowed  £40,000  of  a  railroad  company  (1900).  Where  a  pledgee  directs  its 
and  gave  it  unissued  shares  as  se-  agent  to  cause  the  stock  to  be  trans- 
curity,  they  being  placed  in  the  hands  ferred  into  the  name  of  the  pledgee 
of  a  trustee,  with  power  to  sell,  and  "as  pledgee,"  but  the  agent  takes  a 
thus  reduce  the  debt.  Afterwards  the  new  certificate  running  to  the  pledgee 
railway  company  bought  the  hotel,  as  absolute  owner,  the  pledgee  is  not 
and  the  hotel  company  was  wound  liable  on  the  stock  to  corporate  cred- 
up.  Held,  that  the  railway  company  itors,  it  being  shown  that  the  pledgee 
were  not  stockholders,  but  creditors,  did  not  know  of  such  issue  of  the 
and  were  entitled  to  deduct  the  new  certificate;  and  especially  is  this 
amount  of  the  loan  from  the  pur-  the  case  where  the  pledgee  is  a  bank 
chase-money.  See  also  Manchester,  which  had  authority  to  take  stock 
etc.  Corp.'s  Case,  22  W.  R.  41  (1873);  in  pledge,  but  not  to  purchase  it  ab- 
Nellis  v.  Coleman,  98  Pa.  St.  465  solutely.  May  v.  Genesee,  etc.  Bank, 
(1881),  where  the  corporation  re-  120  Mich.  330  (1899).  It  is  proper 
ceived  subscriptions  as  a  loan,  to  be  and  legal  for  a  corporation  to  add  to 
repaid.  It  was  held  to  be  valid.  In  the  name  appearing  on  the  stock  cer- 
Massachusetts  the  pledgee  is  liable  tificate  the  words  "as  pledgee,"  or 
on  the  stock  as  owner  only  when  the  "as  collateral  security,"  or  similar 
certificate  fails  to  show  that  the  words.  See  §  466  and  ch.  XXVII, 
shares  are  held  merely  as  collateral,  infra.  Where  a  pledgee  requests  the 
Barre  Nat.  Bank  v.  Hingham  Mfg.  corporation  to  transfer  the  stock  to 
Co.,  127  Mass.  563  (1879).  And  so  in  him  as  pledgee  and  the  corporation 
Connecticut.  Davis  v.  Essex  Baptist  transfers  it  to  him  individually,  but 
Soc,  44  Con.  582  (1877).  he  immediately  returns  it  and  re- 
i  Pauly  v.  State  L.  &  T.  Co.,  165  U.  quests  a  new  certificate  to  him  as 
S.  606  (1897).  A  pledgee  of  national  pledgee,  he  is  not  liable  to  a  corpo- 
bank  stock  is  not  liable  on  the  statu-  rate  creditor  as  the  owner  of  the 
tory  liability,  where  he  is  registered  stock,  even  though  the  corporation  de- 
on  the  books  of  the  bank  as  holding  layed  for  four  weeks  in  making  the 
the  stock  as  collateral.  Beal  v.  Essex  change.  Welch  v.  Gillelen,  147  Cal. 
Sav.  Bank,  £1  Fed.  Rep.  816  (1895).  571  (1905).  A  court  will  not  at  the 
Where  the  receiver  of  a  national  bank  instance  of  a  pledgee  order  a  trans- 
proves  by  the  certificate  of  stock  book  fer  to  be  recorded  on  the  books  to  the 
that  a  certificate  of  stock  was  issued  pledgee  as  pledgee,  and  giving  the 
to  a  pledgee  as  pledgee,  and  then  pledgor  the  right  to  vote  the  stock, 
canceled  and  issued  to  another  per-  inasmuch  as  this  would  complicate 
son  who  in  fact  was  only  pledgee,  but  the  title  as  between  the  corporation 
who  appeared  on  the  face  of  the  cer-  and  its  stockholders  and  interfere 
tificate  as  though  he  were  the  abso-  with  the  business  of  the  corporation, 
lute  owner,  the  presumption  is  that  American,  etc.  Co.  v.  Pacific,  etc.  Co., 
the  stock  book  would  have  shown  the  34  Wash.  10  (1904). 
true  facts,  and  hence  a  case  is  not 

674 


CH.  XIV.] 


LIABILITY  OF  PLEDGEES,  AGENTS,  ETC. 


[§  247. 


as  pledgee,  but  apparently  as  owner.1  However  that  may  be,  the  law 
is  clear  that  a  person  to  whom  stock  is  issued  by  a  bank  "as  cashier," 
but  who  really  is  only  pledgee,  is  not  liable  on  the  statutory  liability.2 
A  pledgee  of  stock  who  holds  the  certifieates,  but  who  does  not 
appear  on  the  corporate  books  as  a  stockholder,  is  not  liable  as  a 
stockholder.3  It  has  even  been  held  that  a  pledgee  of  national  bank 
stock  who  has  sold  the  same  at  public  sale  and  purchased  the  stock 
himself  is  nevertheless  not  liable  on  the  stock  to  corporate  creditors, 
if  the  stock  has  not  been  transferred  into  his  name  on  the  books  of 
the  bank.4  In  a  suit  to  enforce  the  liability  of  a  stockholder  in  a 
national  bank,  both  the  pledgee  and  the  pledgor  may  be  joined,  and 
the  decree  may  compel  the  pledgor  to  indemnify  the  pledgee  where 
the  latter  is  held  liable.5  Where  the  corporation  pledges  its  unis- 
sued stock  in  order  to  secure  a  corporate  debt,  the  pledgee  is  not  liable 
to  other  corporate  creditors  on  such  stock.6 


i  See  §  252,  infra.  In  the  case  of 
Robinson  v.  Southern,  etc.  Bank,  180 
U.  S.  295  (1901),  the  court  declined 
to  pass  upon  the  question  of  whether 
a  national  bank  would  be  liable  on 
stock  which  it  held  as  collateral  se- 
curity where  the  stock  stands  on  the 
books  in  the  name  of  the  bank. 

2  Frater  v.  Old  Nat.  Bank,  etc.,  101 
Fed.  Rep.  391  (1900).  In  the  case  of 
Robinson  v.  Southern,  etc.  Bank,  180 
U.  S.  295  (1901),  the  court  approved 
the  decisions  in  Baker  v.  Old  National 
Bank,  86  Fed.  Rep.  1006,  and  101  Fed. 
Rep.  391,  holding  that  where  stock  in 
one  national  bank  stands  in  the  name 
of  a  person  as  cashier  of  another  na- 
tional bank,  the  latter  may  show  that 
it  held  the  stock  only  as  collateral 
security,  and  hence  is  not  liable 
thereon. 

In  the  case  of  Baker  v.  Old  Nat. 
Bank,  86  Fed.  Rep.  1006  (1898),  the 
court  held  that  where  national  bank 
stock  stands  on  the  books  in  the  name 
of  the  cashier  of  another  national 
bank  as  cashier,  this  in  itself  is  suf- 
ficient notice  that  the  latter  holds  the 
stock  as  pledgee,  and  hence  neither 
the  cashier  personally,  nor  the 
pledgee  bank  as  a  bank,  is  liable  on 
the  statutory  liability;  the  basis  of 
this  decision  being  that  the  liability 


of  the  pledgee  in  such  case  is  based 
on  estoppel  only,  and  that  there  was 
sufficient  notice  on  the  corporate 
books  of  the  fact  that  the  stock  was 
held  in  pledge,  especially  as  a  na- 
tional bank  has  no  power  to  buy  such 
stock  or  take  the  same  in  payment  of 
a  debt,  except  a  bad  debt. 

3Prouty  v.  Prouty,  etc.  Co.,  155 
Pa.  St.  112  (1893).  An  unrecorded 
pledgee  is,  of  course,  not  liable  on  the 
statutory  liability.  Henkle  v.  Salem, 
etc.  Co.,  39  Ohio  St.  547  (1883).  See 
also  §  258,  infra. 

4  Even  though  a  national  bank,  as 
pledgee  of  a  national  bank  stock 
which  stands  on  the  books  of  the  lat- 
ter bank  in  the  name  of  the  pledgor, 
sells  the  stock  on  notice  and  buys  it 
in  at  a  nominal  figure,  yet  if  the 
pledgee  does  not  have  the  stock  trans- 
ferred to  himself  on  the  books  of  the 
bank  he  cannot  be  held  liable  thereon, 
the  pledgee  having  soon  after  the 
sale  waived  its  rights  as  a  purchaser 
at  such  sale.  Robinson  v.  Southern, 
etc.  Bank,  180  U.  S.  295   (1901). 

5  Baker  v.  Old  Nat.  Bank,  91  Fed. 
Rep.  449    (1899). 

6  Stock  issued  by  the  corporation 
to  a  person  to  insure  the  carrying  out 
by  another  person  of  the  latter's  con- 
tract to  underwrite  the  bonds,  does 


675 


§  248.] 


LIABILITY   OF   PLEDGEES,   AGENTS,   ETC. 


[cn.  xiv. 


§  248.  The  liability  of  an  executor  or  administrator  and  the 
estate. — The  estate  of  a  deceased  person  is  liable  upon  stock  held 
and  owned  by  the  decedent  in  the  same  way  and  to  the  same  ax- 


not  render  such  a  person  so  holding 
the  stock  liable  thereon.  Colonial  T. 
Co.  17.  McMillan,  188  Mo.  547  (1905). 
Pledgees  of  stock  from  the  corpora- 
tion itself  are  not  liable  on  the  stock 
under  the  Maine  statute,  where  the 
entries  on  the  stock  ledger  showed 
that  the  stock  was  issued  as  collateral. 
In  re  Noyes  Bros.,  136  Fed.  Rep.  977 
(1905).  It  may  be  shown  by  parol 
evidence  whether  the  issue  of  stock 
to  an  individual  by  the  corporation 
was  a  sale  of  the  same  or  was  as  col- 
lateral security.  In  re  McLean-Bow- 
man Co.,  138  Fed.  Rep.  181  (1905). 
In  the  case  Beattie  v.  Ebury,  L.  R.  7 
H.  of  L.  102  (1874),  where  unissued 
stock  had  been  issued  as  collateral 
security  for  a  loan  to  the  company 
the  court  held  that  even  though  the 
stock  stood  in  the  names  of  nominees 
of  the  pledgee,  yet  such  nominees 
were  not  liable  on  the  stock.  In  the 
case  In  re  City  Terminus  Hotel  Co., 
L.  R.  14  Eq.  10  (1872),  on  the  wind- 
ing up  of  a  solvent  company,  stock 
issued  as  collateral  security  to  a  cred- 
itor of  the  company  was  held  not  to 
make  the  creditor  a  stockholder  and 
he  was  entitled  to  full  payment  of  his 
debt  upon  the  return  of  the  stock. 
Even  though  a  corporation  issues 
stock  in  pledge  to  one  of  its  bond- 
holders, yet  the  bondholder  is  not 
liable  thereon,  though  the  corporation 
becomes  insolvent.  Deavitt  v.  El- 
dridge,  73  Vt.  332  (1901).  Although 
stock  pledged  by  the  corporation  to 
one  of  its  creditors  is  stock  which  has 
been  surrendered  by  a  subscriber  who 
had  never  paid  therefor,  yet  the 
pledgee  is  not  liable  on  said  stock, 
even  though  the  subscriber  was  to  be 
entitled  to  the  equity  of  redemption. 
Sturtevant  v.  National,  etc.  Works,  88 
Fed.  Rep.  613  (1898).  Where  a  Wis- 
consin corporation  pledges  its  own 
stock  to  one  of  its  own  creditors,  such 


creditor  is  not  liable  thereon  to  cor- 
porate creditors  as  a  stockholder.  An- 
drews v.  National  Foundry,  etc. 
Works,  77  Fed.  Rep.  774  (1897). 
Where  the  pledgees  of  stock  from  the 
corporation  foreclose  by  sale,  they  do 
not  thereby  become  liable  on  the 
stock  either  to  the  corporation  or  its 
creditors.  Andrews  v.  National  Foun- 
dry, etc.  Works,  76  Fed.  Rep.  166, 
175  (1896),  holding  also  that  under 
the  Wisconsin  statute,  if  an  issue  of 
stock  as  collateral  for  a  debt  of  the 
company  is  illegal,  the  stock  is  void, 
and  the  holder  thereof  is  not  liable 
to  corporate  creditors  who  were  not 
especially  misled  by  his  conduct;  and 
that  persons  holding  stock  by  direct 
issue  as  collateral  security  for  a  debt 
of  the  company  to  them  are  not  liable 
to  creditors  of  the  company  as  sub- 
scribers, unless  they  allow  themselves 
to  be  represented  as  stockholders  to 
the  creditors,  who  gave  credit  on  the 
faith  of  that  liability.  Where  the 
corporation  pledges  its  unissued  stock 
to  one  of  its  creditors  as  collateral  se- 
curity, he  is  not  liable  to  corporate 
creditors  who  were  such  before  the 
issue  was  made.  Gilman  v.  Gross,  97 
Wis.  224  (1897).  Unissued  stock  may 
be  issued  by  the  corporation  as  a 
pledge  to  secure  a  loan,  and  the  cor- 
poration cannot  set  up  that  it  was  is- 
sued at  less  than  par  in  violation  of 
the  constitution.  The  issue  is  good 
in  the  hands  of  the  pledgee  to  the  ex- 
tent of  the  loan.  Gasquet  v.  Crescent 
City  Brewing  Co.,  49  Fed.  Rep.  496 
(1892);  aff'd,  148  U.  S.  31.  Even 
though  stock  is  issued  by  the  cor- 
poration as  security  for  its  debts, 
yet  if  it  is  issued  to  a  third  person 
and  the  certificates  transferred  by 
that  person  to  the  creditors,  and  the 
debt  is  afterwards  paid  and  the  stock 
is  still  held  by  the  first  named  per- 
son for  many  years,  he  is  liable  there- 


676 


CH.  XIV.] 


LIABILITY  OF  PLEDGEES,  AGENTS,  ETC. 


[§   248. 


tent  that  the  stockholder  was  liable  in  his  life-time.  Accordingly, 
an  executor  or  administrator  of  the  estate  of  a  deceased  stockholder 
is  chargeable  upon  the  shares  of  the  decedent  to  the  extent  of  the 
property  that  comes  into  his  hands  as  the  personal  representative  of 
the  deceased,  he  not  having  been  discharged.1     The  cause  of  action 


on  to  corporate  creditors.  Hecht,  etc. 
Co.  v.  Phenix,  etc.  Co.,  121  Fed.  Rep. 
188  (1903).  A  person  who  subscribes 
for  stock  and  receives  it  and  becomes 
a  director  and  takes  part  in  declar- 
ing illegal  dividends  cannot  claim  as 
against  creditors  that  he  merely 
loaned  the  money  to  the  corporation 
and  held  the  stock  as  collateral. 
American,  etc.  Co.  v.  Eddy,  138  Mich. 
403    (1904). 

A  constitutional  provision  against 
the  issue  of  bonds,  except  for  money, 
labor  or  property,  does  not  prevent 
the  corporation  from  pledging  its 
bonds.  Illinois,  etc.  Bank  t.  Pacific 
Ry.,  117  Cal.  332  (1897).  Where  a 
corporation  pledges  its  stock  as  se- 
curity for  a  debt  due  from  the  cor- 
poration to  the  pledgee,  and  the  cer- 
tificates of  stock  state  upon  their  face 
that  they  are  full  paid,  the  pledgee 
cannot  be  held  liable  on  said  stock, 
even  though  the  company  has  become 
insolvent.  Bloomenthal  v.  Ford, 
[1897]  A.  C.  156,  rev'g  Re  Veuve  Mon- 
nier,  etc.  Co.,  [1896]  2  Ch.  525.  But 
Furness  v.  Cynthiana,  etc.  Co.,  [1893] 
21  R.  239,  holds  otherwise  where  the 
pledgee  knew  that  they  were  not  paid 
up.  A  depositor  in  a  bank  who  has 
been  induced  to  take  from  the  bank 
its  stock  as  security  may  show  by 
parol  evidence  that  she  took  such 
stock  as  collateral  security  and  not  in 
liquidation  of  her  deposit.  Williams 
v.  American  Nat.  Bank,  85  Fed.  Rep. 
376  (1898).  Even  though  bank  books 
include  the  name  of  a  person  as  a 
stockholder,  and  even  though  such 
person,  after  the  bank  became  insolv- 
ent, referred  to  herself  as  a  stock- 
holder, yet  if  she  was  not  aware  of 
the  entries,  and  understood  that  she 
had  the  stock  as   collateral  security, 


she  can  enforce  her  claim  against  the 
bank  as  a  debt.  American  Nat.  Bank, 
etc.  v.  Williams,  101  Fed.  Rep.  943 
(1900).  Where  the  pledgee  has  the 
stock  transferred  into  his  own  name 
absolutely,  he  is  liable  to  corporate 
creditors  for  the  unpaid  subscription 
price.  Fisher  v.  Seligman,  75  Mo.  13 
(1881),  rev'g  7  Mo.  App.  383.  In 
this  case  the  stock  had  been  pledged 
by  the  corporation  itself  to  the  de- 
fendant. 

i  An  estate  is  liable  on  the  statu- 
tory   liability    of    the   deceased   as    a 
stockholder  in  a  Kansas  corporation. 
Mechanics'  Sav.  Bank  v.  Fidelity,  etc. 
Co.,    87    Fed.    Rep.    113     (1898).      An 
estate    is    liable    on    an    unpaid    sub- 
scription made  by  the  deceased.  Fitz- 
gerald's Estate   v.   Union   Sav.   Bank, 
65   Neb.   97    (1902).     The  estate   of  a 
deceased  stockholder  is  liable  on  the 
statutory  liability  in  Wisconsin,  even 
though   the  stock  still   stands  in  the 
name   of   the   deceased    person.     The 
executors  are  not  liable  except  to  the 
extent  of  the  estate.    Gianella  v.  Bige- 
low,   96  Wis.   185    (1897).     An  estate 
is  liable  on  the  statutory  liability  of 
a  deceased  stockholder  in  a  national 
bank.    Wickham  v.  Hull,-  60  Fed.  Rep. 
326     (1894).       See    also,    in    general, 
Thomas's   Case,    1   De   G.    &    Sm.    579 
(1849)  ;  Baird's  Case,  L.  R.  5  Ch.  App. 
725  (1870),  holding  that  the  presump- 
tion  is  that  executors  of  a  deceased 
stockholder    succeed    to    his    full    lia- 
bility;  Thomas  v.  Evans,  9  Sc.  Ct.  of 
Sess.     Cas.     (3d     ser.)     810     (1871); 
Evans  v.  Coventry,  25  L.  J.  (Ch.)  489 
(1856),    holding    the    executor    liable 
only  to  the  extent  of  the  estate  funds. 
To   same    effect,    Blakeley's"  Case,    13 
Beav.    133    (1850);    Ex   parte   Gouth- 
waite,   3   Mac.   &  G.   187    (1851);   Ex 


677 


248.] 


LIABILITY   OF    PLEDGEES,    AGENTS,    ETC. 


[CH.  XIV. 


against  a  stockholder,  arising  from  his  statutory  liability,  is  not 
defeated  by  bis  death.  The  action  may  proceed  againsl  his  estate.1 
The  executor  or  administrator  becomes  personally  Liable  upon  the 
stock,  if  be  pay  away  the  assets  of  the  estate  in  legacies  withoul  mak- 
ing provision  to  mee1  the  Liability  on  the  stock.-  Where,  however,  the 
stock  goes  to  a  Legatee  or  Life  tenant,8  the  estate  may  not  be  liable.  An 
estate  is  Liable  for  Btock  which  the  deceased  owned  in  a  national 
bank,    and   such   liability    may   be   enforced    in   the   federal    court, 


parte  Doyle,  2  Hall  &  T.  221   (1850); 
Ex    parte    Hall,    1    Mac.    &    G.    307 
(1849);   Hamer's  Case,  2  De  G.,  M.  & 
G.  366   (1852);  Robinson's  Case,  6  De 
G.,  M.  &  G.  572   (1856);  Ness  v.  Arm- 
strong, 3  De  G.  &  Sm.  38,  n.   (1849); 
Straffon's  Case,  1  De  G.,  M.  &  G.  576 
(1852);   Bulmer's  Case,  33  Beav.  435 
(1864);    Gouthwaite's   Case,   3   De  G. 
&  Sm.  258    (1850)  ;    Taylor  v.  Taylor, 
L.  R.  10  Eq.  477   (1870);  Alexander's 
Case,     15     Sol.     Jour.     788      (1871); 
Hamer's    Case,    3    De    G.    &    Sm.    279 
(1850);  New  England  Comm.  Bank  r. 
Newport   Steam  Factory,  6  R.   I.   154 
(1859);  Crandall  v.  Lincoln,  52  Conn. 
73   (1884);   Bailey  v.  Hollister,  26  N. 
Y.  112    (1862);   Chase  v.  Lord,  77  N. 
Y.   1    (1879);    Witters   v.   Sowles,    25 
Fed.  Rep.  168    (1885);   s.  c,  32  Fed. 
Rep.   130    (1887),   relative  to  the  lia- 
bility  of  an  executor  under  the  fed- 
eral      statute      governing      national 
banks;   also  Davis  v.  Weed    (U.  S.  D. 
C),  44  Conn.  569  (1877);  s.  c,  7  Fed. 
Cas.  186;    Schouler,  Executors,   §380. 
An  administrator  is  not  liable  on  na- 
tional bank  stock  even  though  he  is 
the   residuary   distributee   of   the   es- 
tate.     Re    Bingham,    127    N.    Y.    296 
(1891).     Some  of  the  earlier  Massa- 
chusetts cases  are  in  apparent  conflict 
with   the   rule   declared   in   the   text. 
Child  v.   Coffin,   17  Mass.   64    (1820); 
Gray  v.  Coffin,  63  Mass.   200    (1852); 
Ripley    v.     Sampson,     27     Mass.     371 
(1830);     Andrews     v.     Callender,     30 
Mass.  484   (1833);  Dane  v.  Dane  Mfg. 
Co.,    80    Mass.    489     (1860);     Grew    v. 
Breed,  51  Mass.  569  (1846).    See  also 
Re   Cheshire    Banking   Co.,    L.    R.    32 
Ch.  D.  301  (1886).     A  residuary  lega- 


tee is  not  a  proper  party  defendant 
to  a  suit  to  enforce  the  deceased's  lia- 
bility as  a  stockholder.  Starkweather, 
etc.  v.  Brown,  25  R.  I.  142    (1903). 

i  Richmond  v.  Irons,  121  U.  S.  27 
(1887);  Chase  v.  Lord,  77  N.  Y.  1 
(1879).  But  see  Dane  v.  Dane  Mfg. 
Co.,  80  Mass.  488  (1860).  A  statu- 
tory liability  in  reference  to  illegal 
dividends  may  not  survive  the  death 
of  a  director  who  is  liable.  Boston, 
etc.  R.  R.  v.  Graves,  80  Fed.  Rep.  588 
(1897). 

-  Taylor  v.  Taylor,  L.  R.  10  Eq.  477 
(1870);  Jefferys  v.  Jefferys,  24  L.  T. 
Rep.  177  (1871);  Thomas's  Case,  1 
De  G.  &  Sm.  579  (1849),  where  the 
debts  had  exhausted  the  estate.  In 
Stewart  v.  Evans,  9  S.  Ct.  Sess.  Cas. 
(3d  ser.)  810  (1871),  it  is  held  that 
where  executors  pay  away  the  es- 
tate bona  fide,  they  are  not,  after  a 
lapse  of  sixteen  years,  liable  person- 
ally for  a  deficit  on  shares.  Cf.  Wit- 
ters v.  Sowles,  25  Fed.  Rep.  168 
(1885). 

3  The  estate  is  not  liable  on  the 
statutory  liability  where  the  stock 
is  transferred  to  the  life  tenant. 
Blackmore  v.  Woodward,  71  Fed.  Rep. 
321  (1895).  See  §§  252,  560,  infra. 
Even  though  executors  transfer  to 
themselves  as  trustees  certain  na- 
tional bank  stock,  and  pay  the  divi- 
dends to  a  legatee  of  a  share  in  the 
estate,  yet  if  the  will  did  not  set  aside 
such  stock  for  such  legatee,  the  es- 
tate, and  not  the  legatee's  interest,  is 
liable  for  an  assessment  on  such 
stock.  Earle  v.  Rogers,  105  Fed.  Rep. 
208    (1900). 


678 


CII.  XIV.] 


LIABILITY  OF  PLEDGEES,   AGENTS,  ETC. 


[§    248. 


although  the  estate  is  still  in  the  probate  court  and  the  time  for  filing 
claims  against  the  estate  in  the  probate  court  has  expired.1  But 
where  claims  against  estates  must  be  presented  to  the  court  within  two 
years,  a  subscription  liability  presented  after  that  time  is  barred.2 
An  unpaid  subscription  due  from  the  estate  of  a  deceased  stock- 
holder is  a  claim  which  should  be  presented  to  the  probate  court.3 
An  executor  is  no  longer  liable  for  an  assessment  on  stock  after  he 
has  been  finally  discharged  and  distribution  ordered.4  Even  though 
a  national  bank  becomes  insolvent  after  a  stockholder  has  died,  yet, 
if  the  stock  still  stands  in  his  name,  his  estate  is  liable  for  the  assess- 
ment on  such  stock,  and  if  the  estate  has  been  distributed  the  dis- 
tributees must  refund  to  the  extent  of  such  liability.5     A  statutory 


1  Zimmerman  r.  Carpenter,  84  Fed. 
Rep.  747  (1898).  An  estate  is  liable 
on  national  bank  stock  where  such 
estate  is  still  unsettled,  even  though 
the  sole  legatee,  who  is  also  the  ex- 
ecutor, has  paid  all  other  claims  and 
taken  the  assets.  Tourtelot  v.  Finke, 
87  Fed.  Rep.  840  (1898).  Suit  may 
be  brought  to  enforce  the  liability  of 
a  stockholder  in  a  national  bank,  al- 
though such  stockholder  is  dead  and 
his  estate  is  being  administered  in  a 
state  probate  court.  Brown  v.  Ellis, 
86  Fed.  Rep.  357    (1898). 

2  Morse  v.  Pacific  Ry.,  191  111.  356 
(1901).  See  s.  c,  191  111.  371.  A 
statute  limiting  claims  against  es- 
tates to  such  claims  as  are  presented 
within  a  year  applies  to  a  statutory 
liability  of  a  deceased  stockholder. 
Barto  v.  Stewart,  21  Wash.  605  (1899). 
The  statutory  liability  of  a  Maine 
stockholder  in  a  Minnesota  corpora- 
tion cannot  be  enforced  in  Maine, 
where  the  stockholder  has  died  and 
his  estate  been  distributed,  and  the 
suit  was  not  instituted  until  three 
years  after  the  decree  of  insolvency 
in  Minnesota,  and  the  one-year  stat- 
ute of  limitations  in  Maine  in  suits 
against  estates  had  run.  Hale  v. 
Coffin,  114  Fed.  Rep.  567  (1902).  An 
executor  has  no  power  to  waive  a 
short  statute  of  limitations  applica- 
ble to  the  statutory  liability  on  stock 
in  a  Kansas  corporation.  Stebbins  v. 
Scott,  172  Mass.  356    (1899). 


3  State  v.  Probate  Court,  66  Minn. 
246   (1896). 

4  Childs  v.  De  Laveaga,  89  Pac.  Rep. 
82  (Cal.  1907);  Union  etc.  Bank  v. 
De  Laveaga,  89  Pac.  Rep.  84  (Cal. 
1907).  The  executors  may  distribute 
the  entire  estate,  although  it  includes 
stock  which  has  not  been  fully  paid 
for.  Re  Mary  King.  95  L.  T.  Rep. 
724  (1906).  If  an  executor  distrib- 
utes the  assets  knowing  that  there  is 
a  liability  on  the  stock,  he  is  per- 
sonally liable  therefor,  if  it  cannot 
be  collected  from  the  distributees. 
Potter  v.  Mortimer,  114  111.  App.  Rep. 
422   (1904)  ;   aff'd  213  111.  178. 

5Matteson  v.  Dent,  176  U.  S.  521 
(1900);  s.  c,  70  Minn.  519  (1897), 
and  75  N.  W.  Rep.  1041.  A  distribu- 
tee may  be  held  liable  on  a  statutory 
liability  of  the  decedent  in  a  corpora- 
tion to  the  extent  of  the  assets  re- 
ceived by  him.  Hale  v.  Coffin,  114 
Fed.  Rep.  567  (1902),  aff'd,  120  Fed. 
Rep.  470.  Where  an  estate  has  been 
distributed,  calls  on  stock  standing  in 
the  name  of  the  testator  may  be  col- 
lected from  the  distributees.  The 
statute  of  limitations  applicable  to 
claims  against  any  estate  does  not  ap- 
ply, inasmuch  as,  the  corporation  be- 
ing solvent,  the  claim  is  contingent 
and  hence  could  not  be  allowed  by  the 
probate  court  anyway.  South  Mil- 
waukee Co.,  v.  Murphy,  112  Wis.  614 
(1902).  Where  the  commissioners  of 
the  estate  of  a  deceased  stockholder 


679 


248.] 


LIABILITY   OF    PLEDGE!:-.    AdENTS,    ETC. 


|  (II.  XIV. 


limitation   as  to  the  time   within   which   clai]  tate 

shal]  be  presented,  does  not  apply  to  the  statutory  liability  on  national 
bank  stock,  inasmuch  as  tin-  United  States  statutes  regulate  that.1 
Where  the  estate  has  been  administered  ami  distributed  ami  the  ad- 
ministrators discharged,  the  property  of  the  estate  may  be  followed 
into  ilic  hands  of  distributees  for  the  purpose  of  paying  an  unpaid 
subscription.2  An  executor  is  not  released  from  a  statutory  liability, 
even  though  his  accounts  have  boon  judicially  Bettled.3  Executors 
who  have  inventoried  national  bank  stock  as  pari  of  the  of  the 

estate  are  liable  thereon  .  eutors.4     An  assessment  levied  under 

the  national  hank  act.  on  stock  held  by  an  administrator  has  no 
preference  over  other  debts  of  the  i  '    Where  the  executor  settles 

the  estate  without  probate  proceedings,  the  property  of  the  estato 
may  be  followed  to  answer  to  the  statutory  liability  on  national 
bank  stock  standing  in  the  name  of  the  deceased.6  When  the  execu- 
tors accept  a  transfer  in  their  own  names  they  make  themselves  per- 
sonally liable  on  the  stock.7     An  executor  who  takes  new  shares  for 


have  no  power  to  pass  on  a  claim  aris- 
ing from  a  statutory  liability  on  stock, 
the  six-months  statute  of  limitations 
applicable  to  claims  against  estates 
is  not  applicable  to  such  liability.  If 
the  estate  has  been  distributed  the  as- 
sets may  be  followed  into  the  hands  of 
the  heirs  and  legatees.  Barton,  etc. 
Bank  v.  Atkins,  72  Vt.  33  (1899). 
Where,  pending  a  suit  to  enforce 
stockholders'  liability,  one  of  the 
stockholders  dies  and  his  executors 
distribute  the  estate  and  are  dis- 
charged, the  distributees  may  be 
brought  in  as  parties  defendant.  Wil- 
loughby  v.  St.  Paul,  etc.  Co.,  80  Minn. 
432  (1900). 

i  Mortimer  v.  Potter,  213  111.  178 
(1904). 

2  Lake,  etc.  Co.  v.  Lindeke,  66  Minn. 
209  (1896).  A  national  bank  receiver 
may  maintain  a  bill  in  equity  against 
the  trustees  and  distributees  of  the 
estate  of  a  deceased  stockholder  in 
the  bank  to  collect  an  assessment  on 
the  stock.  Mortimer  v.  Potter,  213  111. 
178   (1904). 

3  Mahoney  v.  Bernhard,  45  N.  Y. 
App.  Div.  499  (1899);  aff'd,  169  N. 
Y.  589. 

4  Parker  v.  Robinson,  71  Fed.  Rep. 


256  (1895).  A  decree  that  shares  of 
stock  in  a  national  bank  do  not  belong 
to  an  estate  does  not  prevent  another 
suit  against  another  person  as  the 
owner,  even  though  such  other  per- 
son was  a  party  defendant  to  the 
first  suit,  being  a  daughter  and  heir 
of  the  decedent.  Ricaud  v.  Tyson,  78 
Fed.  Rep.  561   (1897). 

•r>  In  re  Beard's  Estate,  7  Wyo.  104 
(1897). 

o  Baker  v.  Beach,  85  Fed.  Rep.  836 
(1S98). 

7  Alexander's  Case,  15  Sol.  Jour. 
788  (1871).  An  executrix  is  liable  on 
stock  standing  in  the  name  of  the  es- 
tate instead  of  in  the  name  of  the 
deceased  or  of  the  executrix,  it  being 
shown  that  the  stock  formerly  stood 
in  the  name  of  the  deceased.  Brown 
v.  Ellis,  103  Fed.  Rep.  834  (1900). 
In  New  York  it  is  held  that  an  action 
to  charge  an  executor  on  the  stock  of 
the  estate  need  not  be  joined  with  an 
action  to  enforce  an  individual  sub- 
scription by  the  executor,  Erie  etc. 
R.  R.  v.  Patrick,  2  Keyes,  256  (1865). 
A  special  statute  of  limitations  ap- 
plicable to  executors  will  apply  to  an 
executor's  liability  on  stock.  Sayles 
v.    Bates,   15   R.    I.   342    (1886).     In 


6S0 


CH.  XIV.] 


LIABILITY  OF  PLEDGEES,  AGENTS,  ETC. 


[§  249. 


the  estate  is  personally  liable  thereon.1  A  partnership  association 
under  the  statutes  of  Pennsylvania  is  not  a  corporation  to  the  extent 
that  the  estate  of  a  stockholder  is  liable  on  a  claim  arising  after  the 
death  of  such  stockholder.2  Statutes  are  often  found  relieving  execu- 
tors and  administrators  from  this  liability.3  A  foreign  executor  or 
administrator  has  no  absolute  right  to  transfer  the   stock  of  the 

§  249.  The  liability  of  principal  and  agent  on  stock  standing  in 
the  agent's  name.— -Sometimes  a  subscription  for  stock  is  made  by 
one  person  as  the  agent  of  another,  and  the  stock  is  entered  on  the 
corporate  books  in  the  name  of  the  agent.  In  such  a  case  it  is  the 
rule  that  corporate  creditors  may  hold  either  the  principal  or  the 
ao-ent  responsible  on  the  stock.5  An  agent  who  is  compelled  to  assume 
and  pay  charges  on  the  stock  may  recover  from  his  principal  the 
amount  so  paid.6    Where  a  transfer  is  made,  not  to  the  principal  him- 

En-land  an  executor  is  liable  person-  stock  as  a  favor,  and  under  agree- 
any  on  stock  if  he  transfers  it  to  him-  ment  that  he  should  incur  no  liabil- 
sell-  otherwise  not,  the  title  to  the  ity,  was  held  to  be  a  contributory. 
s  c'k  being  eft  in  the  name  of  the  A  broker  who  has  the  stock  trans- 
testator  Healey,  Company  Law  and  ferred  into  his  own  name  is  liable  as 
P       r     90     Bucnan's   Case,   L.   R.    4  though  he  were  the  full  owner     Mc- 

a  ^    «?«  7lS79)  Kim  v-  Glenn'  66  Md-  479   (1887)'     AU 

iFeTrnside's  Case  L.  R.  1  Ch.  App.  unregistered  transfer  to  one  as  agent 

231    (1866    -Spence's  Case,  17  Beav.  to   sell   does   not   render   -ch   agent 

203     1853    •   Jackson  r.  Turquand,  L.  liable    for    the    unpaid    subscription. 

203   (1853)     Jacks  Mallori(,s  Powen    „    Willamette   Valley   R.    R, 

Case   L  R   2  Ch.  App.  181  (1866).    Cf.    15  Oreg.  393  (1887) ;    Mann  ,.  Cume 
case,  u.  xv.  o  v>u.  i^i  i  ~   „K     oo4    mois->     wVipt-r   nne   who 


Sol.    Jour.     790 


Russell's    Case,    15 

(1871). 
2Bodey    v.    Cooper,    82    Md 

(1896) 


625 


2  Barb.  294  (1848),  where  one  who 
held  stock  in  his  own  name,  but  really 
as  an  agent  or  broker  for  its  sale,  was 
held  to  be  a  stockholder  at  the  suit 


Where  the  executor  causes  stock  of  creditors.  One  to  whom  stock  is 
1,1!  hv  the  decedent  to  be  trans-  issued,  and  in  whose  name  it  ap- 
SrVmtoV^u^name  as  ex-    pears  on  the  books  of  the  corporation 

zt  .  virtue  22^  s  ™  :::::«: 

S^^r^^ntes    — --notthe^erofsuch 

£  M1,ir?»98)  ™«™-  A  person' wh0  by  writ; 

Minn.  138  (1898)  subscribed  for  stock,  cannot 

*  See§  330,  nfra.  ^f  up  that  he  agreed  with  the  prea- 

(XgcTs^riTesflsV^    ^nt'that  he  was  acting  merely  as 

rir^^XS    ^  ,    Bigelow,     14    N.    T.    ». 

681 


§    -!•">().]  LIABILITY    OF    PLEDGEES,    AGENTS,    ETC.  [cil.  XIV. 

self,  but  to  an  agent,   the  latter  is  but  a  nominal  holder,   and   is 
subject  to  the  rule-  applicable  to  such. 

The  transferee  of  an  agent,  when  suil  is  broughl  by  corporate  cred- 
itors i,,  enforce  a  demand  against  the  stock,  cannol  Be1  up  thai  the 
agent  had  no  power  to  transfer  the  stock  to  him.  [f  he  has  received 
the  certificates  and  appears  as  a  stockholder  on  the  1 ks  of  the  cor- 
poration, he  is,  as  between  himself  and  creditors  of  the  corporation, 
a  stockholder.1 

It  is  a  serious  question  whether  so-called  "dummies" — that  is,  per- 
sons holding  in  their  own  names  stock  which  belongs  to  other-,  in 
order  to  enable  the  latter  to  avoid  liability  thereon — are  not  to  be 
regarded  as  agents  rather  than  trustees.  This  question,  however,  is 
considered  elsewhere.2 

§  250.  Liability  where  stock  is  subscribed  for  or  held  by  or  in 
the  names  of  infants  and  married  women. — It  has  already  been 
shown  that  an  infanl  cannot  be  held  liable  upon  a  subscription  to 
stock,3  and  any  person  subscribing  for  -hares  in  the  name  of  an  in- 
fant renders  himself  personally  liable  thereon.  A  pi  rson  buying 
stock  in  a  national  bank  in  the  names  of  his  minor  children  him- 
self becomes  liable  to  assessment  as  a  stockholder,  for  minors  are 
incapable  of  assenting  to  become  stockholders  so  as  to  bind  them- 
selves to  the  liabilities  thereof.4  The  lather  is  liable  even  though 
the  child  becomes  of  age  after  the  assessment  has  been  made  and 
ratines  the  purchase  of  the  stock.5  So,  likewise,  when  shares  are 
assigned  or  transferred  to  infants  as  a  contrivance  to  escape  liability, 
the  transferrer  remains  liable.6     And  this  is  the  rule  as  to  an  infant 

(1856);     aff'g     s.     c,     20     Barb.     21  crues,    the    corporate    creditors    may 

(1854);   Stover  v.  Flack,  30  N.  Y.  64  look   to    the   transferrer.     Maitland's 

(1864).'  Case'  38  L-  J-  (ch)   554  (1869).    And 

i  Wakefield  v.  Fargo,  90  N.  Y.   213  a    director    in    an    incorporated    com- 

(1882).     Upon  the  liability  of  agents  pany,  who  induces  his  minor  children 

or   trustees   in   these   cases,   see   also  to  take  stock  in  the  company  in  their 

Crandall    v.    Lincoln,     52     Conn.    73  own  names,  is  liable  upon  the  wind- 

(1884).  ing  up  for  a  breach  of  trust,  in  case 

2  See  §  253,  infra.  the    children    are    still    minors.      Ex 

3  See   §  67,  supra,  and   §  318,  infra,  parte  Wilson,    L.   R.    8    Ch.   App.    45 

4  Foster  v.  Chase,  75  Fed.  Rep.  797  (1872).  A  transferrer  of  national 
(1896).  But  if  a  father  buys  shares  bank  stock  to  his  infant  children  is 
in  the  name  and  for  the  benefit  of  not  relieved  from  liability.  Aldrich 
his  son,  who  is  a  minor,  and  when  v.  Bingham,  131  Fed.  Rep.  363  (1904). 
the  transfer  is  made  informs  the  5  Foster  v.  Wilson,  75  Fed.  Rep.  797 
broker  of  the  vendor  of  the  minority  (189G). 

of  the  transferee,  the  father,  upon  c  Capper's  Case,  L.  R.  3  Ch.  App. 
the  winding  up,  is  not  liable  on  the  458  (1868);  Mann's  Case,  L.  R.  3  Ch. 
stock,  but,  the  transferee  continuing  App.  459,  n.  (1867);  Weston's  Case, 
a  minor  when  the  right  of  action  ac-    L.  R.   5   Ch.  App.   614    (1870);    Rich- 

682 


CH.  XIV.] 


LIABILITY  OP  PLEDGEES,  AGENTS,  ETC. 


[§   250. 


transferee,  although  the  transfer  was  bona  fide,  and  even  in  igno- 
rance of  the  infancy  of  the  transferee.1  Even  though  stock,  the  sub- 
scription price  of  which  has  not  been  paid,  is  transferred  after  wind- 
ing up  has  been  commenced,  to  an  infant  with  the  consent  of  the 
liquidator,  yet  stock  brokers  who  brought  about  the  transaction  are 
not  liable  on  the  stock.2 

An  infant  who  has  subscribed  for  and  paid  money  on  stock  may 
repudiate  and  recover  back  the  money  so  paid,  if  no  benefit  has  been 
received.3  The  infant  may,  however,  upon  attaining  his  majority, 
ratify  or  acquiesce  in  a  transfer  of  shares  to  him  during  his  infancy, 
and  thereby  render  himself  liable  on  the  stock.4    The  plea  of  infancy 


ardson's  Case,  L.  R.  19  Eq.  588 
(1875);  Roman  v.  Fry,  5  J.  J.  Marsh. 
(Ky.)  634  (1831);  Castleman  v. 
Holmes  4  J.  J.  Marsh.  (Ky.)  1  (1830). 
But  see  Parsons's  case,  L.  R.  8  Eq.  656 
(1869),  where  the  action  of  the  com- 
pany in  continuing  an  infant's  name, 
and  not  notifying  his  vendor  of  his 
infancy,  was  held  to  be  such  laches 
as  to  estop  the  official  liquidator  from 
substituting  the  vendor's  name  for 
that  of  the  infant.  Curtis's  Case,  L. 
R.  6  Eq.  455  (1868);  Reid's  Case,  24 
Beav.  318  (1857);  and  see  cases  in 
the  succeeding  notes  herein. 

i  Weston's  Case,  L.  R.  5  Ch.  App. 
614  (1870);  Mann's  Case,  L.  R.  3  Ch. 
App.  459,  n.  (1867).  Thus,  a  broker 
purchasing  shares  for  the  account  of 
an  infant  was  held  liable  as  holder 
of  the  stock,  not  even  his  broker's 
agency  availing  to  protect  him.  Ruch- 
izky  v.  De  Haven,  97  Pa.  St.  202 
(1S8-1).  In  Nickalls  v.  Merry,  L.  R. 
7  H.  L.  530  (1875),  a  stock-jobber  was 
held  liable  where,  in  a  suit  to  re- 
cover calls  on  stock  sold  by  him  for 
the  Stock  Exchange,  it  turned  out 
that  the  ultimate  transferee  of  the 
shares  was  a  minor,  and  his  trans- 
ferrer had,  in  consequence,  been  com- 
pelled to  pay  the  calls.  If  three  per- 
sons buy  fifteen  shares  and  take  title 
in  an  infant's  name,  each  is  liable 
on  five  shares  and  no  more.  Brown 
v.  Black  L.  R.  8  Ch.  App.  939  (1873). 
"Where  a  party  subscribes  for  stock 
in  the  name  of  his  son,  even  without 


the  consent  or  knowledge  of  the  son, 
the  party  so  subscribing  is  not  liable 
himself  thereon.  Re  Britannia,  etc. 
Assoc,  [1891]  1  Ch.  202.  If  a 
father  transfers  shares  of  stock  to 
his  minor  son,  though  in  good  faith, 
he  is,  upon  the  winding  up,  liable 
upon  the  stock,  as  though  no  trans- 
fer had  been  attempted,  if  the  son 
repudiates  the  transaction.  Litch- 
field's Case,  3  De  G.  &  Sm.  141 
(1850);  Weston's  Case,  L.  R.  5  Ch. 
App.  614  (1870).  Cf.  Roman  v.  Fry, 
5  J.  J.  Marsh.  (Ky.)  634  (1831).  So 
also  where  the  vendor  of  shares 
allows  the  certificate  to  be  made  to 
the  minor  son  of  his  vendee,  and  the 
son  upon  attaining  his  majority  re- 
pudiates the  transaction,  the  vendor 
and  not  the  vendee  is  liable  upon  the 
winding  up.  Hennessey's  Case,  3  De 
G.  &  Sm.  191  (1850).  But  where  a 
stockholder  transferred  to  an  infant, 
and  this  infant  to  another  infant,  who 
in  his  turn  transferred  to  an  adult 
capable  of  responding  upon  the  stock, 
all  the  transfers  having  been  duly 
registered,  it  was  held  that  the  last 
vendee  was  a  contributory,  and  that 
the  immediate  transfers  could  not  be 
avoided.  Gooch's  Case,  L.  R.  8  Ch. 
App.  266   (1872). 

2  Re   National    Bank,   etc.   Ltd.,   96 
L.  T.  Rep.  493   (1907). 

3  Hamilton  v.  Vaughan-Sherrin,  etc. 
Co.,   [1894]   3  Ch.  589. 

4  Lumsden's  Case,  L.  R.  4  Ch.  App. 
31     (1868),    where    an    infant    held 


683 


250.] 


LIABILITY   OF   PLEDGEES,    AGENTS,    ETC. 


[CH.  XIV. 


in  these  cases  musl  allege  repudiation  within  a  reasonable  time  after 
attaining  majority.1 

What  is  a  reasonable  time  within  which  the  infanl  musl  repudiate 
the  contract  in  order  to  escape  chargeability  is,  in  general,  a  question 
of  law,  and  it  will  vary  with  the  particular  circumstances  of  each 
individual  case.  In  general  it  is  the  rule  that  the  transferee,  on 
coming  of  age,  must  disaffirm  promptly.  I. ache-  will  bar  his  right, 
to  repudiate.12 


stock  for  six  months.  Accordingly, 
where  an  infant,  after  becoming  of 
age,  permits  his  name  to  remain  on 
the  registry  as  a  stockholder,  he  is 
held  to  have  ratified  the  antecedent 
transfer  to  him  during  his  minor: 
Cork,  etc.  Ry.  r.  Cazenove,  10  Q.  B. 
935  (1847).  An  infant  may  be  an  in- 
corporator, at  least  until  he  repu- 
diates the  transaction.  All  rights 
acquired  prior  to  such  repudiation  are 
protected.  Re  Laxon,  [1892]  3  Ch. 
555. 

i  Dublin,  etc.  Ry.  v.  Black,  8  Exch. 
181   (1S52).     Cf.  Birkenhead,  etc.  Ry. 
v.  Pilcher,  5  Exch.  24   (1S50).     Where 
an   infant   transferee   became   of   age 
fourteen  months  before   the  winding 
up,  he  was  held  liable  as  a  contribu- 
tory by  acquiescence.    Ebbetts's  Case, 
L.  R.  5  Ch.  App.  302  (1870)  ;   s.  ...  18 
W.    R.    202    (1869).      But    in    a   case 
where  the  winding  up  came  just  be- 
fore an   infant  transferee  became  of 
age,   it  was  held  that  no  affirmative 
repudiation   was   necessary,   but  that 
some  distinct  act  of  affirmation  alone 
would    avail    to    render    him    liable 
after  majority.     Wilson's  Case,  L.  R. 
8  Eq.  240  (1869).    Where  the  winding 
up   occurs   just   before   or   just   after 
the  infant  transferee  becomes  of  age, 
it  is  said  that  he  need  not  expressly 
repudiate  in  order  to  escape  liability, 
"because  he  cannot  tell  whether  the 
company     intends    to    enforce     their 
claim  against  him,  and  therefore  he 
is    not    bound,    till    some    steps    are 
taken,    to    resist    his    being    a    stock- 
holder  in   the   company."     Mitchell's 
Case,    L.    R.    9    Eq.    363     (1870).      It 
seems,  also,  that  a  repudiation  during 


infancy  may,  under  certain  circum- 
stances, avail  to  discharge  an  infant 
stockholder  from  liability  to  pay  calls 
which  are  made  after  he  attained  the 
age  of  twenty-one  years.  Newry,  etc. 
Ry.  V.  Coombe,  3  Exch.  5G5,  578 
(1849).  The  court  said:  "He  became 
a  shareholder  by  contract  during  in- 
fancy, and  during  infancy  he  disaf- 
firmed the  contrail;   therefore,  in  my 

lion,  he  ceased  to  be  a  share- 
holder  liable  to  be  sued  for  calls." 
Where  the  infant  transferee,  coming 
of  age  after  the  winding  up  had  been 
commenced,  offered  to  affirm  the  con- 
tract, it  was  held  that  the  liquidators 

at,  in  the  interest  of  the  creditors, 
refuse  to  accept  the  offer,  and  might 
instead  hold  the  transferrer  liable. 
Symon's  Case,  L.  R.  5  Ch.  App.  298 
(1870);  Castello's  Case,  L.  R.  8  Eq. 
504    (1869). 

2  In  one  English  case  we  find  it 
held  that  two  years'  delay  after  com- 
ing of  age  is  a  ratification  of  the  con- 
tract. Mitchell's  Case,  L.  R.  9  Eq.  363 
(1870).  In  another  case  fourteen 
months  was  held  sufficient.  Ebbetts's 
Case,  L.  R.  5  Ch.  App.  302  (1870).  In 
a  third  case  a  lapse  of  three  years 
was  held  not  to  amount  to  an  affirm- 
ance of  the  contract.  Hart's  case,  L. 
R.  6  Eq.  512  (1868).  In  this  case  the 
infant  stockholder  came  of  age  six 
months  after  the  proceedings  to  wind 
up  the  company  had  been  commenced. 
She  was  served  with  notice  of  these 
proceedings  shortly  before  her  major- 
ity. Two  years  after,  a  list  of  stock- 
holders liable  as  contributors,  which 
included  her  name,  was  filed,  and  a 
year    later   a   notice    of   a    call    was 


684 


CH.  XIV.] 


LIABILITY  OF  PLEDGEES,  AGENTS,  ETC. 


[§  250. 


No  general  rule  can  be  laid  down  as  regards  the  effect  of  a  transfer 
of  stock  to  a  married  woman.  By  the  law  of  most  of  the  states  she 
may  contract  as  a  feme  sole  in  respect  to  her  separate  estate,  and  may 
become  a  transferee  of  stock,  and  hence  is  liable  on  such  stock  the 
same  as  any  other  stockholder.1     In  such  cases  she  would  also  have 


served  on  her.  She  resisted  the  col- 
lection of  the  amount  of  that  call; 
and  although  her  resistance  was 
made  three  years  after  she  came  of 
age,  the  court  held  that  she  was  not 
liable.  After  a  repudiation  of  the 
contract  on  attaining  majority,  it  is 
held  that  rendering  aid  in  holding  the 
transferrer  liable  is  not  a  waiver  by 
the  infant  of  his  formal  repudiation 
of  the  transfer  to  him  cf  which  the 
corporate  creditors  can  take  advan- 
tage, when  for  any  reason  they  fail  to 
make  their  claim  against  the  vendor 
of  the  infant.  Baker's  Case,  L.  R.  7 
Ch.  App.  115  (1871).  After  a  winding 
up  is  commenced,  a  person  in  whose 
name,  while  an  infant,  stock  had  been 
placed,  but  who  had,  with  knowledge, 
allowed  the  subscription  to  continue 
after  he  came  of  age,  cannot  repudi- 
ate. Re  Yeoland  Consols,  58  L.  T. 
Rep.  922  (188S). 

i  See  §  66,  supra,  and  §  319,  infra.  A 
woman  to  whom  stock  is  transferred 
in  the  corporate  books  is  liable  on 
the  statutory  liability  if  she  approves 
or  acquiesces  in  it  in  any  way,  as  by 
signing  an  application  to  change  the 
charter  of  the  bank,  or  by  indorsing 
checks  which  are  made  out  to  her  for 
dividends.  She  is  estopped  from 
denying  that  she  knew  what  she  was 
signing.  It  is  immaterial  whether 
new  certificates  were  issued  to  her, 
and  also  whether  the  transfer  to  her 
was  by  the  husband  in  order  to  con- 
ceal his  property.  A  married  woman 
may  be  a  stockholder  in  a  bank  in 
the  District  of  Columbia,  and  be 
liable  on  the  statutory  liability.  The 
court  refused  to  pass  on  the  question 
as  to  what  property  might  be  reached 
as  against  her.  Keyser  v.  Hitz,  133 
U.  S.  138  (1890).  A  married  woman 
may  be  an  incorporator.     Good  Land 


Co.  v.  Cole,  131  Wis.  467  (1907).  A 
married  woman  who  becomes  a  di- 
rector and  president  is  liable  on  the 
statutory  liability  of  her  stock.  Ar- 
kansas Stables  v.  Samstag,  78  Ark. 
517  (1906).  A  married  woman  who 
is  a  stockholder  is  subject  to  the 
statutory  liability.  Dickinson  v. 
Traphagan,  147  Ala.  442  (1906). 
A  married  woman  may  become  a 
transferee  of  stock,  and  as  such  is 
liable  on  such  stock  the  same  as 
though  she  were  unmarried.  Kerr 
v.  Urie,  86  Md.  72  (1897);  Hobart  v. 
Johnson,  8  Fed.  Rep.  493  (1881).  See 
also  Johnson   v.   Gallagher,   3   De   G., 

F.  &  J.  494  (1861);  Matthewman's 
Case,  L.  R.  3  Eq.  781  (1866);  Luard's 
Case,  1  De  G.,  F.  &  J.  533  (1860); 
Reg.  v.  Carnatic  Ry.,  L.  R.  8  Q.  B. 
299    (1873).     In   Angas's  Case,  1   De 

G.  &  Sm.  560  (1849),  the  constitution 
of  the  corporation  prevented  such  a 
transfer.  See  also  Re  Reciprocity 
Bank,  22  N.  Y.  9  (1860).  In  England 
the  husband  is  liable  on  stock  owned 
by  his  wife  when  he  married  her. 
Burlinson's  Case,  3  De  G.  &  Sm.  18 
(1849);  Sadler's  Case,  3  De  G.  &  Sm. 
36  (1849);  White's  Case,  3  De  G.  & 
Sm.  157  (1850).  But  he  is  liable  only 
for  subsequent  liabilities  of  the  com- 
pany. Kluht's  Case,  3  De  G.  &  Sm.  210 
(1850).  See  also  Butler  v.  Cumpston, 
L.  R.  7  Eq.  16  (1868),  where  the  wife 
was  a  cestui  que  trust.  A  husband 
has  been  held  liable  on  stock  which 
was  given  to  his  wife  after  their 
marriage  by  way  of  legacy,  and  was 
accepted  by  her.  Thomas  v.  City  of 
Glasgow  Bank,  6  Sc.  Ct.  of  Sess.  Cas. 
(4th  ser.)  607  (1879).  One  who  sub- 
scribes to  corporate  stock  for  his 
wife,  in  the  wife's  name,  is  not  liable 
on  the  subscription,  because  a  mar- 
ried woman  cannot  make  such  a  sub- 


CS5 


§  250.] 


LIABILITY    OF    PLEDGEES,    AGENTS,    ETC. 


[GIL  XIV. 


power  to  transfer  her  stock  without  the  consent  of  her  husband. 
Although  a  husband  indorses  a  certificate  of  stock  to  his  wife  and 
keeps  it  among  his  papers,  yet,  if  she  was  informed  that  the  stock 
was  hers  and  received  dividend  checks  and  ind<>i-<d  them,  and 
received  the  money,  she  is  liable  on  the  statutory  liability.1  A  mar- 
ried woman  is  liable  on  national  bank  stock  even  though  she  pur- 
chased the  stock  without  the  consent  of  her  husband,  and  the  statutes 
of  the  state  provided  that  a  married  woman  should  not  be  liable  on 
a  contract  without  such  written  consent.2  A  married  woman  in 
.Florida  who  is  a  stockholder  in  a  national  bank  is  liable  on  the 
statutory  liability,  even  though  by  the  laws  of  Florida  a  married 
woman  cannot  enter  into  a  contract.3  Where  a  person  subscribes  for 
stock  in  the  name  of  his  wife,  but  she  repudiates  the  subscription, 

scription;  but  if  the  subscription  is  statute  whereby  a  married  woman 
for  himself,  although  in  the  wife's  may  become  a  stockholder,  a  trans- 
name,  it  is  otherwise.  The  fact  that  fer  of  stock  from  the  husband  to  the 
the  husband  took  part  of  the  stock  wife  is  valid,  and  relieves  him  from 
in  his  own  name  and  participated  in  liability  on  the  stock,  the  same 
the  business  of  the  company  tends  as  though  he  had  transferred  to 
to  show  that  the  subscription  was  for  any  other  person.  A  married  woman 
his  benefit.  Shields  v.  Casey,  155  Pa.  may  give  away  or  pledge  her  stock. 
St.  253  (1893).  Where  the  husband  Walker  r.  Joseph,  etc.  Co.,  47  N.  J. 
subscribes  for  stock  in  his  wife's  Eq.  342  (1890).  Married  women  are 
name,  and  she  is  incompetent  to  re-  liable  on  the  statutory  liability.  Dreis- 
spond,  he  is  liable  on  the  stock.  Na-  bach  v.  Price,  133  Pa.  St.  560  (1890). 
tional  Com'l  Bank  v.  McDonnell,  92  A  married  woman  is  not  at  common 
Ala.  387  (1891).  When  a  director  law  qualified  to  act  as  an  incorporator 
enters  stock  in  his  wife's  name,  but  nor  as  treasurer.  Op.  Atty.  Gen. 
she  knows  nothing  of  it,  and  he  re-  (Pa.),  9  Ry.  &  Corp.  L.  J.  197  (1891). 
ceives  all  dividends  and  votes  it,  she  i  Michigan  T.  Co.  v.  Comstock,  123 
cannot  be  charged  as   a  stockholder.  Mich.  689  (1900). 

Longdale  Iron  Co.  v.  Pomeroy  Iron  '2  Robinson  v.  Turrentine,  59  Fed. 
Co.,  34  Fed.  Rep.  448  (1888).  A  mar-  Rep.  554  (1894).  See  also  Witters  v. 
ried  woman  is  herself  liable  for  the  Sowles,  32  Fed.  Rep.  767  (1887);  s.  c, 
statutory  liability  on  stock,  where  she  35  Fed.  Rep.  640  (1888);  38  Fed.  Rep. 
has  power  to  be  a  stockholder.  Sayles  700;  Anderson  v.  Line,  14  Fed.  Rep. 
v.  Bates,  15  R.  I.  342  (1886) ;  Bundy  v.  405  (1880).  A  married  woman  living 
Cocke,  128  U.  S.  185  (1888).  A  wife  in  Maryland,  and  being  a  stockholder 
in  whose  name  stock  is  placed  with-  in  a  national  bank  in  Texas,  is  liable 
out  her  knowledge  is  not  liable  there-  on  the  statutory  liability,  irrespective 
on.  Washington  Sav.  Bank  v.  Butch-  of  the  statutes  of  Texas.  Kerr  v. 
ers',  etc.  Bank,  130  Mo.  155  (1895).  Urie,  86  Md.  72  (1897).  The  law  of 
The  husband  is  personally  liable  on  the  state  wherein  the  company  is  in- 
stock  subscribed  for  by  him  in  the  corporated  seems  to  govern.  Hobart 
name  of  his  wife.  Kampmann  v.  Tar-  v.  Johnson,  8  Fed.  Rep.  493  (1881). 
ver,  29  S.  W.  Rep.  1144  (Tex.  1895).  3  Christopher  v.  Norvell,  201  U.  S. 
The  case  of  Simmons  v.  Dent,  16  Mo.  216  (1906). 
App.  288   (1884),  holds  that  under  a 

686 


CH.  XIV.] 


LIABILITY  OF  PLEDGEES,  AGENTS,  ETC. 


[§    251. 


and  he  keeps  the  stock,  lie  is  liable  thereon.1  Where  the  corporation 
has  allowed  the  stockholder  to  transfer  his  stock  to  his  wife,  it  cannot, 
as  against  a  bona  fide  pledgee  from  the  wife,  claim  that  the  transfer 
was  colorable,  and  that  the  husband  was  still  the  real  owner  and  that 
the  corporation  has  a  lien  on  the  stock  for  the  husband's  debts.2 

§  251.  The  liability  of  the  corporation  itself  as  a  stockholder.— 
When  the  corporation  becomes  the  purchaser  of  its  own  stock,  and 
the  stock,  as  is  generally  the  case,  is  transferred  into  the  name  of 
a  trustee  for  the  corporation,  it  is  the  rule,  both  here  and  in  England, 
that  the  trustee  is  personally  liable  in  respect  of  all  the  stock  so 
standing  in  his  name.3 


1  Hunt  v.  Reardon,  93  Minn.  375 
(1904). 

2  Just  v.  State  Sav.  Bank,  132  Mich. 
600   (1903). 

3  U.  S.  Trust  Co.  r.  U.  S.  F.  Ins.  Co., 
18  N.  Y.  199,  226  (1858);  Allibone  v. 
Hager,  46  Pa.  St.  48  (1863);  Crandall 
v.  Lincoln,  52  Conn.  73  (1884).  Cf. 
Sanger  v.  Upton,  91  U.  S.  56,  60 
(1875).  To  the  same  effect  are  the 
English  cases.  Re  St.  Marylebone 
Banking  Co.,  3  De  G.  &  Sm.  21 
(1849);  Re  National  Fin.  Co.,  L.  R. 
3  Ch.  App.  791  (1868),  in  which  one 
who  held  shares  in  one  company  as 
trustee  for  another  company  was  de- 
clared to  be  a  creditor  of  the  company 
for  which  he  held  the  shares  to  the 
amount  of  the  calls  made  upon  and 
paid  by  him  on  account  of  the  other 
company.  A  person  who  allows  stock 
to  stand  in  his  name  on  the  books  of 
a  national  bank  is  liable  on  the  statu- 
tory 'liability  therefor,  even  though 
he  held  the  stock  as  trustee  for  the 
bank  itself.  Lewis  v.  Switz,  74  Fed. 
Rep.  381  (1896);  Ind's  Case,  L.  R.  7 
Ch.  App.  485  (1872);  Eyre's  Case, 
31  Beav.  177  (1862);  Munt's  Case,  22 
Beav.  55  (1856);  Richmond's  Case,  3 
De  G.  &  Sm.  96  (1849);  Walters's 
Second  Case,  3  De  G.  &  Sm.  244 
(1850).  The  last  four  cases  are  in- 
stances of  attempted  transfers  to 
trustees  for  the  benefit  of  the  corpora- 
tion being  declared  void  as  illegal, 
and  the  original  holders  being  de- 
clared   liable.   See    also    §§  282,    313, 


infra.  Chapman's  Case,  L.  R.  3  Eq. 
361  (1866),  holding  also  that  the 
trustee  might  have  a  right  to  be 
idemnified  by  the  company  of  which 
he  was  merely  a  trustee.  The  trustee 
for  the  corporation  has  recourse 
against  it  for  calls  paid  by  him. 
Goodson's  Claim,  28  W.  R.  760  (1880). 
Where  the  company  issues  its  stock 
as  collateral  security  to  notes  given 
to  it  by  its  subscribers  in  payment 
for  such  stock,  and  then  sells  the 
notes,  the  stock  follows  the  notes  and 
may  be  subjected  to  the  payment  of 
judgment  on  the  notes.  If  the  cor- 
poration has  issued  the  stock  to 
others  it  must  pay  the  judgments. 
Houston,  etc.  Ry.  v.  Bremond,  66  Tex. 
159  (1886).  Concerning  a  pledge  of 
its  own  stock  by  a  corporation,  see 
§  465,  infra,  and  §  247,  supra.  A  per- 
son who  receives  a  certificate  of 
stock  from  a  company  in  order  to  en- 
able it  to  organize,  and  immediately 
transfers  it  back  to  the  company,  is 
not  liable  on  such  stock  as  an  offset 
to  claims  which  he  has  as  a  creditor 
of  the  corporation.  Parberry  v.  Wood- 
son Sheep  Co.,  18  Mont.  317  (1896). 
Where  a  bank  illegally  holds  its  own 
stock  and  induces  a  person  to  take 
it  and  give  his  own  note  therefor, 
on  the  understanding  that  such  note 
is  merely  for  the  accommodation  of 
the  bank  and  is  not  to  be  collected,  a 
receiver  of  the  bank  cannot  enforce 
the  note,  unless  it  is  shown  that  the 
bank  is  insolvent  or  that  debts  exist. 


687 


251.] 


LIABILITY   OF   PLEDGEES,   AGENTS,   ETC. 


[CH.  XIV. 


The  transferrer,  also,  if  he  knew  that  the  transferee  took  as  trustee 
for  the  corporation,  is  liable  upon  the  stock.1  Bui  when  this  knowl- 
edge is  not  imputable  to  the  transferrer,  he  is  not  liable.-  Nor,  of 
course,  is  he  liable  when  the  corporation  has  power,  by  charter  or 
otherwise,  to  deal  in  its  own  shares.3  Where  the  owner  of  stock 
transfers  it  directly  to  the  corporation  itself,  without  the  intervention 
of  a  trustee,  the  transferrer  is  not  released  from  his  liability  on  the 
stock,  but  remains  as  fully  chargeable  as  though  ao  transfer  had  been 
attempted.4  Where  some  of  the  stock  is  held  by  the  corporation  itself, 
this  will  not  compel  the  other  stockholders  to  boar  the  statutory  lia- 
bility as  to  the  stock  so  held  by  the  corporation/'     A  corporation  can- 


Shuey  v.  Holmes,  20  Wash.  13  (1898), 
s.  c,  22  Wash.  193.  A  corporation 
cannot  subscribe  for  its  own  stock. 
See  §  64,  supra. 

i  Lawes's  Case,  1  De  G.,  M.  &  G., 
421  (1852);  Walters's  Second  Case, 
3  De  G.  &  Sm.  244  (1850);  Daniell's 
Case,  22  Beav.  43  (1856).  Cf.  John- 
son v.  Laflin,  5  Dill.  65  (1878);  s.  c, 
13  Fed.  Cas.  758;  aff'd,  103  U.  S.  800 
(1880);  and  particularly  Crandall  v. 
Lincoln,  52  Conn.  73  (1884).  See  also 
§  309,  infra. 

2  Hollwey's  Case,  1  De  G.  &  Sm. 
777  (1849);  Nicol's  Cass,  3  De  G.  & 
J.  387  (1859);  Johnston  v.  Laflin,  103 
U.  S.  800   (1880). 

3  Grady's  Case,  1  De  G.,  J.  &  S.  488 
(1863);  Dane's  Case,  1  De  G.,  J.  &  S. 
504    (1863). 

4  Re  Reciprocity  Bank,  22  N.  Y.  9 
(1860) ;  Currier  v.  Lebanon  Slate  Co., 
56  N.  H.  262  (1875) ;  Walters's  Second 
Case,  3  De  G.  &  Sm.  244  (1850); 
Glenn  v.  Scott,  28  Fed.  Rep.  804 
(1886).  Compare  Zulueta's  Claim,  L. 
R.  5  Ch.  App.  444  (1870);  Addison's 
Case,  L.  R.  5  Ch.  App.  294  (1870). 
Subscribers  whose  stock  is  taken 
back  by  the  corporation  may  be  liable 
thereon  at  common  law  or  by  statute 
relative  to  transfers.  Ailing  v.  Wen- 
zel,  133  111.  264  (1890).  See  §§167- 
171,  supra. 

Sometimes,  by  agreement  between 
discontented  stockholders  and  the  di- 
rectors of  the  corporation,  transfers 
are  made  by  such  shareholders  as  de- 


sire to  be  released  from  their  obliga- 
tion as  stockholders  to  nominees  of 
the  corporation,  with  the  intent  there- 
by to  relieve  themselves  from  liability 
upon  the  stock.  In  such  cases  it  is 
held  that  the  action  of  the  directors 
in  permitting  or  sanctioning  such  a 
transfer  was  ultra  vires,  and  that  in 
consequence  the  transferrer  is  still 
liable.  Morgan's  Case,  1  De  G.  &  Sm. 
750  (1849);  Bennett's  Case,  5  De  G., 
M.  &  G.  284  (1854);  Addison's  Case, 
L.  R.  5  Ch.  App.  294  (1870);  Nathan 
v.  Whitlock,  9  Paige,  152  (1841).  See 
also  §§  253,  309,  310,  infra. 

5  Crease  v.  Babcock,  51  Mass.  525, 
556  (1846).  Where  a  corporation  uses 
its  profits  to  buy  its  own  stock,  the 
remaining  stockholders  are  not  liable 
on  the  statutory  liability  attaching 
to  the  stock  so  purchased  by  the  cor- 
poration. Moon,  etc.  Co.  v.  Waxa- 
hachie,  etc.  Co.,  13  Tex.  Civ.  App.  103 
(1896);  aff'd,  89  Tex.  511  (1896).  In 
Re  Republic  Ins.  Co.,  3  Biss.  452 
(1873);  s.  c,  20  Fed.  Cas.  544,  where 
the  insolvent  corporation  had,  some 
three  years  previously,  when  the  cor- 
poration was  solvent,  purchased  stock 
of  various  stockholders  and  still  held 
it,  the  court  held  that  these  old  stock- 
holders were  not  liable  for  the  un* 
paid  subscription  price  thereof.  Even 
though  a  corporation  purchases 
shares  of  its  own  stock,  which  are 
but  partially  paid,  this  does  not  ren- 
der the  remaining  stockholders  lia- 
ble for  the  balance  due  on  such  un- 


688 


CH.  XIV.  J  LIABILITY  OF  PLEDGEES,  AGENTS,  ETC,  [§   252. 

not  subscribe  for  its  own  stock,  even  though  such  subscription  is  made 
in  the  name  of  a  trustee  for  the  corporation.  The  trustee  is  per- 
sonally liable  in  such  case  to  corporate  creditors.1  A  stockholder  in 
an  insolvent  national  bank  cannot  avoid  the  statutory  liability  on  the 
ground  that  he  purchased  the  stock  from  the  bank  and  that  the  bank 
prior  to  that  time  had  purchased  it  ultra  vires.2 

§  252.  The  liability  of  legatees,  assignees  in  insolvency,  joint 
owners,  and  of  a  corporation  owning  stock  in  another  corpora- 
tion.— A  Legatee  of  shares  of  stock  may,  of  course,  if  he  thinks 
proper,  decline  to  receive  his  testator's  gift.  But  if  he  accepts  the 
legacy,  it  is  well  settled  that,  as  specific  legatee,  he  is  bound  to  pay 
all  calls  made  upon  the  stock  after  the  death  of  the  testator.3  He. 
must  also  pay  all  calls  voted  before,  but  not  due  and  payable  in  the 
regular  course  of  business  until  after,  the  testator's  death.4  The 
estate  is  not  liable  on  a  statutory  liability  where  the  stock  is  trans- 
ferred to  the  life  tenant.5  "Where  only  the  dividends  are  specifically 
bequeathed,  the  legatee  is  not  liable  on  the  stock  itself.6  Where  stock 
is  still  in  the  name  of  the  estate  a  general  legatee  may  be  liable  to  the 
extent  of  personal  assets  received  by  him.  If  such  assets  have  been 
fully  administered  he  is  liable  as  devisee  of  real  estate.7 

It  has  been  held  that  an  assignee  of  the  estate  of  a  bankrupt  is 
not  liable,  personally  or  as  assignee,  upon  the  bankrupt's  shares  of 
stock,  unless  he  accepts  the  same.  He  is  not  bound,  as  assignee,  to 
accept  as  part  of  the  estate  property  of  this  nature,  when  it  is  of  an 
onerous  or  unprofitable  character.8 

paid  shares  so  purchased.     Crawford  o  Potter  v.  Mortimer,   114   111.   App. 

v.   Roney,    126   Ga.    763    (1906).  Rep.  422  (1904);   aff'd  213  111.  178. 

i  Johnston    v.    Allis,    71    Conn.    207  7  Re  St.  Georges  Steam  Packet  Co. 

(1898).     See  also   §64,  supra.  Hauler's  Case,  2  De  G.,  M.  &  G.  366 

2Lantry  v.  Wallace,   182  U.  S.  536  (1852),  rev'g  3  De  G.  &  Sm.  279.  See 

(1901).  also  §  248,  supra. 

3  If  "the  testator  owns  the  stock  at  8  American  File  Co.  v.  Garrett,  110 
the  time  of  his  death  the  specific  U.  S.  288  (1883);  Amory  v.  Law- 
legatee  thereof  must  pay  future  calls,  rence,  3  Cliff.  523  (1872);  s.  c,  1  Fed. 
but  if  he  did  not  own  it  completely  Cas.  778;  and  see  Rugely  v.  Robinson, 
the  general  estate  must  pay  the  calls.  19  Ala.  404  (1851);  Streeter  v.  Sum- 
Day  v.  Day,  1  Dr.  &  Sm.  261  (1860).  ner,  31  N.  H.  542  (1S55);  Ex  parte 
Cf.  Witters  v.  Sowles,  25  Fed.  Rep.  168  Davis,  L.  R.  3  Ch.  D.  463  (1876); 
(1885).     See  also  §248,  supra.  Furdoonjee's  Case,  L.  R.  3  Ch.  D.  268 

4  Addams  v.  Ferick,  26  Beav.  384  (1876),  holding  that  the  liability  up- 
(1859).  For  a  mere  complete  state-  on  shares,  not  being  a  debt  provable 
ment  of  the  law  relative  to  legacies  of  in  insolvency  proceedings,  is  not 
stock,  see  ch.  XVIII,  infra.  barred  by  the  order  of  discharge.     As 

5  Blackmore  v.  Woodward,  71  Fed.  to  this,  cf.  note  2,  p.  498,  supra.  An 
Rep.  321  (1895).  See  also  §  248,  su-  assignee  for  the  benefit  of  creditors 
pra.  of  a  stockholder  in  a  national  bank 

(44)  6S9 


§  252.] 


LIABILITY   OF   PLEDGEES,    AGENTS,    ETC. 


I'll.  XIV. 


Upon  the  death  of  one  who  is  joint  owner  with  another  or  othi  i- 
of  shares  of  stock,  the  liability  thereon  attaches  only  to  the  surviving 
owners,  and  the  estate  of  the  deceased  owner  cannol  be  charged.1 
Where  stock  stands  in  the  name  of  two  persons  they  arc  presumed 
to  be  tenants  in  common,  each  holding  one-half  and  each  is  Liable 
for  one-half  of  the  statutory  liability  attached  to  such  stock.2 
When;  a  firm  holds  stock  and  the  corporation  becomes  insolvent, 
the  statutory  liability  on  the  stock  is  a  claim  against  the  partnership 
assets.3 

Where  a  national  hank  Invests  its  money  in  the  stock  of  a  savings 
hank  the  investment  is  ultra  vires,  and  even  though  the  savings  bank 
becomes  insolvent,  the  national  hank  is  not  liable  on  the  statutory 
'liability  attached  to  such  Bavings  bank  stock,   notwithstanding  the 

national  bank  received  dividends  on  the  stock.4  So  also  win  re  a 
national  bank  invests  its  money  in  the  stock  of  another  national  hank 
the  investment  is  ultra  circs  and  the  former  hank  is  nol    liable  on 

such  stock,  even  though  the  latter  bank  be< Lea  insolvent.6     Where 

a  national  bank  as  pledgee  of  national  hank  stock  take-  over  the  stock 


may  be  liable  for  an  assessment  levied 
upon  such  stock,  the  bank  having  be- 
come insolvent.     Graham  v.  Piatt,  28 
Colo.    421    (1901).      An   assignee   for 
the  benefit  of  creditors  is  not  liable 
where  the  stock  has  not  been  trans- 
f(  rred  to  him,  but  the  estate  may  be 
liable.     Hill  v.  Graham,  11  Colo.  App. 
536     (1898).      Where    a    stockholder 
makes  an  assignment  for  the  benefit 
of  creditors  and  the  stock  is  assigned 
to   the   assignee,   and   afterwards   the 
corporation     becomes     insolvent,     the 
assignee  is  not  liable  on  the  statutory 
liability  on  the  stock,  but  any  claims 
which  the  assignee  holds  against  the 
corporation     will     be     offset     against 
such    liability.      Markell    v.    Ray,    75 
Minn.  138   (1898).     Where  a  corpora- 
tion itself  assigned  shares  of  its  own 
stock  to  an   assignee  for  the  benefit 
of    corporate    creditors,    it    was    held 
that  the  assignee  was  not  liable,  per- 
sonally or  as  assignee,   thereon.     Re 
City    Terminus    Hotel    Co.,    L.    R.    14 
Eq.  10   (1872).     In  Rhode  Island  one 
who    makes    an    assignment    for    the 
benefit  of  creditors  is  thereby  released 
from  liability  on  stock,  even  though 
the  transfer  has  not  been  recorded  in 


the  corporate  books.     Sayles  r.  Bates, 
15  R.  I.  342   (188G). 

i  Re  Maria  Anna,  etc.  Co.,  44  L.  J. 
(Ch.)  423  (1875);  Hill's  Case,  L.  R. 
20  Eq.  585   (1875). 

2  Markell  v.  Ray,  75  Minn.  138 
(1898). 

3  Barton,  etc.  Bank  t>.  Atkins,  72 
Vt.  33   (1899). 

4  California  Bank  v.  Kennedy,  167 
U.  S.  362  (1897).  It  is  illegal  for  a 
national  bank  to  purchase  stock  in 
a  savings  bank,  and  hence  a  national 
bank  is  not  liable  by  reason  of  the 
statutory  liability  attached  to  such 
stock  in  the  savings  bank.  Chemical 
Nat.  Bank  v.  Havermale,  120  Cal.  601 
(1898). 

5  Concord  First  National  Bank  v. 
Hawkins,  174  U.  S.  364  (1899),  rev'g 
First  National  Bank  v.  Hawkins,  79 
Fed.  Rep.  51,  and  82  Fed.  Rep.  301. 
Prior  to  this  decision  the  following 
decisions  were  made  by  lower  courts. 
A  state  bank  may  be  held  liable  on 
the  statutory  liability  on  national 
bank  stock  which  the  former  has 
purchased,  even  though  the  purchase 
is  ultra  vires.  Citizens'  State  Bank 
v.  Hawkins,  71  Fed.  Rep.  369  (1896), 


G90 


CH.  XIV.] 


LIABILITY  OF  PLEDGEES,  AGENTS,  ETC. 


[§   252. 


at  a  fixed  price  agreed  upon  with  the  pledgor,  and  credits  the  amount 
on  the  note,  such  bank  is  liable  on  the  statutory  liability  attached  to 
the  stock,  even  though  it  continues  to  stand  in  the  name  of  a  dummy.1 
A  national  bank,  which  is  a  creditor  of  an  insolvent  manufacturing 
company,  has  no  power  to  join  in  a  reorganization  plan  by  which 
it  turns  over  its  claim  to  a  new  corporation  and  takes  stock  of  the  new 
corporation  in  payment  therefor,  and  hence  if  the  new  corporation- 
fails,  the  bank  is  not  liable  as  a  stockholder  on  a  statutory  double 
liability  attaching  to  such  stock.2  A  national  bank  which  has  taken 
as  security  for  a  debt  and  then  acquired  shares  of  stock  in  an  unincor- 
porated association,  formed  for  speculative  purposes,  is  not  liable  on 
said  stock,  its  acquisition  having  been  ultra  vires.3  A  stockhold*  r 
in  a  national  bank  who  is  sued  on  the  statutory  liability  cannot  set 
up  the  defense  that  the  money  is  to  be  used  to  pay  a  liability  of  such 
bank,  as  a  stockholder  in  another  insolvent  national  bank.4  The 
general  rule  is  that  where  one  corporation  owns  stock  in  another  cor- 
poration, and  the  latter  becomes  insolvent,  the  former  is  liable  on  the 
stock  so  held  by  it.5 


qualified  in  92  Fed.  Rep.  744.  So  also 
as  to  an  insurance  company  holding 
such  stock.  Cooper  Ins.  Co.  v.  Haw- 
kins, 71  Fed.  Rep.  372  (1896).  A 
state  bank  has  no  power  to  purchase 
stock  in  a  national  bank  as  an  in- 
vestment, and  hence  is  not  liable  on 
such  stock  in  case  the  national  bank 
becomes  insolvent.  Schofield  v.  Good- 
rich, etc.  Co.,  98  Fed.  Rep.  271  (1899). 
In  the  case  of  Robinson  v.  Southern, 
etc.  Bank,  180  U.  S.  295  (1901),  the 
court  approved  the  decisions  in  Baker 
v.  Old  National  Bank,  86  Fed.  Rep. 
1006,  and  101  Fed.  Rep.  391,  holding 
that  where  stock  in  one  national  bank 
stands  in  the  name  of  a  person  as 
cashier  of  another  national  bank,  the 
latter  may  show  that  it  held  the  stock 
only  as  collateral  security,  and  hence 
is  not  liable  thereon. 

i  Ohio,  etc.   Bank  V.   Hulitt,  204  U. 
S.  162  (1907). 

2  First  National  Bank  v.  Converse, 
200  U.  S.  425    (1906). 

3  Merchants'      National      Bank      v. 
Wehrmann,  202  U.  S.  295   (1906). 

4  Martin   v.  Wilson,   120   Fed.   Rep. 
202  (1903). 

5  A  bank  holding  stock  in  its  own 


name  in  another  bank  is  liable  thereon 
as  a  stockholder,  even  though  in  fact 
it  held  it  only  as  a  pledge.  Adams  v. 
Clark,  36  Col.  65  (1906).  A  manu- 
facturing company  which  buys  bank 
stock  and  for  several  years  receives 
dividends  thereon  with  the  knowledge 
of  all  its  stockholders,  is  liable  on  a 
statutory  liability  attached  to  such 
stock.  Hunt  v.  Hauser,  etc.  Co.,  90 
Minn.  282;  aff'd,  95  Minn.  206  (1903). 
A  malting  company  is  liable  on  the 
statutory  liability  on  bank  stock 
which  it  has  purchased  and  held  for 
some  time,  especially  where  it  took 
part  in  the  reorganization.  Hunt  v. 
Hauser,  etc.  Co.,  95  Minn.  206;  aff'g 
s.  c,  90  Minn.  282  (1905).  A  corpora- 
tion which  owns  all  the  stock  of  an- 
other corporation  is  liable  on  the 
statutory  liability  attached  to  such 
stock.  Gamewell,  etc.  Co.  v.  Fire,  etc. 
Co.,  116  Ky.  759  (1903).  Even  though 
a  real  estate  corporation  purchases 
bank  stock  and  receives  dividends 
thereon  yet  if  it  was  prohibited  by  its 
charter  from  so  doing  it  is  not  liable 
on  the  statutory  liability  on  the  stock. 
White  v.  Com.,  etc.  Bank,  66  S.  C.  491 
(1903).  A  religious  corporation  which 


691 


253.] 


LIABILITY  OF  PLEDGEES,   AGENTS,   ETC. 


[CH.  XIV. 


§253.  The  use  of  "dummies"  and  transfers  to  nominal  and 
fictitious  persons.—  Frequently  it  happens  that  persons  purchasing 
or  subscribing  for  stock  do  not  wish  to  take  the  stock  in  their  own 
names,  inasmuch  as  they  thereby  incur  liability,  or  make  known 
to  the  public  the  fact  that  they  are  stockholders.  Accordingly,  it 
is  the  custom  in  such  cases  to  have  the  stock  taken  or  purchased  in 
the  names  of  other  persons.  These  latter  are  called  "dummies."1 
The  law  is  well  settled  that  such  a  "dummy"  is  liable  on  the  stock 
to  the  corporal i<ni  and  corporate  creditors  to  the  same  extent  that 
he  would  be  if  he  were  the  real  owner  of  the  stock.2  Where  stock 
stands  in  the  name  of  a  person  as  "trustee,"  he  is  liable  thereon 


has  subscribed  for  stock  in  a  building 
and  loan  association  and  given  a  mort- 
gage in  connection  therewith,  cannot 
maintain  a  suit  to  have  the  mortgage 
canceled,    even    though    it    is    ultra 
vires.     United  States,  etc.  Co.  v.  Con- 
vent of  St.  Rose,   133  Fed.  Rep.   354 
(1904).    A  national  bank  is  liable  on 
stock  of  a  corporation  organized  for 
improving  real  estate.    Western  Imp. 
Co.    v.    Des    Moines    Nat.    Bank,    103 
Iowa,  455  (1897).    A  jewelry  corpora- 
tion that  has  sold  goods  and  taken  in 
payment  stock  of  a  park  corporation 
cannot  avoid   liability   on   said   stock 
on  the  ground  that  it  had  no  power 
to  acquire  it.    White  v.  Marquardt,  70 
N.  W.  Rep.  193  (Iowa,  1897).    A  com- 
pany organized  to  deal  in  jewelry  and 
which  takes  stock  of  another  company 
in  exchange  for  its  merchandise  and 
then  sells  the  stock  cannot  avoid  lia- 
bility  on   such   stock  by   the  plea  of 
ultra  vires.     White   v.   Marquardt   & 
Sons,  105  Iowa,  145    (1S98).     A  bank 
may  buy  the  stock  of  another  bank 
under  the  express  power  of  the  former 
to  discount  securities,  and  as  a  stock- 
holder is  liable  on  the  stock.    Latimer 
r.  Citizens'  State  Bank,  102  Iowa,  162 
(1897).      Where    a    corporation    own- 
ing land  becomes  a  stockholder  in  a 
building  association  and  gives  a  mort- 
gage   in    connection    therewith,    the 
mortgage   is   valid,   even   though   the 
corporation  was  not  authorized  to  sub- 
scribe for  stock.     Meares  v.  Monroe, 


etc.  Co.,  126  N.  C.  662  (1900);  s.  c, 
127  N.  C.  580.  The  secretary  and 
treasurer  of  a  cotton  trading  company 
has  no  power  to  subscribe  in  the  name 
of  the  company  for  stock  in  a  cotton 
manufacturing  company.  Wells  Co. 
v.  Avon  Mills,  118  Fed.  Rep.  190 
(1902);  s.  c,  198  U.  S.  177. 

i  The  cases  in  this  section  refer  to 
the  use  of  "dummies"  without  the 
real  owner  appearing  at  all  on  the 
corporate  books  as  a  stockholder. 
These  cases  differ  from  those  where 
stock  is  transferred  by  a  stockholder 
from  himself  to  a  "dummy"  or  to  an 
irresponsible  person.  See  §§  263-266, 
infra.  > 

2  Wakefield  v.  Fargo,  90  N.  Y.  213 

(1882) ;  Re  Reciprocity  Bank,  22  N.  Y. 

9    (1860);    Barrett's   Case,    4    De    G., 

J.  &  S.  416  (1864) ;  Bugg's  Case,  2  Dr. 

&  Sm.  452  (1865).    Cf.  Fox  v.  Clifton, 

6  Bing.  776   (1830).    A  new  trial  was 

granted  in   9   Bing.   115.     A  transfer 

of  stock  on  the  books  to  a  director 

renders   him  liable   on   the   statutory 

liability,    even    though    the    transfer 

was  to  render  him  eligible  for  office, 

and  he  was  unaware  of  the  transfer, 

and    had    paid    the   dividends    to   the 

transferrer.  As  director  he  was  bound 

to  know.    Brown  v.  Finn,  34  Fed.  Rep. 

124    (1888);    aff'd,   142    U.    S.    56.     A 

dummy    into    whose    name    national 

bank    stock    is    transferred    is    liable. 

Kenyon  v.  Fowler,  155  Fed.  Rep.  107 

(1907). 


692 


CH.  XIV.]  LIABILITY  OF  PLEDGEES,  AGENTS,  ETC.  [§    253. 

even  though  he  is  acting  merely  as  the  agent  of  another  person.1 
Where  a  person  buys  certificates  of  stock  in  a  national  hank,  the 
certificates  being  indorsed  in  blank,  and  the  bank  makes  a  memo- 
randum in  the  certificate  of  stock  book  that  it  had  been  transferred 
to  him,  and  sends  him  dividends,  he  is  liable  thereon,  although  no 
transfer  of  the  certificate  is  made  on  the  corporate  books,  and 
although  he  bought  the  stock  for  the  cashier  of  the  bank  and  was 
merely  a  nominal  holder.  He  is  not  such  a  trustee  as  is  exempt  from 
liability  under  the  national  bank  act.2  * 

Although  stock  stands  in  the  name  of  a  person  who  is  not  the 
real  owner,  yet,  where  judgment  has  been  taken  against  the  real 
owner,  the  nominal  holder  cannot  be  held  liable.3  Both  the  real 
owner  of  stock  and  the  nominal  holder  of  record  of  stock,  or  either 
of  them,  may  be  held  liable,  however,  on  the  unpaid  subscription 
price  of  such  stock. 4  A  broker  may  be  compelled  to  disclose  the  name 
of  his  customer  for  whom  he  purchased  stock  and  put  the  stock  in  the 
name  of  a  clerk.  A  receiver  of  the  corporation  may  file  a  bill  of 
discovery  for  that  purpose  in  order  that  an  assessment  may  be  levied 
on  the  stock  for  the  unpaid  subscription  price.5  A  receiver  may 
maintain  a  bill  of  discovery  against  a  broker  to  compel  him  to  divulge 
the  names  of  the  real  owners  of  stock  which  stands  in  the  name  of 
the  broker's  clerk,  such  stock  being  unpaid.6  A  promoter  or  agent 
who  causes  stock  belonging  to  others  to  be  placed  in  the  name  of  a 
dummy  is  not  liable  for  the  unpaid  subscription  price  of  such  stock, 
even  though  he  did  not  state  the  names  of  the  persons  for  whom  he 
was  acting.7     A  broker  buying  for  a  customer  is  not  liable  on  the 

i  Wadsworth  v.  Laurie,  164  111.  42  who  is  the  real  owner  of  stock  pur- 

(1896).     See  also  §249,  supra.  chased  by  the  broker,  on  which  stock 

2  Horton  v.  Mercer,  71  Fed.  Rep.  153  an  assessment  has  been  made.  Brown 
(1895).  Where  the  statute  prescribes  v.  Magee,  146  Fed.  Rep.  765  (1906). 
that  only  bona  fide  stockholders  shall  A  receiver  may  file  a  bill  in  equity 
vote,  a  stockholder  of  record  who  is  against  a  clerk  in  the  employ  of  stock 
really  a  dummy  for  the  real  owner,  brokers  to  compel  the  clerk  to  dis- 
in  order  to  enable  the  latter  to  avoid  close  who  is  the  real  owner  of  stock 
the  statutory  liability,  cannot  vote,  standing  in  his  name,  in  order  that 
Smith  v.  San  Francisco,  etc.  Ry.,  115  the  receiver  may  collect  the  unpaid 
Cal.  584  (1897).  part  of  the  subscription  price  there- 

3  Yardley  v.  Wilgus,  56  Fed.  Rep.  for.  Brown  v.  McDonald,  133  Fed. 
965    (1893).  Rep.  897  (1905);    rev'g  130  Fed.  Rep. 

4  Dunn  v.  Howe,  107  Fed.  Rep.  849  964. 

(1901).  7  American,   etc.   Co.   v.  Kurtz,   138 

5  Brown  v.  Palmer,  157  Fed.  Rep.  Fed.  Rep.  392  (1905).  The  real  owner 
797  (1907).  of  stock  standing  in  the  name  of  a 

e  Kurtz  v.  Brown,  152  Fed.  Rep.  372  dummy  is  liable  on  his  subscription 
(1906).  A  receiver  may  by  bill  of  or  statutory  liability  even  though  the 
discovery   compel    a   broker   to   state    stock  has  never  been  in  his  name,  but 

693 


;  253.] 


LIABILITY   OF    PLEDGEES,   AGENTS,   ETC. 


I'll.  XIV. 


statutory  liability,  even  though  he  did  not  give  up  the  name  of  the 
customer,  the  broker's  name  not  having  appeared  on  the  corporate 
books.1  The  real  owner  of  stock  is  liable  to  repay  to  his  "dummy" 
any  sum  of  money  which  the  Latter  has  paid  to  the  corporation  or  the 
corporate  creditors.2  An  attachment  against  the  "dummy"  may  take 
the  stock  in  those  states  wherein  attachment  takes  precedence  over 
an  unregistered  transfer  of  the  certificate  of  stock;3  but  the  prevail- 
ing rule  in  most  of  the  states  is  to  the  contrary.4  The  law  relative  to 
the  use  of  dummies  is  in  many  respects  similar  to  the  law  where  stock 
stands  in  the  name  of  an  agent — a  subject  considered  elsewhere.5 

A  difficult  question  arises  when  an  attempt  is  made  to  hold  the 
real  owner  of  the  stock  liable  to  the  corporation  or  corporate  creditors. 


a  broker  who  subscribes  for  stock 
and  pays  the  first  assessment,  is  not 
liable  on  the  stock,  even  though  he 
transferred  it  to  his  clerk,  the  real 
owners  being  his  customers  and  no  re- 
quest having  been  made  of  him  to 
give  their  names.  American  Alkali 
Co.  v.  Kurtz,  134  Fed.  Rep.  663 
(1905);  aff'd,  138  Fed.  Rep.  392.  Even 
though  brokers  subscribe  for  stock  in 
their  own  name,  yet  if  they  direct 
the  certificates  to  be  made  out  in  the 
name  of  a  clerk,  which  is  done,  they 
are  not  liable  for  a  call  made  subse- 
quently to  the  issue  of  the  stock,  even 
though  the  clerk  was  merely  a  nomi- 
nal holder  for  the  customers  of  the 
broker.  Bean  v.  American,  etc.  Co., 
134  Fed.  Rep.  57  (1905);  rev'g,  125 
Fed.  Rep.  823.  In  ordering  a  receiver 
to  collect  a  portion  of  unpaid  sub- 
scriptions the  court  must  determine 
judicially  how  much  will  be  needed 
to  pay  the  debts,  and  the  application 
of  the  receiver  for  an  order  will  be 
denied  if  the  assets  have  not  yet  been 
exhausted,  and  if  the  real  owners  of 
stock  held  in  the  name  of  dummies 
might  be  ascertained  but  have  not 
been.  Kirkpatrick  v.  American,  etc. 
Co.,  135  Fed.  Rep.  230  (1905). 

i  Joecken  v.  Cuyahoga,  etc.  Co.,  Ohio 
Circuits  (1903),  p.  605. 

2  This  is  the  rule  whether  the  rela- 
tion of  the  real  owner  be  considered 
that  of  a  principal  towards  an  agent 
(see  §  249,  supra),  or  that  of  a  cestui 


que  trust  towards  a  trustee  (see  §  245, 
supra).  Where  the  "dummy"  dies, 
and  his  representatives  claim  the 
stock,  and  they  pay  the  real  owner  a 
small  sum  in  settlement,  the  compro- 
mise will  be  upheld.  Antoine  v.  Smith, 
40  La.  Ann.  560  (1888).  Where  the 
"dummy"  dies  and  is  insolvent,  the 
stock  cannot  be  reclaimed  by  the  real 
owner.  Hirsch  v.  Norton,  115  Ind. 
341  (1888).  Stock  held  in  the  name 
of  a  "dummy"  is  subject  to  his  debts, 
even  though  he  notified  the  secretary 
of  the  company  that  he  held  it  in 
trust.  Ex  parte  Ord,  2  Mont.  &  A. 
724  (1835);  Ex  parte  Watkins,  2 
Mont.  &  A.  348  (1835),  reversing  1 
Mont.  &  A.  689 

3  White  v.  Rankin,  90  Ala.  541 
(1890).  Cf.  Mowry  v.  Hawkins,  57 
Conn.  453  (1899).  See  also  §  490,  infra. 
Where  the  real  owner  of  stock  turns  it 
over  to  his  agent  or  trustee  to  look  af- 
ter the  stock,  the  stock  itself  being 
put  in  the  name  of  the  agent  or  trus- 
tee as  absolute  owner,  and  the  stock 
is  subsequently  attached  for  a  debt 
of  such  agent  or  trustee  and  sold 
thereunder,  the  real  owner  of  the 
stock  may  hold  the  agent  or  trustee 
liable  for  the  value  of  the  stock.  Long 
delay  is  not  a  bar  so  long  as  the 
agent  does  not  deny  the  agency  or 
trusteeship.  Hovey  v.  Bradbury,  112 
Cal.  620    (1896). 

4  See  ch.  XXVII,  infra. 

5  See  §  249,  supra. 


C94 


CH.  XIV.] 


LIABILITY  OF  PLEDGEES,  AGENTS,  ETC. 


[§   253. 


It  is  established  law,  however,  that  where  a  person  purchases  stock 
in  a  national  bank,  but  has  it  transferred,  not  to  himself,  but  to  an- 
other person,  a  "dummy,"  the  real  owner  of  the  stock  is  liable  thereon, 
although  he  never  appears  on  the  corporate  books  as  a  stockholder.1 


i  Where  the  real  owner  of  stock  in 
a  national  bank  transfers  it  to  an- 
other person,  or  causes  it  to  be  placed 
in  the  name  of  another  person  to 
avoid  the  liability  to  creditors  under 
the  national  bank  act,  such  real  owner 
may  be  held  liable  on  such  stock. 
Pauly  v.  State,  etc.  Co.,  165  U.  S.  606 
(1897);  Dunn  v.  Howe,  107  Fed.  Rep. 
849  (1901).  Where  a  national  bank 
as  pledgee  of  national  bank  stock 
takes  over  the  stock  at  a  fixed  price 
agreed  upon  with  the  pledgor,  and 
credits  the  amount  on  the  note,  such 
bank  is  liable  on  the  statutory  liabil- 
ity attached  to  the  stock,  even  though 
it  continues  to  stand  in  the  name  of 
a  dummy.  Ohio,  etc.  Bank  v.  Hulitt, 
204  U.  S.  162  (1907).  A  stockholder 
in  a  national  bank  is  liable  on  his 
stock,  even  though  it  is  in  the  name 
of  his  agent.  McDonald  v.  Dewey,  202 
U.  S.  510  (1906).  The  real  owner  of 
stock  in  a  national  bank  is  liable 
thereon,  although  the  stock  has  never 
stood  in  his  name  on  the  books  of 
the  bank,  but  has  stood  in  the  name 
of  a  dummy  for  him.  Houghton  v.' 
Hubbell,  91  Fed.  Rep.  453  (1899); 
Davis  v.  Stevens,  17  Blatchf.  259 
(1879)  ;s.c,  7  Fed.  Cas.  177,  where 
the  question  was  "whether,  in  an  ac- 
tion at  law  by  a  receiver  of  the  bank, 
the  real  owner  of  stock  in  a  national 
bank,  standing  by  his  procurement  in 
the  name  of  another,  and  never  having 
teen  in  his  own  name  on  the  books, 
can  be  charged  as  a  shareholder  with 
the  statutory  liability  for  debts." 
Held,  that  the  real  owner  is  liable. 
"Every  principal  is  responsible  for 
the  obligations  of  his  agency.  The 
debt  of  the  agent  is  the  debt  of  the 
principal,  and  always  recoverable 
from  the  principal."  See  also,  to  same 
effect,  Case  v.  Small,  10  Fed.  Rep.  722 


(1881),  and  cases  in  note  5,  p.  681, 
supra.  Where  a  subscription  is  by 
"U  F.  White,  as  trustee,"  he  being 
merely  an  agent,  the  undisclosed  prin- 
cipals may  be  held  liable  thereon. 
Cole  v.  Satsop,  etc.  Co.,  9  Wash.  487 
(1894).  A  person  obtaining  stock 
through  another  and  paying  calls  on 
it  is  liable  on  the  subscription.  Kri- 
ger  v.  Hanover  Nat.  Bank,  72  Miss. 
462  (1894).  The  real  owner  of  stock 
is  likewise  liable  where  he  transfers 
it  from  his  own  name  to  that  of  an 
irresponsible  person.  §§  263-266,  in- 
fra. An  undisclosed  owner  of  stock, 
standing  in  the  name  of  another  as 
trustee,  is  liable  on  the  statutory  lia- 
bility. Borland  v.  Haven,  37  Fed.  Rep. 
394  (1888);  Castleman  v.  Holmes,  4 
J.  J.  Marsh  (Ky.)  1  (1830),  holding 
that  one  who  subscribed  for  stock 
in  the  name  of  an  infant  for  the  pur- 
pose of  avoiding  responsibility,  and 
who  enjoyed  the  benefits  of  the  stock, 
was  individually  responsible  as  a 
stockholder  for  debts  of  the  corpo- 
ration. A  person  subscribing  for 
stock  in  the  name  of  another,  without 
the  knowledge  of  the  latter,  is  liable 
himself  thereon.  Barron  v.  Burrill, 
86  Me.  72  (1893).  A  corporate  cred- 
itor, after  obtaining  a  judgment 
against  the  corporation  and  having 
execution  returned  unsatisfied,  may 
hold  liable  the  stockholders  who  re- 
ceived the  stock  of  another  corpora- 
tion which  took  over  all  the  assets 
of  the  former  corporation,  even 
though  such  stockholders  were  not 
stockholders  of  record.  Each  stock- 
holder is  liable  for  the  entire  amount 
received  by  him  to  the  amount  of  the 
claim,  and  it  is  not  necessary  to  join 
all  the  stockholders.  Williams  v.  Com- 
mercial Nat.  Bank,  90  Pac.  Rep.  1012 
(Ore.  1907). 


695 


§  253.]  LIABILITY  OF   PLEDl  'C.  [CH.  XIV. 

In  England  a  directly  contrary  rule  prevails.1 

In  America  the  relation  of  the  real  owner  to  the  "dummy"  is  held 
to  be  that  of  principal  and  agent,  and  the  principal  is  held  Liable,  on 
the  ground  that  an  undi  I  principal  is  liable  on  the  contracts 

of  his  agent.    In  England  the  real  owner  of  the  stock  is  looked  upon 

a  cestui  que  trust,  and  hence  is  not  Liable.  Where  the  real  owner 
of  all  the  stock  of  a  company,  anno  of  which  has  been  paid  up,  holds 
the  same  in  the  name  of  a  person  who  is  practically  a  dummy,  and 
the  real  owner  holds  the  stuck  as  "pledgee,"  ho  is  liable  on  the  sub- 
scription price,  even  though  the  stock  stands  in  his  name  on  the 
corporate  books  as  "pledgee."  k"A  stockholder  cannot  escape  Liability 
by  the  use  of  the  name  of  a  dummy."2  Under  the  Ohio  statute  the 
word  "stockholders"  applies  to  persons  owning  stock  in  the  uame  of 
another,  as  well  as  to  persons  appearing  on  the  corporate  boohs  as 

stockholders.3 

A  transfer  to  a  fictitious  person  is  void,  ami  leaves  all  parties  as 
they  were.4  An  unauthorized  signature  of  a  name  to  a  subscription 
list  may  be  forgery.5 

i  King's  Case,  L.  R.  6  Ch.  App.  196  purchaser  had  the  stock  transferred 

(1871)    where  the  court  says  it  does  into   the   name   of   the   "dummy"   as 

not  know  upon  what  ground  a  court,  "trustee."     A  person  who  subscribes 

"setting  aside  a  transaction  as  fraud-  for  stock  in  a  Canadian  corporation 

ulent   is  able  to  make  a  new  contract  in  the  name  of  another,  a  "dummy," 

for   persons  which  they   have   never  is  not  liable  for  the  unpaid  subscrip- 

made  themselves."     Cox's  Case,  4  De  tion.    Molson's  Bank  v.  Boardman,  47 

g'   J    &  S    53    (1863),  s.  c,  33  L.  J.  Hun    (N.    Y.),    135    (1888).     That   a 

(Ch)    145     is    distinguished    on    the  cestui  que  trust  is  not  liable  on  stock 

ground  that  Cox  had  agreed  to  take  held  by  his  trustee,  see  §§  245,   246, 

certain  shares,  and  the  decision  was  supra.     See  also  cases  in  note  2,  p. 

in    the    nature    of    specific    perform-  672. 

ance     In  Cox's  Case,  also,  he  had,  by  2  National  Foundry,  etc.  Works  v. 

the  use  of  "dummies,"  entrapped  the  Oconto  Water  Co.,  68  Fed.  Rep.  1006 

public  into  believing  that  many  per-  (1895).     See  also   §  249,  supra.     The 

sons   were   investing.     In  Williams's  owner  of  a  certificate  of  stock  not  paid 

Case  L  R  1  Ch  D.  576  (1875),  where  up  is  liable  thereon  to  corporate  cred- 

a  purchaser  of  shares  had  them  trans-  itors  although  such  owner  never  ap- 

ferred  to  one  of  his  employees,  the  peared  as  such  on  the  corporate  books, 

real  owner  was  held  not  liable  there-  White  v.  Marquardt  &  Sons,  105  Iowa, 

on.  In  the  case  Ex  parte  Bugg,  2  Dr.  &  145(1898). 

Sm    452   (1865)    a  similar  conclusion  3  Lloyd  v.   Preston,    146    U.    S.    630 

was  arrived  at   the  court  saying  that  (1892);   White  v.  Marquardt  &  Sons, 

the  relation  between  the  real  owner  105  Iowa,  145   (1898) 

and  the  "dummy"  was  that  of  cestui  4  Arthur  v.  Midland  Ry.,  3  Kay  &  J. 

Te  irust  and  trustee.     Such,  also,  is  204    (1857).     See  Pugh  &  Sharman's 

the  rule  Lid  down  in  Fenwick's  Case,  Case,  L.  R.  13  Eq.  566  (1872),  where 
1  De  G.  &  Sm.  557   (1849),  where  the    the  transfer  was  to  a  married  woman, 


5  State  v.  Hazzard,  80  N.  E.  Rep.  149   (Ind.  1907). 

696 


CH.  XIV.] 


LIABILITY  OF  PLEDGEES,  AGENTS,  ETC. 


[§  253. 


Where  the  real  owner  was  formerly  the  registered  stockholder,  but 
has  transferred  his  stock  to  an  irresponsible  person,  a  class  of  cases 
is  found  which  is  considered  elsewhere.1 


but  the  court  treated  it  as  a  transfer 
to  a  fictitious  person.  In  Muskingum, 
etc.  Co.  v.  Ward,  13  Ohio,  120  (1844), 
where  the  transfer  was  made  to  a 
fictitious  person,  the  court  held  that 
the  transaction  was  a  mere  nullity, 
and  that  it  could  not  be  regarded  as 
an  abandonment  of  the  stock.  So 
where  one  purchased,  or  assumed  to 
purchase,  shares  for  an  infant,   and 


gave  the  name  of  the  infant  but  did 
not  disclose  the  infancy,  it  was  held 
that  by  such  a  transaction  the  pur- 
chaser did  not  become  liable  upon 
the  shares,  nor  was  the  vendor  re- 
leased. Maitland's  Case,  38  L.  J. 
(Ch.)  554  (1869).  See  also  Richard- 
son's Case,  L.  R.  19  Eq.  588  (1875). 
i  See  §§263-266,  infra. 


697 


CHAPTER  XV. 


LIABILITY  AS  AFFECTED  BY  TRANSFERS. 


254.  The  subject  herein. 

255.  Liability  of  the  transferrer  on 

unpaid  subscriptions  after 
registry. 

25G.  Liability  of  the  transferee  on 
unpaid  subscriptions  after 
registry. 

257.  Knowledge  that  the  shares  are 

not  fully  paid  up,  how  far 
imputable  to  a  transferee. 

258.  Liability  on  subscription  after 

transfer  but  before  registry 
—Irregular  and  attempted 
transfers. 


§259 


Does  the  statutory  liability  at- 
tach when  the  corporate  debt 
is  contracted,  or  is  due,  or  is 
sued  upon? 
Transferrer's  statutory  liability 
after  transfer  but  before  reg- 
istry. 
The  transferee's  statutory   lia- 
bility. 
262.  Liability  of  transferee  to  trans- 
ferrer. 
203^266.  A  transfer  to  a  "dummy" 
or  to  an  insolvent  person  in 
order  to  escape  liability. 


2G0. 


261. 


§  254.  The  subject  herein. — When  shares  of  stock  are  transferred 
from  one  owner  to  another,  it  at  once  becomes  an  important  matter 
to  determine  who  is  liable  upon  unpaid  subscriptions,  and  who  is 
liable  on  a  liability  imposed  by  statute.  The  difficulty  is  increased 
by  the  rule  of  law  that  no  transfer  is  complete  until  it  is  duly  en- 
tered or  recorded  on  the  books  of  the  corporation.  The  complication 
is  usually  greatest  in  cases  involving  the  question  of  statutory  lia- 
bility, since  generally  each  case  turns  more  or  less  upon  the  particular 
words  of  the  statute  by  which  the  liability  is  imposed.  There  are, 
however,  many  rules  which  are  general  in  their  character  and  applica- 
tion, governing  the  liability  of  stockholders  as  affected  by  transfer, 
and  these  are  the  subject  of  this  chapter. 

§  255.  Liability  of  the  transferrer  on  unpaid  subscriptions  after 
registry. — Transfers  of  shares  may  be  made  at  any  time  after  the 
contract  of  subscription  is  made,  and  before  any  part  or  after  a  part 
or  the  whole  of  the  subscription  price  has  been  paid.  The  well- 
established  and  general  rule  of  law  is,  that  where  a  stockholder  makes 
an  absolute  transfer  of  his  stock  in  good  faith,  and  the  transfer  is 
duly  recorded  on  the  corporate  books,  the  transferrer  is  thereby 
wholly  discharged  from  all  further  liability  upon  the  uncalled  sub- 
scription price  of  the  stock.1 


i  Huddersfield  Canal  Co.  v.  Buckley,  Co.,  55  S.  C.  78  (1899) ;  Cole  v.  Adams, 
7  T.  R.  36  (1796),  by  Lord  Kenyon;  19  Tex.  Civ.  App.  507  (1898).  After 
Gilmore  v.  Bank  of  Cincinnati,  8  Ohio,  transfer  on  the  books  the  transferrer 
62,  71  (1837) ;    Efird  v.  Piedmont,  etc.    is  no  longer  liable  for  the  subscription 

698 


CH.  XV.  ]  TRANSFERRER 's  AND  TRANSFEREE 's  LIABILITY. 


[§   255. 


A  stockholder  has  a  right  to  sell  his  stock  and  have  it  transferred 
on  the  corporate  books,  although  there  are  unpaid  calls  due  on  the 


price  even  though  the  •corporation  has 
a  lien  on  the  stock  by  statute,  the 
transfer  having  been  allowed  by  the 
officers  of  the  corporation.  Rochester, 
etc.  Co.  v.  Raymond,  158  N.  Y.  576 
(1899).  A  transferrer  is  not  liable 
on  an  unpaid  subscription.  "A  trans- 
fer of  stock  made  in  good  faith,  and 
at  a  time  when  the  corporation  is  a 
going  and  solvent  concern,  and  which 
is  entered  upon  the  books,  would  cer- 
tainly relieve  the  transferrer  from 
all  of  the  responsibilities  which  at- 
tached to  him  as  a  stockholder." 
Tucker  v.  Gilman,  121  N.  Y.  189 
(1890) ;  Billings  v.  Robinson,  94  N.  Y. 
415  (1884),  affirming  s.  c,  28  Hun, 
122  (1882);  Wakefield  v.  Fargo,  90 
N.  Y:  213  (1882);  Cowles  v.  Cromwell, 
25  Barb.  413  (1857);  Cole  v.  Ryan, 
52  Barb.  168  (1868);  Isham  v.  Buck- 
ingham, 49  N.  Y.  216  (1872);  Stew- 
art v.  Walla  Walla,  etc.  Co.,  1  Wash. 
St.  521  (1889);  Miller  v.  Great  Re- 
public Ins.  Co.  50  Mo.  55  (1872);  Al- 
len v.  Montgomery  R.  R.,  11  Ala. 
437,  451  (1847) ;  Haynes  v.  Palmer, 
13  La.  Ann.  240  (1858);  Weston's 
Case,  L.  R.  4  Ch.  20  (1868);  McKinzie 
v.  Kittridge,  24  U.  C.  (C.  P.)  1  (1874). 
The  mere  fact  that  the  transferrer, 
after  the  registry,  paid  a  call,  does 
not  estop  him  from  denying  his  liabil- 
ity for  subsequent  calls.  Provincial 
Ins.  Co.  v.  Shaw,  19  U.  C.  (Q.  B.)  533 
(1860).  It  is  not  necessary  to  the 
validity  of  the  transfer  that  there 
should  be  a  consideration  moving 
from  transferee  to  transferrer;  and 
so,  where  one  gives  his  share  away 
absolutely  and  in  good  faith,  the  same 
rule  as  to  liability  prevails.  Re  Euro- 
pean Bank,  Master's  Case,  41  L.  J. 
(Ch.)  501  (1872).  Neither  does  it 
alter  the  rule  that  no  certificates  of 
stock  have  been  issued.  In  such  a 
case  the  transferee  becomes  liable  on 
the  stock,  and  the  transferrer's  liabil- 
ity is  at  an  end.    Burke  v.  Smith,  16 


Wall.  390  (1872);  Brigham  v.  Mead, 
92  Mass.  245  (1865).  See  also  First 
Nat.  Bank  v.  Gifford,  47  Iowa,  575, 
583  (1877) ;  Isham  v.  Buckingham,  49 
N.  Y.  216  (1872).  As  regards  the  rule 
where  the  transfer  is  made  before  the 
corporation  is  organized,  see  §  62, 
supra.  After  a  transfer  and  registry 
the  transferrer  is  not  liable  on  the 
subscription.  Libby  v.  Tobey,  82  Me. 
397  (1890).  In  California  railroad 
stock  cannot  be  issued  until  it  is  fully 
paid  up.  Brewster  v.  Hartley,  37  Cal. 
15  (1869).  Upon  a  valid  transfer  the 
transferrer  is  released,  not  only  upon 
his  liability  for  unpaid  subscriptions, 
but  also  as  to  all  the  existing  debts 
of  the  corporation.  Jackson  v.  Sligo 
Mfg.  Co.,  1  Lea  (Tenn.),  210  (1878); 
Allen  v.  Montgomery  R.  R.,  11  Ala. 
437  (1847).  A  transfer  to  a  solvent 
transferee  while  the  corporation  is 
solvent  releases  the  transferrer  from 
the  subscription  price  and  renders 
liable  the  transferee,  the  transfer 
having  been  recorded,  and  even 
though  the  transfer  was  not  recorded 
within  fifteen  days  after  the  transfer 
of  the  certificates  as  required  by  the 
statute,  this  does  not  change  the  rule 
so  far  as  corporate  creditors  are  con- 
cerned. Henderson  v.  Mayfield,  etc. 
Mills,  45  S.  Rep.  211  (Ala.  1907).  A 
Nebraska  receiver  of  a  Nebraska  cor- 
poration will  not  be  allowed  to  bring 
suit  in  the  Iowa  courts  to  enforce  the 
subscription  liability  of  citizens  of 
Iowa  to  the  stock  of  a  Nebraska  cor- 
poration, where  there  is  no  equity  in 
the  claim,  the  fact  being  that  payment 
for  the  stock  had  been  made  by  notes, 
and  afterwards  upon  a  transfer  of  the 
stock  these  notes  had  been  canceled 
and  notes  of  the  transferee  taken  in 
exchange  therefor.  Wyman  v.  Eaton, 
107  Iowa,  214  (1899).  A  person  to 
whom  stock  is  issued  for  property  and 
who  transfers  the  same  while  the  cor- 
poration is  solvent  cannot  be  held  lia- 


699 


§  255.]  transferrer's  and  transferee's  liability.  [en.  xv. 

,  stock  at  the  time  of  transfer,  and  for  refusal  to  transfer  lie  may  sue 
for  conversion.1  A  transferrer  may  be  released,  although  the  cor- 
porate officers  enter  the  transfer  against  a  protest.2  The  transferrer, 
however,  is  liable  for  calls  payable  before  the  registry  is  made,3  and 
for  calls  made  before,  but  payable  after,  the  registry.4  Frequently 
the  statutes  of  the  state  change  these  common-law  rules  and  provide 
that    both    the    transferrer    and    transferee    shall    be    liable.5     In 


ble  on  such  stock,  even  though  the 
property  was  taken  on  an  overvalua- 
tion. Cole  v.  Adams,  19  Tex.  Civ. 
,  App.  507  (1898).  But  see  §  49,  supra. 
i  Craig  v.  Hesperia,  etc.  Co.,  113 
Cal.  7  (1896).  On  this  subject,  see 
also  §§520,  521,  infra. 

2  London,  etc.  Ry.  v.  Fairclough,  2 
Man.  &  G.  674,  706  (1841);  Upton 
v.  Burnham,  3  Biss.  520  (1873);  s.  c, 
28  Fed.  Cas.  833;  Webster  v.  Upton, 
91  U.  S.  65  (1875).  In  a  proceeding 
in  equity  a  transferee  will  be  com- 
pelled to  pay  calls  made  after  transfer 
of  the  certificate  and  before  registry 
of  the  same.  Webster  v.  Upton,  91  U. 
S.  65  (1S75). 

3  Vicksburg,  etc.  R.  R.  v.  McKeen, 
14  La.  Ann.  724  (1859).  The  trans- 
ferrer is  liable  where  the  transfer 
was  made  on  the  books  after  the  as- 
sessment on  the  stock  had  been  made. 
Visalia,  etc.  R.  R.  v.  Hyde,  110  Cal. 
632  (1895),  and  cases  in  this  section 
generally,  and  §  258,  infra. 

4  A  transfer  after  a  call,  but  before 
it  is  due,  does  not  relieve  the  vendor 
from  liability  thereon,  even  though 
the  stock  is  actually  transferred  on 
the  books.  American  Alkali  Co.  v. 
Campbell,  113  Fed.  Rep.  398  (1902). 
Where  the  resolution  of  the  directors 
specifies  that  the  call  shall  be  made 
on  Septemoer  16th  following,  and  shall 
be  payable  in  instalments  at  specified 
times  thereafter,  the  date  of  the  call 
is  September  16th,  and  a  stockholder 
who  transfers  his  stock  after  Septem- 
ber 16th  but  before  the  instalments 
are  payable,  is  liable  for  such  instal- 
ments. Campbell  v.  American,  etc. 
Co.,  125  Fed.  Rep.  207  (1903).  North 
American,  etc.  Assoc,  v.  Bentley,  19 


L.  J.  (Q.  B.)  427  (1850);  Schenec- 
tady, etc.  Co.  v.  Thatcher,  11  N.  Y. 
102,  113  (1854).  Contra,  West  Phila- 
delphia Canal  Co.  v.  Innes,  3  Whart. 
(Pa.)  198  (1838).  But  this  case  was 
decided  on  the  ground  that  the  trans- 
feree had  not  accepted  the  stock,  and 
could  not  be  held  liable  by  the  corpo- 
ration. Cf.  Aylesbury  Ry.  v.  Mount, 
4  Man.  &  C.  651  (1842),  reversing  5 
Scott,  N.  R.  127;  Re  Hoylake  Ry.,  L. 
R.  9  Ch.  257  (1874). 

5  Under  the  Nebraska  constitution 
both  the  transferrer  and  transferee 
are  liable  for  the  unpaid  subscription 
price  to  corporate  creditors.  Com'l 
Nat.  Bank  v.  Gibson,  37  Neb.  750 
(1893).  A  provision  in  the  Nebraska 
constitution  rendering  subscribers  lia- 
ble to  creditors  to  the  extent  of  their 
unpaid  subscriptions,  makes  them  li- 
able, even  though  they  have  trans- 
ferred their  stock,  and  may  be  en- 
forced by  a  receiver.  This  is  the  rule, 
even  though  the  transferee  gave  his 
notes  to  the  corporation  in  substi- 
tution for  notes  of  the  transferrer 
which  the  corporation  gave  up.  Wy- 
man  v.  Bowman,  127  Fed.  Rep.  257 
(1904).  Under  the  Illinois  statute 
making  both  transferrer  and  trans- 
feree liable  for  the  unpaid  subscrip- 
tion, a  corporate  creditor's  suit  need 
not  join  all  the  parties  who  are  lia- 
ble. Meyer  v.  Ruby,  etc.  Co.,  192  Mo. 
162  (1905).  Where  both  transferrer 
and  transferee  are  liable  by  statute, 
one  may  be  sued  after  the  other  has 
been.  Glenn  v.  Hunt,  120  Mo.  330 
(1894).  In  Virginia,  see  Glenn  v. 
Scott,  28  Fed.  Rep.  804  (1866);  Mc- 
Kim  v.  Glenn,  66  Md.  479  (1887); 
Glen    v.    Foote,     36     Fed.    Rep.     824 


700 


CH.  xv.]  transferrer's  axd  transferee's  liability.  [§256. 

England  the  company  may  allow  a  transfer  of  stock  after  liquidation 
proceedings  have  been  commenced,  and  then  the  transferee  is  liable.1 
An  agreement  between  the  transferrer  and  transferee  of  stock  that  the 
former  will  pay  a  certain  call  on  the  stock,  when  made  by  the  corpora- 
tion, cannot  be  enforced  by  the  corporation  itself.2  Where  stock  has 
been  issued  for  property  or  contract  work  fraudulently  overvalued, 
the  person  so  receiving  the  stock  may  be  liable  thereon,  even  though 
he  has  transferred  it  to  others.3 

§  256.  Liability  of  the  transferee  on  unpaid  subscriptions  after 
registry. — When  a  transfer  of  stock  is  made,  and  the  transfer  is 
duly  recorded  in  the  corporate  stock-book,  the  transferee  thereupon 
becomes  liable  for  any  balance  of  the  subscription  price  uncalled 
and  unpaid  at  the  time  of  the  transfer.  The  transfer  releases  the 
transferrer  and  charges  the  transferee.1     Where  a  person  makes  an 


(1888);  Priest  v.  Glenn,  51  Fed.  Rep. 
400  (1892);  Hamilton  v.  Glenn,  85  Va. 
901  (1889).  Subscribers  to  stock  are 
liable  according  to  tbe  law  of  tbe 
state  incorporating  the  company,  and 
not  according  to  the  law  of  the  state 
where  the  subscribers  reside.  A  sub- 
scriber to  stock  in  a  Virginia  corpora- 
tion is  liable  by  statute  although  he 
has  transferred  his  stock.  Morris  v. 
Glenn,  87  Ala.  628  (1SSS).  In  Mary- 
land the  ordinary  statutory  provision 
holding  stockholders  liable  until  the 
capital  stock  is  fully  paid  in  is  held  to 
render  the  stockholder  liable,  even 
though  he  has  transferred  his  shares. 
Hager  v.  Cleveland,  36  Md.  476  (1872). 
Where  the  statute  makes  the  trans- 
ferrer liable  for  the  unpaid  subscrip- 
tion in  case  the  transfer  is  to  defraud 
corporate  creditors,  another  statute 
making  transferrers  liable  if  the 
transferees  do  not  pay  is  construed 
to  apply  only  to  cases  of  fraudulent 
transfer.  Re  People's  Live-stock  Ins. 
Co.  56  Minn.  180  (1894).  Under  the 
statutes  of  Iowa  the  transferrer  of 
stock  continues  to  be  liable  on  the 
subscription  price  to  creditors  who 
were  such  at  the  time  of  the  transfer. 
White  v.  Green,  105  Iowa,  176  (1898). 
i  After  a  winding  up  has  been  com- 
menced and  a  receiver  been  appointed, 
the  court  may  allow  transfers  of  the 


stock,  but  in  case  calls  have  to  be 
made  subsequently  on  said  stock  a 
transferrer  is  liable  in  case  the  trans- 
feree does  not  pay.  Re  National  Bank 
of  Wales,  [1897]  1  Ch.  298. 

2  Crown,  etc.  Co.  v.  Allen,  199  Pa. 
St.  239   (1901). 

3  See  §§45-50,  supra.  A  sub- 
scriber for  stock  who  has  not  paid 
therefor,  except  by  turning  in  worth- 
less property,  and  who  afterwards 
then  transfers  his  stock  to  another 
person  after  the  company  becomes 
insolvent,  is  still  liable  on  the  stock. 
McConey  v.  Belton,  etc.  Co.,  97  Minn. 
190  (1906). 

4  Quoted  and  approved  in  Sigua, 
etc.  Co.  v.  Brown,  171  N.  Y.  488 
(1902),  the  court  holding  also  that 
no  express  contract  by  the  trans- 
feree to  pay  is  necessary.  Webster 
v.  Upton,  91  U.  S.  65  (1875);  Pull- 
man v.  Upton,  96  U.  S.  328  (1877); 
Upton  v.  Hansbrough,  3  Biss.  417 
(1873);  s.  c,  28  Fed.  Cas.  839;  Hall 
v.  U.  S.  Ins.  Co.,  5  Gill  (Md.),  484 
(1847);  Visalia,  etc.  R.  R.  v.  Hyde, 
110  Cal.  632  (1895);  Bend  v.  Susque- 
hanna Bridge  Co.,  6  Har.  &  J.  (Md.) 
128  (1823);  Merrimac  Min.  Co.  v. 
Bagley,  14  Mich.  501  (1866);  Brig- 
ham  v.  Mead,  92  Mass.  245  (1865); 
Hartford,  etc.  R.  R.  v.  Boorman,  12 
Conn.  530   (1838);  Moore  v.  Jones,  3 


701 


§  256.]  transferrer's  and  transferee's  liability.  [cii.  XV. 

executory  agreemenl  to  purchase  a  certain  amount  of  stock  when  it 
is  issued  to  the  vendor,  the  subscription  price  being  unpaid  to  the 
corporation,  and  the  vender  transfers  the  stock  on  the  books  of  the 
corporation,  and  the  vendee  acquiesce  therein,  the  latter  is  liable 
on  the  subscription.1 

A  person  who  buys  stock  at  an  execution  sale  thereof  and  takes  the 


Woods,  53  (1838);  s.  c,  17  Fed.  Cas. 
€90;  Merrimac  Min.  Co.  v.  Levy,  54 
Pa.  St.  227  (1867);  Huddersfield  Ca- 
nal Co.  v.  Buckley,  7  T.  R.  36  (1796). 
A  transferee  is  liable  on  an  unpaid 
subscription  where  tbe  transfer  has 
been  recorded  on  the  books,  even 
though  the  transferee  did  not  comply 
with  the  by-law  requiring  the  name 
of  transferees  to  be  submitted  to  the 
board  of  directors  and  the  approval 
of  such  board  and  requiring  trans- 
ferees to  sign  the  by-laws.  The  cor- 
poration may  waive  such  require- 
ments. People's,  etc.  Bank  v.  Rickard, 
139  Cal.  285  (1903).  A  purchaser  of 
a  certificate  of  stock  which  recites  on 
its  face  that  it  is  only  one-third  paid 
up,  is  liable  for  the  other  two-thirds 
on  call  of  the  directors.  People's,  etc. 
Bank  v.  Sadler,  1  Cal.  App.  189  (190G). 
Where  an  assessment  is  made  on  the 
same  day  that  a  purchaser  of  stock 
takes  his  certificate,  he  is  liable  to 
the  company  for  the  assessment.  San 
Gabriel,  etc.  Water  Co.  v.  Dennis,  34 
Pac.  Rep.  441  (Cal.  1893).  A  person 
who  acquiesces  in  a  transfer  of  stock 
to  him  is  liable,  even  though  origi- 
nally he  was  ignorant  of  the  trans- 
fer. Sigua  Iron  Co.  v.  Greene,  88  Fed. 
Rep.  207  (1898).  A  transferee  is  lia- 
ble although  he  took  the  stock  as  a 
gift,  and  did  not  know  why  it  was 
given  him,  and  never  agreed  to  pay 
for  it.  Tuthill  Spring  Co.  v.  Smith, 
90  Iowa,  331  (1894).  A  duly  re- 
corded transferee  is  liable  on  the  un- 
paid subscription,  even  to  a  creditor 
who  was  a  creditor  before  the  trans- 
fer of  the  stock  was  made.  Calumet 
Paper  Co.  v.  Stotts  Inv.  Co.,  96  Iowa, 
147  (1895).  It  is  no  defense  that  the 
obligation   for  which  the  assessment 


is  made  was  incurred  before  the  stock- 
holder purchased  his  stock.  Visalia, 
etc.  R.  R.  v.  Hyde,  110  Cal.  632 
(1895).  In  Gray's  Case,  L.  R.  1  Ch. 
D.  6G4  (1876),  where  an  owner  of 
iron-works  sold  them  to  a  corporation 
for  its  stock,  and  guaranteed  that  the 
net  dividends  should  not  be  less  than 
ten  per  cent,  on  the  paid-up  capital, 
for  which  purpose  the  shares  given 
as  consideration  were  vested  in  trus- 
tees, but  were  not  to  be  registered 
in  their  names  except  by  their  own 
direction,  it  was  held  that  they  were 
not  liable  as  stockholders  because 
they  had  not  elected  to  be  registered 
as  stockholders.  When  a  person  pur- 
chases shares  of  a  company,  he,  as 
between  himself  and  other  stockhold- 
ers, takes  those  shares  with  all  the 
rights  and  liabilities  attaching  to 
them,  so  that  his  co-stockholders  have 
a  perfect  right  to  insist  upon  his  con- 
tributing with  them  towards  the  liq- 
uidation of  debts  contracted  before 
he  joined  the  company.  Taylor  v. 
Ifill,  1  N.  R.  566  (1863),  V.-C.  W.; 
Cape's  Case,  2  De  G.,  M.  &  G.  562 
(1852);  Mayhew's  Case,  5  De  G.,  M. 
&  G.  837  (1854).  See,  too,  Horsley 
I?.  Bell,  Ambl.  769  (1778),  cited  in  1 
Bro.  Ch.  101,  n.  Sanderson's  Case, 
3  De  G.  &  S.  66  (1849),  cannot  be  re- 
garded as  correct  on  this  point.  See 
Henderson  v.  Sanderson,  3  H.  L.  Cas. 
698  (1852). 

l  The  question  of  whether  the  ven- 
dee acquiesced  may  be  a  question  for 
the  jury.  The  mere  fact  that  his 
name  appeared  on  the  books  as  a 
stockholder  is  not  sufficient.  Greene 
v.  Sigua,  etc.  Co.,  88  Fed.  Rep.  207 
(1898). 


702 


CH.  xv.]  transferrer's  and  transferee's  liability.  [§  257 

sheriff's  certificate  therefor,  and  presents  the  same  to  a  corporation 
for  transfer,  thereby  becomes  a  stockholder  to  the  extent  at  least  of 
being  liable  for  any  unpaid  part  of  the  subscription  price  of  such 
stock.1 

In  some  of  the  states  the  liability  of  the  transferee  is  regulated 
by  statute,  and  where,  by  statute  or  a  by-law  of  the  corporation,  no 
valid  transfer  can  be  made  while  there  are  calls  due  and  unpaid,  it  is 
held  that  a  transfer  without  such  payment  will  not  render  the  trans- 
feree liable  thereon.2  In  Pennsylvania,  after  considerable  doubt  and 
conflict,  it  has  been  clearly  stated  by  the  supreme  court  that  the 
transferee  of  stock  is  liable  on  the  unpaid  subscription.5 

§  257.  Knowledge  that  the  stock  is  not  fully  paid  up,  how  far 
imputable  to  a  transferee.  —The  question  whether  the  purchaser  of 
stock  is  bound  to  take  notice  that  the  stock  he  purchases  is  not  fully 
paid  for  is  a  serious  and  complicated  one.  The  better  opinion  and 
the  one  most  in  accord  with  the  usages  and  demands  of  trade   is  that 


i  Basting  v.  Northern  Trust  Co.,  61 
Minn.  307  (1895).  And  is  also  liable 
on  the  statutory  liability  attaching  to 
such  stock.  Oswald  v.  Minneapolis 
Times  Co.,  65  Minn.  249  (1896).  A 
dictum  in  Sturges  v.  Stetson,  1  Biss. 
246  (1858);  s.  c,  23  Fed.  Cas.  311, 
says  that  the  purchaser  at  execution 
sale  is  liable  on  an  unpaid  subscrip- 
tion the  same  as  his  debtor  .was.  A 
person  who  buys  stock  at  an  execution 
sale,  after  it  has  already  been  pledged 
for  its  full  value  to  others  and  a 
transfer  to  them  made,  is  not  liable 
for  calls  on  the  stock,  even  though 
such  pledgees  transferred  it  to  him 
without  his  knowledge.  Simmons  v. 
Hill,  96  Mo.   679    (1898). 

2  Watson  v.  Eales,  23  Beav.  294 
(1856);  McCready  v.  Rumsey,  6  Duer, 
574  (N.  Y.  Super.  Ct,  1857),  was  a 
case  under  a  prohibition  against 
transfer  in  a  bank  organized  under 
the  New  York  General  Banking  Act 
of  1838.  Re  Bachman,  12  Nat.  Bankr. 
Reg.  223  (1876) ;  s.  c,  2  Fed.  Cas.  310, 
was  a  case  where  the  corporation  had 
a  lien  on  the  stock. 

3  Bell's  Appeal,  113  Pa.  St.  88 
(18S7);  Citizens',  etc.  Co.  r.  Gillespie, 
115  Pa.  St.  564  (1887),  where,  how- 
ever,    the     transferee     directly     con- 


tracted to  pay.     Compare  West  Phila- 
delphia Canal  Co.  v.  Innes,  3  Whart. 
(Pa.  198)    (1838);  Aultman's  Appeal, 
98  Pa.  St.  505  (1881) ;  Bunn's  Appeal, 
105    Pa.    St.    49     (1884);     Palmer    v. 
Ridge  Min.  Co.,  34  Pa.  St.  288  (1859)  ; 
Pittsburgh,  etc.  Co.  v.  Otterson,  4  W. 
N.  Cas.  545    (1877);   Delaware  Canal 
Co.    v.    Sansom,    1    Binn.     (Pa.)     70 
(1803);    Merrimac  Min.  Co.   v.   Levy, 
54  Pa.  St.  227   (1867).     And,  in  gen- 
eral, as  regards  the  Pennsylvania  Gen- 
eral   Railroad   Act   of   Feb.    19,    1849, 
see  Pittsburgh,  etc.  R.  R.  v.  Clarke, 
29  Pa.  St.  146   (1857);   Graff  v.  Pitts- 
burgh,   etc.    R.    R.,    31    Pa.    St.    489 
(1858).      Cf.    Franks    Oil    Co.    v.    Mc- 
Cleary,  63  Pa.  St.  317  (1869),  holding 
that  the  transferee  in  a  mining  com- 
pany  is    not   liable.     Messersmith  v. 
Sharon  Savings  Bank,  96  Pa.  St.  440 
(1880),  to  same  effect;    and  see  Ault- 
man's Appeal,  9S  Pa.  St.  505    (1881), 
involving  an  Ohio  corporation;    Pitts- 
burgh,  etc.  Co.  v.  Otterson,  4  W.  N. 
Cas.   545    (1878);    Provincial,  etc.   Co. 
v.  Shaw,  19  U.  C.  (Q.  B.)  533  (1860); 
Miller  v.  Peabody  Bank,  15  W.  N.  Cas. 
76   (1883);   Reimer,  etc.  Co.  v.  Rosen- 
berger,  40  Leg.  Int.  381  (1883);  Pitts- 
burgh, etc.  R.  R.  v.  Clarke,  29  Pa.  St. 
153    (1857). 


703 


§  258.] 


TRANSFERRER'S  AND  TRANSFEREE'S   LIABILITY.  [dl.  XV. 


where  one  buys  stock  in  open  market,  in  good  faith,  and  without 
notice  that  the  subscription  price  thereof  has  not  been  paid  up,  such 
a  purchaser  cannot  be  held  liable  to  pay  the  unpaid  balance  of  sub- 
scription.1 But  where  a  person,  to  whom  stock  is  is-iu<l  for  property 
at  a  fraudulent  overvaluation,  purchases  other  Btock  of  the  same  kind, 
he  is  liable  not  only  on  the  stock  originally  issued  to  him  but  also  on 
the  stock  so  purchased  by  him,  even  though  the  stock  on  its  face 
states  that  it  is  "full-paid  and  non-assessable."2 

§  258.  Liability  on  subscription  after  transfer  but  before  regis- 
try—  Irregular  and  attempted  transfers.  —  Until  a  transfer  is  re- 
corded in  the  transfer  book  of  the  corporation,  the  transferee,  not 
be i ni;'  duly  recognized  as  a  stockholder,  is  not  chargeable  either  with 
corporate  debts  or  unpaid  balances  of  the  subscription.     He  is  bound 


i  Certificates  of  stock  have  become 
such  important  factors  in  trade  and 
credit,  and  general  investment  by  all 
classes,  that  the  law  is  steadily  tend- 
ing towards  the  complete  protection 
of  a  bona  fide  purchaser  of  them  in 
open  market,  and  without  notice  of 
facts  which  will  decrease  the  apparent 
value  of  the  stock.  The  constant  ten- 
dency of  the  courts  to  increase  the  ne- 
gotiability of  certificates  of  stock  will 
probably  establish  the  rule  that  the 
purchaser  in  good  faith  of  a  certificate 
of  stock  is  not  liable  on  any  unpaid 
subscription  price  thereof,  unless  such 
liability  is  stated  on  the  face  of  the 
certificate  itself.  Indeed,  even  now 
this  may  be  said  to  be  the  established 
rule.  See  §  50,  supra.  Where  a  mem- 
ber has  not  paid  for  his  stock  in  full 
and  sells  it  as  though  it  was  full 
paid,  he  must  refund  to  the  transferee 
the  balance  which  the  transferee  is 
obliged  to  pay.  Jamison  v.  Harbert, 
87  Iowa,  186  (1893).  But  where  a 
subscription  is  not  paid,  and  the  stock 
is  transferred  to  the  corporation  as 
"treasury  stock"  and  then  sold  below 
par,  the  purchaser  is  liable  for  the 
unpaid  par  value.  Ailing  v.  Wenzel, 
133  111.  264  (1890).  A  contract  by  a 
corporation  that  it  will  issue  its  stock 
for  one-fifth  of  its  par  value  is  void 
under  the  Alabama  constitutional  pro- 


hibition. The  subscriber  having  sold 
his  contract  to  another  person  cannot 
collect  on  such  sale.  Williams  v.  Ev- 
ans, 87  Ala.  725  (1889).  A  transferee 
of  stock,  the  certificates  reciting  on 
the  face  thereof  that  a  certain  amount 
is  still  due,  is  liable  therefor.  Glenn 
v.  Porter,  73  Fed.  Rep.  275  (1896). 
2  Higgins  v.  Illinois,  etc.  Bank,  193 
111.  394  (1901).  In  Illinois  the  trans- 
ferrer of  stock  is  liable  secondarily 
on  stock  issuexl  tor  property  taken  at 
a  fraudulent  overvaluation,  the  trans- 
feree being  primarily  liable.  Flor- 
sheim  v.  Illinois,  etc.  Bank,  93  111. 
App.  297  (1901);  aff'd,  192  111.  382; 
Rogan  v.  Illinois,  etc.  Bank,  93  111. 
App.  39  (1900).  Even  a  bona  fide 
purchaser  of  what  purports  to  be  full- 
paid  stock  in  a  corporation  is  liable 
on  the  double  liability  attached  to  the 
stock,  under  the  New  York  statute, 
where  the  stock  was  issued  for  prop- 
erty taken  at  an  overvaluation  and  no 
certificate  of  payment  has  been  filed, 
as  required  by  the  statute.  If,  how- 
ever, after  the  issue  of  the  stock, 
further  sums  of  money  were  paid  in 
by  the  stockholders  equal  to  the  dif- 
ference between  the  par  value  of 
the  stock  and  the  value  of  the 
property,  the  liability  ceases  as  to 
subsequent  creditors.  White,  Corbin 
&  Co.  V.  Jones,  167  N.  Y.  158   (1901). 


704 


CII.  xv.] 


transferrer's  and  transferee's  liability. 


[§  258. 


to  protect  and  indemnify  his  transferrer,  bnt  lie  is  not  liable  to  the 
corporation  or  corporate  creditors  or  other  stockholders.1 

The  general  rule  is  that  the  transferrer  is  not  released  from  lia- 
bility until  the  transfer,  is  duly  registered  in  the  corporate  books.2 


1  Quoted  and  approved  in  People's, 
etc.  Bank  v.  Stadtmuller,  150  Cal.  106 
(1906).  Marlborough  Mfg.  Co.  v. 
Smith,  2  Conn.  579  (1818);  Topeka 
Mfg.  Co.  v.  Hale,  39  Kan.  23  (1888); 
Midland,  etc.  Ry.  v.  Gordon,  16  M.  & 
W.  804  (1847).  Cf.  McDowell  v.  Shee- 
han,  129  N.  Y.  200,  207  (1891).  The 
agreement  of  the  purchaser  of  the  ma- 
jority of  the  stock  that  he  will  in- 
demnify and  save  harmless  the  vend- 
ors from  the  liabilities  of  the  com- 
pany does  not  render  the  vendee  liable 
to  the  creditors  of  the  company.  Trad- 
ers', etc.  Bank  v.  Washington,  etc. 
Co.,  22  Wash.  467  (1900).  Even  though 
a  national  bank,  as  pledgee  of  na- 
tional bank  stock  which  stands  on  the 
books  of  the  latter  bank  in  the  name 
of.  the  pledgor,  sells  the  stock  on  no- 
tice and  buys  it  in  at  a  nominal  figure, 
yet  if  the  pledgee  does  not  have  the 
stock  transferred  to  itself  on  the 
books  of  the  bank  it  cannot  be  held 
liable  thereon,  the  pledgee  having 
soon  after  the  sale  waived  its  rights 
as  a  purchaser  at  such  sale.  Robin- 
son v.  Southern,  etc.  Bank,  180  U.  S. 
295  (1901).  In  Indiana  it  has 
been  held  that  a  statute  will 
not  be  construed  so  as  to  make 
both  transferrer  and  transferee  liable 
directly  for  the  same  indebtedness. 
Williams  v.  Hanna,  40  Ind.  535 
(1872). 

2  Quoted  and  approved  in  Bracken 
v.  Nicol,  99  S.  W.  Rep.  920  (Ky.  1907). 
Shellington  v.  Howland,  53  N.  Y.  371 
(1873);  Barron  v.  Burrill,  86  Me.  72 
(1893);  Worrall  v.  Judson,  5  Barb. 
21U  (1849);  Louisiana  Ins.  Co.  v. 
Gordon,  8  La.  Rep.  174  (1835);  Dane 
V.  Young,  61  Me.  160  (1872);  Fowler 
v.  Ludwig,  34  Me.  455  (1852);  Davis 
v.  Essex  Bapt.  Soc,  44  Conn.  582 
(1877);  Kellogg  v.  Stockwell,  75  111. 
68    (1874);    Bowden  r.  Farmers',  etc. 

(45)  70 


Bank,  1  Hughes,  307;  s.  c,  3  Fed.  Cas. 
1029  (1877);  London,  etc.  Ry.  v.  Fair- 
clough,  2  Man.  &  G.  674  (1841).  To 
the  same  effect,  McEuen  v.  West  Lon- 
don Wharves,  etc.  Co.,  L.  R.  6  Ch. 
655  (1871),  in  which  it  was  held  that 
the  sale  and  transfer  by  delivery  of 
scrip  certificates  allotted  and  issued 
to  a  subscriber,  entitling  the  bearer 
to  exchange  them  for  share  certifi- 
cates, would  not  exonerate  the  vendor 
from  liability  for  calls,  even  though 
the  vendee  had  paid  some  calls;  Mid- 
land, etc.  Ry.  v.  Gordon,  16  M.  &  W. 
804  (1847);  Sayles  v.  Blane,  19  L.  J. 
(Q.  B.)  19  (1849).  See  also  Hawkins 
v.  Glenn,  131  U.  S.  319  (1889).  The 
registered  stockholder  is  liable  on  the 
subscription.  Baines  v.  Babcock,  95 
Cal.  581  (1892).  An  original  sub- 
scriber for  stock  is  not  released  from 
his  obligation  although  he  sells  and 
transfers  the  certificate  of  stock,  such 
transfer  not  having  been  recorded  on 
the  corporate  books.  Hood  v.  Mc- 
Naughton,  51  N.  J.  L.  425  (1892).  A 
person  sued  as  a  subscriber  cannot 
set  up  that  he  subscribed  at  the  solici- 
tation of  another  person  who  agreed 
to  take  the  subscription  off  his  hands 
at  once.  Stutz  v.  Handley,  41  Fed. 
Rep.  531  (1890);  reversed  on  other 
grounds,  139  U.  S.  417.  A  transferrer 
is  liable  until  the  transfer  is  made  on 
the  books.  Abbott  v.  Jack,  136  Cal. 
510  (1902).  The  transferrer  of  stock 
not  fully  paid  up  is  liable  to  a  corpo- 
rate creditor  who  became  such  before 
the  transfer  was  recorded  on  the  cor- 
porate books.  Hawkins  v.  Citizens', 
etc.  Co.,  38  Oreg.  544  (1901).  The 
registered  owner  is  liable  on  the  un- 
paid subscription,  even  though  he  has 
actually  transferred  the  certificate. 
Sherwood  v.  Illinois,  etc.  Bank,  195 
111.  112  (1902).  In  a  suit  to  collect  a 
subscription  the  corporation  need  not 


§  258.] 


transferrer's  and  transferee's  liability. 


[CH.  XV. 


This  rule,  however,  is  subject  to  an  important  exception,  namely: 
that  where  the  corporation  accepts  the  transferee  as  a  stockholder 
and  pays  dividends  to  him,  or  Avhere,  through  the  negligence  <>r  fault 
of  the  corporation,  no  transfer  on  the  books  is  made,  in  such  ca 
the  transferrer  is  released,  and  the  transferee  only  is  liable  on  the 
stock,  although  the  stock  still  stands  on  the  corporate  books  in  the 
name  of  the  transferrer.1 

Thus  where  the  transferrer  signs  the  transfer  on  the  back  and 
delivers  tin-  same  to  his  broker,  who  sells  the  stock  and  then  presents 
the  certificate  to  the  corporation  for  transfer,  and  the  corporation 
agrees  so  to  do,  but  neglects  to  for  a  year,  the  transferrer  is  not  liable 


allege  that  the  stock  has  not  heen 
transferred  by  the  subscriber.  South 
Milwaukee  Co.  v.  Murphy,  112  Wis. 
014    (1902). 

l  Isham  v.  Buckingham,  49  N.  Y. 
216  (1872);  Cutting  v.  Damarel,  88  N. 
Y.  410  (1882);  Chambersburg  Ins.  Co. 
r.  Smith,  11  Pa.  St.  120  (1849);  Mur- 
ray v.  Bush,  L.  R.  6  H.  L.  37  (1873) ; 
Upton  v.  Burnham,  3  Biss.  431,  520 
(1873);  s.  c,  28  Fed.  Cas.  831,  833. 
"Wbere  a  stockholder  in  a  national 
bank  sells  his  stock  three  weeks  be- 
fore the  bank  goes  into  a  receiver's 
hands  and  in  the  meantime  has  done 
all  he  could  to  have  a  transfer  made, 
he  is  not  liable  on  the  stock,  even 
though  the  transfer  has  not  actually 
been  made  on  the  books  of  the  bank. 
Earle  v.  Carson,  188  U.  S.  42  (1903). 
In  this  case  the  vendor  delivered  the 
certificate  of  stock  to  the  corporation 
duly  transferred  to  another  person 
and  requested  a  transfer,  and  the  offi- 
cer of  the  corporation  stated  that  the 
transfer  would  be  made,  but  failed  to 
make  it  and  the  vendor,  being  igno- 
rant of  the  fact  of  such  failure,  was 
held  no  longer  liable  on  the  stock. 
But  where  a  stockholder  transfers  to 
an  employee  certain  stock  on  the 
agreement  that  in  case  the  employee 
continues  in  the  employ  of  the  com- 
pany more  than  a  year  the  stock 
should  belong  to  the  employee,  and 
thereafter  the  employee  endeavors  to 
re-transfer  the  stock,  but  the  com- 
pany,   at    the    instance    of    the    first 


named  stockholder,  refuses  to  make 
the  transfer,  the  employee  is  liable 
on  tne  stock  to  the  receiver  for  un- 
paid subscriptions.  Russell  v.  Easter- 
brook,  71  Conn.  50  (1898).  Where  an 
lish  corporation  requires  the  pay- 
ment of  a  small  fee  on  transfer  of 
stock,  and  the  English  statutes  re- 
quire a  stamp  to  be  affixed,  and  an 
American  stockholder  presents  his 
stock  for  transfer  without  paying  the 
fee  or  affixing  the  stamp,  he  re- 
mains liable  on  the  stock,  no 
transfer  of  the  stock  on  the 
books  having  been  made.  Giesen  r. 
London,  etc.  Co.,  102  Fed.  Rep.  584 
(1900).  A  mere  oral  notice  by  a  third 
party  that  a  stockholder  had  trans- 
ferred his  stock  to  a  designated  per- 
son does  not  relieve  the  former  from 
his  liability  on  the  subscription,  no 
formal  transfer  having  been  made, 
the  stock  having  been  issued  at  twen- 
ty cents  on  the  dollar.  Vermont, 
etc.  Co.  v.  Declez,  etc.  Co.,  135  Cal.  579 
(1902).  Even  though  a  Colorado  cor- 
poration is  organized  for  the  issue 
of  stock  in  exchange  for  stock  in  a 
Kansas  corporation  and  a  stockholder 
in  the  latter  assigns  his  Kansas  cer- 
tificate to  another  person  and  causes 
the  Colorado  corporation  to  issue  its 
stock  to  such  other  person,  yet  if  he 
fails  to  have  the  transfer  recorded  in 
the  books  of  the  Kansas  corporation 
he  is  liable  on  such  Kansas  stock. 
Pine  v.  Western,  etc.  Bank,  63  Kan. 
462  (1901).  Where  the  transferrer  re- 


706 


ch.  xv.]  transferrer's  and  transferee's  liability.  [§  258. 


on  the  stock.1  The  transferrer  of  stock  in  a  national  bank  is  released 
from  liability  when  he  goes  with  the  transferee  to  the  bank,  delivers 
the  old  certificate  duly  transferred,  and  leaves  the  same  for  registry, 
even  though  no  registry  is  made.2  But  a  delivery  of  certificates 
of  stock  to  the  president  as  vendee,  and  not  as  president,  is  not  such 
an  attempt  to  transfer  the  stock  on  the  books  as  relieves  the  trans- 
ferrer from  liability.3  Where  a  stockholder  in  a  national  bank  in- 
dorses his  certificate  in  blank,  and  causes  it  to  be  sold  at  public 
auction,  and'  the  auctioneer  sells  it  to  the  cashier  of  the  bank,  and 
takes  it  to  the  bank,  and  presents  it  to  such  cashier  for  transfer,  and 
for  four  years  dividends  thereon  are  paid  to  the  cashier,  the  vendor 
is  no  longer  liable,  even  though  the  stock  was  not  transferred  on  the 
bank  books,  and  even  though  a  by-law  of  the  bank  prohibited  any 
officer  from  holding  stock  in  the  bank  except  by  permission  of 
the  board  of  directors.4  Where  there  is  no  transfer  book,  but  cer- 
tificates are  merely  canceled  and  new  ones  issued,  this  is  sufficient 
to  effect  a  transfer  on  the  corporate  books.5     So  also  where  no  certifi- 


quests  the  corporation  to  make  a 
transfer,  and  it  fails  to  do  so,  he  is 
released  from  the  statutory  liability 
on  the  stock.  Hunt  v.  Seeger,  91  Minn. 
264  (1904).  Under  the  New  Jersey 
incorporating  act  which  allows  special 
provisions  to  be  inserted,  there  may 
be  a  provision  that  stockholders  of 
record  shall  be  liable  for  calls.  Un- 
der such  a  provision  a  stockholder  of 
record  is  liable,  although  he  has  sold 
his  certificate  and  notified  the  com- 
pany of  the  sale,  but  no  transfer  had 
been  made  on  the  books.  Brown  v. 
Morton,  71  N.  J.  L.  26  (1904).  The 
transferrer  is  liable  up  to  the  time 
that  the  transfer  is  recorded  unless  he 
sees  that  the  certificate  is  delivered 
to  the  corporation  with  the  proper 
power  of  attorney  and  data  for  the 
transfer.  M'Donald  v.  Dewey,  134 
Fed.  Rep.  528  (1905) ;  modified  on  an- 
other point  in  202  U.  S.  510. 

i  Quoted  and  approved  in  Bracken 
v.  Nicol,  99  S.  W.  Rep.  920  (Ky.  1907). 
Young  v.  M'Kay,  50  Fed.  Rep.  394 
(1892). 

2  Hayes  v.  Shoemaker,  39  Fed.  Rep. 
319  (1889).  See  also  §§490,  523-525, 
532,  infra.     Cf.   §§  382,  383,  infra. 

3  Richmond   v.   Irons,   121  U.   S.   27 


(1887).  Even  though  the  stockholder 
sells  his  stock  to  a  director  and  de- 
livers the  certificates  to  him  and  re- 
ceives payment,  yet  if  the  stock  is  not 
transferred  on  the  books  the  transfer- 
rer is  liable  on  the  statutory  liability. 
Schofield  17.  Twining,  127  Fed.  Rep. 
486  (1904). 

4  Earle  v.  Coyle,  97  Fed.  Rep.  410 
(1899).  It  has  been  held,  that  where 
a  stockholder  in  a  bank  sells  his  stock 
to  the  cashier  and  assigns  to  him  the 
certificate,  he  ceases  to  be  liable  on 
such  stock  to  corporate  creditors,  even 
though  the  cashier  does  not  transfer 
the  stock  on  the  bank  books.  Foster 
v.  Row,  120  Mich.  1  (1899).  Where 
a  bank  director  sold  his  stock  and  di- 
rected the  cashier  to  have  it  trans- 
ferred, he  is  no  longer  liable  on  the 
stock,  even  though  it  was  not  regu- 
larly transferred  on  the  books.  Brack- 
en v.  Nicol,  99  S.  W.  Rep.  920  (Ky. 
1907).  Even  though  the  stockholder 
in  a  bank  sells  his  stock  to  the  cashier 
with  instructions  to  transfer  the  same 
on  the  books,  yet  if  the  cashier  fails 
to  do  so  the  transferrer  is  liable. 
White  v.  Commercial,  etc.  Bank,  66 
S.  C.  491  (1903). 

5  Plumb  v.  Bank  of  Enterprise,  48 


707 


§  258.]  transferrer's  and  transferee's  liability.  [cii.  XV. 


cates  have  ever  been  issued,  a  transfer  may  be  made  orally  or  in 
writing.1  A  stockholder  who  has  transferred  his  stock  on  the  books 
of  the  company  cannot  be  held  liable  under  a  statutory  liability  for 
debts  subsequently  incurred,  even  though  he  has  not  published  notice 
of  such  transfer  as  required  by  statute."  Where  the  transferee  dors 
not  know  that  the  transfer  has  been  made  and  never  agreed  to  be  a 
stockholder  he  is  not  liable  as  such,  even  though  the  transfer  has 
been  made  on  the  books  of  the  corporation.3  Even  though  by  reason 
of  the  transfer  books  being  closed  for  a  short  period  of  time,  a  vendor 
of  stock  is  unable  to  have  it  transferred  on  the  books,  and  the  coin- 


Kan.  484  (1892).  Where  there  is  prac- 
tically no  book  except  the  certificate- 
of-stock  book,  and  a  purchaser  of 
stock  at  execution  sale  sends  the  cer- 
tificate to  the  company  for  transfer, 
which  is  refused  by  reason  of  an  un- 
paid call,  the  purchaser  is  liable  on 
the  unpaid  subscription,  the  corpora- 
tion having  subsequently  recognized 
him  as  owner  of  the  stock.  Basting 
v.  Northern  Trust  Co.,  61  Minn.  307 
(1895).  Where  no  stock  or  transfer 
books  are  kept,  although  the  statute 
requires  them,  and  the  certificate-of- 
stock  book  is  so  kept  that  upon  a 
transfer  the  old  certificates  of  stock 
are  so  pasted  back  on  to  the  stubs 
corresponding  thereto,  the  transferrer 
may  be  liable  for  subsequent  debts, 
even  though  a  new  certificate  was  is- 
sued to  the  transferee  and  the  stub 
opposite  thereto  stated  from  whom  the 
stock  was  transferred.  Herrick  v. 
Wardwell,  58  Ohio  St.  294  (1898).  Un- 
der the  New  York  statute  a  holder  of 
unpaid  stock  is  not  relieved  from  lia- 
bility by  a  transfer  of  the  same,  un- 
less such  transfer  is  registered  in  a 
stock  book;  and  it  is  held  that  even 
though  no  stock  book  is  kept  by  the 
corporation,  yet  if  the  transferrer  was 
an  officer  of  the  company  and  par- 
tially responsible  for  not  having  such 
book  kept,  he  cannot  set  up  the  de- 
fense that  no  such  book  was  kept, 
especially  where  there  is  evidence  of 
bad  faith  in  the  transfer.  Beals  v. 
Buffalo,  etc.  Co.,  49  N.  Y.  App.  Div. 
589  (1900).  See  also  §382,  infra. 
l  A   subscription   of   stock   may   be 


assigned,  even  though  only  a  part  of 
the  subscription  has  been  called  for 
and  paid,  and  even  though  no  certifi- 
cate of  stock  had  ever  been  issued. 
Such  assignment  may  be  oral.  Man- 
chester St  Ry.  v.  Williams,  71  N.  H. 
312  (1902).  Where  the  certificates 
for  unpaid  stock  are  never  issued,  and 
the  stockholder  disposes  of  his  inter- 
est to  another  person  and  the  corpora- 
tion recognizes  that  person  as  such 
stockholder,  the  original  subscriber 
is  no  longer  liable.  Dain,  etc.  Co.  v. 
Trumbull,  etc.  Co.,  95  Mo.  App.  144 
(1902). 

^  Brunswick  T.  Co.  v.  Natl.  Bank 
etc.,  192  U.  S.  386  (1904).  A  trans- 
fer to  a  solvent  transferee  while  the 
corporation  is  solvent  releases  the 
transferrer  from  the  subscription 
price  and  renders  liable  the  trans- 
feree, the  transfer  having  been  re- 
corded, and  even  though  the  transfer 
was  not  recorded  within  fifteen  days 
after  the  transfer  cf  the  certificates  as 
required  by  the  statute,  this  does  not 
change  the  rule  so  far  as  corporate 
creditors  are  concerned.  Henderson 
v.  Mayfield,  etc.  Mills,  45  S.  Rep.  211 
(Ala.  1907).  Where  by  statute  no 
transfer  of  stock  on  the  corporate 
books  shall  be  legal  until  a  statement 
of  such  transfer  has  been  filed  with 
the  secretary  of  state,  the  transferrer 
remains  liable  on  the  stock  until  such 
statement  is  filed  with  the  secretary 
of  state.  Henley  v.  Myers,  93  Pac. 
Rep.  168  (Kan.  1907). 

3  Manor  v.  Aldrich,  126  Fed.  Rep. 
934    (1903). 


70S 


en. xv.]  transferrer's  and  transferee's  liability. 


[§  258. 


pany  fails  before  the  books  are  opened,  lie  is  liable  on  the  unpaid 
subscriptions.1  Various  other  illustrations  of  irregular  or  unauthor- 
ized transfers  and  of  the  liability  of  the  various  parties  thereto  are 
given  in  the  notes  below.2 


1  Cook  v.  Carpenter,  212  Pa.  St.  177 
(1905). 

2  A  substitution  of  stockholders 
after  organization  by  canceling  some 
subscriptions  and  filling  in  others  is 
illegal.  There  should  be  a  transfer. 
Cartwright  v.  Dickinson,  88  Tenn. 
476  (1890).  Where  a  party  buys  stock 
through  a  broker,  and  the  broker, 
without  authority,  causes  the  stock 
to  be  transferred  on  the  books  to  the 
purchaser,  but  the  latter,  upon  receiv- 
ing the  certificates,  returns  them  and 
repudiates  the  transfer  and  orders  a 
sale  and  transfer,  and  the  company 
■fails  before  such  resale  is  made,  the 
purchaser  is  not  liable  to  corporate 
creditors  on  the  subscription  price 
of  the  stock.  Glenn  v.  Garth,  133  N. 
Y.  18  (1892).  Where  a  person  sub- 
scribes to  the  proposed  increased  cap- 
ital stock,  but  the  increase  is  not 
made,  and  the  officers  surreptitiously 
transfer  some  of  their  old  stock  to 
him,  he  is  not  liable  on  the  statutory 
liability  thereon,  even  though  he  ac- 
cepted the  stock,  if  he  accepted  in  ig- 
norance of  the  fraud  practiced  upon 
him.  Stephens  v.  Follett,  43  Fed.  Rep. 
842  (1890).  A  stockholder  is  liable 
by  statute  on  stock  where  he  has 
merely  transferred  the  certificate,  and 
no  effort  has  been  made  to  complete 
the  transfer  on  the  corporate  books. 
Where  a  person  agrees  to  accept  a 
transfer  of  stock,  and  acts  as  director, 
he  is  liable  on  the  unpaid  subscrip- 
tion, though  no  formal  transfer  is 
made.  Weinman  v.  Wilkinsburg,  etc. 
Ry.,  118  Pa.  St.  192  (18S8);  Bernard's 
Case,  5  De  G.  &  Sm.  283  (1852).  See 
also  §  260,  infra.  Where  an  executory 
sale  of  stock  is  made,  with  a  forfeit 
in  case  it  is  not  completed,  and  the 
vendor,  without  the  knowledge  of  the 
vendee,  causes  the  stock  to  be  trans- 
ferred to  the  vendee  on  the  books  of 


the  company,  and  the  company  fails, 
and  the  next  day  the  parties,  without 
knowledge  of  the  failure,  close  the 
transaction,  the  vendor  may  be  held 
liable  on  the  statutory  liability  on 
such  stock.  May  v.  McQuillan,  129 
Mich.  392  (1902).  Even  though  a 
person's  name  appears  on  a  certificate 
of  stock  on  the  transfer  on  the  back 
thereof,  yet  if  a  line  is  drawn  through 
it  and  the  certificate  is  canceled  and 
a  new  one  issued  to  the  original 
owner,  the  person  whose  name  is  can- 
celed is  presumed  not  to  have  been 
the  owner.  Gillett  v.  Chicago  Title  & 
T.  Co.,  82  N.  B.  Rep.  891  (111.  1907).  A 
person  to  whom  stock  is  transferred 
on  the  corporate  books  is  liable  on 
the  statutory  liability,  if  he  approves 
or  acquiesces  in  it  in  any  way,  as  by 
signing  an  application  to  change  the 
charter  of  the  bank,  or  by  indorsing 
checks  which  are  made  out  to  him 
for  dividends.  He  is  estopped  from 
denying  that  he  knew  what  he  was 
signing.  It  is  immaterial  whether  a 
new  certificate  was  issued  to  him  or 
not.  Keyser  v.  Hitz,  133  U.  S.  138 
(1890).  Cf.  Ex  parte  Hall,  1  Macn. 
&  G.  307  (1849),  holding  that  an  un- 
registered transferee  is  not  liable 
merely  because  he  accepts  dividends; 
Shipman's  Case,  L.  R.  5  Eq.  219 
(1868),  in  which  a  purchaser  offered 
a  name  to  which  he  wished  the  shares 
transferred  on  the  register,  but  which 
was  rejected  by  the  directors.  The 
vendor,  in  whose  name  they  stood, 
was  held  liable  for  calls,  and  the 
court  refused  to  remove  his  name; 
Sheffield,  etc.  Ry.  v.  Woodcock,  7  M.  & 
W.  574  (1841),  holding  that  where,  by 
law,  transfers  of  stock  were  to  be 
made  by  deed,  a  transfer  in  blank, 
and  stating  the  consideration  untruly, 
made  to  a  purchaser  who  afterwards 
signed  and  sent  to  the  company  a 
09 


§  258.] 


transferrer's  and  transferee's  liability. 


[en.  xv. 


Where  a  person  buys  certificates  of  stock  in  a  national  bank,  the 
certificates  being  indorsed  in  blank,  and  the  bank  makes  a  meinoran- 


proxy,  in  which  he  described  himself 
as  the  proprietor  of  the  shares,  con- 
stituted him  a  stockholder  for  the 
purpose  of  requiring  him  to  respond 
to  calls  for  assessments;  Taylor  v. 
Hughes,  2  Jones  &  Lat.  (Ir.  Ch.)  24 
(1844),  in  which  the  court  refused 
to  hold  liable  as  a  stockholder  of  a 
bank  one  who  had  transferred  his 
stock  seven  years  before,  though  not 
by  a  proper  method,  and  whose  name 
had  not  appeared  on  the  books  during 
that  time,  but  had  been  re-entered  by 
a  committee  after  the  failure  of  the 
bank.  Burnes  v.  Pennell,  2  II.  L.  Cas. 
497  (1849),  held  that  where  certain 
forms  were  to  be  observed  by  a  trans- 
feree of  shares  in  a  Scotch  joint-stock 
company,  the  required  acts  were  for 
the  benefit  of  the  company,  and 
therefore  the  leaving  of  one  of  such 
acts  unexecuted  by  a  purchaser  was 
not  allowed  to  enable  him  to  retire 
from  his  contract.  Maguire's  Case, 
3  De  G.  &  Sm.  31  (1849).  In  this  case 
a  stockholder  in  a  steam  packet  com- 
pany transferred  two  shares  to  his 
son  without  his  knowledge.  The  son 
did  not  receive  dividends  nor  do  any 
act  as  proprietor;  but  for  the  purpose 
of  obtaining  free  passages  upon  the 
boats  of  the  company,  he  obtained 
from  the  company  certificates  that  he 
was  a  proprietor.  It  was  held  that 
the  son  was  a  contributory  in  respect 
of  the  two  shares. 

A  receiver  cannot  apply  to  have  a 
transferee's  name  put  on  the  list  of 
contributories  on  ground  of  undue 
delay  of  the  company  in  registering 
the  transfer.  Only  the  transferrer 
can  complain.  Sichell's  Case,  L.  R.  3 
Ch.  119  (1S67).  See  Marlborough 
Mfg.  Co.  v.  Smith,  2  Conn.  579  (1818), 
holding  that  a  mere  entry  on  the  cor- 
porate books  crediting  the  shares  to 
the  transferee  is  insufficient;  and  see 
also  Dane  v.  Young,  61  Me.  160  (1872), 
holding  that  the  failure  to  have  the 


registry    properly    witnessed     invali- 
dates it.    A  vendee  of  stock  who  is  to 
be  entitled  to  it  only  upon  payment  is 
not  liable  for  the   subscription   price 
if  he  never  pays  for  the  stock  and  his 
name    never    appears    on    the    books. 
Cormac  v.  Western,  etc.  Co.,  77  Iowa 
32    (1889).     For  other  cases  holding 
the  transferee  liable,  although  all  the 
formalities  of  registry  were  not  com- 
plied with,  see  Ex  parte  Dixon,  1  Dr. 
&  Sm.   225    (1860);    Gordon's  Case,  3 
De  G.   &   Sm.   249    (1850);    Straffon's 
Case,  1  De  G.,  M.  &  G.   576    (1852); 
Walters's   Case,   3    De   G.   &   Sm.   149 
(1850);     London,    etc.    Ry.    v.    Fair- 
clough,  2  Man.  &  G.  674  (1841);  Lon- 
don, etc.  Ry.  v.  Freeman,  2  Man.  &  G. 
606    (1841);   Birmingham,  etc.  Ry.  v. 
Locke,  1  Q.  B.  256  (1841).    For  a  case 
holding  that  the  transferrer  is  liable, 
see  Keene's  Case,  3  De  G.,  M.  &  G.  272 
(1853).     For  cases  to  the  effect  that 
the    transferrer    is,    in    general,    dis- 
charged only  when  the  transfer  is  ac- 
tually recorded,  and  duly  recorded  in 
the  stock-book,  and  when  all  the  pre- 
scribed conditions  of  a  valid  transfer 
have    been    duly    complied    with,    see 
Cartmell's    Case,    L.    R.    9    Ch.    691 
(1874);   Heritage's  Case,  L.  R.  9  Eq. 
5  (1869);  Henessey's  Case,  3  De  G.  & 
Sm.  191  (1850);  Ex  parte  Henderson, 
19  Beav.  107   (1854).    Where  the  con- 
sent of  the  board  of  directors  is  nec- 
essary to   a   transfer,   no   transfer   is 
complete  without  it,  and  the  transfer- 
rer    remains     liable.       Bosanquet    v. 
Shortridge,  4  Exch.  699   (1850).     But 
this  case  at  law  was  enjoined  by  Bar- 
gate  v.   Shortridge,  5   H.  L.   Cas.   297 
(1855),  in  equity,  and  it  was  held  that 
the   transferrer   was   not   liable.     To 
same  effect,  see  Taylor  v.  Hughes,  2 
Jones    &    Lat.    (Ir.    Ch.)     24     (1844), 
where  the  registry  was  not  regularly 
made,  but  the  transferee  was  treated 
as  a  stockholder.    Cf.  Murray  v.  Bush, 
L.    R.    6    H.   L.   37    (1873),    affirming 


710 


en.  xv.]  transferrer's  and  transferee's  liability.  [§  258. 

dum  in  the  certificate-of-stock  book  that  it  had  been  transferred  to 
him  and  sends  him  dividends,  he  is  liable  thereon,  although  no  trans- 
fer of  the  certificate  is  made  on  the  corporate  books,  and  although  he 
bought  the  stock  for  the  cashier  of  the  bank  and  was  merely  a  nominal 
holder.  He  is  not  such  a  trustee  as  is  exempt  from  liability  under 
the  national  bank  act.1 

It  is  immaterial  that  no  certificate  of  stock  is  issued  to  the  trans- 
feree. The  registry  is  complete  without  it.2  When  the  transferrer 
has  done  all  in  his  power  to  complete  the  transfer  and  is  guilty  of 
no  laches,  his  liability  to  corporate  creditors  is  thereby  determined; 
and  accordingly  he  is  discharged,  as  though  the  registry  had  been 
made.3     A  stockholder  who  received  his  certificate  and  dividends  for 


Bush's  Case,  L.  R.  6  Ch.  App.  246.  In 
this  case  the  deed  of  settlement, 
among  other  things,  required  a  trans- 
feree to  covenant  by  deed  to  abide  by 
the  rules  of  the  company.  A  director 
who  failed  to  comply  with  that  re- 
quirement was  held  to  be  a  stock- 
holder as  to  the  shares,  because  he 
had  been  recognized  as  a  stockholder 
by  the  directors  at  a  meeting  of  stock- 
holders and  had  been  at  that  meeting 
elected  a  director.  The  transferrer 
was  held  not  liable.  Contra,  Keene's 
Case,  3  De  G.,  M.  &  G.  272  (1853); 
Mayhew's  Case,  5  De  G.,  M.  &  G.  837 
(1854),  where  the  parties  went  to- 
gether to  the  proper  officer  of  the  com- 
pany and  deposited  a  transfer,  but  no 
notice  in  writing  was  given  to  the 
officer  as  required  by  the  company's 
rules.  The  transferee  was  held  to 
be  properly  placed  on  the  list  of  con- 
tributories.     See  also  notes  below. 

i  Horton  v.  Mercer,  71  Fed.  Rep.  153 
(1S95).  Where  a  vendor  of  stock  in 
a  national  bank  transfers  the  certifi- 
cates indorsed  by  him  on  the  back  to 
the  vendee,  the  vendee  being  the  cash- 
ier and  the  bank  being  solvent,  and 
for  five  years  dividends  are  paid  to 
such  cashier,  the  vendor  is  not  liable, 
even  though  the  stock  was  never 
transferred  on  the  corporate  books. 
Snyder  v.  Foster,  73  Fed.  Rep.  136 
(1896).  Where  the  vendor  of  stock 
in  a  national  bank  transfers  the  cer- 
tificate to  the  vendee  and  delivers  it 


711 


to  the  president  of  the  bank,  who 
promises  to  transfer  the  same  on  the 
books,  but  does  not  do  so,  and  the 
bank  thereafter  treats  the  vendee  as 
the  owner,  the  vendor  is  not  liable 
on  the  statutory  liability.  Cox  v. 
Elmendorf,  97  Tenn.  518  (1896). 

2  First  Nat.  Bank  v.  Gifford,  47 
Iowa,  575,  583  (1877);  Brigham  v. 
Mead,  92  Mass.  245  (1865);  Straffon's 
Case,  1  De  G.,  M.  &  G.  576  (1852); 
Chouteau  Spring  Co.  v.  Harris,  20  Mo. 
382  (1855),  holding  that  an  assign- 
ment upon  the  books  of  the  company, 
without  having  a  new  certificate  is- 
sued, is  a  sufficient  transfer  to  exon- 
erate the  assignor  from  liability  for 
assessments;  and  that  any  transfer  in 
writing  is  valid  against  a  company 
which,  having  notice,  refuses  to  allow 
it  to  be  made.  The  stockholder  can- 
not set  up  for  defense,  to  an  action  by 
a  corporate  creditor,  that  some  third 
person  had  contracted  to  purchase  his 
shares,  or  a  portion  of  them,  but  that 
with  the  consent  of  the  corporate  au- 
thorities it  had  been  agreed  that,  un- 
til that  third  person  had  paid  the 
notes  given  for  the  purchase  price  of 
the  stock,  the  transfer  should  not  be 
made  on  the  corporate  stock-book. 
Phoenix  Warehousing  Co.  v.  Badger, 
67  N.  Y.  294  (1876),  affirming  s.  c,  6 
Hun,  293  (1875).  See  85  N.  E.  Rep.  91. 
3  Quoted  and  approved  in  Bracken 
v.  Nicol,  99  S.  W.  Rep.  920  (Ky.  1907). 
Whitney    v.    Butler,    US    U.    S.    655 


§  258.] 


TRANS]  VXD   TRANSFEREE  S    LIABILITY. 


[CH.  XV. 


several  years  cannoi  avoid  the  statutory  liability  on  the  ground  that 
the  original  subscriber,   from   whom   be   purchased,    never   made    a 


(1886).  See  also  §383,  infra.  Ex 
parte  Henderson,  19  Beav.  107 
(1854);  Shortridge  v.  Bosanquet,  16 
Beav.  84  (1852),  overruling  s.  a,  sub 
nom.  Bosanquet  v.  Shortridge,  4  Exch. 
699  (1850).  A  person  who  sells  his 
stock  in  a  bank  and  delivers  the  cer- 
tificate to  the  bank  duly  assigned  for 
transfer,  and  the  bank  states  that  it 
will  issue  the  new  certificates,  is  not 
liable  on  such  stock  thereafter,  even 
though  the  transfer  is  not  made  by 
the  bank.  Foster  v.  Row,  120  Mich.  1 
(1899).  In  White's  Case,  L.  R.  3  Eq. 
86  (1866),  a  transferrer  was  held  not 
discharged  because  of  laches;  Fyfe's 
Case,  L.  R.  4  Ch.  App.  768  (1869), 
where  there  was  an  improper  delay  on 
the  part  of  the  company  in  register- 
ing a  transfer;  Lowe's  Case,  L.  R.  9 
Eq.  589  (1870),  on  similar  facts  and 
to   same  effect;    Nation's  Case,  L.  R. 

3  Eq.  77  (1866),  in  which  the  direc- 
tors did  not  confirm  a  transfer  at  their 
next  meeting  after  it  was  left  for  that 
purpose,  thereby  causing  an  unneces- 
sary delay;  Hill's  Case,  L.  R.  4  Ch. 
App.  769  (1867),  note,  to  same  effect 
as  Fyfe's  Case,  L.  R.  4  Ch.  App.  768 
(1869),  Ward  and  Garfit's  Case,  L.  R. 

4  Eq.  189  (1867),  in  which  the  court 
rectified  the  register  by  completing  a 
transfer  which  was  duly  executed  and 
left  for  registry  the  day  before  the 
corporation  stopped  business,  but  was 
not  registered  on  that  account; 
Ward's  Case,  L.  R.  2  Eq.  226  (1866), 
in  which  the  names  of  purchasers  of 
shares  had  not  been  placed  on  the 
register  in  place  of  that  of  the  vendor 
in  consequence  of  disputes  among 
themselves;  Ex  parte  Hall,  5  Ry.  & 
Canal  Cas.  624  (1849),  holding  that 
where  a  transferee  whose  name  has 
not  been  actually  entered  on  the  reg- 
istry has  so  acted — as  being  a  trustee 
for  his  wife — and  his  acts  have  been 
so  far  adopted  that  a  waiver  of  the 
necessary  forms  may  be  inferred,  he 


will  be  held  a  contributory  in  wind- 
ing-up proceedings.  De  Pass's  Case, 
4  De  G.  &  J.  544  (1859).  In  this  case 
the  certificates  were  transferable  by 
delivery;  and  in  winding-up  proceed- 
ings the  holders  were  adjudged  to  be 
contributories,  though  it  appeared 
that  as  to  some  shares  they  were  not 
delivered  until  after  the  winding-up 
order  was  made,  and,  as  to  others, 
that  they  were  delivered  to  a  clerk  for 
a  nominal  consideration  in  order  to 
escape  liability.  Marino's  Case,  L.  R. 
2  Ch.  Ap.  596  (1867),  in  which  the 
transferee,  who  lived  in  Smyrna,  and 
had  not  sufficient  time  to  execute 
and  forward  the  deed  required  of  him 
by  the  rules  and  usage  of  the  company 
to  effect  a  valid  transfer,  was  held  not 
to  be  contributory;  Skowhegan  Bank 
V.  Cutler,  49  Me.  315  (1872),  holding 
that,  in  order  to  hold  a  transferee  lia- 
ble, it  must  be  shown  that  statutory 
provisions  relating  to  transfer  have 
been  observed;  Laing  v.  Burley,  101 
111.  591  (1S82),  holding  that,  where 
there  was  no  transfer  on  the  books  of 
a  national  bank  as  required  by  law, 
but  new  certificates  had  been  issued 
to  the  transferee,  who  wis  also  rec- 
ognized as  a  stockholder  on  the 
bank's  ledger,  the  transferee  was  lia- 
ble; Midland,  etc.  Ry.  v.  Gordon,  16 
M.  &  W.  804  (1847),  holding  that  a 
holder  of  scrip  certificates  for  shares 
to  be  allotted  at  a  future  time,  having 
sold  them  in  the  market,  was  liable 
for  calls  until  the  name  of  the  vendee 
was  registered  as  the  holder  of  them. 
See  also  Harpold  v.  Stobart,  46  Ohio 
St.  397  (18S9).  That  the  failure  to 
record  the  transfer  is  the  fault  of  the 
corporation  itself,  or  of  the  officer 
thereof  whose  duty  it  is  to  make  the 
entries  in  the  stock-book,  is  not  suffi- 
cient to  relieve  the  stockholder  who, 
having  transferred  his  shares,  fails 
to  see  to  it  that  the  proper  entry  is 
actually   and    duly   made.     Re   Bach- 


712 


CH.  xv.]  transferrer's  and  transferee's  liability.  [§  259. 

formal  transfer.1  The  corporation  cannot  hold  liable  on  the  unpaid 
subscription  for  stock  a  person  who  purchased  and  held  the  cer- 
tificates of  stock,  but  sold  them  without  appearing  on  the  corporate 
books  as  a  stockholder.2 

Where  the  transferee  of  the  certificate  has  repeatedly  demanded 
a  transfer  of  the  company,  but  been  refused,  a  subsequent  attach- 
ment by  a  creditor  of  the  transferrer  does  not  take  precedence,  even 
though  the  statutes  require  a  registry  within  sixty  days.3  A  person 
who  accepted  a  transfer  of  stock  in  order  to  make  a  quorum  is  liable 
to  creditors,  although  he  at  once  signed  a  retransfer  and  supposed  it 
was  recorded.4 

§  259.  Does  the  statutory  liability  attach  to  him  who  is  the  reg- 
istered stockholder  when  the  corporate  debt  is  contracted,  or  is  due, 
or  is  sued  upon? — When  the  question  of  statutory  liability  is  con- 
sidered there  is  more  difficulty,  as  between  transferrer  and  trans- 
feree, in  determining  who  is  to  be  charged.  Frequently  the  statute 
itself  prescribes  when  the  liability  is  to  attach.  The  important  ques- 
tion which  arises  herein  is  whether  the  corporate  debt  raises  a  lia- 
bility against  him  who  was  the  registered  stockholder  when  the  cor- 
poration entered  into  the  contract  leading  to  the  debt,  or  against  him 
who  was  the  registered  stockholder  when  the  debt  itself  became  due 
and  payable  to  the  corporate  creditor,  or  against  him  who  was  the 
registered  stockholder  when  suit  is  brought  by  the  corporate  creditor 
against  the  corporation  to  collect  the  debt,  or  against  him  who  was 

man,  12  Nat.  Bankr.  Reg.  223  (1876);  due  calls.     Burt  v.  Real  Estate,  etc., 

s.  c,  2  Fed.  Cas.  310.     Cf.  Russell  v.  175    Pa.   St.   619    (1896).     Where,   by 

Easterbrook,  71  Conn.  50   (1898).  statute,   the   transferrer   is   liable   on 

i  Bissell    v.    Heath,    98    Mich.    472  the    subscription    for    a    year    after 

(1894).     The  holders  of  stock  cannot  transfer,  and  transfer  shall  be  on  the 

escape  the  statutory  liability  thereon,  books,   he   is  liable  for  a  year  after 

even  though,  when  the  transfer  of  the  such  transfer  on  the  books.    Kriger  v. 

stock  to  them  was  made,  the  old  cer-  Hanover    Nat.    Bank,    72    Miss.    462 

tificates  were  not  canceled,  but  were  (1894).     But  where  the  company  rec- 

abstracted  by  a  corporate  officer  and  ognizes    a    transfer    as    having    been 

hypothecated  by  him,  thereby  creating  made,  the  transferee  then  becomes  lia- 

an  overissue.     Burt  v.  Bailey,  73  Fed.  ble  and  the  transferrer's  time  begins 

Rep.  693   (1896).     The  stockholder  of  to  run.    Kriger  v.  Hanover  Nat.  Bank, 

record  is  not  relieved  from  liability  on  16  S.  Rep.  353   (1894). 

his  subscription  by  the  fact  that  at  2  Vale  Mills  v.   Spalding,   62  N.  H. 

the  request  of  the  treasurer  he  trans-  605     (1883).      Cf.    §253,    supra,    and 

fers  his  certificate  of  stock  in  blank  §  261,  infra. 

on  the  back  and  leaves  the  certificates  3  "Weber    v.    Bullock,    19    Colo.    214 

with  the  treasurer,  even  though  the  (1893).    See  also  ch.  XXVII,  infra. 

motive  of  the  treasurer  was  the  fact  4  Ontario,    etc.    Assoc,    v.    Leys,    23 

that  the  subscriber  had  not  paid  past-  Ont.  Rep.    (Can.)   496    (1893). 

713 


§   259.]  TRANSFERRER'S  AND  TRAN  '      LIABILITY.  [cil.  XV. 

the  registered  stockholder  when  suit  was  brought  against  the  stock- 
holder. 

Under  certain  statutes  to  that  effect,  those  stockholders  arc  liable 
who  arc  such  at  the  time  wlim  the  execution  againsl  the  corporation 
is  returned  nulla  bona.1 

As  |<>  whether,  under  the  usual  statute  making  the  stockholders 
liable,  to  a  greater  or  less  extent,  for  the  debts  of  the  corporation, 
a  registered  stockholder  is  liable  for  debts  contracted  before  he  be- 
came such,  as  well  as  for  those  contracted  while  he  was  such,  although 
he  subsequently  transfers  his  stock,  the  words  of  the  statute  control, 
and  decisions  on  various  statutes  are  given  in  the  notes  below.2 


l  Nixon  v.  Green,  11  Exch.  550 
(1856) ;  Dodgson  v.  Scott,  2  Exch.  457 
(1848);  Longley  v.  Little,  26  Me.  162 
(1846);  Bond  v.  Appleton,  8  Mass. 
472  (1812).  In  this  case,  under  a 
statute  making  the  original  stock- 
holders, their  successors,  assigns,  and 
the  members  of  the  corporation  liable 
for  the  debts  of  the  corporation,  it 
was  held  that  only  such  persons  as 
were  members  at  tbe  time  payment 
was  refused  were  intended;  McClaren 
v.  Franciscus,  43  Mo.  452  (1869); 
Dauchy  v.  Brown,  24  Vt.  197  (1852). 
Cf.  Deming  v.  Bull,  10  Conn.  409 
(1835).  Under  the  provision  of  a  char- 
ter that  stockholders  should  "at  all 
times  be  liable  for  all  debts  due  by 
said  corporation,"  it  was  held  that 
those  who  were  members  when  the 
debt  was  contracted,  but  had  trans- 
ferred their  stock  absolutely  and  in 
good  faith  before  the  commencement 
of  the  suit  against  the  corporation, 
are  not  to  be  held  liable  under  the 
statute.  Middletown  Bank  v.  Magill, 
5  Conn.  28  (1823),  following  Bond  v. 
Appleton,  8  Mass.  472  (1812) ;  Child  v. 
Coffin,  17  Mass.  64  (1820),  holding 
that  where  there  is  a  statutory  provi- 
sion "that  a  creditor,  in  a  certain  case, 
may  levy  his  execution  upon  the  body 
or  estate  of  any  member  of  the  cor- 
poration, this  must  be  understood  of 
such  as  were  members  at  the  time  of 
the  commencement  of  the  action,  and 
of  those  only."  It  does  not  authorize 
an  execution  upon  the  estate  of  a  cor- 


porator who  died  before  the  com- 
mencement of   the   action. 

Under  the  statute  making  all  the 
members  of  a  company  liable  in  cer- 
tain cases  for  its  debts,  the  liability 
extends  to  all  who  were  members 
when  it  was  sought  to  be  enforced, 
and  is  not  confined  to  such  persons  as 
were  members  when  the  debt  was 
contracted.  Curtis  v.  Harlow,  53 
Mass.  3   (1846). 

2  Under  the  Maryland  statute  mak- 
ing stockholders  in  banks  or  trust 
companies  liable  to  depositors  and 
creditors  for  double  their  stock,  a 
stockholder  is  not  liable  for  debts  due 
to  depositors  and  creditors  before  he 
became  a  stockholder.  Murphy  v. 
Wheatley,  102  Md.  501  (1906).  A  stat- 
utory liability  of  stockholders  propor- 
tionately for  the  debts  applies  only  to 
those  who  are  stockholders  at  the 
time  suits  are  brought  against  the 
company  by  its  creditors.  Wheatley 
v.  Glover,  125  Ga.  710  (1906).  A  stock- 
holder is  not  liable  to  a  corporate 
creditor,  under  the  New  York  statute, 
on  stock  issued  to  him  at  less  than 
par,  unless  such  stockholder's  liability 
existed  when  the  creditor  recovered 
judgment  against  the  company.  Dyer 
v.  Drucker,  108  N.  Y.  App.  Div.  238 
(1905).  The  statutory  liability  of  a 
stockholder  in  a  Minnesota  corpora- 
tion when  it  once  attaches  is  not  re- 
leased by  a  transfer  of  the  stock.  Tiff- 
any v.  Giesen,  96  Minn.  488  (1905). 
See  also  Chesley  v.  Pierce,  32  N.  H. 


714 


CH.  xv.]          transferrer's  and  transferee's  liability.  [§  259. 

In  Kansas  "a  bona  fide  transfer  terminates  the  liability  of  the 

transferrer  either  to  the  company  or  to  creditors,"    and   where    by 
statute  execution  may  be  issued  to  enforce  a  statutory  liability,  the 

388  (1855),  holding  that,  under  a  stat-  Adderly  v.  Storm,  6  Hill,  624   (1844), 
ute  making  stockholders  liable  for  the  holding  that  they  are  considered  lia- 
debts  of  a  corporation,  the  individual  ble  whose  names  appear  on  the  books 
stockholders  are  not  liable  for  debts  of  the  company  as  stockholders  when 
contracted  before  they  became  such;  the  debt  was  contracted.    But  see  Mc- 
Castleman  v.  Holmes,  4  J.  J.  Marsh.  Master    v.    Davidson,     29     Hun,    542 
(Ky.)    1    (1839),   but  here   a  statute  (1883),    varying   this    rule   as   appli- 
made  them  liable  for  debts,  etc.,  con-  cable  to  New  York  manufacturing  cor- 
tracted  "during  the  time  he  or  they  porations;   and  cf.  Tracy  v.  Yates,  18 
held    stock;"    Mill-dam    Foundery    v.  Barb.  152   (1854);  Phillips  v.  Theras- 
Hovey,    38    Mass.    417,    453     (1834),  son,    11    Hun,    141    (1877);    King   v. 
where  the   question   arose  on   an   ob-  Duncan,  38  Hun,  461   (1886);   David- 
jection  to  a  witness  in  a  suit  against  son   v.    Rankin,    34    Cal.    503    (1868), 
a  corporation  on  the  ground  that  he  holding    that    the    cause    of    action 
was  liable  for  its  debts ;  Holyoke  Bank  against    a    stockholder    of    a    mining 
v.  Burnham,   65  Mass.  183    (1853),   a  corporation,   under  the  laws  of  Cali- 
case  where,   under  a  statute  making  fornia  accrues   at   the  same  time  as 
liable  "all  members"  of  a  corporation,  against  the  corporation.    Even  though 
a  shareholder  was  held  for  all  debts  a  stockholder  transfers  his  stock  to 
contracted   while  he  was   a  member,  a  solvent  purchaser,  the  statutory  lia- 
although  he  ceased  to  be  a  member  bility  on  debts  then  existing  remains 
before    they    were    payable,    and    not  against    him.      Gunnison    v.    United 
liable  for  debts  contracted  before  he  States  Inv.  Co.,  70  Minn.  292   (1897). 
became  a  member  if  his  membership  The   Iowa  statute  that  a  transferrer 
expired   before  they   became   payable  shall  be  liable  on  existing  debts  ap- 
and    action    brought;    Southmayd    v.  plies  to  a  bonded  debt,  although  not 
Russ,  3  Conn.  52  (1819),  holding  that  yet  due,  and  includes  a  liability   on 
the  judgment  creditor  cannot  proceed  the    unpaid    subscription.      White    v. 
against  stockholders  by  scire  facias,  Greene,    70    N.    W.    Rep.    182    (Iowa, 
but   must   sue    them   upon   their   lia-  1897);    affd,    105    Iowa,    176    (1898). 
bility;    Williams    v.    Hanna,    40    Ind.  Upon  the  transfer  of  stock  the  trans- 
535    (1872),   holding  that   owners   of  ferrer  ceases  to  be  liable  to  corporate 
stock  .at  the  time  corporate  debts  are  creditors,  under  the  statute  of  Ohio, 
contracted  are  intended,  in  a  statute  except  that  in  case  the  company  be- 
making    stockholders    liable    for    all  comes  insolvent  and  the  total  amount 
debts  of  the  company,  etc.;   Larrabee  collectible   from   the   stockholders    at 
v.  Baldwin,  35  Cal.  155   (1868);  Moss  the  date  of  insolvency  is  insufficient 
v.  Oakley,  2  Hill,  265  (1842),  holding  to  pay  the  debts,  the  old  stockholders 
that  a  charter  declaring  stockholders  are   liable   for   the  deficiency,   so   far 
jointly    and    severally   liable   for   the  as  the  same  is  due  to  those  who  were 
debts    of   the   company   makes   liable  creditors  at  the  time  of  such  transfer, 
only  such  as  were  members  when  the  Wick  Nat.  Bank  v.  Union  Nat.  Bank, 
debt    was    contracted    and    not   those  62  Ohio   St.   446    (1900).     Under  the 
persons  who  became  members  after-  Ohio  statutes  a  stockholder  who  trans- 
wards;   Judson  v.  Rossie  Galena  Co.,  fers   his    stock   is   liable    for    a   debt 
9    Paige,    598     (1842),    to    the    same  existing  at  the  time  of  the  transfer, 
effect;   McCullough  v.  Moss,  5  Denio,  and    a    subsequent    renewal    of    such 
567    573    585    (1846),  to  same  effect;  debt  by  the  corporation  does  not  re- 

715 


259.] 


transferrer's  and  transferee's  liability.  [en.  XV. 


liability  attaches  to  the  "persons  only  who  are  stockholders  at  the 
time  the  execution  against  the  property  or  effects  of  the  corpora- 
tion is  found  to  be  ineffectual."1 

lease  him.  Boice  v.  Hodge,  51  Ohio  does  not  exonerate  the  transferrer 
St.   236    (1894).     In   Ohio  those   who    from    liability    for    a    corporate    debt 


own  the  stock  at  the  time  the  cor 
poration  creditor  commences  his  suit 
against  stockholders  to  enforce  their 
statutory  liability  are  liable  under 
the  statute.  It  is  immaterial  that 
some  of  the  stock  was  issued  after 
the  debt  itself  was  incurred  by  the 
corporation.  See  Barrick  v.  Gifford, 
47  Ohio  St.  180  (1890).  Stockholders 
are  liable  under  the  Ohio  statute  for 
debts  incurred  before  they  became 
stockholders,  but  the  equities  between 


contracted  while  he  was  a  stockhold- 
er and  before  the  capital  stock  was 
paid  in.  His  liability  is  in  the  nature 
of  a  contract  with  the  company,  and 
is  not  affected  by  a  transfer  of  his 
stock.  The  statutory  liability  in  an 
insolvent  Michigan  bank  attaches  to 
the  stockholders  then  of  record  irre- 
spective of  when  the  deposits  in  the 
bank  were  made.  Foster  v.  Row,  120 
Mich.  1  (1899),  the  court  referring 
to  various  statutes  in  different  states 


them  and  the  transferrers  of  the  stock  varying  this  rule.  Where  a  guarantor 
may  be  adjusted  in  the  same  suit,  pays  a  corporate  note,  his  recourse 
Railroad  Co.  v.  Smith,  48  Ohio  St.  219  on  the  statutory  liability  of  stock- 
(1891).  Under  the  Ohio  statute  the  holders  is  to  those  who  were  stock- 
transferees  are  liable  for  precedent  holders  when  he  paid  the  note.  Yule 
debts.  See  Brown  v.  Hitchcock,  36  v.  Bishop,  133  Cal.  574  (1901). 
Ohio  St.  667    (1881);   Mason  v.  Alex-  l  Van  Denmark  v.  Barous,  52  Kan. 


ander,  44  Ohio  St.  318  (1886);  Wheel 
er  v.  Faurot,  37  Ohio  St.  26    (1881); 
Brown  v.  Hitchcock,  36  Ohio  St.  667 
(1881),  holding  also  that  the  liability 


779  (1894).  A  person  who  is  a  stock- 
holder in  a  Kansas  corporation  at  the 
time  when  judgment  is  obtained 
against  it  is  liable,  although  he  was 


is    not'  discharged    by   a    subsequent  not  a  stockholder  when  the  debt  ac 

transfer   of   the   stock;    that   in  such  crued.       Rhode     Island,     etc.     Co.    v. 

cases  there  is  an  implied  undertaking  Moulton,    82    Fed.    Rep.    979     (1897). 

by    the    assignee    to    indemnify    the  Under  the  Kansas  statute  all  persons 

assignor  from  the  liability  for  debts  who  are  stockholders  when  an  execu- 

contracted  while  he  was  a  stockhold-  tion  is  returned  unsatisfied  are  liable 

er     Under  the  old  constitutional  pro-  to  the  judgment  creditor.     Brown  v. 

vision   in    Ohio   rendering   stockhold-  Trail,  89  Fed.  Rep.  641  (1898). 
ers    doubly   liable   on   their    stock,    a        The  statutory  liability  in  Michigan 

stockholder  who   has  transferred  his  for  labor  performed  does  not  render  a 

stock  in  good  faith  is  not  liable,  even  stockholder  liable  for  labor  performed 

on  a  debt  then   existing,   until   after  before     he     became     a     stockholder. 


the  full  liability  of  solvent  stockhold- 
ers within  the  jurisdiction  at  the  time 
of  corporate  insolvency  has  been  ex- 
hausted, and  then  he  is  liable  only 
for  his  part  of  the  deficiency,  even 
though  the  transferee  afterwards  be- 
came insolvent.  Poston  v.  Hull,  80 
N.  E.  Rep.  11  (Ohio  1907).  Hager 
v.  Cleveland,  etc.,  36  Md.  476  (1872), 
holds  that,   by  virtue   of  the  statute 


Kamp  v.  Wintermute,  107  Mich.  635 
(1895).  A  creditor  who  was  such  be- 
fore the  stock  was  sold  may  enforce 
the  statutory  liability  against  the 
transferrer.  Voight  v.  Dregge,  97 
Mich.  322  (1893).  In  Illinois  suit 
may  be  brought  against  him  who  is 
a  stockholder  at  the  time  suit  is 
brought.  "The  liability  being  because 
of  the  ownership  of  stock,  it  follows 


of   Maryland,   the   transfer   of    stock    the  stock,  into  whosesoever  hands  it 

716 


ch.  xv.]  transferrer's  and  transferee's  liability. 


[§  260. 


§  260.  Transferrer's  statutory  liability  after  transfer  but  before 
registry. — The  previous  section  treated  of  the  statutory  liability  of 
a  transferrer  in  cases  where  the  transfer  is  recorded  on  the  corpo" 
rate  books  at  the  same  time  that  the  sale  and  transfer  of  the  cer- 


may  go,  and  whoever  purchases  it 
does  so  at  the  risk  of  this  liability." 
Root  v.  Sinnock,  120  111.  350  (1887). 
Individual  liability  continues,  even 
after  the  death  of  the  stockholder, 
until  a  transfer  is  made.  Davis  v. 
Weed  (U.  S.  D.  C),  44  Conn.  569 
(1877);  s.  c,  7  Fed.  Cas.  1S6.  See 
also  Witters  v.  Sowles,  32  Fed.  Rep. 
130  (1887);  Phillips  v.  Therasson,  11 
Hun,  141  (1877);  Tracy  v.  Yates,  18 
Barb.  152  (1854),  holding  that,  under 
the  New  York  statute  of  1848,  a  stock- 
holder was  not  liable  for  debts  con- 
tracted before  he  was  such.  But  see 
McMaster  v.  Davidson,  29  Hun,  542 
(1883).  Cf.  Rosevelt  v.  Brown,  11 
N.  Y.  148  (1854);  Cutting  v.  Damerel, 
88  N.  Y.  410  (1882).  See  also  §261, 
infra.  A  stockholder  does  not,  by 
transfer,  avoid  a  statutory  liability  to 
creditors  who  were  such  at  the  time 
of  the  transfer.  Jackson  v.  Meek,  87 
Tenn.  69  (1888).  Under  the  Minneso- 
ta statute,  where  stockholders  in 
banks  are  liable  for  a  year  after  they 
transfer  their  stock,  execution  is  first 
issued  against  the  transferee.  The 
liability  cannot  be  enforced  twice, 
once  against  the  transferee  and  once 
against  the  transferrer,  on  the  same 
stock.  The  liability  is  enforced  irre- 
spective of  the  liability  of  trans- 
ferrers of  other  stock.  The  transferrer 
is  liable  only  for  his  proper  share  of 
the  debts  existing  at  the  time  of  the 
transfer  and  which  still  remain  un- 
paid, excepting  so  far  as  they  have 
been  paid  by  other  stockholders.  The 
distribution  from  corporate  assets  is 
for  the  benefit  of  transferees  as  well 
as  the  stockholders  of  record.  The 
money  paid  by  the  transferees  goes 
into  the  common  fund  and  is  not  ap- 
plied to  any  particular  debts.  As  to 
extensions  of  debts  he  is  liable  unless 
he    shows    that    he    did    not    consent 


thereto.  Harper  v.  Carroll,  66  Minn. 
487  (1896).  In  Minnesota  it  is  held 
that  the  stockholder's  statutory  lia- 
bility attaches  to  debts  due  from  the 
corporation  before  as  well  as  after 
the  stockholder  bought  his  stock. 
Olson  v.  Cook,  57  Minn.  552  (1894). 
All  who  are  stockholders  at  the  time 
the  action  is  commenced  are  liable 
undar  the  Minnesota  statute,  irre- 
spective of  when  the  debt  was  in- 
curred. First  Nat.  Bank  v.  Winona 
Plow  Co.,  58  Minn.  167  (1894).  Where 
the  transferrer  is  liable  for  one  year 
after  a  transfer,  this  liability  applies 
only  to  debts  created  before  the  trans- 
fer. An  action  to  enforce  a  liability 
against  him  may  be  brought  within 
six  years  after  the  debt  against  the 
corporation  matures.  Harper  v.  Car- 
roll, 62  Minn.  152  (1895).  It  is  not 
always  clear  precisely  when  a  given 
indebtedness  may  be  held  to  have 
been  "contracted."  When  a  corpo- 
rate note  has  been  renewed,  it  is 
doubtful  whether  the  renewal  oper- 
ates to  create  a  new  indebtedness  or 
to  continue  and  perpetuate  that  in- 
debtedness for  which  the  original  note 
was  given.  In  Ohio  it  is  held  that  a 
renewal  which  is  a  payment  or  ex- 
tinguishment of  the  debt  discharges 
the  stockholders  who  were  bound  un- 
der the  old  note.  Wheeler  v.  Faurot, 
37  Ohio  St.  26  (1881).  In  Maine  the 
date  of  the  second  or  renewal  note  is 
taken  as  the  time  when  the  indebted- 
ness accrued.  Milliken  v.  Whitehouse, 
49  Me.  527  (1S60).  In  Massachusetts 
the  debt  is  said  to  be  contracted  when 
the  corporation  accepts  a  bill  of  ex- 
change. Byers  v.  Franklin  Coal  Co., 
106  Mass.  131  (1870).  Cf.  Freeland 
v.  McCullough,  1  Denio,  414,  426 
(1845),  holding  that,  in  a  suit  upon 
a  note  given  by  the  corporation  for 
a  debt  on  a  simple  contract,  the  stock- 


717 


260.] 


transferrer's  and  transferee's  liability. 


[CH.  XV. 


tificates  are  made.  But  frequently  there  is  some  delay  in  register- 
ing the  transfer  in  the  corporate  books,  and  in  such  cases  the  further 
complication  arises  as  to  who  is  liable  for  corporate  debts  and  lia- 
bilities incurred  during  that  interim.  The  rule  in  such  cases,  how- 
ever, is  clear.  The  law  is  well  settled  that  the  transferrer  of  stock 
is  liable  to  corporate  creditors  on  his  statutory  liability,  up  to  tho 
time  of  a  registry  of  the  transfer,  to  the  same  extent  that  he  would 
be  if  no  sale  and  transfer  of  the  certificate  had  been  made  until  tho 
date  of  the  registry.  Until  registry  is  made  corporate  creditors  may 
hold  the  transferrer  liable,  as  though  he  had  not  sold  his  stock.  As 
to  them  the  transfer  will  be  deemed  to  have  been  made  only  at  the 
date  of  the  record  thereof  in  the  corporate  books.1     Such,  also,  is  the 


holders  at  the  time  the  debt  was  con-  holding  that  the  transferee  is  not 
tracted  are  the  ones  to  be  held  liable,  liable  on  prior  debts;  Cape's  Case,  2 
See  also,  in  New  York,  Parrott  v.  Col-  De  G.,  M.  &  G.  562  (1852),  holding 
by,  6  Hun,  55;  affirmed,  71  N.  Y.  597  that  the  transferee  is  liable  for  debts 
(1877);  Jagger  Iron  Co.  v.  Walker,  76  incurred  before  as  well  as  after  the 
N.  Y.  521  (1879),  overruling  Fisher  transfer;  McMaster  v.  Davidson,  29 
v.  Marvin,  47  Barb.  159  (1866);  Moss  Hun,  542  (1883),  holding  that  the 
v.  Oakley,  2  Hill,  265  (1842),  holding  transferee  is  liable  on  debts  contract- 
that,  where  stockholders  at  the  time  ed  before  he  became  such,  but  falling 
the  debt  was  contracted  are  liable,  a  due  after  he  became  a  stockholder, 
note  given  for  a  debt  will  be  presumed  Under  the  Massachusetts  Manufactur- 
to  have  been  made  when  the  debt  ing  Act,  as  re-enacted  in  Rhode  Island, 
was  contracted.  It  has  been  held  that  "the  liability  extends  to  all  persons 
the  debt  does  mot  accrue,  as  against  who  were  stockholders  when  the  debt 
the  stockholder,  at  the  time  judgment  was  contracted,  and  also  to  all  per- 
thereon  is  recovered  against  the  cor-  sons  who  are  stockholders  when  the 
poration.  See  §225(0,  supra.  And  liability  is  sought  to  be  enforced, 
as  to  the  effect  of  renewals  of  notes  though  they  may  have  become  such 
on  a  stockholder's  liability,  see  since  the  debt  was  contracted,  but 
§225  (a),  supra.  Larrabee  v.  Bald-  does  not  extend  to  persons  who  had 
win,  35  Cal.  155,  168  (1868).  In  this  become  stockholders  after  the  debt 
case  Sawyer,  C.  J.,  said:  "The  claim  of  was  contracted,  and  had  ceased  to  be 
the  respondent,  that  the  judgment  is  such  before  the  debt  became  payable 
itself  a  contract  creating  a  new  debt,  and  action  was  brought."  Sayles  v. 
within  the  meaning  of  the  statute,  for  Bates,  15  R.  I.  342  (1886).  By  the 
which  all  who  were  stockholders  at  law  of  copartnership  a  new  partner 
the  date  of  the  rendition  of  the  judg-  is  not  liable  for  old  debts.     See  Lind- 


ment  are  personally  liable,  is  too  ab- 
surd to  require  argument  to  refute  it." 
Registered  transferees  are  liable  the 
same     as     their     transferrers,     even 


ley,  Partn.  *205,  208,  435   (Callaghan 
&  Co.,  1888). 

i  Richmond  v.  Irons,  121  U.  S.  27, 
58     (1887);    Irons    v.    Manufacturers' 


though  before  the  transfer  the  statu-  Nat.  Bank,  27  Fed.  Rep.  591    (1886); 

tory  liability  was  decreased  by  statute.  Man  v.  Boykin,  60  S.  E.  Rep.  17  (S.  C. 

The  liability  of  old  creditors  follows  1908);    Brown  v.  Hitchcock,   36  Ohio 

the    stock.      National    Com.    Bank   v.  St.  667  (1881),  holding  also  that  after 

McDonnell,   92   Ala.   387    (1891).     Cf.  the  liability  attaches  to  a  stockholder 

Tracy  v   Yates,  18  Barb.  152   (1854),  it  is  not  discharged  by  an  assignment 

718 


ch. xv.]  transferrer's  and  transferee's  liability.  [§  260. 

rule  of  the  English  courts.1     The  corporate  creditor,  in  determining 


or  transfer  of  the  stock,  but  the  sub- 
sequent holders  of  it  impliedly  under- 
take to  indemnify  the  assignor  from 
his  liability.  A  stockholder  who  sells, 
but  does  not  cause  a  transfer  of  the 
stock  to  be  recorded  until  after  a 
debt  is  incurred  is  liable  on  the  stat- 
utory liability.  Knickerbocker  T.  C. 
v.  Myers,  133  Fed.  Rep.  764  (1904). 
Cf.  Wehrman  v.  Reakirt,  1  Cin.  Super. 
Ct.  (Ohio),  230  (1871);  Jackson  v. 
Sligo  Mfg.  Co.,  1  Lea  (Tenn.),  210 
(1878);  Shellington  v.  Howland,  53 
N.  Y.  371  (1873);  Johnson  v.  Under- 
bill, 52  N.  Y.  203  (1873);  Veiller  v. 
Brown,  18  Hun,  571  (1879);  Richard- 
son v.  Abendroth,  43  Barb.  162 
(1864);  Worrall  v.  Judson,  5  Barb. 
210  (1849) ;  Borland  v.  Haven,  37  Fed. 
Rep.  394  (1888);  Dane  v.  Young,  61 
Me.  160  (1872);  Skowhegan  Bank  v. 
Cutler,  49  Me.  315  (1860);  Fowler  v. 
Ludwig,  34  Me.  455  (1852);  Stanley 
v.  Stanley,  26  Me.  191  (1846),  holding 
that  parol  evidence  is  not  admissible, 
as  against  the  books  of  a  cor- 
poration, to  prove  who  were  its 
stockholders  in  suits  <by  creditors. 
A  transferrer  is  liable  not  only 
for  existing  debts,  but  for  future  debts 
contracted  before  he  transfers  the 
stock  on  the  books  to  another.  Hence, 
where  both  the  transferrer  and  trans- 
feree are  liable,  the  loss  falls  upon  the 
successive  owners  in  the  inverse  or- 
der of  their  ownership  in  point  of 
time;  Chatham  Bank  v.  Brobston,  99 
Ga.  ?01  (1896).  A  transferrer  is  not 
released  fc-oni  statutory  liability  until 
the  transfer  is  entered  in  the  books. 
Parker  v.  Carolina,  etc.  Bank,  53  S. 
C.  583  (1898).  In  support  of  the  gen- 
eral rule  see  also  Price  v.  Whitney, 
28  Fed.  Rep.  297  (1886),  holding  that 
the  executors  of  one  whose  name  ap- 
pears on  the  books  as  a  stockholder 
are  liable  for  assessment,  though  de- 
ceased, in  his  life-time,  had  sold  the 
stock;  but  reversed  on  other  grounds 
in  Whitney  v.  Butler,   118  U.   S.  655 


(1886).  The  transferrer  is  liable  on 
debts  existing  at  the  time  of  registry 
of  the  transfer.  Harpold  v.  Stobart, 
46  Ohio  St.  397  (1889).  In  an  action 
to  charge  a  transferrer  for  corporate 
debts  incurred  between  transfer  and 
registry,  the  transferee  is,  in  Ohio,  a 
necessary  party.  Wheeler  v.  Faurot, 
37  Ohio  St.  26  (1881).  Where  a  cer- 
tificate of  stock  is  transferred  to  the 
corporation  itself,  but  is  not  recorded 
on  the  corporate  books  until  after 
the  corporation  is  insolvent,  the  trans- 
ferrer is  liable  on  the  stock  as  though 
no  such  transfer  had  been  made. 
Harper  v.  Carroll,  66  Minn.  487 
(1896).  A  transferrer  having  paid 
the  statutory  liability  to  the  receiver 
of  a  national  bank  cannot  recover  it 
back  from  him.  Holt  v.  Thomas,  105 
Cal.  273  (1894).  A  transferrer  is  lia- 
ble on  the  stock  until  the  transfer  is 
registered  in  the  corporate  books. 
Powers  v.  Knapp,  71  Hun,  371  (1893), 
being  a  case  of  liability  under  a  stat- 
ute; Aulbach  v.  Dahler,  4  Idaho  654 
(1896). 

i  Musgrave's  Case,  L.  R.  5  Eq.  193 
(1867);  Walker's  Case,  L.  R.  6  Eq.  30 
(1868);  McEuen  v.  West  London 
Wharves,  etc.  Co.,  L.  R.  6  Ch.  App. 
655  (1871);  Gowers's  Case,  L.  R.  6 
Eq.  77  (1868),  holding  that,  where 
shares  had  been  forfeited  by  a  resolu- 
tion of  the  directors,  but  the  names 
of  their  owners  had  not  been  removed 
from  the  register,  they  were  contribu- 
tories  in  winding-up  proceeding  in- 
stituted a  year  later.  Humby's  Case, 
5  Jur.  (N.  S.)  215  (1859);  Head's 
Case,  L.  R.  3  Eq.  84  (1S66);  White's 
Case,  L.  R.  3  Eq.  86  (1866);  Shep- 
herd's Case,  L.  R.  2  Ch.  App.  16 
(1866).  Even  though  stock  stands  in 
the  name  of  a  pledgee  for  a  short 
time  and  is  then  transferred  back  to 
the  owner,  yet  the  pledgee  is  not 
liable  on  the  statutory  liability  for 
subsequent  debts,  even  though  he  has 
not  given  public  notice  of  the  transfer 


719 


§261.]  TRANSFERRER'S  AND   TRANSFEREE'S   LIABILITY.  [CH.  XV. 


who  are  stockholders,  need  only  show  that  the  persons  whom  he  sues 
appear  as  stockholders  on  the  corporate  stock-books.1 

Different  questions  arise  when  an  irregular  registry  of  the  trans- 
fer has  been  made,  or  the  transferrer  has  done  all  in  his  power  to 
effect  a  registry,  or  the  corporation  has  accepted  the  unregistered 
transferee  as  a  stockholder.  These  questions,  however,  are  considered 
elsewhere.2 

§  2G1.  The  transferee's  statutory  liability. — The  transferee  of 
stock  whose  name  has  been  duly  entered  on  the  stock-book  as  a  stock- 
holder becomes  thereupon  liable  on  the  stock  to  corporate  creditors. 
The  registry,  which  operates  to  change  the  stockholder,  at  the  same 
time  operates  to  charge  the  transferee.3  A  statutory  liability  at- 
tached to  stock  follows  the  stuck  into  the  hands  of  a  transferee,  even 
as  to  a  liability  existing  before  the  purchase.4  It  is  immaterial  that 
no  certificate  has  been  issued  to  the  transferee,  or  that  the  corpora- 
tion has  not  issued  certificates  to  any  of  the  stockholders.5  Nor  will 
the  transferee  be  heard  to  allege,  as  defense  against  an  action  to 
enforce  the  statutory  liability,  that  he  was  induced  by  fraudulent 


by  him  as  required  by  statute.  Bruns- 
wick Terminal  Co.  v.  National  Bank, 
112  Fed.  Rep.  813    (1901). 

i  Magruder  v.  Colston,  44  Md.  349, 
356  (1875).  Cf.  Fisher  v.  Seligman, 
75  Mo.  13  (1881);  Adderly  v.  Storm, 
6  Hill.  624  (1844) ;  Crease  v.  Babcock, 
51  Mass.  525  (1846);  U.  S.  Trust  Co. 
v.  U.  S.  F.  Ins.  Co.,  18  N.  Y.  200,  224 
(1858);  Holyoke  Bank  v.  Burnham, 
65  Mass.  183,  187  (1853),  and  see  §  55, 
supra.  A  stockholder  is  presumed  to 
have  continued  to  be  a  stockholder 
until  the  contrary  is  shown.  Barron 
v.  Paine,  83  Me.  312   (1891). 

2  See  §  258,  supra. 

3  Webster  v.  Upton,  91  U.  S.  65 
(1875) ;  De  Pass's  Case,  4  De  G.  &  J. 
544  (1859);  Cape's  Case,  2  De  G.,  M. 
&  G.  562  (1852);  Briggs  v.  Waldron, 
83  N.  Y.  582  (1881).  Cf.  Chesley  v. 
Pierce,  32  N.  H.  388  (1855);  Thebus 
v.  Smiley,  110  111.  316  (1S84),  to  the 
effect  that  there  can  be  but  one 
amount  for  which  there  is  liability  on 
account  of  the  same  stock,  and,  the 
statutory  double  liability  having  been 
once  met  by  an  owner  of  the  stock, 
his  transferee  takes  it  free  from  lia- 
ity.      A    stockholder   of   record    in    a 


national  bank  cannot  set  up  that  the 
transfer  was  made  without  his  knowl- 
edge or  consent,  where  he  was  cashier 
of  the  bank  and  was  bound  by  law 
to  know  about  the  stock-book.  Finn 
v.  Brown,  142  U.  S.  56  (1891).  Where 
the  certificate  of  stock  is  transferred 
in  June,  1891,  and  is  transferred  on 
the  books  July,  1892,  and  about  a  year 
afterwards  the  national  bank  becomes 
insolvent,  the  transferee  is  liable  on 
the  statutory  liability,  and  the  trans- 
feree cannot  claim  that  he  was  igno- 
rant of  the  transfer  and  sale,  when  he 
was  during  this  time  a  director  and 
actually  indorsed  the  transfer  on  the 
back  of  the  certificates  so  issued  to 
him.  O'Connor  v.  Witherby,  111  Cal. 
523  (1896).  The  holders  of  stock 
cannot  escape  the  statutory  liability 
thereon,  even  though  when  the  trans- 
fer of  the  stock  to  them  was  made 
the  old  certificates  were  not  canceled, 
but  were  abstracted  by  a  corporate 
officer  and  hypothecated  by  him,  there- 
by creating  an  over-issue.  Burt  v. 
Bailey,  73  Fed.  Rep.  693   (1896). 

4  Barton,  etc.  Bank  v.  Atkins,  72  Vt. 
33    (1899).   See  69  Atl.  Rep.  765. 

5  See   §  258,  supra. 


720 


CH.  XV.]  TRANSFERRER'S  AND   TRANSFEREE'S   LIABILITY.  [§262. 


representations  to  purchase  the  shares.1  A  stockholder  in  a  national 
bank  who  was  induced  to  become  such  by  fraud  may  have  his  name 
taken  from  the  list  of  stockholders  except  as  against  creditors  of  the 
bank  who  became  such  after  he  became  a  stockholder  and  without 
notice  of  the  fraud.2  Whether  the  statutory  liability  attaches  to  a 
stockholder,  in  respect  of  debts  contracted  before  he  became  a  mem- 
ber of  the  corporation,  is  a  question  turning  upon  the  words  of  the 
statute.3  Nevertheless,  although  the  transferee  may  not  be  liable  to 
others,  he  clearly  is  liable  herein  to  his  transferrer  for  liabilities 
herein  which  fall  upon  the  latter.4  A  purchaser  of  stock  may  be  held 
liable  to  creditors  upon  the  liability  imposed  by  statute,  although  the 
transfer  is  not  recorded.5  A  statute  rendering  stockholders  person- 
ally liable  until  the  whole  amount  of  the  capital  stock  is  paid  in  and 
the  certificate  recorded  applies  to  subsequent  purchases  of  the  stock 
as  well  as  the  original  subscribers.6  . 

§  262.  Liability  of  transferee  to  transferrer  herein.  — A  transfer 
of  stock  may  be  said  to  involve  three  distinct  acts,  all  of  which  may 
take  place  at  one  and  the  same  time,  or  each  at  a  different  time. 

1  Oakes  v.  Turquand,  L.  R.  2  H.  L.  sumed  to  be  liable  on  the  statutory 
325  (1867);  Houldsworth  v.  City  of  liability  of  stockholders,  in  McDowall 
Glasgow  Bank,  L.  R.  5  App.  Cas.  317  v.  Sheehan,  129  N.  Y.  200  (1891); 
(1880);  Tennent  v.  City  of  Glasgow  Powers  v.  Knapp,  71  Hun,  371  (1893). 
Bank,  L.  R.  4  App.  Cas.  615  (1879);  A  purchaser  of  stock  in  a  bank  who 
and  see  ch.  IX,  supra,  and  §§  163,  164,  pledges  it  to  the  bank  to  borrow 
supra.  Cf.  Slater's  Case,  35  Beav.  391  money  to  pay  for  the  stock  is  liable 
(1866).  Fraud  on  the  part  of  the  on  the  statutory  liability  on  such 
officers  in  inducing  the  purchase  is  stock,  even  though  the  stock  was 
no  defense  to  the  statutory  liability  never  transferred  into  his  name.  Fos- 
after  the  company  becomes  insolvent  ter  v.  Row,  120  Mich.  1  (1899).  Al- 
and passes  into  a  receiver's  hands,  though  a  husband  indorses  a  certifi- 
Bissell  v.  Heath,  98  Mich.  472  (1894).  cate  of  stock  to  his  wife  and  keeps  it 
A  transferee  claiming  to  be  defrauded  among  his  papers,  yet,  if  she  was 
is  nevertheless  liable  on  the  statutory  informed  that  the  stock  was  hers  and 
liability,  where  he  brought  a  suit  for  received  dividend  checks  and  in- 
damages  for  the  fraud  and  recovered  dorsed  them,  and  received  the  money, 
judgment.     Such  a  suit  is  a  ratifica-  she  is  liable  on  the  statutory  liability. 


tion  of  the  transfer.  Stuart  v.  Hay- 
den,  72  Fed.  Rep.  402  (1895),  aff'd 
169  U.  S.  1.  It  is  immaterial  that  he 
was  deceived  by  the  transferrer. 
O'Connor  v.  Witherby,  111  Cal.  523 
(1896). 

2  Stufflebeam  v.  De  Lashmutt,  83 
Fed.  Rep.  449  (1897).  See  also  §  356, 
infra. 

3  See  §  259,  supra. 

4  See  §  262,  infra. 

5  An  unrecorded  transferee  was  as- 

(46)  721 


Michigan    T.    Co.    v.    Comstock,    123 
Mich.  689   (1900).     Cf.  §258,  supra. 

g  Lazard,  etc.  v.  Phetteplace,  26  R. 
I.  568  (1905).  In  the  case  Reid  v.  De 
Jarnette,  123  Ga.  787  (1905)  the  pro- 
vision that  stockholders  shall  be 
liable  to  the  amount  of  their  unpaid 
subscriptions  and  for  an  additional 
equal  amount,  was  held  to  apply  only 
to  the  original  subscribers  and  not  to 
the  transferees. 


262.] 


transferrer's  and  transferee's  liability.  [en.  XV. 


There  is,  first,  the  agreement  of  sale,  by  which  the  right  to  the  stock 
passes  from  the  transferrer  to  the  transferee;  second,  the  formal 
transfer  of  the  certificate  of  stock ;  third,  a  registry  of  the  transfer, 
by  an  entry  on  the  corporate  transfer-book.  It  frequently  happens 
that  the  registry  is  not  made  until  some'  time  after  the  agreement 
of  sale,  and  that  during  the  interim  calls  on  the  subscription  are  made 
or  corporate  creditors'  rights  attach.  The  law  then  holds  liable  the 
transferrer  whose  transfer  has  not  been  registered.  But  in  reality 
his  transferee  ought  to  meet  that  liability.  Hence  the  rule  that  for 
liabilities  arising  after  a  sale  of  stock,  but  before  a  registry  of  the 
same  on  the  corporate  books,  the  vendee  is  liable  to  the  vendor  when 
such  liabilities  are  paid  by  the  latter.1  The  transferrer  in  these 
cases  may  have  recourse  to  the  real  and  not  the  nominal  transferee.2 
In  case  of  several  successive  transfers,  the  transferrer  who  has  paid 
an  assessment  or  corporate  debt  may  look  to  his  immediate  transferee, 
although  there  be  another  one  in  the  series  who  will  ultimately  be 
charged.3     A  transferrer  who  has  paid  may  file  a  bill  in  equity  to 


l  Johnson  v.  Underhill,  52  N.  Y.  203 
(1873);  Kellogg  v.  Stockwell,  75  111. 
68  (1874) ;  Morse  v.  Pacific  Ry.,  93 
111.  App.  33  (1900);  Hutzler  v.  Lord, 
64  Md.  534  (1886);  Brigham  v.  Mead, 
92  Mass.  245  (1865);  Man  v.  Boykin, 
60  S.  E.  Rep.  17  (S.  C.  1908) ;  Walker 
v.  Bartlett,  18  C.  B.  845  (1856),  over- 
ruling Humble  v.  Langston,  7  M.  & 
W.  517  (1841);  Grissell  v.  Bristowe, 
L.  R.  3  C.  P.  112  (1868);  rev'd  on 
another  point  in  L.  R.  4  C.  P.  36; 
Davis  v.  Haycock,  L.  R.  4  Exch.  373 
(1869);  Bowring  v.  Shepherd,  L.  R. 
6  Q.  B.  309  (1871);  Kellock  v.  En- 
thoven,  L.  R.  9  Q.  B.  241  (1874); 
s.  c,  L.  R.  8  Q.  B.  458.  The  statute 
of  limitations  does  not  begin  to  run 
against  the  transferrer  until  the 
assessment  is  paid  by  him.  Hutzler 
v.  Lord,  64  Md.  534  (1885).  So  also 
when  shares  are  sold  for  future  de- 
livery, but  before  the  time  for  de- 
livery the  seller,  in  order  to  save  the 
stock  from  forfeiture,  is  compelled  to 
pay  assessments  duly  levied  upon  it, 
the  seller  may  refuse  to  deliver  until 
he  is  repaid  the  amount  of  such 
assessments.  Whitney  v.  Page  (N.  Y. 
Supreme  Ct),  Daily  Register,  March 
31,    1885.      A    transferrer   who    seeks 


recourse  to  his  transferee  for  calls 
paid  by  the  former  after  the  transfer 
does  not  prove  the  transfer  by  show- 
ing a  registry  of  the  same.  He  must 
prove  some  act  of  purchase  or  accept- 
ance by  the  transferee.  Tripp  v.  Ap- 
pleman,  35  Fed.  Rep.  19  (1888). 
Where  a  purchaser  of  bank  stock  pays 
a  statutory  liability  on  said  stock,  he 
cannot  recover  from  the  vendor  the 
amount  so  paid.  Danielson  v.  Yoak- 
um, 116  Cal.  382    (1897). 

2  Castellan  v.  Hobson,  L.  R.  10  Eq. 
Cas.  47  (1870).  But  not  to  an  inter- 
vening unregistered  transferee.  Shaw 
v.  Fisher,  2  De  G.  &  Sm.  11  (1848); 
s.  c,  5  De  G.,  M.  &  G.  596  (1855). 
See  also  §  253,  supra.  An  unrecorded 
transferee  who  has  transferred  the 
certificate  to  still  smother  party  is 
not  liable  to  his  transferrer  for  calls 
made  after  the  transferee  had  trans- 
ferred to  the  second  transferee. 
Brinkley  v.  Hambleton,  67  Md.  169 
(1887). 

3  Nickalls  v.  Eaton,  23  L.  T.  Rep. 
689  (1871);  Kellock  v.  Enthoven,  L. 
R.  9  Q.  B.  241  (1874).  Or  he  may 
look  to  the  final  transferee,  even 
though  the  call  was  made  before  the 
latter  purchased.    Hawkins  v.  Maltby, 


722 


ch.  xv.l  transferrer's  and  transferee's  liability.  [§§  263-265. 

compel  a  registry  of  the  transfer  and  to  obtain  repayment.1  The 
transferrer  who  is  sued  and  held  liable  in  a  suit  in  equity  against  all 
stockholders  may  file  a  cross-bill  and  bring  in  the  transferee,  although 
the  transfer  has  never  been  recorded  on  the  corporate  books.2 

§§  263-265.  A  transfer  to  a  "dummy"  or  to  an  insolvent  to  es- 
cape liability." — In  the  United  States  a  transfer  of  shares  in  a  fail- 


L.  R.  4  Ch.  App.  200  (1869),  aff'g  L. 
R.  6  Eq.  505  s.  c,  L.  R.  3  Ch.  App. 
188  (1867).  Where  a  stockholder  of 
record  sells  the  certificate  of  stock  to 
a  broker  and  delivers  the  same  in- 
dorsed in  blank,  and  the  broker  trans- 
fers the  same  to  his  principal,  the 
broker  is  liable  to  indemnify  the 
vendor  against  a  statutory  liability 
which  the  vendor  has  to  pay.  Boult- 
bee  v.  Gzowski,  29  Canada  S.  C.  Rep. 
54  (1898).  In  Lesassier  v.  Kennedy, 
36  La.  Ann.  539  (1884),  an  unregis- 
tered vendee  escaped  liability  of  in- 
demnity to  his  vendor,  because  the 
vendee  sold  to  a  person  to  whom  the 
transfer  direct  from  the  first  vendor 
was  made  on  the  corporate  books,  but 
without  the  knowledge  of  the  vendor. 
The  dissenting  opinions  in  this  case 
are  to  be  commended. 

i  Wynne  v.  Price,  3  De  G.  &  Sm.  310 
(1849);  Cheale  v.  Kenward,  3  De  G. 
&  J.  27  (1858);  Morris  v.  Cannan,  4 
De  G.,  F.  &  J.  581  (1862);  Butler  v. 
Cumpston,  L.  R.  7  Eq.  16  (1868); 
Evans  v.  Wood,  L.  R.  5  Eq.  9  (1867); 
Paine  v.  Hutchinson,  L.  R.  3  Eq.  257 
(1866)-;  aff'd  L.  R.  3  Ch.  App.  388; 
Cruse  v.  Paine,  L.  R.  6  Eq.  641;  s.  c, 
L.  R.  4  Ch.  App.  441  (1869);  Shaw  v. 
Fisher,  2  De  G.  &  Sm.  11  (1848); 
James  v.  May,  L.  R.  6  H.  L.  328 
(1873);  Allen  v.  Graves,  L.  R.  5  Q. 
B.  478  (1870),  holding  that,  where 
the  purchaser  did  not  offer  as  trans- 
feree the  name  of  a  person  to  whom 
no  reasonable  objection  could  be 
made,  he  had  not  fulfilled  the  contract 
of  sale  and  was  liable  for  the  amount 
of  a  call  subsequently  made,  and  inter- 
est, as  damages;  Shaw  v.  Rowley,  16 
M.  &  W.  810  (1847),  substaining  an 
action  for  the  price  of  shares  sold  on 


which  a  previous  call  had  not  been 
paid,  it  being  held  that  plaintiffs 
could  recover  because  they  could  have 
paid  the  call  and  transferred  the 
stock  if  defendants  had  furnished  the 
name  of  the  transferee  when  re- 
quested. As  to  interest  on  the  amount 
paid,  see  Hawkins  v.  Maltby,  L.  R.  6 
Eq.  505  (1868) ;  aff'd,  L.  R.  4  Ch.  App. 
200  (1869).  In  Ohio,  under  the  act 
creating  a  statutory  liability  on  the 
part  of  stockholders,  transferees  are 
liable,  as  between  themselves  and 
their  vendors,  for  all  indebtedness  of 
the  corporation,  whether  incurred  be- 
fore or  after  the  transfer,  "as  if  they 
had  owned  the  stock  from  the  organ- 
ization of  the  company."  Wheeler  v. 
Faurot,  37  Ohio  St.  26  (1881);  Brown 
v.  Hitchcock,  36  Ohio  St.  667  (1881), 
a  case  wherein  the  question  of  statu- 
tory liability  is  very  fully  and  satis- 
factorily discussed.  To  same  effect, 
Cape's  Case,  2  De  G.,  M.  &  G.  562 
(1852).  That  a  transferrer  may  com- 
pel the  transferee  to  register  the 
transfer,  see  §  3S4,  infra.  The  court 
will  determine  the  liability  as  be- 
tween the  transferrer  and  transferee, 
in  connection  with  a  corporate  cred- 
itors' suit,  brought  to  enforce  the 
stockholder's  liability.  Mason  v.  Alex- 
ander, 44  Ohio  St.  318  (1886).  Sayles 
v.  Blane,  19  L.  J.  (Q.  B.)  19  (1849), 
holds  that  a  transferrer  who  contin- 
ues to  be  the  owner  on  the  registry, 
and  who  has  been  compelled  to  pay 
calls  made  after  the  transfer,  cannot 
recover  the  money  so  paid  from  the 
transferee  upon  the  common  count 
for  money  paid  for  his  use. 

2  Harper   v.   Carroll,   66    Minn.   487 
(1896). 

3  The  cases  in  this  section  refer  to 


723 


§§263-265.]  transferrer's  and  transferee's  liability.  [en.  xv. 

ing  concern,  made  by  the  transferrer  with  the  intention  and  for 
the  purpose  of  escaping  liability  as  a  stockholder,  to  a  person  who 
for  any  cause  is  incapable  of  responding  in  respect  of  such  liability, 
is  voidable,  both  as  to  creditors  of  the  company  and  as  to  other 
stockholders;  and  that,  too,  although  as  between  the  transferrer 
and  transferee  the  transaction  may  have  been  absolute  and  no  secret 
trust  involved.1     Where  a  stockholder  knows  the  corporation  is  in- 


instances  where  a  person  transfers  transferred  the  stock  to  still  another 
stock  from  his  own  name  to  that  of  insolvent  person.  People's,  etc.  Bank 
a  "dummy."  An  entirely  different  v.  Rickard,  139  Cal.  285  (1903).  A 
class  of  cases  exists  where  the  per-  stockholder  who  sells  his  stock  to  an 
son  really  interested  buys  stock  or  irresponsible  person,  and  takes  notes 
subscribes  for  stock  in  the  name  of  a  in  payment  secured  by  the  stock,  will 
"dummy,"  and  the  name  of  the  real  be  held  liable  on  the  unpaid  sub- 
owner  never  appears  on  the  corporate  scription.  Gillett  v.  Chicago  Title  & 
books.  The  latter  class  of  cases  is  T.  Co.,  82  N.  E.  Rep.  891  (111.  1907). 
considered  in  §  253,  supra.  A  transferrer  may  be  held  liable 
i  Cited  in  McDonald  v.  Dewey,  202  herein  though  the  transfer  of  the 
TJ.  S.  510  (1906)  and  quoted  and  ap-  certificate  was  made  long  previous, 
proved  in  National,  etc.  Co.  v.  Story,  but  registered  only  shortly  before  in- 
etc.  Co.,  Ill  Oal.  531  (1896);  Ward  solvency,  and  though  all  parties  acted 
v.  Joslln,  100  Fed.  Rep.  676    (1900);  in  good  faith.    Richmond  v.  Irons,  121 


aff'd  186  U.  S.  142;    Nathan  v.  Whit- 
lock,  3  Edw.  Ch.   (N.  Y.)   215   (1838); 


U.  S.  27,  58  (1887);  Veiller  v.  Brown, 
18    Hun,    571     (1879);     McClaren    v. 


s.   c,   9   Paige,   152    (1841);    Wishard    Franciscus,  43  Mo.  452  (1869);  Miller 
v.    Hansen,    etc.    Co.,    99    Iowa,    3*07    v.  Great  Republic  Ins.  Co.,  50  Mo.  55 


(1896);    Rider   v.   Fritchey,    49    Ohio 
•St.   285    (1892).     An   officer  of  a  na- 


(1872),   holding,   however,   tbat    if   a 
sale  and   transfer   be   made   honestly 


tional  bank  who  knows  that  it  is  in-  and  without  intent  to  defraud  the 
solvent  and  transfers  stock  to  various  creditors  of  the  corporation,  the  fact 
insolvent  people  may  be  held  liable  that  the  purchaser  is  insolvent  will 
on  the  stock,  although  the  bank  does  not  render  the  vendor  liable;  Provi- 
not  actually  fail  for  two  years  there-  dent  Sav.  Inst.  v.  Jackson  Place,  etc. 
after.  McDonald  v.  Dewey,  202  U.  S.  Rink,  52  Mo.  557  (1873);  Chouteau 
510(1906).  Where  an  insolvent  Kan-  Spring  Co.  v.  Harris,  20  Mo.  382 
sas  corporation  transfers  all  its  assets  (1855) ;  Mandion  v.  Firemen's  Ins.  Co. 
to  a  Missouri  corporation,  and  at  the  11  Rob.  (La.)  177  (1845),  where  the 
same  time  all  the  stock  of  the  former  transfer  was  a  gift;  Re  Bachman,  12 
is  transferred  to  the  latter,  the  trans-  Nat.  Bankr.  Reg.  223  (1875);  s.  c,  2 
action  is  ultra  vires  and  fraudulent,  Fed.  Cas.  310;  Marcy  v.  Clark,  17 
and  the  statutory  liability  of  the  Mass.  330  (1821);  Central  Agric.  etc. 
stockholders  in  the  Kansas  corpora-  Assoc,  v.  Alabama,  etc.  Ins.  Co.,  70 
tion  continues.  Anglo-American,  etc.  Ala.  120  (1881);  Gaff  v.  Flesher,  33 
Co.  v.  Lombard,  132  Fed.  Rep.  721  Ohio  St.  107  (1877);  Dauchy  v. 
(1904).  A  stockholder  who  transfers  Brown,  24  Vt.  197  (1852);  Aultman's 
his  stock  to  an  insolvent  person,  the  Appeal,  98  Pa.  St.  505  (1881).  In  the 
corporation  being  insolvent  and  the  last  case  one  who  held  stock  as  col- 
purpose  being  to  avoid  liability  on  lateral  security  and  surrendered  it, 
the  unpaid  subscription  will  be  held  after  the  company's  insolvency,  to 
liable,  even  though  the  transferee  has  the  company,  which  issued  a  new  cer- 

724 


ch. xv.]         transferrer's  and  transferee's  liability.  [§§263-265. 

solvent  and  transfers  his  stock  voluntarily  and  without  consideration 
and  out  of  the  ordinary  course  of  business  to  an  irresponsible  trans- 
feree, the  transfer  is  void  as  against  corporate  creditors  without 
proof  that  the  intent  was  to  escape  liability.1  However,  if  a  stock- 
holder in  a  national  bank  sells  his  stock  three  weeks  before  the  bank 
goes  into  a  receiver's  hands,  yet,  if  he  swears  that  he  sold  the  stock 
in  good  faith  without  knowledge  or  suspicion  that  the  bank  was 
insolvent  or  likely  to  become  insolvent,  or  that  the  pur-' 
chaser  of  the  stock  was  insolvent,  and  there  is  no  evidence  to  the* 
contrary,  he  is  not  liable  on  the  stock  unless  proof  to  the 
contrary   is  given.2      A   stockholder  in  an  insolvent  national  bank 


tificate  to  the  former  owners,  was 
held  responsible  to  the  creditors  of 
the  company.  Everhart  v.  "West  Ches- 
ter, etc.  R.  R.,  28  Pa.  St.  339  (1857); 
Rider  v.  Morrison,  54  Md.  429  (1880) ; 
Paine  v.  Stewart,  33  Conn.  516 
(1866);  Bowden  v.  Santos,  1  Hughes, 
158  (1877);  s.  c,  3  Fed.  Cas.  1034; 
Wehrman  v.  Reakirt,  1  Cin.  Super.  Ct. 
(Ohio),  230  (1871);  Bowden  v.  John- 
son, 107  U.  S.  251  (1882);  Davis  v. 
Stevens,  17  Blatchf.  259  (1879);  s.  c, 
7  Fed.  Cas.  177.  Cf.  Allen  v.  Mont- 
gomery R.  R.,  11  Ala.  437  (1847); 
Billings  V.  Robinson,  28  Hun,  122 
(1882);  aff'd  94  N.  Y.  415  (1884).  It 
is  also  held  that  the  owner  of  stock 
cannot  escape  liability  by  transfer- 
ring it  to  his  infant  children,  or  by 
taking  it  originally  in  their  names. 
See  §  250,  supra.  It  has  been  held, 
also,  that  no  transfer  made  in  antic- 
ipation of  a  judgment  against  the  cor- 
poration, and  for  the  purpose  of  es- 
caping liability,  is  valid,  and  stock- 
holders who  make  such  a  transfer  will 
be  held  liable.  McClaren  v.  Francis- 
cus,  43  Mo.  452  (1869);  Marcy  v. 
Clark,  17  Mass.  330  (1821).  Where  a 
transfer  is  merely  colorable,  with  a 
secret  trust  in  favor  of  the  transfer- 
rer, the  transferrer  is  still  liable.  Sin- 
clair v.  Dwight,  9  N.  Y.  App.  Div.  297 
(1896),  a  dictum,  aff'd  on  other  points 
in  158  N.  Y.  607.  Although  creditors 
may  object  to  an  assignment  of  stock 
to  an  irresponsible  party  after  the  cor- 
poration  has    become    insolvent,    yet 


the  corporation  itself  cannot  object 
and  sue  the  transferrer,  where  the 
corporation  has  accepted  the  transfer 
and  issued  new  stock  to  the  trans- 
feree, even  though  the  latter  is  irre- 
sponsible. Rochester,  etc.  Co.  v.  Ray- 
mond, 4  N.  Y.  App.  Div.  600  (1896); 
aff'd  158  N.  Y.  576.  A  transfer  to  a 
dummy  does  not  relieve  the  transfer- 
rer from  liability  to  corporate  credit- 
ors, even  though  the  transfer  was 
made  before  the  corporate  debts  were 
incurred.  Pioneer  Fuel  Co.  v.  St. 
Peter,  etc.  Co.,  64  Minn.  386    (1896). 

1  Welch    v.    Sargent,    127    Cal.    72 
(1899). 

2  Earle  v.  Carson,  188  U.  S.  42 
(1903).  The  basis  on  which  a  stock- 
holder is  held  liable  for  transferring 
his  stock  with  intent  to  evade  liability 
is  fraud,  implied  in  selling  with  no- 
tice of  insolvency  of  the  corporation, 
and  with  intent  to  evade  liability  and 
the  fact  that  the  sale  is  to  an  insolv- 
ent person  is  proof  of  such  fraud, 
but  not  sufficient  proof  unless  it  is 
proved  that  the  party  knew  that  the 
corporation  was  insolvent.  McDon- 
ald v.  Dewey,  202  U.  S.  510  (1906). 
A  stockholder  in  a  national  bank  may 
donate  his  stock  to  his  children  by 
putting  it  in  trust  for  them,  and  he 
is  not  then  liable  on  the  stock  where 
it  is  clear  that  his  acts  were  not  for 
the  purpose  of  avoiding  liability. 
Fowler  v.  Gowing,  152  Fed.  Rep.  801 
(1907).  Under  the  New  York  Bask- 
ing Act  a  transferrer  of  stock  in  an 


725 


§§  263-265.]  transferrer's  and  transferee's  liability.         [ch.  xv. 


cannot  avoid  the  liability  thereon  by  transferring  his  stock  with 
intent  to  avoid  that  liability,  knowing  or  having  reason  to  believe,  at 
the  time  of  a  transfer  on  the  books  of  the  bank,  that  it  is  insolvent 
or  about  to  fail.  The  receiver  may  treat  the  person  so  transferring 
his  stock  as  the  real  stockholder,  without  reference  to  whether  the 
transferee  is  solvent  or  not.1  On  the  other  hand,  if  a  national  bank 
is  able  to  meet  its  obligations  at  the  time  of  the  transfer  of  stock,  the 
transferrer  is  no  longer  liable  on  the  statutory  liability,  even  though 
his  motive  may  have  been  to  escape  liability  on  the  stock.2  If,  how- 
ever, the  transfer  was  made  to  an  irresponsible  person,  it  is  imma- 
terial as  to  whether  the  transferrer  knew  of  the  insolvency  of  the 
bank  or  not.3  Where  a  national  bank  is  insolvent,  and  a  stock- 
holder transfers  his  stock  to  an  irresponsible  person,  both  the  trans- 
ferrer and  the  transferee  are  liable.4  In  Nebraska  a  receiver  may 
join  both  the  transferrer  and  transferee  in  a  suit  to  set  aside  the 
transfer  as  fraudulent,  and  to  hold  the  transferrer  liable ;  but  if  the 
transferee  is  held  liable  the  transferrer  cannot  be.5  If  the  transfer 
is  bona  fide,  and  the  transferrer  is  ignorant  of  the  insolvency  of  the 
transferee,  and  the  company  is  not  insolvent,  the  transfer  is  effectual, 


insolvent  bank  is  liable  on  tbe  statu- 
tory liability,  even  though  he  made 
the  transfer  in  good  faith.  Persons 
v.  Gardner,  113  N.  Y.  App.  Div.  597 
(1906);   afl'd  188  N.  Y.  571. 

i  Stuart    v.    Hayden,    169    U.    S.    1 
(1898);    aff'g  72  Fed.  Rep.  402,  hold- 
ing also  that  in  such  a  suit  a  cross- 
bill of  the  transferee  for  a  rescission 
on  the  ground  that  he  was  defrauded 
cannot  be  tried  in  that  suit.     Where 
the  real  owner  of  stock  in  a  national 
bank  transfers  it  to  another  person, 
or  causes  it  to  be  placed  in  the  name 
of  another  person,  to  avoid  the  liabil- 
ity  to   creditors    under   the    national 
bank   act,    such    real    owner   may   be 
held   liable  on  such  stock.     Pauly  v. 
State,  etc.  Co.,  165  U.  S.  606    (1897). 
Where  a  stockholder  in  a  failing  na- 
tional bank  transfers  his  stock  with- 
out consideration  to  his  children,  and 
the  bank  fails  within  five  months,  the 
transferrer  is  liable  on  the  statutory 
liability,  and  the  transferees  are  also 
liable.    Foster  v.  Lincoln,  74  Fed.  Rep. 
382   (1896).     Where  a  national  bank, 
although  not  supposed  to  be  insolvent, 
may  not  be  able  to  stand  a  run  which 


has  commenced,  a  stockholder  cannot 
give  away  or  transfer  his  stock  to 
his  children  and  avoid  the  liability. 
Foster  v.  Lincoln,  79  Fed.  Rep.  170 
(1897).  In  proving  that  the  trans- 
ferrer knew  the  bank  was  insolvent, 
it  is  enough  to  show  that  he  had  good 
ground  to  apprehend  the  failure  and 
made  the  transfer  to  relieve  himself 
of  liability.  Cox  v.  Montague,  78  Fed. 
Rep.  845  (1897).  Where  a  stockhold- 
er knows  the  corporation  is  insolvent 
and  transfers  his  stock  to  avoid  lia- 
bility, he  continues  liable.  May  v. 
Ullrich,  132  Mich.  6  (1902). 

2  Stuart  v.  Hayden,  169  U.  S.  1 
(1898). 

3  Stuart  v.  Hayden,  169  U.  S.  1 
(1898),  contra;  Sykes  v.  Holloway,  81 
Fed.    Rep.    432    (1897). 

4  Baker  v.  Reeves,  85  Fed.  Rep.  837 
(1898). 

5  Morrill  v.  Crawford,  51  Neb.  284 
(1897).  Both  the  real  owner  of  stock 
and  the  nominal  holder  of  record  of 
stock,  or  either  of  them,  may  be  held 
liable  on  the  unpaid  subscription  price 
of  such  stock.  Dunn  v.  Howe,  107 
Fed.  Rep.  849   (1901). 


725 


ch.  xv.j         transferrer's  and  transferee's  liability.  [§§  263-265. 


and  the  transferrer  is  released  from  liability.1  Even  though  a  bank 
is  insolvent,  yet,  if  a  stockholder  does  not  know  of  that  fact,  a  trans- 
fer of  stock  by  him  is  legal,  even  though  such  transfer  is  to  a  non- 
resident.2 Even  though  a  stockholder  in  a  national  bank  has  sold 
and  transferred  his  stock  to  avoid  liability  and  the  transferees  arc 
irresponsible  he  is  not  liable  to  creditors  who  became  such  after  the 
date  of  the  transfer.3  A  stockholder  in  an  insolvent  corporation  may 
sell  and  transfer  his  stock  to  another  person  for  the  purpose  of  avoid- 
ing liability  as  to  future  debts  of  the  corporation.  The  rule  pro- 
hibiting such  transfers  applies  only  to  debts  existing  at  the  time  of 
the  transfer.4  Where  a  person  transfers  his  stock  regularly  on  the 
books  to  another  person  who  is  solvent,  corporate  creditors  who  be- 
come such  after  the  transfer  cannot  have  recourse  to  the  transferrer 
on  the  statutory  liability,  even  though  the  transferee  becomes  in- 
solvent.5 A  person  selling  stock  in  an  insolvent  bank  to  evade  lia- 
bility is  not  liable  if  the  purchaser  is  solvent,  but  the  burden  of  proof 
is  on  the  transferrer  to  prove  that  fact.6  The  creditor's  remedy  to 
enforce  the  liability  of  a  stockholder  who  has  fraudulently  assigned 
or    transferred   his    stock    may    be    in    a    court    of    equity,7    or    at 


1  Miller  v.  Great  Republic  Ins.  Co., 
50  Mo.  55  (1872).  See  also  Cole  v. 
Ryan,  52  Barb.  168  (1868).  Cf.  Bil- 
lings u.  Robinson,  94  N.  Y.  415  (1884) ; 
s.  c,  28  Hun,  122  (1882).  A  stock- 
holder who  promises  a  corporate 
creditor,  .at  the  time  when  the  com- 
pany's affairs  are  involved,  that  he 
will  not  transfer,  thereby  inducing 
him  not  to  sue  to  collect  his  debt,  is 
liable  to  such  creditor  in  case  he  does 
transfer.  Paine  v.  Stewart,  33  Conn. 
516  (1866).  But  a  transfer  will  be 
held  valid,  it  seems,  when  it  is  made 
pursuant  to  an  antecedent  option 
agreement,  although  the  final  transfer 
is  really  made  in  order  to  avoid  lia- 
bility. Holyoke  Bank  v.  Burnham,  65 
Mass.  183  (1853);  Magruder  v.  Col- 
ston, 44  Md.  349  (1876).  Cf.  Chapman 
v.  Shepherd,  L.  R.  2  C.  P.  228  (1867), 
under  the  English  statute. 

2  Foster  v.  Row,  120  Mich.  1  (1899). 

3  McDonald  v.  Dewey,  202  U.  S.  510 
(1906). 

4  Sinclair  v.  Dwight,  9  N.  Y.  App. 
Div.  297  (1896);  affd  158  N.  Y.  607. 
It  is  legal  for  a  stockholder  in  an  in- 
solvent   corporation    to    transfer    his 


stock  to  an  insolvent  for  the  purpose 
of  avoiding  liability  on  the  stock  to 
future  corporate  creditors.  Peter  p. 
Union,  etc.  Co.,  56  Ohio  St.  181  (1897). 
Where  a  director  must  be  a  stock- 
holder and  there  is  a  statutory  lia- 
bility attached  to  the  directorship,  the 
director  may  transfer  his  stock  in  or- 
der to  cease  to  be  a  director  and  in  or- 
der to  avoid  such  liability.  Sinclair 
v.  Fuller,  158  N.  Y.  607  (1899).  A 
gift  and  transfer  of  stock  in  a  bank 
before  the  bank  becomes  insolvent  re- 
lieves the  transferrer  from  the  statu- 
tory liability  on  such  stock.  Foster 
v.  Row,  120  Mich.  1   (1899). 

5  Merrill  v.  Meade,  6  Kan.  App.  620 
(1897). 

6  McDonald  v.  Dewey,  202  U.  S.  510 
(1906). 

7  Hedlund  v.  Dewey,  105  Fed.  Rep. 
541  (1900);  Johnston  v.  Southwestern 
R.  R.  Bank,  3  Strobh.  Eq.  (S.  C.)  263, 
295  (1848).  A  receiver  of  a  national 
bank  may  sue  in  the  federal  courts 
to  ascertain  and  fix  the  liability  on 
stock  which  has  been  transferred  to 
avoid  liability  where  the  amount  in- 
volved is  over  $2,000.     Thompson  v. 


727 


§  266.] 


transferrer's  and  transferee's  liability. 


[cii.  XV. 


law.1  Where  national  bank  stock  has  been  transferred  in  order  to 
avoid  the  liability  thereon,  a  bill  in  equity  lies  to  hold  the  transferrer 
liable,  even  though  it  is  admitted  that  the  transfer  was  illegal.2  The 
state  statute  of  limitations  begins  to  run  against  an  assessment  of  the 
comptroller  on  national  bank  stock  from  the  time  the  assessment  is 
due,  and  the  same  length  of  time  will  be  a  bar  to  a  suit  in  equity, 
even  as  against  the  party  who  transferred  the  stock  to  an  irresponsible 
person  in  order  to  avoid  liability.3  Questions  relative  to  liability 
where  a  stock  is  placed  in  the  names  of  "dummies"  originally,  with- 
out ever  having  been  in  the  names  of  the  real  owners,  are  considered 
elsewhere.4 

§266.  The  rule  in  England. — The  rule  in  England  is  that  a 
stockholder  may  transfer  his  shares  when  the  company  is  in  a  failing 
condition,  to  a  man  of  straw  for  a  nominal  consideration,  even  thouerh 

^  to 

the  sole  purpose  of  such  a  transfer  be  to  escape  liability.  If  the 
transfer  be  out  and  out,  and  not  merely  colorable  and  collusive,  with 
a  secret  trust  attached,  it  is  valid,  and  the  transferrer  is  thereby  re- 
leased from  liability,  both  as  to  corporate  creditors  and  the  other 
stockholders.5     But  if  the  transfer  is  merely  colorable,   and  there 


German,  etc.  Co.,  76  Fed.  Rep.  892 
(1896).  Where  the  chief  part  of  an 
action  against  the  transferrer  of  stock 
to  enforce  his  subscription  liability  is 
to  set  aside  a  transfer  and  release, 
equity  <has  jurisdiction.  Wyman  v. 
Bowman,  127  Fed.  Rep.  257  (1904). 
A  judgment  creditor  of  a  corporation 
may  hold  liable  for  unpaid  subscrip- 
tion a  stockholder  who  has  trans- 
ferred his  stock  to  an  insolvent  per- 
son, known  so  to  be,  and  the  suit 
may  be  in  equity.  Hall  &  Farley 
v.  Alabama,  etc.  Co.,  143  Ala.  464 
(1905). 

l  A  person  who  has  transferred  his 
stock  in  an  insolvent  corporation  for 
the  purpose  of  avoiding  the  statutory 
liability  may  be  held  liable  on  such 
liability,  even  in  an  action  at  law, 
and  the  fraudulent  transfer  may  be 
shown  in  such  an  action.  Lamson  v. 
Hutchings,  118  Fed.  Rep.  321  (1902). 
A  suit  against  the  transferrer,  the 
transfer  being  in  fraud  of  creditors, 
is  at  law  and  not  in  equity.  Anglo- 
American,  etc.  Co.  v.  Lombard,  132 
Fed.  Rep.  721  (1904). 


2  Zimmerman  v.  Carpenter,  84  Fed. 
Rep.  747  (1898). 

3  Thompson  v.  German,  etc  Co.,  77 
Fed.  Rep.  258   (1896). 

4  See  §  253,  supra. 

5  Cited  in  McDonald  v.  Dewey,  202 
U.  S.  510  (1906).  See  also'De  Pass's 
Case,  4  De  G.  &  J.  544  (1859);  Wes- 
ton's Case,  L.  R.  4  Ch.  App.  20 
(1868);  Harrison's  Case,  L.  R.  6  Ch. 
App.  286  (1871);  Masters's  Case,  L. 
R.  7  Ch.  App.  292  (1872);  Hakim's 
Case,  L.  R.  7  Ch.  App.  296,  n.  (1869) ; 
Bishop's  Case,  L.  R.  7  Ch.  App.  296, 
n.  (1869);  Williams's  Case,  L.  R.  1 
Ch.  D.  576  (1875);  King's  Case,  L.  R. 
6  Ch.  App.  196  (1871);  Chynoweth's 
Case,  L.  R.  15  Ch.  D.  13  (1880);  Jes- 
sopp's  Case,  2  De  G.  &  J.  638  (1858)  ; 
Re  Taurine  Co.,  L.  R.  25  Ch.  D.  118 
(1883);  Moore  v.  McLaren,  11  U.  C. 
(C.  P.)  534  (1862);  Battie's  Case,  39 
L.  J.  (Ch.)  391  (1870).  Cf.  Bunn's 
Case,  2  De  G.,  F.  &  J.  275  (1860). 
Thus,  in  De  Pass's  Case,  4  De  G.  & 
J.  544  (1859),  the  facts  were  that  De 
Pass,  owning  two  hundred  and  fifty 
shares    of   stock    in    the    Mexican   & 


728 


ch. xv.]         transferrer's  and  transferee's  liability.  [§  266. 

exists  a  secret  trust  in  favor  of  the  transferrer,  so  that  as  between 
the  parties  there  has  been  no  bona  fide  transfer,  but  the  object  is  to 
secure  the  stock  to  the  transferrer  in  the  event  that  the  concern  be- 
comes prosperous,  and  to  leave  them  to  the  transferee  if  there  i3 
a  winding  up,  the  transferrer's  name  will  be  put  in  the  list  of  con- 
tributories,  and  the  pretended  transfer  be  wholly  ignored.1 

The  right  to  transfer  shares  in  England  seems  to  exist  up  to  the 
time  the  company  is  ordered  to  be  wound  up  and  the  business  is  sus- 


South  American  Company,  for  which 
he  had  paid  £1,750,  upon  learning  that 
the  concern  was  involved,  handed  the 
certificate  to  his  clerk,  without  hav- 
ing previously  spoken  to  him  of  the 
matter,  saying  that  he  might  have  the 
stock  for  a  sovereign,  which  the  clerk 
instantly  paid,  and  at  the  same  time 
accepted  the  shares.  In  about  three 
weeks  this  clerk  sold  the  shares  to 
another  person  in  the  employ  of  De 
Pass.  Upon  the  winding  up  of  the 
company,  which  was  ordered  within 
a  few  days  after  the  sale  by  De  Pass 
to  his  clerk,  although  it  was  shown 
that  the  shares  at  the  time  of  that 
sale  were  worth  considerably  more 
than  a  sovereign,  still,  inasmuch  as 
the  transaction  appeared  to  have  been 
absolute,  although  confessedly  made 
to  escape  possible  liability,  it  was 
held  that  the  transfer  might  stand, 
and  that  De  Pass  was  not  liable  in 
respect  to  the  shares  after  the  date 
of  the  sale  to  the  clerk.  In  Masters's 
Case,  L.  R.  7  Ch.  App.  292  (1872),  a 
transfer  of  two  hundred  and  eighty 
shares  of  stock  on  which  £15  per 
share  had  been  paid,  for  a  nominal 
consideration,  to  an  irresponsible  son- 
in-law  of  the  transferrer,  the  transfer 
being  made  only  for  the  purpose  of 
escaping  liability  upon  the  shares, 
was  held  to  discharge  the  transferrer. 
A  transfer  by  a  director  in  a  failing 
corporation  to  avoid  liability  is  void. 
Re  South  London,  etc.  Co.,  L.  R.  39 
Ch.  D.  324   (1888). 

i  Budd's  Case,  3  De  G.,  F.  &  J.  297 
(1861);  Payne's  Case,  L.  R.  9  Eq.  223 


(1869) ;  Kintrea's  Case,  39  L.  J.  (Ch.) 
193  (1869) ;  s.  c,  L.  R.  5  Ch.  App.  95; 
Chinnock's  Case,  Johns.  (Eng.  Ch.) 
714  (1860);  Costello's  Case,  2  De  G., 
F.  &  J.  302  (1860) ;  Hyam's  Case,  1  De 
G.,  F.  &  J.  75  (1859);  Lund's  Case, 
27  Beav.  465  (1859);  Ex  parte  Ben- 
nett, 18  Beav.  339  (1854);  Daniell's 
Case,  22  Beav.  43  (1856);  Eyre's  Case, 
31  Beav.  177  (1862);  Munt's  Case,  22 
Beav.  55  (1856);  Bank  of  Michigan 
v.  Gray,  1  U.  C.  (Q.  B.)  422  (1834); 
Cox's  Case,  33  L.  J.  (Ch.)  145  (1864) ; 
s.  c,  4  De  G.,  J.  &  S.  53;  Williams's 
Case,  L.  R.  9  Eq.  225,  n.  (1869);  Cap- 
per's Case,  L.  R.  3  Ch.  App.  458 
(1868);  Mann's  Case,  L.  R.  3  Ch.  App. 
459,  n.  (1867);  Ex  parte  Hatton,  31 
L.  J.  (Ch.)  340  (1862);  Pugh's  Case, 
L.  R.  13  Eq.  566  (1872);  Lankester'3 
Case,  L.  R.  6  Ch.  App.  905,  n.  (1870); 
Gilbert's  Case,  L.  R.  5  Ch.  App.  559 
(1870).  Cf.  Mitchell's  Case,  L.  R.  9  Eq. 
363  (1870);  Slater's  Case,  35  Beav. 
391  (1866) ;  Castellan  v.  Hobson,  L.  R. 
10  Eq.  47  (1870);  Maynard  v.  Eaton, 
L.  R.  9  Ch.  App.  414  (1874);  Colqu- 
noun  v.  Courtenay,  43  L.  J.  (Ch.)  338 
(1874);  29  L.  T.  Rep.  877;  Richard- 
son's Case,  L.  R.  19  Eq.  588  (1875). 
A  transfer  to  an  irresponsible  person 
of  stock  in  a  failing  corporation  does 
not  release  the  transferrer  from  his 
subscription  liability,  it  appearing 
that  the  transferrer  intended  to  pro- 
tect the  transferee,  and  that  the 
transaction  was  really  a  nullity.  Re 
Discoverers,  etc.  Corp.  Ltd.,  97  L.  T. 
Rep.  757  (1907),  distinguishing  De 
Pass's  Case,  4  De  G.  &  J.  544. 


729 


§266.]  TRANSFERRER'S  AND  TB  I fS  LIABILITY.  [dl.XV. 


pended.1  But  after  that  time  the  right  is  gone,  and  it  is  the  du 
of  the  management  to  refuse  to  allow  a  transfer.2  Any  collusion 
between  the  stockholders  and  the  directors  to  evade  the  rules  govern- 
ing transfers,  for  the  purpose  of  evading  liability,  will  invalidate  a 
transfer,3  Persons  to  whom  shares  have  been  transferred  without 
their  knowledge  or  assent  are  not  estopped,  when  the  knowledge  is 
brought  to  them,  from  repudiating  and  denying  the  stockholdership.4 

i  De  Pass's  Case,  4  De  G.  &  J.  544    App.  939   (1873);   Mann's  Case,  L.  R. 


(1859),  and  the  cases  generally  in  the 
preceding  notes. 

2  Mitchell's  Case,  L.  R.  4  App.  Cas. 
548  (1879);  Weston's  Case,  L.  R.  4 
Ch.  20,  30  (18C8);  Ex  parte  Parker, 
L.  R.  2  Ch.  App.  685  (1867);  Chap- 
pell's  Case,  L.  R.  6  Ch.  902  (1871). 
See  also  §  872,  infra.  In  this  country 
directors  have  in  general  no  power  to 
refuse  or  prevent  transfers,  such  as 
inheres  in  the  boards  of  management 
in  English  companies.  See  §§  622,  641, 
infra. 

3  Eyre's  Case,  31  Beav.  177  (1862); 
Bennett's  Case,  5  De  G.,  M.  &  G.,  284 
(1854).     A   director   will    not   be   al- 
lowed to  make  use  of  his  position  as 
director    to    transfer    his    stock,    and 
thus     escape  chargeability     upon     it. 
Munt's  Case,  22  Beav.  55  (1856).    Nor 
will  a  stockholder  be  allowed  to  re- 
lieve himself,  when  he  learns  of  the 
probable  insolvency  of  the  concern,  by 
inducing    the    directors    to    postpone 
their  application  for  an  order  to  wind 
up  until  he  have  time  to  transfer  his 
shares  to  a  pauper  or  other  irrespon- 
sible person.    Ex  parte  Parker,  L.  R. 
2  Ch.  App.  685  (1867) ;  Gilbert's  Case, 
L.    R.    5    Ch.    App.    559     (1870);    Al- 
lin's  Case,  16  Eq.  449   (1873).    And  a 
director  who  transfers  shares  stand- 
ing in  his  name  to  a  person  already 
holding  all  the  shares  any  one  person 
is   allowed  to  hold  will   not  thereby 
escape  liability.     Ex  parte  Brown,  19 
Beav.   97    (1854).     In  general,   more- 
over, a  transferrer  is  not  exempt  from 
liability  by  reason  of  a  transfer,  un- 
less the  transferee  has  the  present  ca- 
pacity to  assume  the  liability.     Nick- 
alls    v.    Merry,    L.    R.    7    H.    L.    530 
(1875);  Brown  v.  Black,  L.  R.  8  Cb. 


3  Ch.  App.  459,  n.  (1867).  Cf.  John- 
son v.  Laflin,  5  Dill.  65,  81  (1878); 
s.  c,  13  Fed.  Cas.  758,  764;  aff'd,  103 
U.  S.  800  (1880);  Re  Reciprocity 
Bank,  22  N.  Y.  9  (I860).  Accordingly 
a  transfer  to  an  infant  for  the  pur- 
pose of  escaping  liability  is  futile. 
Symons's  Case,  L.  R.  5  Ch.  App.  298 
(1870);  Weston's  Case,  L.  R.  5  Ch. 
614  (1870);  Curtis's  Case,  L.  R.  6  Eq. 
455  (1868);  Castello's  Case,  L.  R.  8 
Eq.  504  (1869);  Walsh  v.  Union  Bank, 
5  Quebec  L.  R.  298   (1879). 

4  Birch's    Case,    2    De    G.    &    J.    10 
(1857);   Fox's  Case,  3  De  G.,  J.  &  S. 
465    (1863);   Higgs's  Case,  2  Hem.  & 
M.  657    (1865);   Somerville's  Case,  L. 
R.  6  Ch.  App.  266  (1871).    Cf.  Bullock 
v.  Chapman,  2  De  G.  &  Sm.  211  (1848). 
And  see  also  Re  Reciprocity  Bank,  22 
N.    Y.    9    (I860).      Sigua,   etc.   Co.   v. 
Greene,  88  Fed.  Rep.  207   (1898).     A 
colorable   transfer,    as   has   appeared, 
will    not    operate    to    discharge    the 
transferrer  where  shares  were  collu- 
sively  assigned  to  a  servant  for  the 
purpose  of  evading  liability.     Hence 
when  the  servant,  upon  the  concern 
becoming  solvent,  attempted  to  claim 
the  shares  as  though  the  transfer  had 
been   out  and  out,   the  court  having 
previously  decided   against  the    bona 
fides  of  the  transaction,   it  was  held 
that  the  owner  was  entitled  to  a  dec- 
laration   that    the    servant    held  the 
shares  in  trust  for  him.     Colquhoun 
v.    Courtenay,    43    L.    J.     (Ch.)     338 
(1874);    29  L.  T.  Rep.  877.     As  to  a 
transfer    made    in    ignorance    of    the 
fact  that  a  winding  up  has  been  com- 
menced, see  Emmerson's  Case,  L.  R. 
1  Ch.  App.  433   (1866). 


_730 


CHAPTER  XVI. 

ISSUE  OF  PREFERRED  STOCK  AND   STOCK  UPON  WHICH   INTEREST 

IS  GUARANTEED. 


§267. 
268. 

269, 


271. 


272. 


What  is  preferred  stock? 

When  may  a  corporation  issue 
preferred  stock? 

270.  Rights  of  preferred  stock- 
holders— Amount  of  prefer- 
ence —  Voting  —  Subsequent 
leases,    consolidations,    etc. 

Preferred  stockholders  are  not 
creditors — Dividends  can  be 
only  from  profits — Mortgages 
securing  preferred  stock. 

What  are  net  profits  applicable 
to  preferred  dividends — The 
preferred  stockholder's  rem- 
edy to  enforce  a  dividend. 


§§273,274.  Arrears  of  preferred  stock, 
to  what  extent  payable  sub- 
sequently— Remedies  to  en- 
force payment  of  arrears. 

275.  Rights  of  the  assignee  or  trans- 

feree   of    preferred    stock   in 
arrears  of  dividends. 

276.  "Special    stock"    in    Massachu- 

setts. 

277.  Interest-bearing  stocks. 

278.  Rights   of   preferred   stockhold- 

ers on  dissolution  and  on  a 
reduction  of  the  capital  stock. 


§  267.  What  is  preferred  stock? — By  preferred  stock  is  to  be 
understood  stock  which  entitles  the  holder  to  receive  dividends  from 
the  earnings  of  the  company  before  the  common  stock  is  paid  a  divi- 
dend from  such  earnings.1  In  other  words,  it  is  stock  entitled  to 
dividends  from  the  income  or  earnings  of  the  corporation  before 
any  other  dividend  is  paid.2  The  relation  of  debtor  and  creditor 
does  not  exist  between  the  preferred  stockholders  and  the  corpora- 
tion, and  the  right  to  a  preferred  or  guaranteed  dividend  is  not  a 
debt  until  the  dividend  is  declared.  A  dividend  is  money  paid  out 
of  profits  by  a  corporation  to  its  stockholders.  A  preferred  dividend 
is  nothing  more  than  that  which  is  paid  to  one  class  of  stockholders 
in  priority  to  that  to  be  paid  to  another  class.3     Guaranteed  stock  is 


1  Totten  v.  Tison,  54  Ga.  139  (1875). 

2  Chaffee  v.  Rutland  R.  R.,  55  Vt. 
110  (1S82). 

3  Belfast,  etc.  R.  R.  v.  Belfast,  77 
Me.  445  (1885);  Taft  v.  Hartford, 
etc.  R.  R.,  8  R.  I.  310,  333  (1866); 
Chaffee  v.  Rutland,  etc.  R.  R.,  55  Vt. 
110  (1882).  A  preferred  dividend  has 
also  been  defined  as  "substantially  in- 
terest chargeable  exclusively  on  prof- 
its." Henry  v.  Great  Northern  Ry., 
1  De  G.  &  J.  606,  637  (1857);  Craw- 
ford v.  North  Eastern,   etc.  R.  R.,  3 


Jur.  (N.  S.)  1093  (1856).  The  pre- 
ferred stockholder  is  one  who  may 
say:  "Nobody  shall  have  any  portion 
of  the  profits  of  the  company  until  I 
have  been  paid  my  dividend."  Henry 
v.  Great  Northern  Ry.,  4  Kay  &  J.,  1, 
32  (1857);  aff'd,  1  De  G.  &  J.  606.  A 
preferred  dividend  is  said  to  be  "a 
pledge  of  the  funds  legally  applicable 
to  the  purposes  of  a  dividend."  Taft 
v.  Hartford,  etc.  R.  R.,  8  R.  I.  310, 
335  (1866).  "Payment  of  dividends  to 
preferred    stockholders    differs    from 


731 


§  268.]  PREFERRED  STOCK.  [CH.  XVI. 

the  same  thing  as  preferred  stock,1  except  of  course  where  one  cor- 
poration guarantees  dividends  on  the  stock  of  another  corporation.2 
Founders'  shares  are  a  species  of  preferred  or  deferred  stock,  pecu- 
liar to  England.3 

§  268.  When  may  a  corporation  issue  preferred  stock? — Upon 
the  incorporation  of  a  company  the  incorporators  and  stockholders 
may  agree  that  a  part  of  the  stock  shall  be  preferred  stock.  This 
is  generally  done  by  a  by-law  or  resolutions.  It  is  undoubte<l  Il- 
legal, since  there  is  no  rule  of  public  policy  that  forbids  it,  and  it 
amounts  only  to  a  contract  of  the  stockholders  as  to  how  they  shall 
divide  the  profits  among  themselves.4 

such  payment  to  the  holders  of  idends  cumulative.  See  §§  273,  274, 
common  stock  only  in  that  they  are  infra. 
entitled  to  dividends  in  priority  to  2  See  §  775,  infra. 
any  dividends  upon  the  common  3  See  §  14,  supra. 
stock."  Miller  v.  Ratterman,  47  Ohio  4  Coltraine  v.  Blake,  113  Fed.  Rep. 
St.  141,  158  (1890).  Stock  issued  as  785  (1902);  Hamlin  v.  Toledo,  etc. 
"preferred  debenture  shares  of  the  R.  R.  78  Fed.  Rep.  664  (1897);  Hazel- 
capital  stock"  under  the  New  York  hurst  v.  Savannah,  etc.  R.  R.,  43  Ga. 
statute  is  a  legal  contradiction  on  its  13  (1871);  Synnott  v.  Cumberland, 
face,  and  in  regard  to  taxation  will  be  etc.  Assoc,  117  Fed.  Rep.  379  (1902). 
construed  as  being  preferred  stock.  A  corporation  may  guarantee  divi- 
People  v.  Miller,  180  N.  Y.  16  (1904).  dends  on  its  stock.  Wisconsin  Lum- 
Preferred  stock  under  the  New  Jersey  ber  Co.  v.  Greene,  etc.  Co.,  127  Iowa, 
statute  does  not  differ  from  the  com-  350  (1904).  A  building  and  loan  as- 
mon  stock  in  regard  to  the  liability  sociation  may  issue  preferred  stock, 
to  calls  for  the  unpaid  subscription  Wilson  v.  Parvin,  119  Fed.  Rep.  652 
price  in  order  to  pay  creditors.  Kirk-  (1903).  A  telephone  company  may 
Patrick  v.  American,  etc.  Co.,  140  Fed.  issue  stock,  the  dividend  to  consist  of 
Rep.  186  (1905).  a  right  to  a  pass  for  messages  over 
i  Taft  v.  Hartford,  etc.  R.  R.,  8  R.  I.  its  lines.  Wisconsin  Lumber  Co.  v. 
310,  333,  335  (1866) ;  Field  v.  Lamson,  Greene,  etc.  Co.,  127  Iowa,  350  (1904). 
etc.  Co.,  162  Mass.  388  (1894);  Henry  Where  there  are  but  a  few  stockhold- 
v.  Great  Northern  Ry.,  4  Kay  &  J.,  ers  in  a  corporation  and  without  any 
1, 12,  21  (1857) ;  aff'd,  1  De  G.  &  J.  606;  formal  corporate  action  they  turn  a 
Lockhart  v.  Van  Alstyne,  31  Mich.  76  part  of  the  capital  stock  into  pre- 
(1875).  "Whether  the  stock  is  to  be  ferred  stock  and  thereafter  divide  the 
called  interest-bearing  stock,  preferred  profits  among  themselves  without  de- 
stock,  or  guarantied  stock  makes  no  claring  technical  dividends  with  the 
difference,  as  the  terms,  when  applied  knowledge  and  consent  of  all  the 
to  shares  of  stock,  mean  practically  stockholders,  no  one  of  them  nor  the 
the  same  thing."  Cratty  v.  Peoria,  corporation  itself  can  subsequently 
etc.  Ass'n,  219  111.  516  (1906).  A  guar-  complain  and  defeat  a  suit  by  one  of 
anteed  dividend  differs  in  nothing  them  for  the  amount  so  credited  to 
from  a  preferred  dividend.  Miller  v.  him  on  the  books,  corporate  creditors 
Ratterman,  47  Ohio  St.  141  (1890).  not  being  injured.  Breslin  v.  Fries- 
Cf.  Boardman  v.  Lake  Shore,  etc.  Ry.,  Breslin  Co.,  70  N.  J.  L.  274  (1904). 
84  N.  Y.  157,  174  (1881),  holding  that  The  court  said:  "In  the  present  case 
the  word  "guaranteed"  made  the  div-  we  apply  this  doctrine  to  the  non-ob- 

732 


CH.  XVI.] 


PREFERRED  STOCK. 


[§  268. 


But  after  the  corporation  has  been  organized,  with  common  stock 
only,  and  the  stock  issued  in  whole  or  in  part,  and  business  com- 
menced and  money  invested  in  stock,  it  is  then  too  late  to  make  the 
unissued  stock  preferred  stock,  or  to  increase  the  capital  stock  and 
issue  preferred  stock,  unless  all  the  stockholders  assent  thereto,  or  a 


servance  of  legal  forms  respecting  the 
creation  of  preferred  stock,  the  aban- 
donment by  preferred  stockholders  of 
voting  powers,  the  resignation  of  di- 
rectors, the  reduction  of  the  number 
of  directors  from  six  to  three,  and 
the  apportionment  of  dividends  as 
between  the  stockholders  entitled 
thereto.  In  respect  to  these  matters 
the  jury  was  fully  justified  in  finding 
that  unanimous  consent  of  the  stock- 
holders of  the  defendant  company  had 
been  given,  and  had  been  acted  on  in 
good  faith  by  the  plaintiff  and  others 
concerned  during  a  course  of  years, 
and  that  plaintiff  could  not  be  re- 
stored to  the  status  quo  ante,  were 
the  assent  of  his  fellow  stockholders 
and  of  the  company  to  be  now  with- 
drawn." Where  a  corporation  issues 
its  stock  in  payment  of  a  debt  and 
guarantees  certain  dividends  thereon, 
and  afterwards  repudiates  the  guar- 
antee as  ultra  vires,  the  stockholder 
may  return  the  stock  and  sue  for  the 
money  he  paid  therefor.  McVity  v. 
Albro  Co.,  90  N.  Y.  App.  Div.  109 
(1904);  aff'd,  180  N.  Y.  554.  In  the 
case  of  Toledo,  etc.  R.  R.  v.  Continen- 
tal Trust  Co.,  95  Fed.  Rep.  497,  531 
(1899),  the  court  said,  in  regard  to 
the  legality  of  issuing  preferred  stock 
where  the  statutes  were  silent  on  the 
subject,  "such  an  agreement  is  noth- 
ing more  than  a  contract  between 
stockholders  as  to  how  they  shall  di- 
vide the  corporate  property  and  prof- 
its, and,  if  not  prohibited,  is  clearly 
within  the  general  powers  of  such 
corporators.  It  is  difficult  to  see  how 
such  an  arrangement  is  of  the  slight- 
est consequence  to  the  public,  or  to 
creditors  of  the  corporation.  It  does 
not  withdraw  the  property  from  the 
demands  of  creditors,  and  provides 
only  for  the  division  among  those  who 


are  the  beneficial  owners  of  the  corpo- 
rate property,   after  the   payment   of 
corporate  obligations."     The  case  Re 
South  Durham  Brewery  Co.,  L.  R.  31 
Ch.  D.  261  (1885),  clearly  holds  that, 
although  the  charter  and  statutes  are 
silent  on  the  subject,  yet  that  the  by- 
laws may  provide  for  the  issue  of  pre- 
ferred stock,  and,  this  provision  being 
in  the  original  by-laws,  a  stockholder 
cannot  enjoin  a  subsequent  issue  of 
the  stock;  approving  Harrison  v.  Mex- 
ican   Ry.,    L.    R.    19    Eq.    358    (1875). 
Judge  Cooley,  in  the  case  of  Lockhart 
v.  Van  Alstyne,   31  Mich.   76,   81,   85 
(1875),  said,  in  reference  to  the  is- 
sues of  preferred  stock,  even  though 
the   issues   are   not   provided   for   by 
charter  or  statute,  "there  can  be  no 
reasonable  objection  to  them  if  they 
are  entered  into  with  full  knowledge 
on  the  part  of  all  concerned.     .     .     . 
The  guaranty,  properly  construed,  is 
not    void,    but    unobjectionable."    In 
Kent  v.  Quicksilver  Min.  Co.,  78  N.  Y. 
159     (1879),    affirming    17    Hun,    169, 
the  court  said:      "We  know  nothing 
in   the   constitution   or   the  law   that 
inhibits  a  corporation  from  beginning 
its    corporate    action    by    classifying 
the  shares  in  its  capital  stock,  with 
peculiar  privileges  to  one  share  over 
another,  and  thus  offering  its  stock  to 
the   public  for  subscriptions   thereto. 
No  rights  are  got  until  a  subscription 
is  made.  Each  subscriber  would  know 
for  what  class  of  stock  he  put  down 
his  name,  and  what  right  he  got  when 
he  thus  became  a  stockholder.    There 
need    be    no    deception    or    mistake; 
there    would    be    no    trenching    upon 
rights  previously  acquired;     no   con- 
tract,  express   or   implied,   would   be 
broken  or  impaired."    The  same  ques- 
tion has  recently  arisen  in  the  United 
States  courts,  and  the  court  there  held 


733 


§  268.] 


PREFERRED   STOCK. 


[CH.  XVI. 


statute  authorizes  such  issue.     It  would  be  a  breach,  of  contract  to 
issue  preferred  stock  then,  inasmuch  as  the  existing  stockholders  in- 


that  a  stockholder  who  participated 
in  the  issue  cannot,  after  two  years, 
when  the  corporation  is  insolvent,  say- 
that  the  statutes  of  the  state  author- 
ized the  issue  of  common  stock  only. 
Banigan  v.  Bard,  134  U.  S.  291  (1890), 
aff'g  Bard  v.  Banigan,  39  Fed.  Rep. 
13.  Although  the  banking  law  of  New 
York  provides  only  for  instalment 
stock  for  building  associations,  yet 
the  parties  interested  may  provide 
for  prepaid  and  income  stock  as  well 
as  instalment  stock.  People  v.  Pres- 
ton, 140  N.  Y.  549  (1894).  Preferred 
stock  may  be  issued  without  statutory 
authority.  Havemeyer  v.  Bordeaux 
Co.,  8  Nat.  Corp.  Rep.  127  (111.  C.  C, 
1894).  After  the  lapse  of  twenty 
years,  the  creation  of  preferred  stock 
cannot  be  attacked  by  a  stockholder. 
Higgins  v.  Lansingh,  154  111.  301 
(1895).  A  corporate  creditor  can- 
not object  to  the  issue  of  preferred 
stock  so  long  as  it  is  fully  paid  for, 
even  though  such  stock  was  made  pre- 
ferred stock  by  agreement  of  the 
stockholders  and  not  in  accordance 
with  any  statute.  First,  etc.  Bank  v. 
Peoria  Watch  Co.,  191  111.  128  (1901). 
The  highest  authority  in  England, 
Lindley  on  Companies  (Eng.  1902),  p. 
550,  says:  "Shares  conferring  on  their 
holders  preferential  or  additional 
rights  not  enjoyed  by  the  holders  of 
other  shares  are  called  preference 
shares.  They  can  only  be  created 
when  the  authority  to  create  them  is 
given  by  statute  or  charter,  or  by 
agreement  between  all  parties  inter- 
ested." If,  however,  authority  to  is- 
sue them  is  given  by  a  company's 
memorandum  of  association,  or  by  its 
articles  of  association  as  originally 
framed,  preference  shares  may  be  is- 
sued. If  all  assent  the  issue  is  legal. 
Re  Bridgewater  Nav.  Co.,  L.  R.  39 
Ch.  D.  1  (1888);  McGregor  v.  Home 
Ins.  Co.,  33  N.  J.  Eq.  181  (1880).  In 
Bates  v.  Androscoggin,  etc.  R.  R.,  49 


Me.  491  (1860),  preferred  stock  was 
issued  by  unanimous  consent,  but 
without  express  statutory  authority. 
Preferred  stock  was  issued  without 
statutory  authority  in  Gordon  v.  Rich- 
mond, etc.  R.  R.,  78  Va.  501  (1884). 
In  Sturge  v.  Eastern  Union  Ry.,  7 
De  G.,  M.  &  G.  158  (1855),  the  court 
declined  to  pass  upon  the  question 
whether,  at  common  law,  it  was  legal 
for  a  corporation  to  issue  preferred 
stock.  In  England  a  stock  dividend 
of  preferred  stock  may  be  enjoined 
by  any  stockholder,  inasmuch  as  any 
stock  dividend  may  be  objected  to.  In 
America  the  rule  is  different.  See  ch. 
XXXII,  infra.  Where  a  person  bought 
new  preference  stock  of  a  railway 
company  which  both  he  and  the  di- 
rectors bona  fide  believed  the  company 
had  power  to  issue,  but  which,  in 
truth,  it  had  not,  it  was  held  that 
he  had  no  remedy  against  them,  for 
there  was  nothing  more  than  a  com- 
mon mistake  of  law.  Eaglesfield  v. 
Londonderry,  L.  R.  4  Ch.  D.  693 
(1876);  affd  (H.  L.),  26  W.  R.  540. 
It  is  no  defense  to  a  subscription 
for  stock  that  the  company  had  secret- 
ly agreed  with  certain  subscribers 
to  give  them  a  preferred  dividend. 
Such  an  agreement  is  void  as  regards 
another  subscriber  who  did  not  assent 
thereto.  Ryder  v.  Alton,  etc.  R.  R.,  13 
111.  516  (1851).  In  the  case  of  Bigbee, 
etc.  Co.  v.  Moore,  121  Ala.  379  (1899), 
the  court  sustained  a  by-law  whereby 
stockholders  in  a  steamboat  company 
each  put  a  boat  into  the  service  of 
the  company  and  each  was  to  draw 
dividends  on  his  stock  only  so  long 
as  his  boat  remained  fit  for  service, 
such  dividend  to  cease  upon  the  boat 
becoming  unfit  for  service  until  it  was 
repaired  by  the  owner.  Even  though 
the  preference  given  by  preferred 
stock  is  illegal,  yet  the  stock  itself 
may  be  valid  as  common  stock.  For- 
wood  v.  Eubank,  106  Ky.  291  (1899). 


734 


CH.  XVI.] 


PREFERRED  STOCK. 


[§  268. 


vested  their  money  on  the  basis  of  common  stock  only.  Hence  a 
dissenting  stockholder  may  enjoin  the  corporation,  the  directors,  and 
the  majority  of  stockholders  from  issuing  preferred  stock  in  such  a 


case/ 

Preferred  stock  is  not  legal  in  build- 
ing associations.  Sumrall  v.  Commer- 
cial Bldg.  etc.,  106  Ky.  260  (1899); 
Forwood  v.  Eubank,  106  Ky.  291 
(1899).  Contra,  119  Fed.  Rep.  652. 
Where  a  joint-stock  association  having 
$12,000,000  surplus  invested  in  securi- 
ties, issues  its  bonds  to  the  amount  of 
$12,000,000  to  its  stockholders  as  a  div- 
idend in  place  of  distributing  such  se- 
curities or  the  proceeds  thereof,  the 
interest  on  the  bonds  to  be  paid  only 
from  the  income  from  the  securities 
after  paying  the  debts,  such  bonds  do 
not  belong  to  a  life  tenant,  but  be- 
long to  the  remaindermen.  D'Ooge 
v.  Leeds,  176  Mass.  558  (1900),  the 
court  saying:  "If  this  company  had 
been  a  corporation,  and  had  wished 
to  make  a  dividend  of  preferred  stock 
to  its  shareholders,  it  would  have 
done  it  in  just  this  way.  There  has 
been  no  dividend  of  any  money  or 
property  among  the  shareholders. 
There  has  been  merely  a  change  of  the 
form  of  the  ownership  in  the  property 
by  dividing  it  into  two  classes,  and  by 
making  a  different  provision  in  regard 
to  dividends  for  each  class,  and  by 
giving  one  class  a  preference  over  the 
other  in  its  right  to  the  assets  on 
final  liquidation.  Not  a  dollar's  worth 
of  the  property  of  the  company  is 
taken  out  of  the  business,  or  changed 
in  its  relation  to  the  business.  .  .  . 
It  is  plain  that  the  action  of  the  com- 
pany was  like  making  a  dividend  of 
preferred  stock.  It  was  a  more  formal 
capitalization  of  earnings  which  pre- 
viously had  been  capitalized  in  sub- 
stance and  effect."See!26N.Y.A.D.176 
A  corporation  by  the  action  of  its 
board  of  directors  and  consent  of  all 
its  stockholders  may  agree  that  a  cer- 
tain percentage  of  its  profits  shall  be 
paid  annually  to  a  person  for  services 
already  rendered  by  him.    In  a  suit  by 


him  to  enforce  such  agreement  and 
asking  an  injunction  against  any  sales 
of  stock,  except  with  notice  of  such 
agreement,  stockholders  are  necessary 
parties  defendant.  Such  an  agree- 
ment is  not  an  exclusion  of  future 
boards  of  directors  from  the  manage- 
ment of  the  company.  Dupignac  v. 
Bernstrom,  76  N.  Y.  App.  Div.  105 
(1902).   See  96  Pac.  Rep.  52. 

i  Kent  v.  Quicksilver  Min.  Co.,  78 
N.  Y.  159  (1879).  After  common  stock 
has  been  issued,  no  provision  having 
been  made  at  the  time  for  the  issue 
of  preferred  stock,  and  there  being 
no  charter  provision  authorizing  the 
issue  of  preferred  stock,  any  stock- 
holder can  object  to  an  issue  of  pre- 
ferred stock.  Knoxville,  etc.  R.  R.  v. 
Knoxville,  98  Tenn.  1  (1896).  Com- 
pare Andrews  v.  Gas  Meter  Co.,  [1897] 
1  Ch.  361,  overruling  Hutton  v.  Scar- 
borough, etc.  Co.,  2  Dr.  &  Sm.  521 
(1865).  In  the  case  of  Moss  v.  Syers, 
32  L.  J.  (Ch.)  711  (1863),  the  court, 
at  the  instance  of  dissenting  stock- 
holders, enjoined  the  issue  of  pre- 
ferred stock  which  was  not  provided 
for  by  the  charter  or  by  the  original 
agreement  of  the  stockholders.  A 
pledgee  of  a  certificate  of  stock  is  not 
bound  by  a  subsequent  agreement  of 
all  the  stockholders  to  surrender  to 
the  corporation  a  part  of  their  stock, 
which  part  is  then  to  be  considered 
preferred  stock  and  is  to  be  sold  by 
the  corporation  for  the  purpose  of 
paying  corporate  debts.  Although  all 
the  other  stock  has  had  this  agree- 
ment stamped  on  the  certificates,  yet 
the  corporation  cannot  insist  that 
the  purchaser  of  the  stock  so  pledged 
shall  allow  the  same  agreement  to  be 
stamped  on  the  new  certificates  issued 
to  such  purchaser.  The  court  will 
order  a  transfer  free  from  the  agree- 
ment.   Campbell  v.  American  Zylonite 


735 


§  268.] 


PREFERRED    STOCK. 


[Cli.  XVI. 


So  also  a  common  stockholder  may  object  where  preferred  and 
common  stock  are  already  issued  and  an  attempt  is  made  to  issue 
second  preferred.1 

But  the  dissenting  stockholder  must  move  quickly  in  the  matter. 
If  he  delays  in  bringing  his  suit,  so  that  the  interested  parties  are 
justified  in  believing  that  he  acquiesces  in  the  issue,  and  the  issue 
itself  is  made,  his  remedy  is  barred.  His  injunction  suit  will  fail.2 
Where  the  statutes  of  the  state  authorize  the  issue  of  preferred  stock, 
or  where  the  by-laws  contemplate  a  future  issue  of  such  stock,  its 
issue  will  be  legal,  even  though,  some  of  the  stockholders  object.3 

Preferred  stock  may  be  issued  subsequently  to  the  issue  of  the 
common,  and  against  the  dissent  of  the  minority  stockholders,  where 
the  legislature  amends  the  charter  and  provides  for  the  issue  of  pre- 


Co.,  122  N.  Y.  455  (1890).  A  prelim- 
inary injunction  against  the  issue  of 
preferred  stock  in  order  to  raise  capi- 
tal for  an  old  corporation  was  refused 
in  Fielden  v.  Lancashire,  etc.  Ry.,  2 
De  G.  &  Sm.  531  (1848),  because  only 
five  stockholders  dissented,  but  the 
court  expressly  refused  to  declare  the 
issue  a  legal  one.  70  Atl.  Rep.  295. 

i  Melhado  v.  Hamilton,  28  L.  T. 
Rep.  578  (1873);  affirmed,  20  L.  T. 
Rep.  364. 

2  A  stockholder  who  is  an  officer  of 
the  company,  who  is  active  in  having 
preferred  stock  issued,  subscribes  for 
it,  pays  for  it,  takes  his  certificate 
therefor,  votes  upon  it,  and  induces 
others  to  take  it,  cannot  after  two 
years,  when  the  corporation  is  insolv- 
ent, say  that  the  statutes  of  the  state 
authorize  the  issue  of  common  stock 
only.  Banigan  v.  Bard,  134  U.  S. 
291  (1890),  aff'g  Bard  v.  Banigan,  39 
Fed.  Rep.  13.  In  Andrews  v.  Gas 
Meter  Co.,  [1897]  1  Ch.  361,  where 
preferred  stock  had  been  issued  in 
1865  upon  an  increase  of  the  capital 
stock,  although  neither  the  charter 
nor  the  by-laws  authorized  any  prefer- 
ences, the  court  held  that  the  issue 
was  legal,  and  overruled  Hutton  v. 
Scarborough,  etc.  Co.,  2  Dr.  &  Sm.  521 
(1865);  rev'g  Andrews  v.  Gas  Meter 
Co.,  75  L.  T.  Rep.  267.  The  court  has 
refused  relief  where  there  was  a  de- 


lay of  four  years,  Kent  v.  Quicksilver 
Min.  Co.,  78  N.  Y.  159  (1879);  or  ten 
years,  Taylor  v.  South,  etc.  R.  R.,  13 
Fed.  Rep.  152  (1882).  Delays  in  rais- 
ing the  question  of  the  validity  of  an 
issue  of  preferred  stock,  advantages 
having  accrued  in  the  meantime  to 
the  corporation  and  the  stockholders, 
have  been  held  such  acquiescence  as 
will  bar  the  right  of  a  stockholder  to 
object.  Acceptance  of  the  preferred 
stock  and  dividends  thereon  also  bars 
the  right  to  challenge  the  legality  of 
the  issue.  Branch  v.  Jesup,  106  U.  S. 
468  (1882).  Preferred  stock  may,  by 
unanimous  consent,  be  issued,  al- 
though the  statutes  are  silent  concern- 
ing it.  When  issued  after  the  first 
issue  of  stock  has  been  made,  it  may 
be  prevented  by  a  dissenting  stock- 
holder; yet  delay  on  the  part  of  the 
latter  will  bar  his  objection.  Hazle- 
hurst  v.  Savannah,  etc.  R.  R.,  43  Ga. 
13  (1871).  But  see  Moss  v.  Syers,  32 
L.  J.  (Ch.)  711  (1863). 

3  If  the  by-laws  provide  that  any  in- 
creased capital  may  be  made  in  such 
manner  and  with  rules,  regulations, 
privileges,  and  conditions  as  a  meet- 
ing of  the  stockholders  might  deter- 
mine, preferred  stock  may  be  issued 
on  an  increase  of  the  capital  stock. 
Harrison  v.  Mexican  Ry.,  L.  R.  19  Eq. 
358   (1875). 


736 


CH.    XVI.] 


PREFERRED    STOCK. 


[§  268. 


ferred  stock.     Such  an  amendment  is  considered  incidental  and  is 
constitutional.1 

But  where  the  articles  of  incorporation  specify  the  amount  of  pre- 
ferred and  common  stock,  and  also  state  that  further  stock  may  he 
issued,  this  increased  stock  must  he  common  stock,  and  cannot  he 
second  preferred  stock,  even  though  the  by-laws  provide  that  it  may 
be  issued  on  such  conditions  as  the  corporation  may  determine.2 
Nevertheless  the  articles  of  incorporation  may  he  so  drawn  as  to  allow 
subsequent  issues  of  preferred  stock.3     Thus,  where  the  certificate  of 


i  Everhart  v.  West  Chester,  etc.  R. 
R.,  28  Pa.  St.  339  (1857),  holding  that 
a  charter  amendment  authorizing  the 
issue  was  legal;  Rutland,  etc.  R.  R.  v. 
Thrall,  35  Vt.  536,  545  (1863),  to  same 
effect,    and    holding   that    a    common 
stockholder  could  not  defeat  his  sub- 
scription   on    this   ground;    Williston 
v.  Michigan,  etc.  R.  R.,  95  Mass.  400 
(1866);  Curry  v.  Scott,  54  Pa.  St.  270 
(1867);    Covington   v.   Covington,  etc. 
Bridge  Co.,  10  Bush  (Ky),  69  (1874), 
where  the  dissenting  stockholder  did 
not   object   until   after   the   preferred 
stock  had  been  issued  and  dividends 
paid  upon  it.    Under  its  reserved  pow- 
er to  amend  or  repeal  a  charter,  the 
legislature  may  authorize  the  corpora- 
tion on  a  two-thirds  vote  of  its  stock- 
holders    to     issue     preferred     stock. 
Hinckley    v.    Schwa  rzschild,   etc.    Co., 
107  N.  Y.  App.  Dlv.  470  (1905).   Even 
though  the  statute  under  which  a  cor- 
poration  is  organized  authorizes  the 
issue  of  preferred  stock  only  on  unani- 
mous consent,   yet  such  statute  may 
be  amended  after  the  corporation  has 
been    formed   authorizing   such   issue 
on  a  two-thirds  vote  of  the  stockhold- 
ers.    Hinckley  v.  Schwarzschild,  etc. 
Co.,  45  N.  Y.  Misc.  Rep.  176    (1904). 
In  Covington,  etc.  Bridge  Co.  v.  Sar- 
gent,  1   Cin.    Super.   Ct.    (Ohio),   354 
(1871),   there   is   an   intimation   that 
such  a  statute  is  unconstitutional,  and 
the  court  held  that  statutory  power  to 
issue  a   certain  amount  of  preferred 
stock  did  not  authorize  an   issue  of 
partly  preferred  and  partly  common. 
This  decision  may  well  be  questioned. 
In  England  an  act  of  parliament  may 
(47)  73 


authorize  such  an  issue.  Stevens  v. 
South  Devon  Ry.,  9  Hare,  313  (1851). 
In  one  case  the  legality  of  the  issue 
of  preferred  stock  under  a  statute  was 
put  upon  the  ground,  not  of  the  right 
to  borrow  money,  but  upon  the  ground 
of  a  right  to  raise  funds  by  sale  of 
stock.  Chaffee  v.  Rutland,  etc.  R.  R., 
55  Vt.  110  (1882).  In  the  case  of 
Eichbaum  v.  Chicago  Grain  Elevators, 
[1891]  3  Ch.  459,  the  court  held  that 
the  company,  upon  increasing  its  capi- 
tal stock,  might,  by  a  majority  vote  of 
its  stockholders,  make  such  increased 
capital  preferred  stock,  calling  for  a 
certain  dividend,  with  no  rights  in 
surplus  profits  beyond  that  dividend, 
and  might  give  to  common  stockhold- 
ers the  right  to  exchange  their  com- 
mon stock  for  such  preferred. 

2  Melhado  v.  Hamilton,  28  L.  T. 
Rep.  578;  affirmed,  29  L.  T.  Rep.  364 
(1873),  the  court  saying:  "If  they 
could  issue  one  share  they  could  issue 
a  thousand,  and  if  at  seven  per  cent, 
they  might  issue  them  at  seventy  per 
cent,  and  thus,  at  a  general  meeting, 
they  might  pass  resolutions  which 
would  have  the  effect  of  utterly  anni- 
hilating the  interests  of  the  ordinary 
shareholders." 

3  The  following  is  a  charter  provi- 
sion in  an  English  corporation: 

Any  of  the  original  shares  for  the  time 
being  unissued,  and  any  new  shares  from 
time  to  time  to  be  created,  may  from  time 
to  time  be  issued  with  any  such  guarantee 
or  any  such  right  of  preference,  whether  iu 
respect  of  dividend  or  of  repayment  of  capi- 
tal, or  both,  or  any  such  other  special  privi- 
lege or  advantage  over  any  shares  previous- 
ly issued,  or  then  about  to  be  issued  (other 


§    268.]  PREFERRED    STOCK.  [CH.  XVI. 

incorporation  provides  for  preferred  and  common  stock,  with  the 
further  provision  that  additional  stock  may  be  issued  at  any  time 
with  such  priority  of  dividends  and  generally  on  such  terms  as 
the  company  might  determine  from  time  to  time,  new  preferred 
stock,  ranking  equally  with  the  original  preferred  stock,  may  be 
issued.1  Although  the  issue  of  preferred  slock  is  not  regularly  au- 
thorized, yet  the  issue  may  be  subsequently  ratified  by  a  stockholders' 
meeting.2  A  corporate  creditor  who  takes  preferred  stock  in  pay- 
ment cannot  upon  corporate  insolvency  repudiate  the  issue  of  stock 
on  the  ground  that  the  certificate  therefor  had  not  been  filed  as  re- 
quired by  the  statutes  of  the  state.3 

A  subscriber  to  preferred  stock  may  be  liable  on  the  subscription, 
although  no  preferred  stock  can  be  issued,  where  he  continues  to 
act  as  a  stockholder.4  A  person  who  loans  money  to  be  repaid  in  such 
stock  may  recover  it  hack  if  the  stock  cannot,  he  issued.5  Where  a 
person  has  subscribed  for  stock,  but  the  corporation  finds  it  has 
issued  all  of  its  stock,  it  can  not,  compel  such  subscriber  to  take  pre- 
ferred stock  instead."  An  agreement  to  deliver  stock  in  a  company 
to  be  formed,  nothing  being  said  as  to  any  preferred  slock,  is  not 
fulfilled  by  delivering  common  stock,  where  there  is  preferred  stock 
issued  also.7  A  provision  in  a  bond  that  the  holder  might  exchange 
it  for  preferred  stock  at  any  time  within  ten  days  after  a  dividend  is 
declared,  lapses  where  the  holder  does  not  make  the  demand  until 
several  months  after  the  bonds  become  due.8 

than  shares  issued  with  a  preference),  or  at     is  provided  for,  and  he  becomes  a  di- 

such   a  premium,   or  with   such   deferred    rector  and  acts  as  such  for  several 

rights  as   compared  with  any  shares  previ-     yearg)    he    .g    ]iable    on    guch    gto(,k    tQ 

ouslv    issued,    or    then    about   to    be    issued, 

y  .  .    "  "             ,   .    „„,.„„„.  „_  nrri  corporate  creditors  as  though  it  were 
or   subject   to   any   such   conditions   or    pro- 
visions, and  with  any  such  right  or  without  a     subscription     for     common     stock. 
any  right  of  voting,  and  generally  on   such  Tama,    etc.    Co.    V.    Hopkins,    79    Iowa, 
terms    as   the   company   may    from    time   to  553    (1890). 
time  by  special  resolution  determine.  5  Where  a  corporation  borrows  mon- 

1  Underwood  r.  London  Music  Hall,  ey  and  agrees  to  repay  it  in  preferred 
[1901]    2   Ch.   309.  stock,  but  has  no  power  to  issue  the 

2  Re  London,  etc.  Inv.  Corp.,  [1895]  preferred  stock,  the  party  paying  the 
2  Ch.  860.  money  may  recover  it  back.    Anthony 

3  Manufacturers',   etc.   Co.   v.  Allen,  v.   Household,    etc.   Co.,    16   R.    I.   571 
etc.  Co.,  154  Fed.  Rep.  906  (1907).  On  (1889). 

dissolution     a     holder     of     deferred  6  Knoxville,  etc.  R.  R.  v.  Knoxville, 

shares  cannot  claim  that  they  were  il-  98  Tenn.  1   (1896). 

legally  issued.     People  v.  New  York,  7  Mcllquham  v.  Taylor,  [1895]  1  Ch. 

etc.    Co.,    119    N.    Y.    App.    Div.    830  53. 

(1907).  8  Loomis   v.   Chicago,   etc.   Ry.,    102 

4  Where  a  person  subscribes  for  pre-  Fed.  Rep.  233  (1900).     See  also  §  270, 
ferred  stock,  but  no  preferred  stock  infra. 

738 


CH.  XVI.]  PREFERRED  STOCK.  [§  269. 

§  269.  Eights  of  preferred  stockholders— Amount  of  preference- 
Voting— Subsequent  leases,  consolidations,  etc. — The  rights,  powers, 
and  privileges  of  preferred  stockholders  depend  largely  on  the  terms 
upon  which  the  preferred  stock  is  issued.  Such  stock  takes  a  multi- 
plicity of  forms,  according  to  the  desire  and  ingenuity  of  the  stock- 
holders and  the  necessities  of  the  corporation  itself.  The  percentage 
of  preferred  dividend  is  always  fixed  at  the  time  of  the  issue.  It  is  a 
matter  of  contract.1  Negotiations  and  conversations  prior  to  the 
issue  of  preferred  stock,  such  issue  being  by  written  agreement,  are 
not  admissible  to  show  the  intent  of  the  parties  as  to  the  rights  of 
such  preferred  stock,  but  evidence  of  the  situation  and  the  objects 
and  purposes  of  the  agreement  and  the  agreement  itself,  and  the  reso- 
lutions authorizing  the  issue,  are  admissible  under  an  allegation 
that  the  certificates  of  preferred  stock  do  not  contain  the  whole  agree- 
ment.2 The  extent  of  the  preference  may  be  determined  from  the 
certificate  of  preferred  stock  itself,  if  there  is  no  other  evidence,  it 
being  shown  that  the  corporation  acquiesced  in  such  certificate.3  The 
preferred  dividends  may  be  made  cumulative  or  non-cumulative.  If 
nothing  is  specified  in  respect  to  this,  then  the  law  makes  the  pre- 
ferred dividends  cumulative.4  It  would  seem  that  unless  the  con- 
tract expressly  provides  otherwise,  preferred  stockholders  participate 
in  the  surplus  profits  remaining  after  the  preferred  dividend  has  been 
declared  on  the  preferred  and  an  equal  dividend  on  the  common 
stock.5     It  has  been  held,  however,  in  Maryland  that  where  preferred 

i  Quoted  and  approved  in  Scott  v.  2  Scott  v.  Baltimore,  etc.  R.  R.,  93 
Baltimore,  etc.  R.  R.,  93  Md.  475  Md.  475  (1901).  Seel2GN.  Y.  A.  D.  176. 
(1901).  The  amount  of  preference,  3  Toledo,  etc.  R.  R.  v.  Continental 
and  whether  cumulative  or  not,  is  all  Trust  Co.,  95  Fed.  Rep.  497  (1899). 
a  matter  of  contract.  Smith  v.  Cork,  The  provision  in  a  certificate  of  stock 
etc.  Ry.,  Ir.  Rep.  3  Eq.  356  (1869).  to  the  effect  that  the  corporation  shall 
The  amount  of  preference  may  be  de-  have  a  lien  on  the  stock  for  debts  due 
termined  by  the  by-laws,  and  the  pro-  to  the  corporation  from  the  registered 
visions  of  such  by-laws  constitute  a  stockholder  may  be  valid  and  enforce- 
contract.  Belfast,  etc.  R.  R.  v.  Belfast,  able,  even  though  neither  the  statutes 
77  Me.  445  (1885).  Cf.  West  Chester  of  the  state  nor  the  charter  nor  the 
etc.  R.  R.  v.  Jackson,  77  Pa.  St.  321  by-laws,  nor  the  proceedings  of  the  di- 
(1875).  In  this  case  the  preferred  rectors  or  stockholders  provide  for 
stock  to  be  redeemed  by  payment  of  such  a  lien.  It  is  sufficient  that  the 
the  par  value  and  a  sum  which,  with  certificate  of  stock  was  the  one  used 
dividends  and  interest  already  paid,  by  the  corporation.  Stafford  v.  Prod- 
should  amount  to  eight  per  cent,  per  uce,  etc.  Co.,  61  Ohio  St.  160  (1899). 
annum  from  the  time  of  its  purchase  4  See  §§  273,  274,  infra. 
from  the  company,  was  declared  to  be  5  In  the  case  Fidelity  Trust  Co.  v. 
a  contract  which  entitled  its  holder  Lehigh  Valley  R.  R.,  215  Pa.  St.  610 
to  his  dividends  before  dividends  were  (1906)  the  preferred  dividend  had 
paid  on  the  common  stock.  been  paid  and  an  equal  dividend  paid 

739 


§  269.] 


PREFERRED   STOCK. 


[CH.  XVI. 


stock  is  entitled  to  dividends  "up  to,  but  not  exceeding,  four  per 
cent,,  before  any  dividends  shall  be  set  apart  or  paid  on  the  common 
stock,"  such  preferred  stock  is  not  entitled  to  dividends  in  excess  of 
four  per  cent.,  even  though  a  larger  dividend  than  four  per  cent  is 
paid  on  the  common  stock,  and  even  though  the  preferred  dividends 
are  non-cumulative.1 

Where  the  preferred  stockholders  are  entitled  to  participate  in 
all  dividends  paid  after  their  preferred  dividend  is  paid,  they  are 
entitled  to  participate  in  a  dividend  of  scrip,  similar  to  a  stock 
dividend,    and   representing   accumulated    profits    which    have    been 


on  the  common,  and  a  dividend  from 
the  remaining  profits  had  been  de- 
clared on  both  preferred  and  common 
equally,  The  court  held  that  this  was 
correct,  and  that  such  extra  payment 
on  the  preferred  stock  did  not  apply 
to  the  regular  preferred  dividends  in 
subsequent  years,  there  being  no  pro- 
vision that  the  preferred  dividends 
were  limited  to  the  specified  amount. 
See  §§  273,  274,  infra.  The  following 
form  provides  against  such  a  result: 

The  preferred  stock  of  this  company  shall 
be  entitled  to  dividends  at  the  rate  of  six 
per  centum  per  annum,  prior  to  the  pay- 
ment of  any  dividends  upon  the  common 
stock,  and  such  dividends  upon  the  pre- 
ferred stock  shall  be  cumulative.  The  pre- 
ferred stock  shall  not  be  entitled  to  any 
dividends  in  excess  of  said  six  per  cent,  and 
arrears  thereof. 

The  following  provision  gives  a 
preference  and  also  gives  the  pre- 
ferred stockholders  an  interest  in  the 
remaining  profits  for  each  year: 

The  common  stock  is  not  to  receive  divi- 
dends for  any  year  unless  per  cent,  be 

first    paid    for    that    year    on    the    existing 

$ of  preferred  capital  stock ;    but  when 

per  cent,  is  paid  for  any  year  on  the 

whole  combined  common  and  preferred  cap- 
ital stock,  further  dividends  for  that  year 
are  to  be  paid  on  all  without  distinction. 

i  Scott  v.  Baltimore,  etc.  R.  R.,  93 
Md.  475  (1901).  citing  the  above  sec- 
tion. In  this  case  the  reasoning  of 
the  court  went  still  further  and  was 
to  the  effect  that  preferred  stock  is 
never  entitled  to  dividends  in  excess 
of  the  amount  specified,  even  though 
the     dividends     are     non-cumulative. 


Theoretically  it  is  difficult  to  justify 
this  conclusion,  but  practically  it  is 
true  that  the  investing  public  assume 
and  understand  that  preferred  stock 
is  neveY  entitled  to  more  than  its 
specified  and  fixed  dividends,  even 
though  the  certificate  is  silent  as  to 
further  dividends,  in  case  a  higher 
dividend  is  paid  on  the  common  stock. 
A  share  of  stock  is  a  share  of  stock, 
whether  preferred  or  common.  A 
share  of  preferred  stock  has  all  the 
rights  of  a  share  of  common  stock,  ex- 
cept as  expressly  restricted  by  the 
terms  under  which  it  is  issued.  Logi- 
cally there  would  seem  to  be  nothing 
in  the  words  "preferred  dividend"  re- 
stricting the  preferred  stock  to  that 
dividend,  after  an  equal  dividend  had 
been  paid  on  the  common  stock,  and 
certainly  not  after  any  arrears  or 
equal  dividends  had  been  made  up 
and  paid  on  the  common  stock.  There 
is  nothing  in  the  word  "preferred" 
which  restricts  or  cuts  down  the 
rights  which  at  common  law  are  in- 
herent in  all  stock.  It  is  settled  law 
that  upon  dissolution  the  preferred 
stock  shares  pro  rata  with  the  com- 
mon stock,  in  the  distribution  of  the 
assets  after  payment  of  debts,  even 
though  such  assets  are  in  excess  of 
the  par  value  of  both  kinds  of  stock. 
The  same  rule  would  seem  to  apply 
to  a  distribution  of  profits  in  excess 
of  the  full  preferred  dividend,  and  of 
an  equal  dividend  on  the  common 
stock.  However,  the  question  may 
still  be  considered  an  open  one. 


740 


CH.  XVI.] 


PREFERRED  STOCK. 


[§  269. 


used  for  betterments.1  The  disposition  of  the  surplus  profits  after 
the  re-ular  dividends  have  been  paid  may  be  a  matter  of  contracL" 
Preferred  stockholders  are  entitled  to  vote  at  elections  and  to  exer- 
cise the  various  rights  of  stockholders  the  same  as  common  stock- 
holders, unless  this  right  is  expressly  withheld  from  them  by  the 
terms  under  which  the  stock  is  issued.3 

i  Gordon's  Ex'rs  v.  Richmond,  etc.    the  preferred  stockholders  in  a  Con- 
r   R    78  Va   501  (1884).  necticut  corporation  have  no  vote,  the 

2  Where   the   articles   of   incorpora-    common  stockholders  are  under  great- 
tion   specify   that,   after  certain   divi-    er  fiduciary  obligations  to  them  than 
dends  have  been  paid  on  both  the  pre-    the   majority   of   the    stock   is    under 
ferred  and  common  stock,  one-fifth  of    towards  the  minority.     Kidd   r.   N  ew 
the  surplus  shall  go  to  the  preferred    Hampshire     etc     Co      66    Atl     Rep. 
stock     the    company    cannot    devote    127      (N.     H.     1907).       In     Mackin- 
suchsurp  us  to  redeeming  of  shares,    tosh  ,  Flint,  etc.  R.  R     32  Fed.  Rep. 
Ashburvi'.  Watson,  L.  R.  30   Ch.  D.     350     (1887);     s.     c,     34     Fed      Rep 
376    (1885).     If  a  stockholder,  by  ac-    582     (1888),    it    appeared    that    the 
cepting    the    benefits,    assents    to    a    common    stockholders    were    by    con- 
change  in  the  privileges  which  pertain    tract  deprived  of  their  right  to  vote 
to  hi"  stock,  he  cannot  afterwards  ob-    for  a  specified  time.     In  Re >  Barrow, 
ject  thereto.    Compton  r.  The  Chelsea,    etc.  Co.,  L.  R.  39  Ch.  D.  oS2    (1888), 
13  N    Y    Supp    722   (1891);   aff'd,  128     the  right  to  vote  was  withheld  from 
NY*  537  (1891)     A  pledgee  of  a  cer-    preferred  stockholders.     In  Hamlin  r. 
tificate  of  stock 'is  not  bound  by  an    Toledo,  etc.  R.  R.,  78  Fed.  Rep    664 
agreement  of  all  the  stockholders  to     (1897),   the   court  said   in   regard   to 
surrender  to  the   corporation  a  part    preferred    stockholders:      "They    sur- 
of   their   stock,   which   part   is  to   be    rendered  the  privilege  of  voting.  That 
then  considered  preferred  stock  and  is    was    perhaps   a   valid    agreement   be- 
to  be  sold  by  the  corporation  for  the    tween  stockholders,  though  of  doubt- 
purpose    of  "paving    corporate    debts,     fnl  public  policy.    They  thereby  gave 
Although  all  the  other  stock  has  had    some  additional  value  to  the  common 
this  agreement  stamped  on  the  certifi-    stock.     The  latter  was  the  exclusive 
cates    yet  the  corporation  cannot  in-    voting    stock,    and    that    was    worth 
sist  that  the  purchaser  of  the  stock  so    something,    as    railway    management 
pledged    shall   allow  the  same  agree-    now  goes."     The  preferred   stock  in- 
meat  to  be  stamped  on  the  new  certifi-    volved  in  the  case  of  Storrow  r  Texas, 
cate"  issued  to  such  purchaser.     The    etc.  Assoc,  87  Fed    Rep    612 :    (1898). 
court  will  order  a  transfer  free  from    was  not   entitled  to   vote.     Although 
the   agreement.     Campbell    r.   Ameri-    preferred   stockholders  who  were  de- 
can    Zylonite    Co.,     122    N.     Y.     455    prived  of  the  right  to  vote  and  whose 
90  '  stock  amounted  to  practically  a  debt 

3  Miller  V.  Ratterman,  47  Ohio  St.  may  be  entitled  to  an  injunction  and 
141  (1S90),  where  the  right  to  vote  an  accounting,  if  the  property  is  being 
was  expressly  withheld.  Preferred  mismanaged,  nevertheless  they  are 
stock  mav  by  'the  terms  of  its  original  not  entitled  to  a  receiver,  unless  he 
issue  be  deprived  of  voting  power,  company  is  insolvent  as  well  as  being 
even  though  the  statutes  provide  for  mismanaged  Texas^  etcM^so, 
each  stockholder  casting  as  many  v.  Storrow  92  Fed.  Rep.  o  (mA 
votes  as  he  has  shares.  State  v.  scheme  whereby  certain  preferred 
Swanger  190  Mo.  561  (1905).    Where    stock  in  a  building  and  loan  associa- 

741 


§   269.]  PREFERRED    STOCK.  [CH.  XVI. 

As  already  stated,  there  is  an  infinite  variety  of  provisions  under 
which  preferred  stock  may  legally  be  issued.  These  provisions  are  to 
be  found  in  the  charter,  the  by-laws,  the  certificates  of  stock,  the 
resolutions  of  the  stockholders  and  directors,  the  minutes  of  corporate 
meetings,  the  reports  of  or  to  the  company,  and  any  contracts  under 
which  the  stock  was  issued.  The  rights  pertaining  to  the  stock  are 
matters  of  contract,  and  this  contract  is  ascertained  from  the  sources 
specified  above.1  Some  of  the  various  devices  for  raising  money 
by  issuing  various  kinds  of  preferred  stock  are  referred  to  in  the 
notes  below.2  Where  a  certain  portion  of  the  cumulative  preferred 
stock  is  entitled  to  preferred  dividends  over  the  remaining  preferred 
stock  for  the  first  three  years,  this  particular  preference  is  also  cumu- 

tion  was  given  the  entire  control  of  etc.  Land  Co.,  134  N.  Y.   197    (1892). 

the    association    to    the    exclusion    of  In  a  suit  by  a  preferred  stockholder 

the     common    stockholders    was    de-  to  enforce  his  rights   as  a  preferred 

clared  illegal  in  the  case  of  Synnott  stockholder  he  must  allege  the  char- 

v.   Cumberland,   etc.   Assoc,   117   Fed.  acter   of   his   preference.     Hackett    v. 

Rep.  379   (1902).    Even  though  a  pro-  Northern,  etc.  Ry.,  140  Fed.  Rep.  717 

vision  that  the  preferred  stock  shall  (1905). 

not  vote  is  illegal  if  objected  to,  yet  2  Under    the    powers    conferred    by 

if  not  objected  to  such  provision  may  the  statute,  30  &  31  Vict.,  ch.  127,  vari- 

be  legal.     Wilson  v.  Parvin,  119  Fed.  ous  plans  have  been  devised  by  Eng- 

Rep.  652  (1903).  lish  companies  on  the  verge  of  insolv- 

i  Boardman  v.  Lake  Shore,  etc.  Ry.,  ency  to   raise   funds;    and  a  favorite 

84  N.  Y.  157   (1881);  Gordon  v.  Rich-  device  is  the  issue  of  preferred  shares 

mond,    etc.    R.    R.,    78    Va.    501,    510  of   stock.     Thus,    in   one   case,    there 

(1884);  Bailey  v.  Hannibal,  etc.  R.  R.,  were  five  kinds  of  preference  shares. 

1  Dill,  174    (1871);    s.  c,  2  Fed.  Cas.  Corry    r.    Londonderry,    etc.    Ry.,    29 

371;    aff'd,   17   Wall.   96;    St.   John  v.  Beav.  263    (1860).     See  also,  by  way 

Erie  Ry.,  22  Wall.  136   (1874);  Webb  of    illustration    as    to    these    various 

v.   Earle,    L.    R.    20   Eq.    556    (1875);  methods  in  England  of  raising  funds 

Matthews  v.  Great  Northern  Ry.,   28  by  the  issue  of  preferred  shares,  Mat- 

L.    J.     (Ch.)     375    (1859),    construing  thews  v.  Great  Northern,  etc.  Ry.,  28 

a  statute  affecting  the  rights  of  hold-  L.  J.   (Ch.)  375  (1859);  Re  Cambrian 

ers    of   "guaranteed"    and    "deferred"  Rys.,  L.  R.  3  Ch.  App.  278  (1868);  Re 

stock;    Belfast,   etc.   R.  R.  v.  Belfast,  Potteries,  etc.  Ry.,  L.  R.  5  Ch.  App. 

77  Me.  445    (1885);    Stevens  v.  South  67    (1869);    Webb  v.   Earle,   L.   R.   20 

Devon  Ry.,  9  Hare,  313  (1851);  Sturge  Eq.  556  (1875);  Stevens  v.  Mid-Hants, 

v.  Eastern  Union  Ry.,  7  De  G.,  M.  &  etc.  Ry.,  L.  R.  8  Ch.  App.  1064  (1873); 

G.   158    (1855);    Harrison  v.  Mexican  Re  Bristol,  etc.  Ry.,  L.  R.  6  Eq.  4,48 

Ry.,  L.  R.   19  Eq.  358    (1875);    Craw-  (1868);    Re  Devon,   etc.  Ry.,  L.   R.   6 

ford  v.  Northeastern  Ry.,   3  Jur.    (N.  Eq.    610    and    615    (1868);    Munns    v. 

S.)     1093     (1856);     Henry    v.    Great  Isle   of  Wight   Ry.,    L.    R.    8   Eq.    653 

Northern  Ry.,  1  De  G.  &  J.,  606,  642,  (1869);  Re  East,  etc.  Ry.,  L.  R.  8  Eq. 

646    (1857).     See  also  Coates  v.  Not-  87     (1869);     London    Fin.    Assoc,    v. 

tingham,  etc.  Co.,  30  Beav.  86  (1861).  Wrexham,  etc.  Ry.,  L.  R.  18  Eq.  566 

The    agreement    is   ascertained    from  (1874);   Re  Anglo-Danubian,  etc.  Co., 

the  contract,  reports,  resolutions,  con-  L.    R.    20    Eq.    339    (1875);    Midland, 

veyances,  etc.     Rogers  v.  New  York,  etc.  Ry.  v.  Gordon,  16  M.  &  W.  804 

742 


CH.    XVI.] 


PREFERRED    STOCK. 


[§  270. 


lative  as  against  the  remaining  preferred  stock.1  A  holder  of  pre- 
ferred stock  may  prevent  a  reduction  of  the  preferred  dividend  by 
an  amendment  of  the  certificate  of  incorporation,  even  though  the 
statutes  of  the  state  at  the  time  of  the  organization  of  the  company 
authorized  amendments  to  the  certificate  of  incorporation  by  a  cer- 
tain vote.  Such  reduction  may  be  enjoined.2  A  provision  in  the 
charter  to  the  effect  that  the  rights  of  preferred  stockholders  may  be 
modified  by  a  three-fourths  vote  in  interest  at  a  meeting  of  the  pre- 
ferred stockholders  only,  is  strictly  construed,  and  where  the  statute 
provides  for  the  mode  of  holding  such  meeting  the  procedure  must 
be  strictly  observed.3 

§  270.  Where  the  corporation  has  power  to  lease  its  road,  it  may 
make  a  lease,  although  the  rental  is  sufficient  to  pay  a  dividend  on 
the  preferred  stock  alone,  leaving  nothing  for  the  common  stock- 
holders.4 

But  in  a  contract  of  lease  the  rent  must  be  applied  to  income  bonds 
before  it  is  applied  to  dividends  on  preferred  stock.5 

Where  a  corporation,  having  issued  preferred  stock,  is  merged  into 
a  new  corporation  by  consolidation,  the  preferred  stockholders  of  the 
old  corporation  may  prosecute  a  suit  for  dividends  against  the  new 


(1S47).  For  a  scheme  where  the 
stock  was  divided  into  half  shares, 
one-half  of  which  were  deferred  to 
the  other  half,  see  Re  Brighton,  etc. 
Ry„  L.  R.  44  Ch.  D.  28  (1890).  In 
Phillips  r.  Eastern  R.  R.,  138  Mass. 
122  (1884),  a  scheme  appears  by 
which,  under  a  statute,  the  creditors 
elected  two-thirds  and  the  stockhold- 
ers one-third  of  the  directors. 

i  Gardner  Sav.  Bank  v.  Taber,  etc. 
Co.,  189  Mass.  363   (1905). 

2  Pronik  v.  Spirits,  etc.  Co.,  5S  N. 
J.  Eq.  97  (1899). 

•°.  Hemans  v.  Hotchkiss,  etc.  Co., 
[1899]  1  Ch.  115.  Where  in  the  issue 
of  preferred  shares  it  is  provided  that 
the  rights  therein  given  might  be 
modified  as  provided  in  the  by-laws, 
the  preferred  shares  of  £5  each  may 
be  changed  into  five  times  that  num- 
ber of  shares  of  £1  each,  and  there- 
after the  preferred  shares  may  be  re- 
duced to  thirteen  shillings  each  by 
canceling  the  remaining  seven  shill- 
ings, and  thereafter  the  preferred 
shares  may  be  converted  into  partly 
preferred    and    partly    common.      Re 


Welsbach,  etc.  Co.,  Ltd.,  [1904]  1  Ch. 
87. 

4  Middletown  v.  Boston,  etc.  R.  R., 
53  Conn.  351  (1885).  In  Re  Buenos 
Ayres,  etc.  Co.,  66  L.  T.  Rep.  408 
(1892),  a  sale  of  the  company's  enter- 
prise to  the  government  upon  terms 
which  paid  something  to  the  preferred 
stockholders,  but  left  nothing  for  the 
common  stockholders,  was  sustained. 

5  In  Phillips  v.  Eastern  R.  R.,  138 
Mass.  122,  135  (1S84),  preferred  stock 
had  been  offered,  under  a  statute,  in 
exchange  for  indebtedness  to  be  paid 
from  income  only.  The  company 
leased  its  property,  and  the  lessee 
agreed  to  use  the  net  profits  to  pay 
dividends  on  the  preferred  stock,  the 
same  as  the  interest  on  such  debts  as 
had  not  been  converted  into  preferred 
stock,  and,  if  the  net  profits  were  not 
sufficient,  each  was  to  get  the  same 
proportionately.  The  court  held  this 
to  be  illegal,  inasmuch  as  it  placed 
the  preferred  stockholders  on  the 
same  basis  as  the  income  creditors. 
On  this  subject  see  also  §§  271,  272, 
infra. 


§  270.] 


PREFERRED    STOCK. 


[cn.  xvi. 


corporation,  if  the  consolidated  company  has  assumed  all  the  obliga- 
tions of  the  old  company.1  A  consolidation  which  is  so  unfair  to- 
wards the  preferred  stockholders  as  to  be  a  breach  of  trusl  may  be 
enjoined  by  them.2  Where,  dividends  on  preferred  -lock  are  cumula- 
tive and  arc  in  arrears,  and  the  company  is  consolidated  with  another 
company,  the  preferred  stockholders  cannot  be  compelled  to  take 
bonds  and  stock  in  the  new  company  for  a  less  amount  than  their  old 
holdings  with  the  arrears  of  dividends,  especially  where  the  original 
stock  provided  that  on  liquidation  it  should  be  paid  in  full  with 
arrears,  and  it  appearing  that  there  were  existing  profits  in  the  old 
company  sufficient  to  pay  such  arrears,  and  that  these  would  go  to 
the  common  stockholders  by  way  of  common  stock  in  the  new  com- 
pany. A  preferred  stockholder  may  enjoin  such  consolidation,  and 
is  not  obliged  to  allow  the  value  of  his  stock  to  be  appraised,  as  pro- 
vided in  the  statute.3 

A  holder  of  preferred  stock  is  entitled  to  subscribe  for  his  propor- 
tionate part  of  new  stock,  even  though  the  preferred  stock  is  limited 
absolutely  as  to  dividends  and  the  now  stock  is  common  stock. 


1.-  4 


1  Boardman  v.  Lake  Shore,  etc.  R. 
R.,  84  N.  Y.  157  (1881) ;  Chase  v.  Van- 
derbilt,  62  N.  Y.  307  (1875).  Cf. 
Prouty  v.  Lake  Shore,  etc.  R.  R.,  52 
N.  Y.  363  (1873).  See  also  §  278,  infra. 
In  Griffith  v.  Paget,  L.  R.  6  Ch.  D.  511 
(1877);  s.  c,  L.  R.  5  Ch.  D.  894,  it 
was  held  that  where  the  company  is 
dissolved  by  a  consolidation  with  an- 
other company,  under  a  statute,  the 
stockholders  of  the  old  being  entitled 
to  exchange  their  stock  for  stock  in 
the  new,  the  preferred  stock  is  not  en- 
titled to  preferred  stock  in  the  new. 

2  A  minority  preferred  stockholder 
may  cause  to  be  set  aside  the  consoli- 
dation of  his  company  with  another 
company  which  the  majority  of  the 
stockholders  of  his  company  own, 
where  before  the  consolidation  his 
preferred  stock  represented  an 
amount  equal  to  one-half  of  the  com- 
bined value  of  the  two  companies, 
and  after  consolidation  less  than  five 
thirty-seconds,  and  before  consolida- 
tion the  assets  of  the  other  company 
represented  six  thirty-sevenths  of  the 
combined  assets  and  after  consolida- 
tion it  represented  four-fifths.  This 
is  an  abuse  of  trust  by  the  majority 


stockholders.  Jones  v.  Missouri,  etc. 
Co.,  144  Fed.  Rep.  765  (1906).  A  pre- 
ferred stockholder  of  a  constituent 
company  who  by  a  consolidation  is 
entitled  to  bonds  in  the  new  company 
having  a  par  value  one  and  one-third 
times  the  par  value  of  his  preferred 
stock,  cannot  object  thereto,  it  being 
shown  that  the  bonds  were  worth 
more  in  the  market  than  the  stock 
had  been  worth,  and  the  new  company 
offering  to  pay  him  the  present  value 
of  his  stock  at  the  time  of  the  consoli- 
dation or  the  present  value  with  fu- 
ture preferred  dividends  discounted. 
Beling  v.  American,  etc.  Co.,  65  Atl. 
Rep.  725  (N.  J.  1907).  See  also 
§§  278,  663,  664,  892,  infra.  680.St.582. 

3  Colgate  v.  United  States,  etc.  Co., 
67  Atl.  Rep.  657  (N.  J.  1907). 

4  Jones  v.  Concord,  etc.  R.  R.,  67  N. 
H.  119  (1891).  Where  two  companies 
are  consolidated  and  their  stockhold- 
ers are  to  receive  new  stock  in  ex- 
change for  old  stock,  such  new  stock 
to  be  of  four  different  kinds,  with 
preferences,  any  increase  of  capital 
stock  of  the  consolidated  company 
must  be  offered  proportionately  to  all 
the     stockholders     making     the     ex- 


r44 


OH.  XVI.] 


PREFERRED   STOCK. 


[§  270. 


A  preferred  stockholder  is  entitled  to  a  certificate  of  stock  which 
seta  forth  the  fact  of  the  preference.1 

Sometimes  the  right  is  given  to  exchange  common  for  preferred 
stock,  or  preferred  for  common,  or  bonds  for  stock.  Concerning  any 
such 'options,  it  is  the  settled  rule  that  any  time  limited  for  the 
exercise  thereof  is  of  the  essence  of  the  offer.2  Where  a  corporation 
is  authorized  to  issue  preferred  stock  it  may  attach  such  conditions 
thereto  as  it  deems  best.  One  of  the  conditions  may  be  that  the  cor- 
poration may  retire  the  stock  at  par  within  a  certain  time.3 

change,    irrespective   of   their   prefer-  v.    London,    etc.    Ry.,    5    Hare,    519 

ence.      Jones  v.  Concord,  etc.  R.  R.,  (1846).      A   provision    in    a    railroad 

67  N  H  234  (1892).  bond    that   at    any   time    within    ten 

'  l  Where    by    statute    municipal-aid  days  after  a  dividend  becomes  payable 

bonds  are  to  be  paid  for  by  preferred  the  holder  of  the  bond  might  surren- 

stock    the  municipality  may  by  man-  der  it  and  demand  full  paid  preferred 

damns  compel  the  company  to  issue  stock  in  exchange  therefor,  does  not 

a  certificate  of  stock  setting  forth  the  continue   beyond   the  time  when   the 

preference      State  v.  Cheraw,  etc.  R.  bond    becomes   due.     Loomis   v.   Chi- 

R     16  S.  C.  524   (1881).  cago,     etc.    Ry.,    97    Fed.    Rep.     755 

2  Where  the  corporation  offers  to  ex-  (1899);     aff'd,     102     Fed.    Rep.     233 

change  preferred  for  common   stock,  (1900).    Where  bonds  are  convertible 

upon"  the   payment   of    an    additional  into  preferred  stock  within  ten  days 

sum  of  money,  a  stockholder  who  de-  after  any  dividend  has  been  paid  on 

lays  fov  thirty  years  to  avail  himself  the    stock    upon    unmatured    coupons 

of  the  privilege  cannot  claim  the  right  being  delivered  up,  it  is  too  late  to 

thereto      The  fact   that  the  corpora-  demand  exchange  after  the  ten  days, 

tion  had  taken  in  some  of  the  com-  or   after   the   coupons   have   matured 

mon  stock  on  a  new  basis  of  exchange  and  been  paid.    Carpenter  v.  Chicago, 


is   immaterial.     Holland   v.    Cheshire 
R.  R.,  151  Mass.  231   (1890).     An  ex- 
tension of  the  time  when  a  bond  is 
to  be  paid  does  not  extend  the  time 
within  which  it  may  be  exchanged  for 
stock   of   the   company.     Muhlenberg 
v.  Philadelphia,  etc.  R.  R.,  47  Pa.  St. 
16  (1864).  Where  an  option  was  given 
to   holders   of   the   common   stock   to 
take   a   certain   number   of   new   pre- 
ferred shares  within  a  given  time,  it 
was  held  that  a  stockholder  who  lived 
abroad  and  had  no  notice  of  the  op- 
tion until  the  expiration  of  the  speci- 
fied time  could  not,  upon  learning  of 
it   afterwards,   come   in   and    demand 
the   right  to   purchase   the   preferred 
shares.     Pearson  v.  London,  etc.  Ry., 
14    Sim.    541    (1845).      Such,    also,    is 
the    rule   where   there    is   an    option 
within  a  fixed   time  to  convert  loan 
notes  into  common  shares.    Campbell 


etc.  R.  R.,  119   N.   Y.   App.   Div.   169 
(1907).    See  also  §  283,  infra. 

3  Where  a  corporation  has  power  to 
issue  preferred  stock  on  such  terms 
as  it  may  fix,  and  also  has  power  to 
borrow  money,  and  it  does  issue  pre- 
ferred stock,  which  by  its  terms  may 
be  retired,  it  may  issue  certificates  of 
indebtedness  to  retire  such  preferred 
stock,  and  immediately  thereafter  as 
a  part  of  the  transaction  issue  com- 
mon stock  to  take  up  such  certificates 
of  indebtedness.     This   is   practically 
the   same  as  changing  the  preferred 
into     common     stock.     A     preferred 
stockholder  cannot  object  thereto  on 
the  ground   that   he   was   entitled   to 
subscribe    for   his   proportion    of   the 
new    common    stock.      Weidenfeld    v. 
Northern,  etc.  Ry.,  129  Fed.  Rep.  305 
(1904).      In    retiring   such    preferred 
stock  the  corporation  may  issue  addi- 


745 


270.] 


PREFERRED   STOCK. 


[CH.  XVI. 


Dividends  on  the  preferred  stock  must  be  on  all  of  that  class,  even 
though  some  of  it  has  been  exchanged  for  preferred  stock  bearing  a 
lower  dividend.1      By  the  consent  of  both  preferred  and  common 


tional  common  stock  to  the  holders  of 
the  old  common  stock  without  giving 
any  rights  to  the  holders  of  preferred 
stock.  Moreover,  even  if  the  preferred 
stockholders  had  a  right  to  a  part  of 
the  new  common  stock,  yet  the  rem- 
edy is  not  an  injunction,  but  a  suit  at 
law  for  damages.  Even  though  such 
preferred  stock  is  retired  for  cash,  yet 
a  holder  of  preferred  stock  cannot  ob- 
ject that  this  impairs  the  capital  of 
the  company,  inasmuch  as  he  ceases 
to  have  an  interest  in  the  company. 
Such  stock  may  be  retired  by  a  vote 
of  the  directors  without  a  vote  of  the 
stockholders.  Hackett  v.  Northern, 
etc.  R.  R.,  36  N.  Y.  Misc.  Rep.  583 
(1901).  See  also  §  271,  infra.  Where 
a  railroad  company  issues  a  bond  con- 
vertible by  its  terms  into  preferred 
stock  at  the  end  of  fifteen  years,  it  is 
no  defense  that  it  had  no  preferred 
stock  outstanding  at  the  date  of  the 
issue  of  the  bond,  such  preferred  stock 
having  been  issued  later,  and  if  it  re- 
fuses to  make  the  exchange,  it  is  lia- 
ble in  damages  to  the  extent  of  the 
market  value  of  the  preferred  stock. 
Bratten  v.  Catawissa  R.  R.  Co.,  211 
Pa.  St.  21  (1905).  A  preferred  stock- 
holder may  agree  with  the  corporation 
that  his  stock  shall  be  common  stock 
in  consideration  of  the  corporation 
waiving  the  right  to  redeem  such  pre- 
ferred stock  as  provided  by  the  terms 
of  such  stock  in  the  original  issue 
thereof.  A  purchaser  of  other  stock 
in  the  corporation  cannot  when  sued 
on  the  contract  of  purchase  set  up 
that  such  agreement  in  regard  to 
the  preferred  stock  was  illegal.  A 
pledgee  of  such  preferred  stock  is 
not  bound  thereby,  but  if  the  debt 
is  afterwards  paid  his  objection 
falls.  Pendleton  v.  Harris-Emery 
Co.,  124  Iowa  361  (1904).  Where 
in  the  organization  of  a  mercantile 
corporation  some  of  the  principal  em- 


ployees become  stockholders,  under  a 
contract  between  all  the  stockholders, 
by  which  a  majority  might  declare  a 
stockholder  to  be  undesirable,  and 
thereupon  he  was  to  be  paid  the  cash 
value  of  the  stock  as  appraised,  the 
stock  to  be  then  divided  among  the 
other  stockholders,  a  suit  in  equity 
lies  to  compel  an  employee  to  give  up 
stock  so  appraised,  and  the  appraisal 
is  the  actual  cash  value  of  the  assets 
without  anything  for  good  will,  and 
the  fact  that  there  is  preferred  stock 
is  immaterial,  if  it  is  redeemable  at 
any  time,  it  being  shown  also  that 
the  common  stock  had  never  been 
sold  on  the  market.  Boggs  v.  Boggs 
&  Buhl  66  Atl.  Rep.  105  (Pa.  1907). 
i  Although  the  preferred  stock  is 
partly  taken  back  by  the  company  and 
new  preferred  stock  of  the  same 
amount,  bearing  a  less  dividend,  is  is- 
sued in  exchange,  yet  this  does  not 
enable  the  company  to  declare  a  divi- 
dend on  the  part  not  exchanged,  and 
on  that  alone.  It  must  declare  on 
all.  Coey  v.  Belfast,  etc.  Ry.,  Ir.  Rep. 
2  C.  L.  112  (1S06).  If  part  of  the 
preferred  stockholders  surrender 
their  stock  for  new  common  stock  on 
a  reorganization  without  foreclosure, 
such  stock  is  canceled,  and  holders 
not  so  surrendering  their  stock  are 
entitled  to  arrears  of  dividends  out 
of  the  first  net  profits,  without  allow- 
ing such  surrendered  stock  to  partici- 
pate therein.  West  Chester,  etc.  R.  R. 
v.  Jackson,  77  Pa.  St.  321  (1875).  In 
this  case  there  was  a  special  act  pro- 
viding for  the  issue  of  preferred  stock, 
and  afterwards  another  for  the  issue 
of  consolidated  stock.  A  dividend 
having  been  declared,  a  holder  of  the 
preferred  stock,  who  had  declined  to 
accept  the  consolidated,  was  held  "en- 
titled to  receive  just  what  the  com- 
pany agreed  to  pay  when  the  money 
was  obtained." 


746 


CH.    XVI.] 


PREFERRED    STOCK. 


[§  271. 


stockholders  all  the  stock  may  be  made  common,  unless,  of  course, 
the  charter  provides  otherwise.1 

From  a  decree  refusing  leave  to  a  preferred  stockholder  to  inter- 
vene and  become  a  party  to  a  foreclosure  suit  no  appeal  lies.2 

Preferred  stockholders  in  a  railroad  may  file  a  bill  in  a  federal 
court  to  enjoin  the  railroad  from  obeying  a  state  statute  requiring 
the  railroad  to  sell  mileage  books  at  two  cents  a  mile,  such  rate  being 
in  violation  of  a  charter  provision  giving  to  the  directors  the  power 
to  fix  rates  subject  to  revision  by  the  supreme  court.3 

Preferred  stockholders  are  subject  to  a  statutory  liability  the  same 
as  common  stockholders.4 

§  271.  Preferred  stockholders  are  not  creditors  —  Dividends  can 
be  only  from  profits  —  Mortgages  securing  preferred  stock.  —For- 
merly it  was  a  matter  of  doubt  and  discussion  whether  or  not  a  pre- 
ferred stockholder  had  any  rights  as  a  creditor  of  the  company  or 
was  confined  to  his  rights  as  a  stockholder.  The  law  is  now  clearly 
settled  that  a  preferred  stockholder  is  not  a  corporate  creditor.5 

The  preferred   stockholder  is  but  a  stockholder  with  a  right  to 


i  Synnott  r.  Cumberland,  etc.  Assoc, 
117  Fed.  Rep.  379  (1902),  holding 
also  that  where  a  proxy  votes  in  fa- 
vor of  making  all  the  stock  common 
stock,  the  stockholder  himself,  if  he 
wishes  to  object,  must  do  so  promptly. 
A  scheme  by  which  founders'  shares 
are  to  be  exchanged  for  ordinary  stock 
at  the  rate  of  one  hundred  shares  of 
the  latter  for  each  share  of  the  for- 
mer, is  ultra  vires  and  illegal,  and  will 
not  be  sanctioned  by  the  court.  Re 
Development  Company,  etc.,  [1902]  1 
Ch.  547.  A  corporation  may  agree  to 
cancel  cumulative  preferred  stock  and 
issue  in  exchange  therefor  non-cumu- 
lative preferred  stock  and  give  an 
interest-bearing  scrip  for  arrears  of 
dividends.  A  non-assenting  preferred 
stockholder  need  not  accept  the  propo- 
sition, but,  on  the  other  hand,  cannot 
prevent  others  accepting  it,  provided 
the  interest  on  the  scrip  is  paid  only 
pro  rata  with  payments  to  him.  The 
common  stockholders  cannot  object. 
Wilcox  v.  Trenton,  etc.  Co.,  64  N.  J. 
Eq.  173  (1902). 

2  Toledo,   etc.   R.  R.  v.  Continental 
,  Trust  Co.,  95  Fed.  Rep.  497  (1899). 


3  Ball  v.  Rutland  R.  R.,  93  Fed.  Rep. 
513    (1899). 

4  Railroad  Co.  v.  Smith,  48  Ohio  St. 
219  (1S91). 

5  Grover  v.  Cavanaugh,  82  N.  E. 
Rep.  104  (Ind.  1907).  A  preferred 
stockholder  is  not  a  creditor  and  can- 
not be  made  such.  Hamlin  v.  Toledo, 
etc.  R.  R.,  78  Fed.  Rep.  664  (1897). 
In  ascertaining  whether  a  corporation 
is  solvent  the  preferred  stock  is  not 
to  be  considered  a  debt.  People,  etc. 
v.  St.  Louis,  etc.  R.  R.,  176  111.  512 
(1S98).  Preferred  stockholders  have 
no  lien  prior  to  the  obligation  of  the 
company  to  pay  the  interest  on  its 
mortgage  bonds.  Mercantile  T.  Co.  v. 
Baltimore,  etc.  R.  R.,  82  Fed.  Rep.  360 
(1897).  The  House  of  Lords  in  Eng- 
land have  clearly  laid  /lown  the  rule 
that  preferred  stockholders  are  not 
creditors.  Birch  v.  Cropper,  14  App. 
Cas.  525  (1889).  The  same  doctrine 
is  expressed  in  Belfast,  etc.  R.  R.  v. 
Belfast,  77  Me.  445  (1885).  A  very 
full,  clear,  and  learned  discussion  of 
the  essential  differences  between  a 
preferred  stockholder  and  a  creditor 
of  a  corporation  is  to   be  found  in 


747 


271.] 


PREFERRED   STOCK. 


[CH.  XVL 


have  his  dividend  paid  before  dividends  on  the  common  stock  are 
paid,  and  he  is  not  entitled  to  any  dividend  until  the  corporation 
has  funds  which  are  properly  applicable  to  the  payment  of  dividends. 
A  contract  that  dividends  shall  be  paid  on  the  preferred  stock  whether 
any  profits  are  made  or  not  would  be  contrary  to  public  policy  and 
void.  An  agreement  to  pay  dividends  absolutely  and  at  all  events — 
from  the  profits  when  there  are  any,  and  from  the  capital  when 
there  are  not — is  an  undertaking  which  is  contrary  to  law,  and  is 
void.1  Public  policy  condemns  with  emphasis  any  such  undertaking 
on  the  part  of  a  corporation  as  to  its  preferred  or  guaranteed  stock. 
A  preferred  stockholder  is  liable  to  corporate  creditors  for  illegal 
dividends  paid  on  his  stock,  the  same  as  a  common  stockholder  is.2 


Miller  v.  Ratterman,  47  Ohio  St.  141 
(1890),  a  case  wherein  the  preferred 
stockholder  was  secured  by  a  mort- 
gage and  was  deprived  of  the  right 
to  vote  at  corporate  elections.  In  Field 
v.  Lamson,  etc.  Co.,  162  Mass.  388 
(1894),  it  was  held  that,  even  though 
the  statute  authorized  the  corporation 
to  guarantee  dividends  on  its  stock, 
nevertheless  that  the  dividends  could 
be  paid  only  out  of  the  net  profits. 
Taft  v.  Hartford,  etc.  R.  R.,  8  R.  I. 
310  (1866);  Chaffee  v.  Rutland,  etc. 
R.  R.,  55  Vt.  110,  129  (1882),  the  court 
saying:  "The  claim  is  that  he  is 
also  a  creditor,  with  all  the  rights 
pertaining  to  that  relation.  Against 
this  claim  are  the  terms  of  the  char- 
ter, the  presumptions  of  law,  and  the 
usual  course  of  business."  In  this  case 
certificates  issued  for  "scrip  divi- 
dends" or  "preferred  guaranteed 
stock"  were  convertible  into  mortgage 
bonds.  The  company  having  refused 
to  convert  them,  it  was  held  that  gen- 
eral assumpsit  for  the  amount  of  the 
certificates  would  lie,  and  that  the 
suit  could  be  brought  in  the  name  of 
the  holder  for  value.  St.  John  v. 
Erie  Ry.,  10  Blatchf.  271  (1872) ;  s.  c, 
21  Fed.  Cas.  167;  aff'd,  22  Wall.  136. 
Where  a  railroad  having  preferred 
stock  is  leased  the  rental  cannot  be 
applied  to  the  preferred  dividend 
equally  with  the  interest  on  existing 
debts.  Phillips  v.  Eastern  R.  R.,  138 
Mass.  122   (1884).  See  %  Pac.  Rep.  52. 


i  An  agreement  to  pay  preferred 
dividends  out  of  capital  stock  is  ille- 
gal and  void.  Cratty  v.  Peoria,  etc. 
Assn.,  219  111.  516  (1906).  Dividends 
on  preferred  stock  can  be  paid  only 
out  of  profits.  Wilson  v.  Parvin,  119 
Fed.  Rep.  652  (1903).  An  agreement 
of  the  corporation  with  a  stockholder 
to  pay  to  him  in  dividends  the 
amount  he  pays  for  the  stock  cannot 
be  enforced  as  an  obligation  of  the 
corporation.  Smith  v.  Alabama,  etc. 
Assoc,  123  Ala.  538  (1899).  Dividends 
on  preferred  stock  cannot  be  paid  out 
of  the  capital  stock.  Davenport  v. 
Lines,  72  Conn.  118  (1899).  A  con- 
tract between  a  corporation  and  a 
stockholder,  by  which  the  stockholder 
is  to  be  repaid  before  creditors  of 
the  corporation  are  paid  is  contrary 
to  public  policy  and  void.  Guaranty, 
etc.  Co.  v.  Galveston,  etc.  R.  R.,  107 
Fed.  Rep.  311  (1901).  A  corporation 
having  charter  power  to  purchase  the 
stock  of  other  corporations  may  give 
its  certificates  of  indebtedness  in  pay- 
ment therefor,  and  may  also  issue 
with  such  certificates  its  preferred 
stock,  the  dividends  to  be  used  to  pay 
the  principal  and  interest  of  such  cer- 
tificates, the  preferred  stock  then  to 
belong  to  the  vendors.  Ingraham  v. 
National  Salt  Co.,  130  Fed.  Rep.  676 
(1904),  rev'g  National  Salt  Co.  v.  In- 
graham, 122  Fed.  Rep.  40. 

2  American,  etc.  Co.  v.  Eddy,  130 
Mich.  266  (1902). 


748 


CH.   XVI.] 


PREFERRED    STOCK. 


[§  271. 


Dividends  on  preferred  stock  are  payable  only  out  of  the  net  earn- 
ings of  the  company.1  The  question  of  what  constitutes  net  earnings 
is  considered  elsewhere.2  A  subscriber  for  preferred  stock  cannot 
rescind  the  subscription  on  the  ground  that  the  stock  contains  a  pro- 
vision that  the  company  shall  buy  it  back  at  a  certain  time  at  par 
and  interest.  Such  a  provision  is  invalid,  but  does  not  invalidate  the 
stock  itself.3 


i  Taft  v.  Hartford,  etc.  R.  R.,  8 
R.  I.  310  (1866);  Lockhart  v.  Van  Al- 
styne,  31  Mich.  76  (1875);  Chaffee 
v.  Rutland,  etc.  R.  R.,  55  Vt.  110 
(1882);  Warren  v.  King,  108  U.  S. 
389  (1883);  Crawford  v.  Northeas- 
tern, etc.  Ry.,  3  Jur.  (N.  S.)  1093 
(1856);  Elkins  v.  Camden,  etc.  R.  R.( 
36  N.  J.  Eq.  233  (1882);  Belfast,  etc. 
R.  R.  v.  Belfast,  77  Me.  445  (1885), 
and  the  cases  supra.  Dividends  may 
be  declared  on  preferred  stock  where 
the  net  earnings  since  the  issue  of 
the  stock  are  sufficient,  even  though 
prior  to  such  issue  the  capital  stock 
had  been  impaired.  Cotting  v.  New 
York,  etc.  R.  R.,  54  Conn.  156  (1886). 
See  also  §  546,  infra.  In  Mills  v. 
Northern  Ry.,  L.  R.  5  Ch.  App.  621 
(1870),  where  a  corporation,  being  in 
arrears  in  the  payment  of  preferred 
stock  dividends,  and  being  at  the 
same  time  largely  indebted,  proposed 
to  appropriate  a  portion  of  its  capital 
and  to  borrow  further  sums  upon  de- 
bentures for  the  purpose  of  paying 
such  preferred  dividends,  it  was  held, 
in  a  suit  by  the  creditors  to  prevent 
such  action,  that  inasmuch  as  the  ap- 
propriation of  the  capital  was  justified 
on  the  ground  that  an  equivalent  por- 
tion of  the  revenue  had  been  used  for 
capital  purposes,  and  the  proposed 
loan  was  within  the  company's  bor- 
rowing power,  an  injunction  could 
not  be  granted. 

In  Guinness  v.  Land  Corporation,  L. 
R.  22  Ch.  D.  349  (1882),  the  court  de- 
clared illegal  a  provision  for  the  pay- 
ment of  preferred  dividends  out  of 
the  capital  stock.  Interest  on  debts, 
even  those  incurred  after  the  pre- 
ferred stock  was  issued,  and  rent  on 


749 


leases,  including  those  taken  after 
such  issue,  must  be  paid  before  divi- 
dends are  declared  on  the  preferred 
stock.  St.  John  v.  Erie  Ry.,  22  Wall. 
137  (1874),  affirming  10  Blatchf.  271 
(1872);  s.  c,  21  Fed.  Cas.  167,  de- 
fining also  the  meaning  of  net  profits. 
In  the  case  of  Williston  v.  Michigan 
Southern,  etc.  R.  R.,  95  Mass.  400 
(1866),  the  court  held  that  preferred 
and  guaranteed  stock  in  a  Michigan 
and  Indiana  corporation  was  not  en- 
titled to  dividends  unless  there  were 
net  profits.  Preferred  dividends  may 
be  paid  out  of  the  gross  earnings 
where  the  statute  evidently  so  in- 
tended. Gordon  v.  Richmond,  etc.  R. 
R.,  78  Va.  501  (1884).  See  also  Rag- 
land  v.  Broadnax,  29  Gratt.  (Va.) 
401  (1877),  where  the  court  upheld 
the  charge  of  guaranteed  dividends 
on  the  gross  receipts.  That  was  the 
case  of  a  debt  converted  into  guaran- 
teed stock.  The  debt  would  have 
borne,  if  it  had  not  been  converted 
into  stock,  interest  at  the  rate  of  six 
per  cent,  per  annum,  whether  they 
were  net  earnings  or  not.  The  court 
held  that  the  guaranty  of  three  per 
cent,  dividend  on  the  whole  stock, 
which  formerly  belonged  to  the  state, 
was  simply  the  six  per  cent,  interest 
upon  the  debt  which  was  converted 
into  stock;  and  it  also  held  that  it 
was  chargeable,  in  accordance  with 
the  plain  provisions  of  the  statute, 
upon  the  gross  receipts.  Guaranteed 
dividends  can  be  paid  only  from  net 
profits.  Miller  v.  Ratterman,  47  Ohio 
St.  141   (1890). 

2  See  ch.  XXXII,  infra. 

3  Long  v.  Guelph,  etc.  Co.,  31  C.  P. 
Rep.    (Can.)    129    (1880).      However, 


§  271.] 


PREFERRED    STOCK. 


[CH.  XVI. 


Occasionally  a  mortgage  is  given  by  the  corporation  to  secure  the 
payment,  of  dividends  on  preferred  stock,  and  to  give  it  a  preference 
in  payment  over  subsequent  debts  of  the  corporation  upon  insolvency 
or  dissolution.  It  is  difficult  to  see  how  such  a  mortgage  would  be 
legal  unless  it  has  been  issued  under  express  statutory  authority.  The 
courts  have  no  power  to  give  the  stockholders  a  preference  over  cred- 
itors, even  though  the  preferred  stock  is  by  its  terms  to  be  a  Lien  on 
the  property.1     A  mortgage  given  to  repay  to  preferred  stockholders 


where  a  corporation  has  power  to  bor- 
row and  al.:j  to  issue  preferred  stock, 
and  does  issue  certificates  which  pro- 
vide for  payment  of  the  par  value 
thereof  at  the  end  of  two  years,  such 
certificates  may  constitute  a  debt  in- 
stead of  preferred  stock,  even  though 
they  are  drawn  in  the  form  of  pre- 
ferred stock.  Savannah,  etc.  Co.  v. 
Gilverberg,  108  Ga.  281  (1899).  Cf. 
§  170,  supra. 

i  Quoted  and  "heartily  concurred" 
in,  in  Black  v.  Ilobart  T.  Co.,  64  N.  J. 
Bq.  415  (1902).  A  mortgage  given 
to  stockholders  for  money  paid  in  en 
their  subscriptions  cannot  be  enforced 
as  against  creditors.  Reed  v.  Helois, 
etc.  Co.,  64  N.  J.  Eq.  231  (1903).  In 
Hamlin  v.  Toledo,  etc.  R.  R.,  78  Fed. 
Rep.  G64  (1897),  where  the  preferred 
stock  provided  that  no  debt  except 
the  first  mortgage  debt  should  come 
in  ahead  of  preferred  stock,  the  court 
said:  "If  the  purpose  in  providing 
for  these  peculiar  shares  was  to  ar- 
range matters  so  that,  under  any  cir- 
cumstances, a  part  of  the  principal 
of  the  stock  might  be  withdrawn  be- 
fore the  full  discharge  of  all  corporate 
debts,  the  device  would  be  contrary  to 
the  nature  of  capital  stock,  opposed 
to  public  policy,  and  void  as  to  cred- 
itors affected  thereby."  A  corporation 
cannot,  in  the  absence  of  statutory 
authority,  make  its  preferred  stock  a 
lien  upon  its  property;  nor  can  an 
agreement  between  the  subscribers  to 
the  stock  of  the  corporation  make 
such  stock  a  lien  on  its  property,  as 
against  bondholders  or  general  cred- 
itors without  notice  of  such  agree- 
ment. Continental  Trust  Co.  v.  Toledo, 


etc.  R.  R.,  72  Fed.  Rep.  (92  (1S96); 
aff'd  in  Toledo,  etc.  R.  R.  v.  Continen- 
tal Trust  Co.,  95  Fed.  Rep.  497  (1899). 
Preferred  stock  which  is  "to  be  and 
remain  a  first  claim  upon  the  property 
of  the  corporation  after  its  indebted- 
ness" has  no  lien  ahead  of  present 
or  future  debts  of  the  company.  King 
v.  Ohio  &  M.  Ry.,  2  Fed.  Rep.  36 
(1880);  aff'd,  108  U.  S.  389  sub  nom., 
Warren  v.  King,  108  U.  S.  389  (1882), 
the  court  holding  that  although  the 
certificates  of  preferred  stock  pro- 
vided that  it  should  "be  and  remain 
a  first  claim  upon  the  property  of  the 
corporation  after  its  indebtedness," 
etc.,  and  although  in  foreclosure  pro- 
ceedings the  preferred  stockholders 
asked  to  have  their  stock  declared  a 
lien  prior  to  a  subsequent  mortgage, 
yet  the  court  refused  the  application 
declaring  that  they  had  priority  over 
the  common  stock  only.  It  has  been 
held,  however,  that  where  preferred 
stock  is  issued,  reciting  that  it  is  a 
lien  on  all  the  property  of  the  corpora- 
tion after  the  first  mortgage,  the  lien 
will  be  upheld  -by  the  court  as  against 
subsequent  mortgages  and  general 
creditors,  although  such  lien  was  not 
secured  by  any  mortgage,  the  trus- 
tees in  the  subsequent  deed  of  trust 
having  known  of  and  acquiesced  in 
the  priority  of  the  preferred-stock 
lien,  and  the  deed  itself  having  recog- 
nized it.  This  bound  the  bondholders. 
Skiddy  v.  Atlantic,  etc.  R.  R.,  3 
Hughes,  320,  355  (1879);  s.  c,  22  Fed. 
Cas.  274,  288.  Where  stock  is  issued 
to  a  city  by  a  street  railway  company 
in  payment  for  its  street  rights,  a  pro- 
vision in  the  grant  of  the  street  rights 


750 


CH.    XVI.] 


PREFERRED    STOCK. 


[§    271. 


the  amount  they  Lave  invested  in  their  stock  as  well  as  to  secure 
regular  creditors  of  the  company  is  invalid  altogether.1 

Nevertheless,  a  mortgage  to  secure  preferred  stock  and  dividends 
thereon  has  been  upheld  in  a  few  cases.2  In  other  cases,  that  which 
was  called  preferred  stock  was  nothing  more  than  income  bonds  with 
a  voting  power.3     It  is  of  course  within  the  power  of  the  legislature 


that  in  case  the  company  became  in- 
debted the  city  should  have  a  lien  on 
the  company's  franchise  and  property 
does  not  give  the  city  a  lien  in  pref- 
erence to  creditors  of  the  company, 
but  only  in  preference  to  other  stock- 
holders. Guaranty,  etc.  Co.  v.  Galves- 
ton, etc.  R.,  107  Fed.  Rep.  311  (1901). 

i  Reagan  v.  First  Nat.  Bank,  157 
Ind.  623  (1901).  A  mortgage  by  an 
insolvent  corporation  for  the  benefit 
of  the  preferred  stockholders  and  also 
creditors  of  the  company  is  fraudu- 
lent and  void  so  far  as  it  is  for  the 
benefit  of  the  preferred  stockholders, 
the  statute  prescribing  that  the  debts 
should  be  paid  in  preference  to  any 
payment  on  the  preferred  stock,  and 
if  only  those  creditors  were  entitled 
to  the  benefit  thereof  who  accepted  it, 
the  whole  mortgage  is  void.  Reagan 
v.  First  Nat.  Bank,  etc.,  157  Ind.  623 
(1901). 

2  Although  the  power  of  a  railroad 
to  borrow  be  limited,  yet  preferred 
stock  may  be  issued,  secured  by  a 
mortgage,  where  the  power  to  mort- 
gage has  been  given,  and  such  pre- 
ferred stock  may  be  deprived  of  the 
power  to  vote.  Miller  v.  Ratterman, 
47  Ohio  St.  Ill  (1890).  A  deed  of 
trust  given  by  a  corporation  upon  its 
lands  to  secure  the  performance  of 
an  undertaking  of  the  company  to 
pay  dividends  on  preferred  stock 
which  was  about  to  be  issued,  and 
also  ultimately  to  pay  for  the  stock 
itself,  is  a  mortgage.  Where  the  cor- 
poration's equity  of  redemption  has 
been  sold,  the  receiver  of  the  corpora- 
tion takes  nothing.  Fitch  v.  Weth- 
erbee,  110  111.  475  (1S84).  In  Davis 
r.  Second  Univ.  Meeting-house,  49 
Mass.  321   (1844),  the  stock,  by  a  by- 


law, was  declared  to  be  entitled  to 
redemption  when  the  holder  moved 
from  the  town.  The  court  upheld  and 
enforced  the  contract.  In  Gordon  v. 
Richmond,  etc.  R.  R.,  78  Va.  501 
(1884),  a  mortgage  had  been  given  to 
secure  the  payment  of  the  par  value 
and  dividends  of  preferred  stock.  The 
case  involved  a  distribution  of  profits 
and  not  a  foreclosure  of  the  mortgage, 
but  the  court  said  that  the  mortgage 
was  legal. 

3  Burt  v.  Rattle,  31  Ohio  St.  116 
(1876),  turned  upon  a  general  'Act 
to  authorize  manufacturing  corpora- 
tions to  issue  preferred  stock."  Where 
such  stock  was  issued  certifying  that 
the  corporation  guaranteed  the  hold- 
ers certain  dividends  not  exceeding 
legal  rates,  and  the  final  payment  of 
the  certificates  at  a  specified  time,  it 
being  provided  that  such  preferred 
stock  might  be  converted  into  com- 
mon stock,  and  the  corporation  is- 
sued its  bond  and  mortgage  to  a  trus- 
tee to  secure  such  certificates,  it  was 
held  that  holders  of  the  so-called  pre- 
ferred stock  did  not  become  stockhold- 
ers and  members,  but  creditors  of  the 
corporation,  so  that,  on  the  winding 
up  of  the  company's  affairs,  they  had 
a  lien  upon  the  mortgage  property 
superior  to  that  of  general  creditors 
and  assignees.  "A  mortgage  creditor, 
although  denominated  a  'preferred 
stockholder,'  is  a  mortgage  creditor 
nevertheless,  and  interest  is  not 
changed  into  a  'dividend'  by  calling 
it  a  dividend."  It  was  a  self-evident 
misnomer  in  the  act.  So  also  under  a 
statute.  See  Pittsburg,  etc.  R.  R.  v. 
Allegheny  County,  63  Pa.  St.  126 
(1869).  Compare  s.  c,  79  Pa.  St. 
210. 


751 


271.] 


PREFERRED    STOCK. 


[CH.  XVI. 


to  prescribe  that  preferred  stock  thereafter  to  be  issued  by  a  corpora- 
tion shall  be  a  lien  on  the  property  and  franchises  of  the  company 
with  a  priority  over  any  subsequent  mortgage.1 

A  preferred  stockholder  is  in  no  better  position  to  enjoin  the  cor- 
poration from  giving  a  mortgage  than  a  common  stockholder.2  Where 
bonds  are  deposited  as  collateral  security  for  preferred  stock,  it  has 
been  held  that  the  corporation  may  call  in,  redeem,  and  cancel  the 
stock  in  exchange  for  the  bonds  ;3  but  it  would  seem  that  this  can  be 
done  only  upon  a  legal  reduction  of  the  capital  stock.  By  its  cer- 
tificate of  incorporation  a  New  Jersey  corporation  may  have  power 
to  purchase  and  retire  part  or  all  of  its  preferred  stock,  and  to  issue 
in  payment  therefor  its  bonds,  or  to  sell  its  bonds  and  use  the  pro- 
ceeds to  retire  such  preferred  stock,  or  it  may  purchase  and  hold 
such  stock  for  re-issue.4 


In  Miller  v.  Ratterman,  47  Ohio  St. 
141  (1890),  the  court  held  that  the 
fact  that  a  mortgage  had  been  given 
to  secure  the  payment  of  preferred 
dividends  does  not  prevent  such  stock 
from  being  considered  stock  instead 
of  a  debt. 

i  Such  a  preference  will  be  upheld, 
but  does  not  create  a  lien  on  fire  in- 
surance money  for  loss  sustained  nor 
on  merchandise  manufactured  for 
sale,  nor  on  book  accounts  represent- 
ing such  sales,  nor  on  rents  due  to 
the  corporation.  Heller  v.  National, 
etc.  Bank,  89  Md.  602  (1899).  Under 
the  statutes  in  Maryland  preferred 
stock  may  be  a  lien.  Rogers,  etc.  Co. 
v.  Citizens',  etc.  Bank,  93  Md.  613 
(1901). 

2  Preferred  stockholders  cannot  pre- 
vent the  corporation  giving  a  consoli- 
dated mortgage  to  secure  past  and  fu- 
ture debts.  "Holders  of  preferred 
stock  have  no  special  control  over  the 
corporation  or  its  management.  .  .  . 
The  corporation  is  in  no  sense  the 
trustee  for  the  holders  of  preferred 
stock.  Its  duty  is  to  each  alike  ac- 
cording to  the  conditions  attached  to 
the  stock  of  each."  Thompson  v.  Erie 
Ry.,  11  Abb.  Pr.  (N.  S.)  188  (N.  Y. 
Supr.  Ct.,  1871) ;  s.  c,  42  How.  Pr.  68. 

3  Totten  v.  Tison,  54  Ga.  139  (1875). 
Where  preferred  stock  is  merged  into 
bonds,  the  common  stockholders  can- 


not defeat  the  enforcing  of  the  bonds. 
Havemeyer  v.  Bordeaux  Co.,  8  Nat. 
Corp.  Rep.  127  (111.  C.  C,  1894).  Even 
though  the  directors  have  sold  pre- 
ferred stock  held  by  them  to  the  cor- 
poration and  taken  its  notes  therefor 
when  the  corporation  was  insolvent, 
yet  a  receiver  should  not  be  appointed 
at  the  instance  of  a  stockholder.  The 
remedy  is  an  injunction  and  account- 
ing. Empire  Hotel  Co.  v.  Main,  98 
Ga.  176    (1896). 

4  The  offer  to  purchase  must  be 
made  pro  rata  to  all  the  preferred 
stockholders.  Under  the  reserved 
right  to  amend,  alter,  or  repeal  char- 
ters, the  rights  of  stockholders  among 
themselves  cannot  be  impaired,  ex- 
cept as  required  by  public  interest; 
but,  while  it  is  true  that  the  charter 
constitutes  a  contract  between  the 
stockholders,  yet  under  this  reserved 
power  the  legislature  may  authorize 
existing  corporations  to  purchase  and 
retire  preferred  stock  and  issue  in 
lieu  thereof  mortgage  bonds,  such 
amendment  being  construed  to  be  In 
behalf  of  the  public  interest.  Where  a 
corporation  has  charter  authority  to 
retire  its  preferred  stock  and  issue 
mortgage  bonds  in  lieu  thereof,  on  a 
vote  of  the  directors  and  stockholders, 
a  minority  stockholder  cannot  enjoin 
such  action  on  the  ground  that  it 
would  be  disastrous  in  its  effect  on 


752 


CH.   XVI.] 


PREFERRED   STOCK. 


[§  272. 


§  272.  What  are  net  profits,  applicable  to  preferred  dividends? — 
The  preferred  stockholder's  remedy  to  enforce  a  dividend. — It  is 
largely  a  matter  of  discretion  with  a  board  of  directors  as  to  whether 
they  will  use  the  net  profits  for  a  dividend  or  will  use  them  in  the 
business  of  the  company,  although  there  is  a  limit  to  this  discretion, 
and  the  courts  will  not  allow  the  directors  to  use  their  power  op- 
pressively by  refusing  to  declare  a  dividend  where  the  net  profits 
and  the  character  and  condition  of  the  business  clearly  warrant  it. 
This  is  the  rule  where  all  the  stock  is  common  stock,1  and  it  is  also 
the  rule  in  regard  to  dividends  on  preferred  stock.  The  preferred 
stockholder  is  not  entitled  as  a  matter  of  right  to  his  dividend,  even 
though  there  are  net  profits  which  might  be  used  for  that  purpose. 
If  the  directors  are  reasonable  in  the  exercise  of  their  discretion,  and 
use  the  profits  to  improve  the  corporate  property,  it  is  held  by  the 
supreme  court  of  the  United  States  that  the  discretion  of  the  directors 
will  not  be  interfered  with.2    This  rule  will  work  no  injustice  where 


the  corporation.  Berger  v.  United 
States  Steel  Corp.,  63  N.  J.  Eq.  809 
(1902).  See  also  Hackett  v.  Northern, 
etc.  R.  R.  36  N.  Y.  Misc.  Rep.  583 
(1901).  Mandamus  does  not  lie  to 
compel  a  corporation  to  redeem  pre- 
ferred stock  at  par  even  though  the 
certificate  of  stock  gave  the  holder 
the  right  to  demand  such  payment, 
where  the  statute  required  the  cer- 
tificate to  specify  the  time  when  it 
should  be  subject  to  redemption,  and 
the  certificate  did  not  so  specify,  even 
though  the  statute  was  afterwards 
changed.  The  court  declined  to  pass 
upon  the  question  whether  a  suit  at 
law  or  in  equity  would  lie.  Smith  v. 
Ferracute,  etc.  Co.,  68  N.  J.  L.  237 
(1902).. 

i  See  ch.  XXXII,  infra. 

2  New  York,  etc.  R.  R.  v.  Nickals, 
119  U.  S.  296  (1886),  reversing  Nick- 
als v.  New  York,  etc.  R.  R.  15  Fed. 
Rep.  575.  In  Field  v.  Lamson,  etc.  Co. 
162  Mass.  388  (1894),  the  court  said: 
"We  do  not  think  that  the  directors 
and  manager  appear  so  plainly  to  have 
acted  in  disregard  of  the  rights  of 
the  preferred  stockholders  as  to  jus- 
tify the  interference  of  a  court  of 
equity.  The  directors  and  manager 
were  bound  to  have  regard  to  all  of 
(48)  75 


the  interests  intrusted  to  them.  If 
one  class  was  to  be  favored  above  an- 
other, the  creditors  were  to  be  looked 
after  in  preference  to  the  stock- 
holders. It  was  for  the  benefit  of  the 
stockholders,  the  preferred  as  well  as 
the  common,  that  the  impaired  capi- 
tal should  be  made  good,  and  that  the 
business,  if  possible,  should  be  put  on 
a  sound  and  enduring  basis.  We  can- 
not say  that,  if  dividends  had  been 
paid,  the  result  might  not  have  been 
to  injure  the  concern,  nor  that  the 
conduct  of  the  directors  and  manager 
has  not  been  on  the  whole  judi- 
cious. .  .  .  Neither  do  we  think 
that  the  guaranty  can  be  regarded  as 
an  undertaking  that  whenever  there 
were  net  profits  they  should  be 
divided,  without  regard  to  the  cir- 
cumstances or  situation  of  the  com- 
pany, among  the  preferred  stock- 
holders. The  act  itself  does  not  in 
terms  compel  such  a  division;  and 
we  see  nothing  in  it  to  take  the  case 
out  of  the  general  rule  that,  in  the 
first  instance,  the  decision  of  the  ques- 
tion whether  there  shall  or  shall  not 
be  dividends  lies  with  the  company  or 
its  agents."  Where  a  corporation 
sells  its  business  in  exchange  for  pre- 
ferred stock  in  another  corporation, 
3 


§  272.] 


PREFERRED   STOCK. 


[CH.  XVI. 


the  corporation  is  liable  for  arrears  of  preferred  dividends.  But  if 
such  arrears  are  not  collectible  under  the  terms  upon  which  the  Btock 
is  issued,  then  this  rule  might  resul1  in  numerous  frauds  by  the  cor- 
poration on  the  preferred  stockholder,  since  no  dividend  mighl  be 
given  to  the  preferred  stockholders  unless  the  net  profits  were  suffi- 
cient for  a  dividend  on  the  common  stock  also.  For  instance,  where 
there  were  enough  profits  for  two  annual  dividends  on  the  preferred 
stock  and  no  more,  it  would  be  a  temptation  to  the  common  stock- 
holders to  declare  no  dividend  at  all  the  first  .year,  and  to  declare 
a  dividend  on  both  the  common  and  preferred  stock  the  second 
year.1  Where  the  directors  are  clearly  guilty  of  a  breach  of  trust  in 
not  paying  dividends  on  the  preferred  stock,  a  preferred  stockholder 
may  file  a  bill  in  equity  for  relief.-     But  where  by  a  by-law  the 


the  transaction  cannot  subsequently 
be  set  aside  on  the  ground  that  the 
preferred  dividends  have  not  been 
paid.  Feld  v.  Roanoke  Inv.  Co.,  123 
Mo.  603  (1894).  In  Mercantile  T.  Co. 
v.  Baltimore  etc.  R.  R.,  82  Fed.^Rep. 
360  (1897),  the  court  ordered  the  re- 
ceiver to  pay  certain  debts  and  con- 
tract obligations,  although  there  were 
profits  which  would  have  been  ap- 
plicable to  dividends  on  the  pre- 
ferred stock  if  the  company  had  not 
been  in  the  receiver's  hands. 

As  to  whether  there  are  dividends 
applicable  to  preferred  stock  depends 
upon  the  circumstances  of  each  case, 
the  nature  of  the  company  and  the 
evidence  of  competent  witnesses. 
Bond  v.  Barrow,  etc.  Co.,  86  L.  T. 
Rep.  10  (1902).  Where  the  licensor 
of  a  patent  is  to  have  from  a  corpora- 
tion as  licensee  a  certain  payment 
from  the  net  profits,  such  payment 
not  to  be  cumulative  and  to  be  sub- 
ject to  provision  for  a  reserve  fund, 
it  is  legal  for  the  company  to  pass  a 
sum  to  the  reserve  fund,  and  also  a 
further  sum  for  depreciation  and  the 
cost  of  licenses.  Bagot,  etc.  Co.  v. 
Clipper  etc.  Co.,  [1902]  1  ch.  146. 

lFor  an  instance,  see  Mackintosh 
v.  Flint,  etc.  R.  R.  32  Fed.  Rep.  350 
(1887);  s.  c,  34  Fed.  Rep.  582. 
Preferred  stockholders,  even  though 
the  preferred  dividend  is  noncumu- 
lative,    cannot   prevent   the   company 


applying  the  earnings  to  a  large 
indebtedness  incurred  during  the 
year  in  enlarging  the  works  and 
business,  even  though  the  result  is 
that  the  preferred  stock  gets  no  div- 
idend that  year.  The  preferred  stock 
in  this  case,  by  its  terms,  gave  wide 
discretion  to  the  directors  in  the  mat- 
ter. McLean  v.  Pittsburg  Plate-Glass 
Co.,  59  Pa.  St.  112   (1893). 

2  Storrow  v.  Texas,  etc.  Assoc,  87 
Fed.  Rep.  612  (1898).  A  bill  in  equity 
lies  to  compel  the  payment  of  pre- 
ferred dividends  where  the  stock- 
holder has  repeatedly  sought  an  ac- 
counting and  there  apparently  is 
money  available  to  pay  such  divi- 
dends. Cratty  v.  Peoria,  etc.  Ass'n, 
219  111.  516  (1906),  the  court  saying 
(p.  522):  "Generally,  the  question  of 
declaring  a  dividend  is  intrusted  to 
the  sound  discretion  of  the  directors; 
and,  as  to  common  stock,  such  dis- 
cretion will  not  be  interfered  with  by 
a  court  of  equity  in  the  absence  of 
bad  faith  or  arbitrary  or  unjustifi- 
able conduct.  But  different  rules  ap- 
ply with  respect  to  the  right  of  hold- 
ers of  preferred  stock  to  invoke  the 
aid  of  a  court  to  order  the  declara- 
tion and  payment  of  dividends  on 
their  stock." 

Where  the  preferred  stockholders  in 
a  Connecticut  corporation  have  no 
vote,  the  common  stockholders  are 
under  greater  fiduciary  obligations  to 


754 


CH.   XVI.] 


PREFERRED   STOCK. 


[§   272. 


board  of  directors  has  power  to  set  aside  from  the  profits  such  sum 
as  they  think  proper  as  a  reserve  fund  to  meet  contingencies,  they 
have  power,  after  paying  dividends  on  the  preferred  stock,  to  carry 
the  balance  to  a  reserve  fund,  although  the  common  stock  is  thereby 
deprived  of  any  dividend.1  And  such  seems  to  be  the  rule  even  if 
there  is  no  by-law  to  that  effect.2  Where  the  charter  provides  that 
dividends  on  the  common  stock  shall  be  declared  after  the  close  of  any 
fiscal  year,  the  corporation  has  no  power  to  pay  any  dividends  on 
the  common  stock  prior  to  the  close  of  the  fiscal  year,  and  hence 
cannot  pay  quarterly  dividends  on  the  common  stock.3 

The  question  of  what  constitutes  "net  profits"  is  discussed  else- 
where.4 This  question  has  arisen  a  few  times  in  connection  with 
preferred  stock,  and  the  courts  are  inclined  to  scan  closely  a  refu- 
sal to  declare  dividends  where  there  are  net  profits  and  where  the 
preferred  stock  is  non-cumulative.5  In  an  action  to  compel  the 
them  than  the  majority  of  the  stock    where     the 


is  under  towards  the  minority.  Kidd 
v.  New  Hampshire,  etc.  Co.,  66  Atl. 
Rep.  127  (N.  H.  1907). 

1  Fisher  v.  Black,  etc.,  Co.,  [1901]  1 
Ch.  174. 

2  The  directors  are  not  bound  to 
declare  a  dividend  on  the  common 
stock,  even  though  there  are  profits 
sufficient  for  that  purpose  after  pay- 
ing the  dividend  on  the  preferred 
stock,  and  even  though  the  profits 
available  for  the  common  dividend 
may  otherwise  be  absorbed  in  sub- 
sequent years  to  pay  the  preferred 
dividend.  Stevens  v.  United  States 
etc.  Corp.,  68  N.  J.  Eq.  373  (1905). 

3  Marquand  v.  Federal,  etc.  Co.,  95 
Fed.  Rep.  725   (1899). 

4  See  ch.  XXXII,  infra. 

5  Non-cumulative  preferred  stock  is 
entitled  to  a  dividend  where  all  the 
property  is  leased  for  $36,000  a  year 
and  there  is  no  floating  debt  and  the 
property  cost  over  $1,000,000,  and  the 
bonded  debt  of  $150,000,  coming  due 
in  three  years,  may  be  extended,  and 
all  annual  outlays  are  but  $9,000.  The 
court  will  order  the  payment  of  a 
dividend.  Hazeltine  v.  Belfast,  etc. 
R.  R.,  79  Me.  411  (1887).  Directors 
are  not  allowed  to  use  their  power 
illegally,  wantonly,  or  oppressively  in 
refusing    to    declare    dividends;    but 


company  owes  $88,000 
floating  debt,  $150,000  debt  due  in  five 
years,  and  $1,000,000  due  in  thirty- 
five  years,  at  which  time  its  profits 
would  probably  be  nothing,  the  court 
will  not  order  a  dividend,  even  on  the 
preferred  stock,  although  the  company 
has  $37,000  on  hand  and  an  annual  in- 
come of  $36,000  from  the  lessee  of  its 
road.  Belfast,  etc.  R.  R.  v.  Belfast,  77 
Me.  445  (1885).  Profits  available  for 
a  dividend  are  such  as  are  left  after 
all  debts  for  rolling-stock,  rails,  sta- 
tion-houses, etc.,  are  paid,  but  not  the 
money  raised  under  the  borrowing 
powers.  Corry  v.  Londonderry,  etc. 
Ry.,  29  Beav.  263  (1860).  In  Stevens 
v.  South  Devon  Ry.,  9  Hare,  313 
(1851),  the  court  refused  to  enjoin 
the  payment  of  dividends  on  pre- 
ferred stock,  even  though  the  floating 
and  unsecured  debt  had  not  been 
paid  or  provided  for.  Where,  by  a 
reorganization  plan,  common  stock- 
holders are  allowed  to  vote,  etc.,  only 
after  certain  dividends  are  declared 
on  preferred  stock,  the  court  will 
determine  whether  such  dividends 
should  have  been  declared.  Mackin- 
tosh v.  Flint,  etc.  R.  R.,  32  Fed.  Rep. 
350  (1887);  s.  c,  34  Fed.  Rep.  582. 
See  also  Smith  v.  Cork,  etc.  Ry.,  Ir. 
Rep.  3  Eq.  356  (1869). 
In  Dent  v.  London  Tramways  Co., 


755 


272.] 


PREFERRED   STOCK. 


[cn.  xvi. 


declaration  of  a  preferred  dividend,  the  common  stockholders  are 
proper  but  not  necessary  parties.1 

A  stock  dividend  is  legal  in  America,  but  cannot  be  forced  upon 
stockholders  in  England.2 

Dividends  need  not  necessarily  be  from  profits.  A  bond  dividend 
is  legal  and  even  if  it  results  in  impairing  the  capital  stock  the 
court  will  not  interfere  if  no  harm  can  come  from  it.3 


L.  R.  16  Ch.  D.  344  (18S0),  it  was 
held  that  the  owners  of  preference 
shares,  the  dividend  on  which  was 
"dependent  upon  the  profits  of  the 
particular  year  only,"  were  entitled 
to  a  dividend  out  of  the  profits  of  any 
year  after  setting  aside  a  proportion- 
ate amount  sufficient  for  the  main- 
tenance and  repair  of  the  tramway 
for  that  year  only;  and  that  they 
were  not  to  be  deprived  of  that  divi- 
dend in  order  to  make  good  the  sums 
which  in  previous  years  should  have 
been  set  aside  by  the  company  for 
maintenance,  but  which  had  been  im- 
properly applied  by  them  in  paying 
dividends.  But  preferred  stockhold- 
ers are  not  entitled  to  a  redemption 
of  their  stock  in  accordance  with  a 
statute  if  it  would  work  an  injustice 
to  creditors  and  the  other  stockhold- 
ers by  taking  all  the  money  from  the 
treasury  and  thereby  crippling  or 
wrecking  the  enterprise.  Culver  v. 
Reno,  etc.  Co.,  91  Pa.  St.  367  (1879). 
In  the  case  Roberts  v.  Roberts,  etc. 
Co.,  184  N.  Y.  257  (1906),  rev'g  102 
App.  Div.  118,  a  corporation  had  $75,- 
000  preferred  stock  and  $225,000 
common  stock.  About  $90,000  capital 
stock  had  been  lost.  The  company 
then  reduced  its  capital  stock  to  $200,- 
000,  being  $50,000  preferred  and 
$150,000  common.  The  court  held 
that  inasmuch  as  by  the  terms  of 
the  preferred  stock  the  dividends 
were  cumulative  and  bore  interest, 
the  dividends  which  had  accumulated 
on  the  $75,000  preferred  stock,  prior 
to  the  reduction,  must  be  paid  with 
such  interest,  before  any  dividends 
were  paid  on  the  common  stock,  but 
that  the  $10,000  surplus,  created  solely 


by  a  reduction  of  the  capital  stock, 
was  not  surplus  profits,  applicable  to 
such  accumulated  dividends.  Such 
$10,000  is  to  be  divided  ratably  among 
all  the  stockholders  without  prefer- 
ence. 

i  Thompson  v.  Erie  R.  R.,  45  N.  Y. 
468  (1871).  See  also  Chase  v.  Vander- 
bilt,  62  N.  Y.  307  (1875),  holding  that 
the  corporate  officers  are  not  neces- 
sary parties. 

2  See  ch.  XXXII,  infra.  In  Howell 
v.  Chicago,  etc.  Ry.,  51  Barb.  378 
(1868),  where  the  rights  of  the  pre- 
ferred and  common  stockholders  were 
clearly  defined  by  the  contract,  a 
stock  dividend  of  preferred  stock  was 
made  to  the  preferred  stockholders 
and  of  common  stock  to  the  common 
stockholders.  In  figuring  the  amount 
of  dividend  thus  declared  the  court 
estimated  the  stock  dividends  at  their 
market  values.  In  Wood  v.  Lary,  124 
N.  Y.  83  (1891),  the  court  sustained 
the  court  below  (47  Hun,  550)  in  re- 
fusing to  cancel  a  mortgage  and 
bonds,  the  bonds  having  been  issued 
as  a  bond  dividend  to  preferred  stock- 
holders. 

3  Where  the  company  pays  divi- 
dends on  preferred  stock  by  issuing 
certificates  entitling  the  holder  to 
bonds  in  exchange  therefor,  the  com- 
pany cannot  afterwards  refuse  to 
deliver  the  bonds  on  the  ground  that 
the  dividend  was  illegal  or  that  such 
an  issue  of  bonds  was  ultra  vires, 
many  bonds  having  already  been  so 
issued.  Chaffee  v.  Rutland  R.  R.,  55 
Vt.  110  (1882).  Although  a  dividend 
may  be  illegal,  yet  "equity  even  would 
not  interfere  with  a  dividend  unless 
it    appeared    that    somebody    in    par- 

56 


CH.  XVI.] 


PREFERRED   STOCK. 


[§  273= 


§  273.  Arrears  of  preferred  stock,  to  what  extent  payable  sub- 
sequently —  Remedies  to  enforce  payment  of  arrears.  — 'When  pre- 
ferred stock  is  issued  it  is  generally  specified  in  the  certificate  itself 
whether  it  is  "cumulative"  or  "non-cumulative."  In  the  former 
case  all  arrears  of  dividends  must  be  paid  on  the  preferred  stock  be- 
fore any  dividend  is  paid  on  the  common.  In  the  latter  case  the 
contrary  is  the  rule.  Such  are  the  rules  where  the  question  is  ex- 
pressly settled  by  the  terms  under  which  the  stock  was  issued. 

If  preferred  stock  is  issued  without  any  mention  of  whether  or 
not  the  dividends  are  cumulative,  then  the  law  makes  them  cumu- 
lative. As  soon  as  there  are  net  profits  available  for  dividends, 
the  corporation  must  pay  the  preferred  dividends  and  all  arrears 
thereon  before  a  dividend  is  declared  on  the  common  stock.  This 
is  the  well-settled  rule  at  common  law  in  this  country  1  and  in  Eng- 
land, and  is  not  only  equitable,  but  is  in  accord  with  the  under- 
standing of  the  business  community.2 


ticular  was  hurt  or  liable  to  be  In- 
jured. It  would  not  interfere  after  all 
danger  had  passed,  and  for  the  sake 
of  vindicating  general  principles." 
Chaffee  v.  Rutland  R.  R.,  55  Vt.  110 
(1882).    See  also  §  546,  infra. 

i  Boardman  v.  Lake  Shore,  etc.  R. 
R.,  84  N.  Y.  157  (1881);  Prouty  V. 
Michigan,  etc.  R.  R.,  1  Hun,  655 
(1874);  Elkins  v.  Camden,  etc.  R.  R., 
36  N.  J.  Eq.  233  (1882) ;  Taft  v.  Hart- 
ford, etc.  R.  R.,  8  R.  I.  310  (1866); 
West  Chester,  etc.  R.  R.  v.  Jackson, 
77  Pa.  St.  321  (1875);  Lockhart  v. 
Van  Alstyne,  31  Mich.  76  (1875),  per 
Cooley,  J.;  Bates  v.  Androscoggin,  etc. 
R.  R.,  49  Me.  491  (1860).  There  are 
cases,  however,  to  the  contrary,  under 
peculiar  provisions  governing  the  div- 
idends. When  the  preferred  dividends 
are  "dependent  upon  the  profits  of  the 
particular  year  only,"  they  are  not 
cumulative.  Dent  v.  London  Tram- 
ways Co.,  L.  R.  16  Ch.  D.  344  (1880). 
Preferred  stock,  under  a  provision 
that  "should  a  surplus  then  remain  of 
net  earnings,  after  both  of  said  divi- 
dends in  any  one  year,  the  same  shall 
be  divided  pro  rata  on  all  the  stock," 
is  non-cumulative.  Hazeltine  v.  Bel- 
fast,  etc.  R.   R.,   79   Me.   411    (1887). 


See  also  dictum  in  Cotting  v.  New 
York,  etc.  R.  R.,  54  Conn.  156  (1886). 

Speaking  of  preferred  stock,  the 
court  said  in  Belfast,  etc.  R.  R.,  v. 
Belfast,  77  Me.  445  (1885),  in  a  dic- 
tum and  under  a  by-law  in  that  case: 
"It  was  not  intended  in  the  present 
instance  to  guarantee  a  dividend.  If 
a  dividend  is  prevented  in  any  one 
year  by  a  deficit  of  earnings,  it  can- 
not be  made  up  from  the  earnings  of 
succeeding  years."  The  preferred 
stock  may  be  made  non-cumulative. 
Bailey  v.  Hannibal,  etc.  R.  R.,  1  Dill. 
174  (1871);  s.  c,  2  Fed.  Cas.  371; 
aff'd  17  Wall.  96  (1873).  Where 
there  is  a  statutory  provision  that 
dividends  on  the  preferred  stock  shall 
not  exceed  a  certain  rate  per  cent, 
then  there  is  no  carrying  over  of  ar- 
rears. Elkins  v.  Camden,  etc.  R. 
R.,  36  N.  J.  Eq.  233  (1882). 

2  Henry  v.  Great  Northern  Ry.,  1  De 
G.  &  J.  606  (1857),  aff'g  4.  K.  &  J.  1; 
Crawford  r.  Northeastern  Ry.,  3  Jur. 
(N.  S.)  1093  (1856);  Sturge  v.  East- 
ern Union  Ry.,  7  De  G.,  M.  &  G.  158 
(1855);  Stevens  v.  South  Devon  Ry., 
9  Hare,  313  (1851);  Matthews  v. 
Great  Northern  Ry.,  28  L.  J.  (Ch.) 
375     (1859);    Corry    v.    Londonderry, 


757 


273.] 


PREFERRED   STOCK. 


[CH.  XVI. 


The  right  of  the  preferred  stockholder  to  arrears  of  dividends  is 
not  deemed  waived  by  delay,  nor  in  any  way  except  upon  clear 

proof  of   intent  to  waive.1      The  dividends   on    the   common   stock 
may  be  made  cumulative  also  before  the  preferred  stock  shares  in 

the  surplus  profits  remaining  after  preferred  dividends  are  paid.2 

etc.  Ry.,  29  Beav.  263   (1860);   Webb  time  being  paid  or  deemed  to  be  paid 

v.  Earle,   L.   R.   20   Eq.   556    (1875);  up  thereon.     After  payment   of  such 

Coates    v.    Nottingham,    etc.    Co.,    30  preferential  dividend,   the  holders  of 

Beav.  86   (1861);    Smith  v.  Cork,  etc.  ordinary   shares  shall   be  entitled   to 

Ry.  Ir.  Rep.  3  Eq.  356   (1869);   s.  c,  a  like  dividend  at  the  rate  of  £10  per 

Ir.  Rep.  5  Eq.  65   (1870);     The  Com-  cent,  per  annum  on  the  amount  paid 

panies   Clauses  Act  of  1863    (26   and  on  such  ordinary  shares.     Subject  as 

27  Vict.,  ch.  118,  §  14)    provides  that  aforesaid,  the  preference  and  ordinary 

preference   shares   or   stock   shall    be  shares    shall    rank    equally    for    divi- 

entitled  to  the  preference  dividend  or  dend."     Staples  v.  Eastman,  etc.  Co., 

interest  assigned  thereto,  out  of  the  [1896]  2  Ch.  303. 

profits  of  each  year,  in  priority  to  the  i  Quoted  and  approved  in  Fidelity  T. 

ordinary  shares  and  stock  of  the  com-  Co.   v.  Lehigh  Valley  R.  R.,   215   Pa. 

pany;    but  that  if  in  any  year  there  St.    610    (1906).      Boardman   v.    Lake 

are  not  profits  available  for  the  pay-  Shore,  etc.  R.  R.,  84  N.  Y.  157  (1881). 

ments  of  the  full  amount  of  the  pref-  In  Smith  v.  Cork,  etc.  Ry.,  Ir.  Rep.  3 

erential  dividend  or  interest  for  that  Eq.  356   (1869),  the  court  held,  under 

year,  no  part  of  the  deficiency  shall  the  facts   of  that  case,  that  the  pre- 

be  made   good   out   of   the   profits   of  ferred   stockholders    had    not   waived 

any   subsequent  year,   or  out  of   any  their  right  to  arrears,  although  they 

other  funds  of  the  company.  In  Henry  had  forborne  and  had  taken  part  in 

v.    Great   Northern    Ry.,    1    De    G.    &  inducing    new    capital    to    come    in. 

J.   606    (1857),   in   which  the   matter  Where  each  share  in  a  company  was 

of  arrears  in  preferred  dividends  was  converted   into  two   half   shares,   one 

elaborately  considered,  it  was  stated  preferred,   the   other   common   or   de- 

that    the    reason    why    such    arrears  ferred,    and   the    holders   of   the    pre- 

ought  to  be  held  payable  out  of  sub-  ferred  half  shares  had,   in  a   former 

sequent  profits  is  that  otherwise  there  year,  acquiesced  in  the  declaration  of 

would  be  a  temptation  to  the  corpora-  a  dividend  on  the  deferred  half  shares, 

tion  to  set  aside  profits  for  improve-  while  there  was  an  arrearage  of  divi- 

ments  when  the  profits  were  too  small  dends  on  the  preferred  half  shares,  it 

for  a  dividend  on  both  the  common  was  held  that,  although  they  had  pre- 

and  the  preferred  shares,  and  not  to  eluded  themselves  from   making  any 

set    aside    enough    for    improvements  claim   to   those  specific  arrears,  they 

when  the  company  made  a  dividend  had  not  waived  their  right  to  claim 

for   both.     Dividends   are   not   cumu-  subsequent     arrears.       Matthews     v. 

lative  under  the  following  provision:  Great  Northern  Ry.,   28  L.   J.    (Ch.) 

"The  capital  of  the  company  is  £150,-  375  (1859). 

000,    divided    into    ten    thousand    or-  2  When  the  preferred  stock  is  en- 

dinary   shares   of   £10    each   and   five  titled    to    participate   in    the    surplus 

thousand    preference    shares    of    £10  after  the   dividends   are   paid   on  the 

each.       The     holders     of     preference  preferred,    and    "a    dividend    of    the 

shares  shall  be  entitled,  out  of  the  net  same  amount  upon  the  whole  amount 

profits  of  each  year,  to  a  preference  of  paid-up  capital"  has  been  paid,  ar- 

dividend  at  the  rate  of  £10  per  cent,  rears    of    dividends    on    the    common 

per   annum   on   the   amount   for   the  sto-lc    as    well    as    on    the    preferred 

758 


en.  xvi.] 


PREFERRED   STOCK. 


[§  274. 


§  274.  The  remedy  of  a  preferred  stockholder,  when  the  com- 
pany proposes  to  pay  dividends  on  the  common  stock  before  pay- 
ing arrears  of  dividends  on  preferred  stock,  is  in  a  court  of  equity.1 

But  an  action  at  law  will  lie  if  dividends  have  already  been  de- 
clared and  paid  to  the  common  stockholders  in  violation  of  the 
rights  of  the  preferred  stockholders.2 

When  the  arrears  and  dividends  of  preferred  stock  are  recover- 
able, the  interest  on  such  arrears  may  be  recovered  from  the  time 
when  moneys  sufficient  to  pay  the  arrears  were  unlawfully  used  to 


must  be  paid  before  there  is  any  sur- 
plus. Allen  v.  Londonderry,  etc.  Ry., 
25  W.  R.  524   (1877). 

i  A  suit  in  equity  to  restrain  the 
corporation  from  declaring  dividends 
on  the  common  stock,  and  to  compel 
an  accounting  and  the  payment  of 
dividends  on  the  preferred  stock,  is 
the  proper  remedy.  Boardman  v.  Lake 
Shore,  etc.  R.  R.,  84  N.  Y.  157  (1881) ; 
Williston  v.  Michigan,  etc.  R.  R.,  95 
Mass.  400  (1S66).  In  this  case  the 
decision  was  that,  when  a  preferred 
stockholder  is  entitled  to  share  pro 
rata  with  holders  of  common  stock  in 
dividends  over  and  above  the  prefer- 
ence, his  remedy  is  not  by  an  action 
at  law  against  the  corporation,  but 
by  a  suit  in  equity.  In  an  action  by 
a  preferred  stockholder  in  behalf  of 
himself  and  others  to  enjoin  the  pay- 
ment of  dividends  to  common  stock- 
holders before  the  arrears  of  pre- 
ferred dividends  are  paid,  he  need 
not  join  all  the  common  stockholders 
as  parties  defendant.  Smith  v.  Cork, 
etc.  Ry.,  Ir.  Rep.  3  Eq.  356  (1869); 
Prouty  v.  Michigan,  etc.  R.  R.  1  Hun, 
655  (1S74),  where  an  injunction  was 
granted  to  restrain  the  declaring  of 
dividends  or  making  other  disposi- 
tion of  the  funds  of  the  corporation 
until  arrears  on  preferred  stock 
should  be  paid;  Thompson  v.  Erie, 
etc.  R.  R.,  45  N.  Y.  468  (1871),  in- 
volving an  action  to  "enforce  the  dec- 
laration and  payment  of  a  dividend;" 
Barnard  v.  Vermont,  etc.  89  Mass.  512 
(1863),  holding  that  where  certifi- 
cates  for   an    intended   dividend   had 


been  issued  payable  at  a  future  time 
when  the  company  should  be  able 
to  pay  them,  the  final  decision  as  to 
when  the  company  is  able  to  pay  does 
not  rest  with  the  directors  but  with 
the  court.  Where  the  common  stock- 
holders in  a  reorganized  company 
claim  that  the  preferred  stockholders 
are  defrauding  them,  a  preliminary 
injunction  will  not  be  ordered  unless 
imminent  danger  is  shown.  Mackin- 
tosh v.  Flint,  etc.  R.  R.,  32  Fed.  Rep. 
350  (1887).  Where  dividends  have 
been  paid  on  the  common  stock,  a 
preferred  stockholder,  as  plaintiff,  by 
offering  in  evidence  his  certificate  of 
stock  and  showing  that  no  dividends 
have  been  paid,  makes  out  a  prima 
facie  case  entitling  him  to  dividends 
and  arrears.  Boardman  v.  Lake 
Shore,  etc.  R.  R.,  84  N.  Y.  157  (1881). 
2  If  dividends  are  declared  and  paid 
on  the  common  stock,  before  paying 
the  arrears  of  dividends  on  the  pre- 
ferred stock,  the  holders  of  the  latter 
may  collect  such  arrears  by  an  action 
at  law  in  assumpsit.  West  Chester, 
etc.  R.  R.,  v.  Jackson,  77  Pa.  St.  321 
(1875).  In  the  case  of  Bates  v.  An- 
droscoggin, etc.  R.  R.,  49  Me.  491 
(1860),  an  action  of  debt  for  past-due 
dividends  was  sustained,  although 
such  dividends  had  not  been  declared, 
they  having  been  earned.  Coey  v.  Bel- 
fast, etc.  Ry.,  Ir.  Rep.  2  C.  L.  112 
(1866),  holding  that  an  action  at  law 
will  lie  against  a  railway  company  for 
not  giving  to  the  plaintiff  preferred 
stockholder  the  same  dividend  that  it 
has  given  to  others. 


759 


§§  275,  276.] 


PREFERRED   STOCK. 


[CH.  X\I. 


pay  dividends  on  the  common  stock  instead  of  being  used  to  pay 
the  arrears  on  the  preferred  stock.1 

§  275.  Rights  of  the  assignee  or  transferee  of  preferred  stock  in 
arrears  of  dividends. — The  transferee  or  assignee  of  preferred  stuck 
stands,  in  respect  to  arrears  of  dividends,  in  the  shoes  of  his  as- 
signor or  transferrer.  The  undeclared  arrears  of  dividends  pass 
to  him  in  the  transfer  of  the  stock,  unless  by  the  terms  of  the 
transfer  the  arrears  are  expressly  separated  from  the  stock  itself 
and  reserved  to  the  transferrer.2  An  assignment  of  preferred  stock 
carries  with  it  all  arrears  of  dividends,  and  a  subsequent  assign- 
ment of  arrears  by  the  transferrer  conveys  nothing.3 

§  27G.  "Special  stock"  in  Massachusetts. — In  Massachusetts  in- 
corporated companies  arc  permitted  by  statute4  to  issue  a  peculiar 
kind  of  stock,  known  as  "special  stock."  It  is  something  essen- 
tially different  from  preferred  stock.5  Its  chief  characteristics 
are  that  it  is  limited  in  amount  to  two-fifths  of  the  actual  capital ; 
it  is  subject  to  redemption  by  the  corporation  at  par  after  a  fixed 


l  Boardman  v.  Lake   Shore,  etc.  R. 
R.,   84   N.  Y.   157    (1881);    Prouty  v. 
Michigan,    etc.    R.    R.,    1    Hun,    655 
(1874).      See    Adams    v.    Fort    Plain 
Bank,  36  N.  Y.  255    (1867).     Contra, 
Corry   v.    Londonderry,    etc.    Ry.,    29 
Beav.  263  (1860).     Cf.  eh.  XXXII,  in- 
fra.   In  the  case  Roberts  v.  Roberts, 
etc.  Co.,  184  N.  Y.  257    (1906),  rev'g 
102  App.  Div.  118,  a  corporation  had 
$75,000   preferred  stock   and   $225,000 
common  stock.   About  $90,000  capital 
stock  had   been  lost.     The  company 
then  reduced  its  capital  stock  to  $200,- 
000,  being  $50,000  preferred  and  $150,- 
000  common.    The  court  held  that  in- 
asmuch as  by  the  terms  of  the  pre- 
ferred stock  the  dividends  were  cu- 
mulative and  bore  interest,  the  divi- 
dends which  had  accumulated  on  the 
$75,000  preferred  stock,  prior  to  the 
reduction,  must  be  paid  with  such  in- 
terest before  any  dividends  were  paid 
on  the  common  stock,  but  that  the 
$10,000   surplus,   created   solely   by   a 
reduction  of  the  capital  stock,  was  not 
surplus  profits,  applicable  to  such  ac- 
cumulated dividends.    Such  $10,000  is 
to  be  divided  ratably  among  all  the 
stockholders    without    preference. 
2  Jermain  v.  Lake  Shore,  etc.  Ry., 


91  N.  Y.  483  (1883);  Boardman  v. 
Lake  Shore,  etc.  Ry.,  84  N.  Y.  157 
(1881);  Hyatt  v.  Allen,  56  N.  Y.  553 
(1874);  Manning  v.  Quicksilver  Min. 
Co.,  24  Hun,  360   (1881). 

3  Manning  v.  Quicksilver  Min.  Co., 
24  Hun,  360  (18S1).  A  stock  divi- 
dend provided  for  in  a  certificate 
of  stock  passes  to  the  transferee  of 
the  stock.  Louisville,  etc.  R.  R.,  v. 
Hart  County,  116  Ky.  186  (1903). 
Where,  upon  the  sale  of  all  the  as- 
sets of  one  corporation  to  another, 
stock  of  the  latter  is  issued  to  stock- 
holders of  the  former,  and  it  is  pro- 
vided that  any  surplus  remaining 
from  a  certain  fund  shall  be  divided 
among  all  the  stockholders  of  both 
companies,  this  interest  in  the  sur- 
plus vests  in  the  then  existing  stock- 
holders individually,  and  this  inter- 
est does  not  pass  on  a  subsequent  sale 
of  his  stock  by  a  stockholder.  Read 
v.  Citizens',  etc.  R.  R.,  110  Tenn.  316 
(1903).     See  also  §641,  infra. 

4  Stats.  1855,  ch.  290;  1870,  ch.  224, 
§§25,  39,  cl.  4;  Pub.  Stats.,  ch.  106, 
§§  42,  61,  cl.  3. 

5  American  Tube  Works  v.  Boston 
Machine  Co.,  139  Mass.   5    (1S85). 


760 


CH.  XVI.] 


PREFERRED   STOCK. 


[§  277. 


time,  to  be  expressed  in  the  certificate;  the  corporation  is  bound  to 
pay  a  fixed  half-yearly  sum,  or  dividend,  upon  it  as  a  debt;  the 
holders  of  it  are  in  no  event  liable  for  the  debts  of  the  corporation 
beyond  their  stock,  and  the  issue  of  this  special  stock  makes  all  the 
general  stockholders  liable  for  all  debts  and  contracts  of  the  corpo- 
ration until  the  special  stock  is  fully  redeemed.1  Special  stock  can 
be  issued  only  by  a  vote  of  three-fourths  of  the  general  stockholders 
of  the  company  at  a  meeting  duly  called  for  that  purpose.2  The 
guarantee  of  dividends  of  special  stock  in  Massachusetts  is  an  ab- 
solute one,  and  not  in  any  degree  conditional  upon  the  earning  of 
sufficient  profits  by  the  corporation.3 

§  277.  Interest-bearing  stocks.—  Occasionally,  instead  of  issuing 
preferred  stock,  a  corporation  issues  ordinary  common  stock,  together 
with  a  promise  that  the  corporation  will  pay  interest  thereon.  Such  a 
promise  is  generally  lawful,  and  may  be  enforced  as  a  contract  in 
the  nature  of  an  agreement  to  pay  a  dividend.4  It  is  a  lawful  con- 
tract, however,  only  when  it  is  to  be  interpreted  as  requiring  pay- 
ment from  profits  alone.5     Any  contract  on  the  part  of  a  corpora- 


i  The  statutes  cited  supra;  Ameri- 
can Tube  Works  v.  Boston  Machine 
Co.,  139  Mass.  5   (1885). 

2  Stats.  1870,  eh.  224,  §  25.  And  the 
corporation  must  have  a  clerk,  who  is 
sworn,  and  who  acts  as  recorder  at 
such  meeting.  Stats.  1870,  ch.  224, 
§§  15, 18;  Pub.  Stats.,  ch.  106,  §§  23,  26. 
See  also  Reed  v.  Boston  Machine  Co., 
141  Mass.  454  (1886).  This  special 
stock  is  declared  to  be  "a  peculiar 
kind  of  stock,  distinctly  provided  for 
by  statute;"  and  it  is  important  that 
the  marked  distinction  between  pre- 
ferred stock,  as  usually  understood, 
and  special  stock,  as  authorized  by 
the  statute  cited  in  the  notes,  be  kept 
plainly  in  view.  American  Tube 
Works  v.  Boston  Machine  Co.,  139 
Mass.  5  (1885). 

It  was  held,  in  accordance  with  this 
view,  in  the  case  last  cited,  that  a  vote 
of  a  corporation  to  issue  special  stock, 
at  a  meeting  called  to  consider 
whether  the  corporation  will  issue 
preferred  stock,  is  invalid;  that  a 
vote  to  issue  special  stock  is  invalid 
if  the  record  of  the  meeting  fails  to 
show  that  three-fourths  of  the  general 
stockholders    voted    for    such    issue; 


761 


that  the  court  will  not  presume,  be- 
cause the  record  showed  that  more 
than  three-fourths  of  the  stockholders 
were  present  at  the  meeting,  that 
therefore  three-fourths  or  more  voted 
for  the  issue  of  special  stock;  and 
that  a  holder  of  special  stock  which 
is  illegally  issued  cannot,  by  estoppel 
or  otherwise,  become  a  member  of  the 
corporation  in  respect  of  such  shares. 

3  Williams  v.  Parker,  136  Mass.  204 
(1884).  See  also  Allen  v.  Herrick,  81 
Mass.  274  (1860). 

4  Barnard  v.  Vermont,  etc.  R.  R.,  89 
Mass.  512  (1863). 

5  Richardson  v.  Vermont,  etc.  R.  R., 
44  Vt.  613  (1872);  Miller  v.  Pitts- 
burgh, etc.  R.  R.,  40  Pa.  St.  237 
(1861);  Cunningham  v.  Vermont,  etc. 
R.  R.,  78  Mass.  411  (1859);  City  of 
Ohio  v.  Cleveland,  etc.  R.  R.,  6  Ohio 
St.  489  (1856);  Wright  v.  Vermont, 
etc.  R.  R.,  66  Mass.  68  (1853) ;  Water- 
man v.  Troy,  etc.  R.  R.,  74  Mass.  433 
(1857);  Barnard  v.  Vermont,  etc.  R. 
R.,  89  Mass.  512  (1863).  In  Ohio 
College  v.  Rosenthal,  45  Ohio  St.  183 
(1887),  where  certificates  of  stock 
bearing  interest  were  issued  by  a  cor- 
poration   which    merely    owned    real 


§  277.] 


PREFERRED    STOCK. 


[CH.  XVI. 


tion  to  pay  interest  or  dividends  to  its  stockholders,  without  refer- 
ence to  the  ability  of  the  company  to  pay  them  out  of  its  earnings, 
is  not  enforceable  unless  sufficient  profits  exist  to  make  such  pay- 
ment.1 Moreover,  the  directors  or  corporate  officers  paying  inter- 
est on  stock  out  of  the  capital  stock  arc  jointly  and  severally  liable 
to  refund  the  amounts  so  paid  out.2  It  has  been  held  that  a  rail- 
road company  may  lawfully  receive  subscriptions  to  its  capital 
stock  upon  the  condition  to  pay  interest  thereon  as  soon  as  the 
amount  of  the  subscription  shall  have  been  paid  in,  and  until  com- 
pletion of  the  road,  or  of  some  part  thereof,  or  imtil  the  road  shall 
have  been  put  in  operation,3  but  stipulated  interest  on  stock  cannot 
become  a  debt  payable  absolutely.4  The  right  of  a  subscriber 
drawing  interest  on  his  stock  to  participate  in  elections  and  general 
corporate  meetings,  and  to  exercise  generally  the  rights  of  a  stock- 
holder is  the  same  as  that  of  other  stockholders.5  Where  stock- 
holders advance  money  in  prepayment  of  calls,  the  company  may 
pay  them  interest  on  the  same  up  to  the  time  that  the  call  is  due, 
even  though  such  interest  is  paid  out  of  capital.0 


estate,  which  was  not  organized  for 
profit,  never  made  any  profit,  never 
expected  to,  and  had  existed  for  forty 
years,  a  suit  by  a  stockholder  to  col- 
lect interest  failed. 

i  Painesville,  etc.  R.  R.  v.  King,  17 
Ohio  St.  534  (1867);  Pittsburg,  etc. 
R.  R.  v.  Allegheny  County,  79  Pa.  St. 
210  (1875);  Pittsburg,  etc.  R.  R.  v. 
Allegheny  County,  63  Pa.  St.  126 
(1869);  Lockhart  v.  Van  Alstyne,  31 
Mich.  76  (1875);  Troy,  etc.  R.  R.  v. 
Tibbits,  18  Barb.  297  (1854);  Salis- 
bury v.  Metropolitan  Ry.,  38  L.  J. 
(Ch.)  249  (1869);  s.  c,  on  further 
hearing  22  L.  T.  Rep.  839;  Re  Na- 
tional, etc.  Co.,  L.  R.  10  Ch.  D.  118 
(1878).  Cf.  Bardwell  v.  Sheffield 
Water-works  Co.,  L.  R.  14  Eq.  517 
(1872).  In  City  of  Ohio  v.  Cleveland, 
etc.  R.  R.,  6  Ohio  St.  489  (1856),  in- 
terest payable  by  stock  dividends  was 
allowed  by  statute.  A  subscriber  to 
stock  which  by  its  terms  is  to  draw 
interest  cannot  defeat  the  subscrip- 
tion on  the  ground  that  the  provision 
as  to  interest  is  illegal.  Evansville, 
etc.  R.  R.  v.  Evansville,  15  Ind.  395 
(1860).  In  McLaughlin  v.  Detroit,  etc. 
Ry.,   8  Mich.  100    (1860),  a  railroad 


company  issued  stock  bearing  inter- 
est. The  court  sustained  it.  The 
stock  called  for  interest  instead  of 
dividends.  Bonds  were  tendered  to 
the  stockholder  in  payment  of  such 
"interest."  He  declined  the  tender 
and  sued  for  the  interest  money.  The 
court  sustained  his  suit.  No  question 
was  raised  as  to  paying  such  "in- 
terest" irrespective  of  profits. 

2  Re  National,  etc.  Co.,  L.  R.  10  Ch. 
D.  118   (1878).     See  also  §550,  infra. 

3  Milwaukee,  etc.  R.  R.  v.  Field,  12 
Wis.  340  (1860);  Racine  County 
Bank  v.  Ayers,  12  Wis.  512  (1860) ; 
Miller  v.  Pittsburgh,  etc.  R.  R.,  40  Pa. 
St.  237  (1861);  Waterman  v.  Troy, 
etc.  R.  R.,  74  Mass.  433   (1857). 

4  Barnard  v.  Vermont,  etc.  R.  R.,  89 
Mass.  512  (1863).  The  relation  of 
debtor  and  creditor  is  created  to  the 
extent  of  the  interest  stipulated  for. 
McLaughlin  v.  Detroit,  etc.  Ry.,  8 
Mich.  100    (1860). 

5  McLaughlin  v .  Detroit,  etc.  Ry.,  8 
Mich.  100   (1860). 

6  Lock  v.  Queensland  Inv.  etc.  Co., 
[1896]  1  Ch.  397;  aff'd  H.  L.,  [1896] 
A.  C.  461.  A  construction  company 
owning  the  stock  of  a  gas  company, 

62 


CH.   XVI.] 


PREFERRED    STOCK. 


[§   278. 


§  278.  Rights  of  preferred  stockholders  on  dissolution  and  on  a 
reduction  of  the  capital  stock.— -Upon  the  dissolution  of  a  corpora- 
tion, and  the  distribution  of  its  assets  among  the  stockholders  after 
the  payment  of  the  corporate  indebtedness,  it  is  the  settled  rule  of 
law  that,  in  the  absence  of  any  provision  in  the  statutes,  by-laws, 
certificate  of  stock,  or  contract  under  which  the  preferred  stock 
was  issued  to  the  contrary,  preferred  stockholders  have  no  priority 
over  common  stockholders.  Their  stock  was  preferred  in  respect  of 
dividends,  and  not  in  reference  to  the  capital  stock.  The  assets  of  the 
corporation  are  to  be  distributed  as  though  the  preferred  stock 
had  been  common  stock.  The  preferred  stockholder  in  the  dis- 
tribution becomes  a  common  stockholder.1      Thus,  where  the  pre- 


upon  selling  such  stock,  on  payments 
to  be  made  in  instalments,  may  agree 
to  allow  interest  on  the  instalments 
paid  in  advance.  Hetfield  p.  Addicks, 
154  Pa.  St.  1  (1893) ;  Porter  v.  Beacon 
Con.  Co.,  154  Pa.  St.  8  (1893). 

i  Coltrane  v.  Baltimore,  etc.  Assoc, 
110    Fed.    Rep.    281,    288    (1901);    Re 
Northwest,  etc.  Ry.,  [1900]  2  Ch.  882; 
People  v.  New  York,  etc.  Co.,  50  N.  Y. 
Misc.  Rep.  23  (1906).    Preferred  stock 
is   not   preferred  as   to   assets   where 
there   is   no  provision  to  that  effect, 
even  though  there  is  a  provision  that 
such  stock  is  to  mature  and  be  pay- 
able seven  years  after  the  first  pay- 
ment  on   the   subscription   price   has 
been    paid.      Sumrall    v.    Commercial 
Bldg.   etc.,  106  Ky.   260    (1899);    For- 
wood  v.  Eubank,  106  Ky.  291   (1899). 
The   House  of   Lords   has   held  that, 
upon  the  dissolution  of  a  corporation 
having  preferred  stock  and  common 
stock,  the  surplus  assets,  after  repay- 
ment of  the  paid-up  capital,  the  com- 
mon stock  not  having  been  paid  up, 
is  divisible  among  all  the  stockhold- 
ers,  common   and   preferred,   in   pro- 
portion  to   their  holdings.     Birch  v. 
Cropper,  14  App.  Cas.  525   (1889),  re- 
versing Re  Bridgewater  Nav.  Co.,  L. 
R.  39  Ch.  D.  1   (1888),  a  case  where 
there  was  a  large  surplus.     See  also 
Re  London  India  Rubber  Co.,   L.  R. 
5  Eq.  519   (1868);  McGregor  v.  Home 
Ins.  Co.,   33   N.  J.  Eq.   181    (1S80),   a 
dictum,   the  court  holding,  however, 


that  under  the  statutes  of  the  state 
the  preferred  stockholders  had  a  pref- 
erence as  to  assets  also,  the  statute 
providing  for  a  division   of  the   sur- 
plus after  payment  to  preferred  stock- 
holders.    Stock  with  guaranteed  divi- 
dends  is   stated   in   Gordon   v.   Rich- 
mond, etc.  R.  R.,  78  Va.  501    (1884), 
to  give  a  preference  as  to  dividends, 
but  not  of  the  assets  on  a  winding  up. 
Under  the  terms  of  a  charter,  distri- 
bution on  dissolution  may  be  accord- 
ing to  the  amount   paid   in,  some  of 
the  stock  not  being  full  paid.  Sheppard 
v.  Murphy,  70  L.  T.  Rep.  3  (1893).  In 
Griffith  v.  Paget,  L.  R.   6  Ch.   D.  511 
(1877);    s.  c,  L.  R.  5  Ch.   D.  894,  it 
was  held  that  where  the  company  is 
dissolved  by  a  consolidation  with  an- 
other company  under  a   statute,    the 
stockholders  of  the  old  being  entitled 
to  exchange  their  stock  for  stock  in 
the  new,   the  preferred   stock  is  not 
entitled  to  preferred  stock  in  the  new. 
On  a  winding  up,  if  it  turns  out  that 
the    profits    had    been    systematically 
overestimated  for  a  number  of  years, 
thereby  depriving  common  stockhold- 
ers   of     the    dividends,    an    account 
should  be  taken  and   such  dividends 
should  be  paid.    Re  Bridgewater  Nav. 
Co.,   [1891]  2  Ch.  317.     See  also  s.  c, 
[1891]  1  Ch.  155.    A  contest  between 
the  preferred  and  common  stockhold- 
ers as  to  who  shall  be  entitled  to  the 
surplus  will  not  be  decided  in  a  fore- 
closure suit,  but  the  surplus  will  be 


763 


§  278.]  PREFERRED   STOCK.  [CH.  XVI. 

ferred  stock  is  not  preferred  as  to  assets,  and  a  reorganization  is 
had  by  selling  out  the  property  of  the  company  to  a  new  company 
for  preferred  and  common  stock  in  the  new  company,  this  pre- 
ferred and  common  stock  of  the  new  company  must  be  distributed 
ratably  among  both  the  common  and  preferred  stockholders  of  the 
old  company.  A  preferred  stockholder  in  the  old  cannot  be  given 
the  preferred  stock  in  the  neAV.  A  common  stockholder  may  en- 
join such  a  distribution.  He  is  entitled  to  his  share  of  the  new 
preferred.1  But  where  a  railroad  may,  by  statute,  consolidate  with 
another  railroad  on  such  terms  as  a  majority  of  the  stockholders 
approve,  the  terms  may  be  that  four  preferred  shares  in  the  old 
shall  receive  five  preferred  shares  in  the  new,  and  two  shares  of 
common  in  the  old  shall  receive  one  preferred  share  in  the  new.  It 
is  not  such  a  dissolution  as  entitles  the  common  to  share  equally 
with  the  pref erred.2  Where  profits  have  been  earned  and  prop- 
erly entered  as  profits  on  the  corporation  books  they  belong  to  the 
stockholders,  even  though  thereafter  the  corporation  becomes  in- 
solvent and  is  wound  up  before  such  profits  are  declared  to  be 
dividends.  The  creditors  of  the  corporation  are  entitled  to  the 
corpus  of  the  estate,  but  not  to  any  profits.  If  there  is  preferred 
stock  such  profits  go  to  that  stock,3  but  the  rule  may  be  different 
where  the  directors  had  power  to  create  a  reserve  fund.4 

Where  a  preference  as  to  capital  has  been  expressly  contracted 

paid  to  the  corporation  for  distribu-  in  proportion  to  the  relative  value  of 

tion.    Continental  Trust  Co.  v.  Toledo,  such    preferred    and    common    stock. 

etc.  R.  R.,  86   Fed.   Rep.  929    (1898).  Cleveland  City  Ry.  v.  First  Nat.  Bank, 

On  dissolution   a  holder   of   deferred  68  Ohio  St.  582   (1903). 

shares  cannot  claim  that  they  were  3  Bishop  v.  Smyrna,  etc.  Ry.,  [1895] 

illegally  issued.    People  v.  New  York,  2  Ch.  265. 

etc.    Co.,    119    N.    Y.    App.    Div.    830  4  Where    a    company,    having    pre- 

(1907).  ferred    and    common    stock,    sells    its 

1  Simpson  v.  Palace  Theater,  69  L.  assets,  excepting  the  profits  of  the 
T.  Rep.  70  (1893).  See  also  §270,  previous  year,  these  profits  do  not  be- 
supra.  long  to  the  preferred  stockholders,  no 

2  Hale  v.  Cheshire  R.  R.,  161  Mass.  dividend  thereon  having  been  de- 
443  (1894).  Cf.  §270,  supra.  Under  clared,  even  though  the  preferred 
the  Ohio  statute  one  of  the  terms  of  stock  was  in  arrears  as  to  dividends, 
a  consolidation  may  be  that  each  con-  the  board  of  directors  having  full 
stituent  company  shall  first  pay  its  power  to  use  profits  for  a  reserve 
debts  and  that  the  stock  going  to  any  fund  and  the  company  having  had 
such  company  shall  be  sold  to  pay  losses  in  prior  years.  The  amount 
such  debts,  and  that  the  remainder  will  be  passed  to  assets  for  final  dis- 
of  the  stock  shall  be  distributed  tribution.  Re  Crichton's  Oil  Co., 
among   the   holders   of  the   preferred  [1901]     2    Ch.    184;     aff'd,     [1902]     2 

and  common  stock  of  such  company  Ch.  86. 

764 


CH.  XVI.] 


PREFERRED   STOCK. 


[§  278. 


for,1  or  is  given  by  a  statute,2  the  preferred  stock  is,  of  course,  pre- 
ferred as  to  assets  also.  In  Kew  Jersey  it  is  held  that  preferred 
stock  is  entitled  to  a  preference  on  dissolution  under  the  statutes  of 
that  state,  which  provides  for  dividends  before  any  dividend  shall 
be  set  aj3art  on  the  common  stock.3 

If  the  capital  stock  is  reduced,  the  preferred  stock  is  reduced 
proportionately  with  the  common,  unless  the  preferred  stock  is 
preferred  as  to  assets  as  well  as  dividends.4      Where  the  preferred 


1  Re  Bangor,  etc.  Slate  Co.,  L.  R.  20 
Eq.  59  (1875).  In  the  issue  of  pre- 
ferred stock  there  may  be  a  provision 
that  any  amounts  which  have  to  be 
paid  to  corporate  creditors  on  the 
winding  up  shall  be  paid  by  the  com- 
mon stockholders.  Welton  v.  Saffery, 
[1897]  A.  C.  299.  The  preference  may, 
by  express  agreement,  be  made  to 
give  a  preference  to  capital  as  well 
as  to  profits.  Hamlin  v.  Toledo,  etc. 
R.  R.,  78  Fed.  Rep.  664  (1897).  Found- 
ers' shares  are  one  species  of  pre- 
ferred or  deferred  stock.  See  §  14, 
supra.  Where,  on  dissolution,  the 
founders'  shares  were  to  have  one- 
fifth  of  the  surplus  assets,  the  words 
"surplus  assets"  are  construed  to  be 
the  assets  remaining  after  paying  the 
debts  and  also  paying  back  whatever 
the  stockholders  had  originally  paid 
in.  Re  New  Transvaal  Co.,  [1896]  2 
Ch.  750,  86  Fed.  Rep.  929.  In  the  case 
South  African,  etc.  Co.,  [1904]  2  Ch. 
268,  the  preferred  stock  was  entitled 
to  a  bonus  of  fifteen  per  cent,  on  its 
par  value  in  case  of  winding  up  for 
reconstruction    or   amalgamation. 

2  McGregor  v.  Home  Ins.  Co.,  33  N. 
J.  Eq.   181    (1880). 

3  Hellman  v.  Pennsylvania,  etc.  Co., 
6  7  Atl.  Rep.  834  (N.  J.  1907). 

4  When  the  capital  stock  is  reduced 
by  decreasing  the  par  value  of  the 
stock,  the  preferred  stock  may  be  re- 
duced equally  with  the  rest.  Re  Bar- 
row, etc.  Co.,  L.  R.  39  Ch.  D.  582 
(1888).  Where,  in  consequence  of 
losses,  the  capital  stock  is  reduced,  as 
allowed  by  the  charter,  by  reducing 
the  par  value  of  the  stock  one-half, 
the  preferred  stock  as   well   as   the 


common  is  reduced  one-half.  Banna- 
tyne  v.  Direct,  etc.  Co.,  L.  R.  34  Ch. 
D.  287  (1886).  But  not  where  the 
preferred  stock  is  preferred  as  to  as- 
sets as  well  as  dividends,  unless  all 
the  preferred  stockholders  assent 
thereto.  Re  Quebrada  Ry.,  etc.  Co., 
L.  R.  40  Ch.  D.  363  (1889).  Where  a 
company  has  not  issued  or  has  ac- 
quired some  of  its  stock,  it  may  re- 
duce its  capital  stock  by  canceling  the 
part  owned  by  it,  although  it  is  all 
preferred,  or  all  common,  or  a  part 
of  both.  Re  Gatling  Gun,  L.  R.  43 
Ch.  D.  628  (1890).  Where  there  is 
both  common  and  preferred  stock,  it 
is  legal  for  the  company  to  reduce 
the  common  stock  without  reducing 
the  preferred.  Re  Agricultural  Hote? 
Co.,  [1891]  1  Ch.  3"96.  Under  the 
English  statutes,  where  the  capital 
stock  consists  of  stock  and  deferred 
stock,  the  former  being  practically 
preferred  stock  and  the  latter  com- 
mon stock,  a  reduction  of  the  whole 
capital  stock  may  be  effected,  with  the 
consent  of  the  common  stockholders, 
by  canceling  a  part  of  the  common 
stock  and  having  the  remainder  be- 
come preferred  stock  (in  other  words, 
by  wiping  out  all  preferences),  even 
though  some  of  the  preferred  stock- 
holders objected,  there  being  origi- 
nally no  preferences  as  to  assets.  Re 
Hyderabad  Co.,  75  L.  T.  Rep.  23 
(1896).  In  National  Dwelling  Soc, 
Lim.,  78  L.  T.  Rep.  144  (1898),  by 
unanimous  consent,  upon  the  reduc- 
tion of  the  capital  stock  of  a  company 
having  both  preferred  and  common 
stock,  the  capital  stock  having  become 
impaired,  all  the  stock  became  com- 


765 


§  278.] 


PREFERRED    STOCK. 


[CH.  XVI. 


stock  is  reduced,  a  preferred  stockholder,  who  accepts  the  reduced 
amount  of  preferred  stock  and  turns  in  the  old  certificate,  may 
claim  the  accumulated  dividends  on  the  amount  canceled  by  the 
reduction,  but  if  the  reduction  resulted  in  a  surplus  over  the  reduced 
capital  stock,  such  surplus  may  be  used  for  dividends  on  both  classes 
of  stock,  because  it  is  not  "surplus  profits."  *  Where  the  preferred 
stock  was  to  have  five  per  cent,  and  the  common  stock  seven  per 
cent.,  and  the  remaining  profits  were  to  go  equally  to  the  common 
stock  and  to  founders'  shares,  and  a  reduction  of  capital  is  made 
by  reason  of  losses,  the  reduction  may  be  made  by  canceling  the 
founders'  shares  and  part  of  the  common  stock.2     Under  the  Eng- 


mon  stock,  the  preferred  stockholders 
reducing  their  holdings  three-fifths 
and  the  common  stockholders  reduc- 
ing their  holdings  nine-tenths.  A 
holder  of  preferred  stock  may  prevent 
a  reduction  of  the  preferred  dividend 
by  an  amendment  of  the  certificate 
of  incorporation,  even  though  the  stat- 
utes of  the  state  at  the  time  of  the 
organization  of  the  company  author- 
ized the  certificate  of  incorporation 
to  be  amended  by  a  certain  vote.  Such 
reduction  may  be  enjoined.  Pronik 
v.  Spirits,  etc.  Co.,  58  N.  J.  Eq.  97 
(1899).  Where  the  property  of  the 
Corporation  consists  of  a  mine  and  it 
has  been  largely  worked  out,  and  the 
corporation  applies  to  the  court  to 
sanction  a  reduction  of  both  preferred 
and  common  stock  by  canceling  one- 
half,  the  court  will  refuse  where  it 
is  shown  that  a  large  sum  had  been 
passed  to  a  reserve  fund  and  profit 
and  loss.  Re  Barrow,  etc.  Co.,  Ltd., 
85  L.  T.  Rep.  493,  [1902]  2  Ch.  746. 
In  this  last  case  the  lower  court  held 
that  under  the  English  statute  re- 
quiring the  consent  of  the  court  to  a 
reduction  of  capital  stock,  the  court 
will,  on  protest  of  preferred  stock- 
holders, refuse  a  reduction  of  all 
classes  of  stock  to  the  extent  of  one- 
half  of  their  face  value,  where  the 
only  ground  for  the  reduction  is  that 
the  property  is  not  worth  the  entire 
capital  stock,  and  a  preferred  stock- 
holder shows  that  the  good  will  and 
reserve  fund  have  not  been  taken  into 


consideration,  and  that  the  scheme  is 
for  the  purpose  of  practically  reduc- 
ing the  dividend  on  the  preferred 
stock.  Barrow,  etc.  Co.,  [1900]  2 
Ch.  846.  Even  though  there  are  dif- 
ferent classes  of  stock,  a  reduction 
of  the  capital  may  be  made  on  a  dif- 
ferent basis  from  the  basis  specified 
as  applicable  upon  a  dissolution  and 
winding  up.  Re  Credit  Assurance,  etc. 
Corp.,   [1902]  2  Ch.  601. 

i  Roberts  v.  Roberts-Wicks  Co.,  184 
N.  Y.  257  (1906).  In  this  case  a  cor- 
poration had  $75,000  preferred  stock 
and  $225,000  common  stock.  About 
$90,000  capital  stock  had  been  lost. 
The  company  then  reduced  its  capital 
stock  to  $200,000,  being  $50,000  pre- 
ferred and  $150,000  common.  The 
court  held  that  inasmuch  as  by  the 
terms  of  the  preferred  stock  the  divi- 
dends were  cumulative  and  bore  in- 
terest, the  dividends  which  had  ac- 
cumulated on  the  $75,000  preferred 
stock,  prior  to  the  reduction,  must  be 
paid  with  such  interest,  before  any 
dividends  were  paid  on  the  common 
stocK,  but  that  the  $10,000  surplus, 
created  solely  by  a  reduction  of  the 
capital  stock,  was  not  surplus  profits, 
applicable  to  such  accumulated  divi- 
dends. Such  $10,000  is  to  be  divided 
ratably  among  all  the  stockholders 
without  preference. 

2  Re  London,  etc.  Inv.  Corp.,  [1895] 
2  Ch.  860,  the  court  saying  that, 
"where  there  are  different  classes  of 
shares,  the  loss  on  a  reduction  ought 


766 


CH.  XVI.]  PREFERRED  STOCK.  [§  278. 

lisli  statute  a  reduction  of  the  capital  stock,  when  approved  by  the 
court,  is  binding,  and  the  court  may  approve  a  reduction  which 
pays  off  the  founders'  shares  at  par,  even  though  the  reserve  is  more 
than  sufficient  therefor,  it  appearing  that  the  founders'  shares  have 
no  commercial  value.1  The  subject  of  reducing  the  capital  stock 
by  purchasing  and  retiring  a  part  of  the  preferred  stock  is  con- 
sidered elsewhere.2 

to  fall  on  those  who  would  have  to  ing  Re  Anglo-French  Ex.  Co.,  [1902] 
bear  it  if  there  were  a  winding  up."      2  Ch.  845. 

i  Poole  v.  National  Bank  of  China,        2  See  §  271,  supra. 
96  L.  T.  Rep.  889   (1907),  disapprov- 

767 


CHAPTEE  XVII. 


INCREASE  AND  REDUCTION  OF  THE  CAPITAL  STOCK  AND  OVER- 
ISSUED STOCK. 


§  279.  Introductory. 


A.      LEGAL     INCBEASE     OB     REDUCTION     OF 
CAPITAL     STOCK. 

280.  Power  of  the  legislature  to  au- 

thorize an  increase  or  reduc- 
tion. 

281.  Power  of  the  corporation  to  in- 

crease or  reduce  the  capital 
stock. 

282.  Effect  of  purchase  by  a  corpo- 

ration  of   shares   of   its   own 
stock. 
2S3.  The  issue  of  bonds  convertible 
into   stock. 

284.  Power  of  a  court  to  direct  an 

increase  or  reduction. 

285.  Stockholders,      not      directors, 

should  authorize  the  in- 
crease. 

286.  Prior    right    of    the    old    stock- 

holders to  buy  increased 
stock  when  issued  for  cash 
— Rule  when  new  stock  is 
issued  for  property  or  on 
consolidation — Are  stockhold- 
ers entitled  to  new  stock  at 
par — Remedies  for  refusal  of 
corporation  to  recognize 
rights* — Waiver  of  rights. 

2S7.  Issue  of  an   increase  of  stock 
by  a  stock  dividend. 


§  2SS.  Liability  of  the  stockholder 
upon  an  increase  of  the  capi- 
tal stock — Irregularities  in 
increasing  the  stock. 

289.  Rights    and    liabilities    of    the 

stockholder  upon  a  reduction 
of   the   capital    stock. 

290.  Changes  in  the  number  or  par 

value  of  the  stock. 

B.      ILLECAL    INCREASE    OF    STOCK,    BEING 
OVERISSUED     STOCK. 

291.  Unauthorized  increase  of  stock 

may    amount    to    overissued 
stock. 

292.  Overissued   stock   is   absolutely 

void. 

293.  Liability  of  the  corporation  on 
overissued  stock — Who  is  a 
bona  fide  holder. 

294.  Defenses  of  the  corporation  to 
such  actions. 

29'5.  Personal  liability  of  the  officers 
of  the  corporation  on  over- 
issued  stock. 

296.  Liability  of  the  vendor  of  over- 
issued stock. 

297.  Equity  will  enjoin  voting, 
transferring,  and  dividends 
on  such  stock,  and  will  ad- 
just the  rights  of  all  parties. 

298.  Subscriber's  right  to  defeat  a 
subscription  to  overissued 
stock,  and  to  recover  back 
money  paid  thereon. 


§  279.  Introductory.—  The  capital  stock  of  all  incorporated  com- 
panies is  generally  fixed  by  the  charters  which  give  them  an  exist- 
ence. Frequently,  however,  in  the  progress  of  the  corporate  en- 
terprise, it  happens  that  the  capital  stock  is  found  to  be  too  small 
or  too  large  for  the  demands  of  the  business,  and  there  is  a  desire 
to  change  it.  This  change  can  be  made  lawfully  only  under  cer- 
tain conditions  and  limitations.  These  are  the  subject  of  this 
chapter. 

A.  LEGAL  INCREASE  OR  REDUCTION  OF  CAPITAL  STOCK. 

§  280.  Power  of  the  legislature  to  authorize  an  increase  or  reduc- 
tion.— It  is  clearly  constitutional  for  the  legislature,  upon  grant- 
ing a  charter,  to  fix  the  capital  stock  and  to  authorize  the  corpora- 

768 


CH.    XVII.]  INCREASE,  REDUCTION,  ETC.  OF  STOCK.  [§   281. 

tion  to  increase  or  decrease  that  capital  stock.  But  where  the  leg- 
islature did  not  authorize  the  corporation  to  vary  its  capital  stock, 
it  is  a  serious  question  whether,  as  against  a  dissenting  stockholder, 
the  capital  stock  may  he  subsequently  changed,  even  under  the  au- 
thority of  a  legislative  enactment.  The  better  and  prevailing  opin- 
ion is  that  it  may  be;  that  the  statute  authorizing  the  change  is 
constitutional ;  and  that  the  increase  or  reduction  is  valid.1 

A  different  conclusion  may  be  reached,  however,  as  regards  the 
rights  of  creditors  of  the  corporation.  It  is  clear  that  the  legisla- 
ture cannot  constitutionally  authorize  a  reduction  of  the  capital 
stock  in  prejudice  of  their  rights  as  to  an  existing  corporate  in- 
debtedness.2 The  supreme  court  of  Minnesota  has  held  that  it  is 
an  unconstitutional  delegation  of  authority  for  a  legislature  to  au- 
thorize state  railroad  commissioners  in  their  judgment  to  allow  an 
increase  of  capital  stock  only  for  such  purposes  and  on  such  terms 
as  they  may  deem  advisable  or  in  their  discretion  to  refuse  to  allow 
such  increase.3 

§  281.  Poiver  of  the  corporation  to  increase  or  reduce  the  capital 
stock. — In  the  absence  of  express  authority  from  the  state,  a  cor- 
poration has  no  power  whatsoever  to  increase  or  reduce  the  amount 
of  its  stock,  and  any  attempt  upon  the  part  of  the  corporation, 
either  by  the  corporate  officers  or  by  the  stockholders,  to  do  so  is 
wholly  illegal  and  void.4  Accordingly  it  is  not  competent  for  a 
corporation  having  a  fixed  capital  stock,  and  being  without  legisla- 
tive authority  to  change  it,  to  reduce  that  capital  to  the  amount 
actually  paid  in.5 

1  See  ch.  XXVIII,  infra,  on  this  sub-  4  Scovill  v.  Thayer,  105  U.  S.  143, 
ject.  An  amendment  authorizing  a  148  (1881);  Sutherland  v.  Olcott,  95 
corporation  to  increase  its  capital  N.  Y.  93,  100  (1884);  New  York,  etc. 
stock  is  a  fundamental,  and  hence  is  R.  R.  v.  Schuyler,  34  N.  Y.  30  (1865)  ; 
a  special  act  in  violation  of  a  con-  Mechanics'  Bank  v.  New  York,  etc. 
stitutional  prohibition  against  special  R.  R.,  13  N.  Y.  599  (1856);  Grangers', 
acts.  Marion  T.  Co.  v.  Bennett,  82  etc.  Ins.  Co.  v.  Kamper,  73  Ala. 
N.  E.   Rep.  782    (Ind.  1907).  325   (1882);   Moses  v.  Ocoee  Bank,  1 

2  See  ch.  XXVIII,  infra.  Lea    (Tenn.),    398    (1878);    Ferris   v. 

3  State  v.  Great  Northern  Ry.,  Ill  Ludlow,  7  Ind.  517  (1856);  Lathrop 
N.  W.  Rep.  289  (Minn.  1907).  This  v.  Kneeland,  46  Barb.  432  (1866); 
is  different  from  delegating  to  the  Salem  Mill-Dam  Corp.  v.  Ropes,  23 
commission  the  ascertainment  of  facts  Mass.  23  (1827).  Parker,  C.  J.,  in  the 
and  deciding  whether  the  facts  bring  case  last  cited,  says  that,  if  a  corpora- 
the  application  within  the  specifica-  tion  is  "created  with  a  fund  limited 
tions  of  a  statute  authorizing  such  an  by  the  act,  it  cannot  enlarge  or  dl- 
increase.  See  same  case  on  this  sub-  minish  that  fund  but  by  license  from 
ject  of  delegation  of  authority,   com-  the  legislature." 

pare  Trustees  of  Saratoga  v.  Saratoga,  5  Droitwich  Patent  Salt  Co.  v.  Cur- 
etc.  Co.,  191  N.  Y.  123  (1908).  zon,  L.  R.  3  Exch.  35,  42    (1867). 

(49)  769 


§   281.]  INCREASE,  REDUCTION,  ETC.  OF  STUCK.  [Cll.    XVII. 

Where  the  attempted  increase  or  reduction  of  the  stock  is  not 
authorized  by  the  charter,  not  even  the  unanimous  assent  and 
agreement  of  all  the  parlies  concerned  will  Legalize  it,1 

A  subscriber  for  stock  may  d<  Eea1  an  action  i  o  his  subscription 
by  tin'  defense  that  the  stock  subscribed  for  is  part  of  an  incre 
of  stock  which  the  statutes  do  not  allow  to  be  made.-  Where 
there  is  no  statutory  authority  for  the  increase,  ami  an  attempted 
increase  is  made  under  a  by-law,  a  subscriber  fur  the-  increased 
capital  stock  is  not  liable  even  to  corporate  creditors,  although  he 
acted  as  a  stockholder.3 

A  different  rule  prevails,  however,  where  the  increase  of  capital 
stock  is  authorized  by  charter  >r  statute,  bul  is  informally  made. 
In  such  a  case  the  increase  is  valid  as  :■._  '  all  parties  excepting 
the  state  which  created  the  corporation.4  Where  the  statutes  do  not 
fix  or  limit  the  capital  stock,  and  give  the  corporation  power  to  fix  it 
by  by-lawr,  the  capital  stock  may  be  increased  from  time  to  time  by 
amending  the  by-law.5 

An  authority  to  reduce  the  number  of  shares  cannot  be  inferred 
from  the  authority  to  increase,  and  a  reduction  with  no  other 
warrant  of  authority  than  a  right  to  increase  will  he  held  void.6 

If  the  charter  of  the  corporation  provides  that  the  capital  stock 
shall  not  he  less  than  a  specified  sum,  nor  greater  than  another 
specified  sum,  the  corporation  may  commence  business  with  less 
than  the  latter  sum,  and  afterwards  increase  the  capital  until  the 
limit  is  reached.7 

i  Quoted  and  approved  in  Cooke  v.  3  Ross-Mehan,  etc.  Co.  v.  Southern, 

Marshall,  191  Pa.  St.  315  (1899);  s.  c,  etc.  Co.,  72  Fed.  Rep.  957  (1896).    See 

196    Pa.    St.    200.      See    §  292,    infra,  also  §  298,  infra. 

Where  a  corporation  having  power  to  4  See  §  288,  infra. 

increase  its  capital  $100,000,  increases  5  Peck  v.   Elliott,   79   Fed.   Rep.   10 

it    $1,100,000,    the    whole    increase    is  (1897). 

void,    and    subscribers    to   it   are   not  o  Sutherland  v.  Olcott,  95  N.  Y.   93 

liable  thereon  to  corporate  creditors.  (1884);   Seignouret  v.  Home  Ins.  Co., 

Kampman    v.    Tarver,     S7     Tex.     491  24  Fed.  Rep.  332    (1885). 

(1895).       The    purchasers     of    stock  7  Gray   v.   Portland    Bank,   3   Mass. 

which    they   suppose    is   the    original  364    (1807);    Somerset,   etc.   R.   R.   v. 

capital  stock,  but  which  is  really  in-  Cushing,  45  Me.  524    (1858).     In  the 

creased  capital  stock,  cannot  sustain  case  last  cited  it  is  held  that,  where 

a  bill   to   cancel  the   original   capital  the  number  of  shares  is  not  fixed  by 

stock,  even  though  the  latter  is  held  charter,  the  directors  or  stockholders 

by    the    parties    who    issued    the    in-  must  fix  it  before  an  assessment  can 

creased  stock,  without  amending  the  be  levied,  and  that  then,  if  the  num- 

charter  as  required  by  statute.  Byers  ber  fixed  is  greater  than  the  number 

v.  Rollins,  13  Colo.  22   (1889).  taken,     it    may     be     reduced     subse- 

2  Laredo  Imp.  Co.  v.  Stevenson,   66  quently. 
Fed.  Rep.  633   (1895). 

770 


CH.   XVII.]  INCREASE,~REDUCTION,  ETC.  OF  STOCK.  [§   282. 

An  injunction  is  the  proper  remedy  to  prevent  an  illegal  increase 
or  reduction  of  the  capital  stock  of  a  corporation.  But  an  injunc- 
tion against  the  issue  of  new  stock  by  a  foreign  corporation  will  be 
dissolved  where  the  courts  of  the  state  where  the  corporation  was 
created  decide  such  issue  of  stock  to  be  legal.1 

§  282.  Effect  of  purchase  by  a  corporation  of  shares  of  its  own 
stock. — If  a  corporation  has  power  to  reduce  its  capital  stock,  it 
may  do  so  by  purchasing  and  retiring  a  portion  of  its  shares.2 
Whether  the  purchase  by  a  corporation  of  its  own  stock  will  oper- 
ate to  diminish  the  capital  stock  is  a  question  of  intention.  If  a 
reduction  is  authorized  by  charter  or  by  statute,  and  the  formalities 
of  making  the  reduction  have  been  complied  with,  and  the  proper 
corporate  authorities  purchase  for  the  corporation  shares  of  its  own 
stock  and  consider  the  capital  stock  thereby  reduced,  the  law  holds 
that  a  reduction  of  the  capital  stock  is  thereby  made.  But  if  any  of 
these  elements  are  wanting,  then  no  reduction  is  effected,  and  the 
corporation  may  at  any  time  sell  and  re-issue  the  stock.  Hence  a 
mere  transfer  of  stock  to  the  corporation,  whether  the  corporation 
assumes  to  buy  the  stock  or  the  stockholders  simply  to  surrender 
it,  will  in  no  case  constitute  a  reduction,  when  no  formal  reduction 
of  the.  capital  stock  is  made.  Even  if  the  stockholder  is  held  to  be 
released  by  such  a  transfer,   still  the  stock  survives  and  subsists. 

i  O'Brien  v.  Chicago,  etc.  R.  R.,  53  tion  may  purchase  its  own  stock  from 
Barb.  568  (1868).  An  increase  of  the  a  part  of  the  stockholders  as  a  means 
capital  stock  without  warrant  of  au-  of  reducing  its  capital  stock.  British, 
thority  is  called  an  overissue  of  stock  etc.  Corp.  v.  Couper,  [1894]  A.  C.  399. 
— a  subject  fully  considered  in  the  Where  a  corporation  uses  its  profits 
succeeding  sections  of  this  chapter,  to  buy  its  own  stock,  the  remaining 
The  issue  of  new  stock  by  the  corpora-  stockholders  are  not  liable  on  the 
tion  cannot  be  enjoined  where  neither  statutory  liability  attaching  to  the 
the  corporation  nor  any  of  its  direct-  stock  so  purchased  by  the  corporation, 
ors  are  parties  to  the  action.  White  Moon,  etc.  Co.  v.  Waxahachie,  etc.  Co., 
v.  Wood,  129  N.  Y.  527  (1892).  A  13  Tex.  Civ.  App.  103  (1896);  aff'd, 
promoter  cannot  enjoin  the  corpora-  89  Tex.  511  (1896);  State  r.  Smith, 
tion  from  increasing  its  stock,  even  48  Vt.  266  (1876),  dictum.  So  also 
though  he  claims  that  such  increase  City  Bank  v.  Bruce,  17  N.  Y.  507 
will  defeat  a  contract  made  prior  to  (1858).  Contra,  Currier  v.  Lebanon 
incorporation,  by  which  he  was  to  Slate  Co.,  56  N.  H.  262  (1875).  Where 
have  a  one-sixth  interest,  the  corpora-  a  company  has  not  issued  or  has  ac- 
tion not  having  ratified  such  contract,  quired  some  of  its  stock,  it  may  re- 
Martin  v.  Remington,  etc.  Co.,  95  N.  duce  its  capital  stock  by  canceling  the 
Y.  App.  Div.  18  (1904).  See  §288,  part  owned  by  it,  although  it  is  all 
infra.  preferred,  or  all  common,  or  part  of 

2  Quoted   and   approved   in    Tulare,  both.     Re  Gatling  Gun,  L.  R.  43  Ch. 

etc.  Dist.  v.  Kaweah,  etc.  Co.  44  Pac.  D.  628   (1890). 
Rep.   662    (Cal.   1896).     The  corpora- 

771 


283.] 


INCREASE,   REDUCTION,  ETC.   OF  STOCK. 


[CH.    XVII. 


The  corporation  is  merely  the  holder  of  it,  and  may  sell  and  re- 
issue it  at  any  time.1 

§  283.  The  issue  of  bonds  convertible  into  stock. — Where  the 
charter  of  a  railroad  corporation  authorizes  the  issue  of  bonds, 
convertible  at  the  option  of  the  holder  into  stock,  such  an  issue 
may  be  made,  even  though,  if  the  bonds  were  converted  into  stock, 
the  capital  stock  would  thereby  be  increased  beyond  the  amount 
fixed  by  the  charter.  The  statute  or  charter  authorizing  such  an 
issue  of  bonds  is  held  to  thereby  authorize,  by  necessary  implica- 
tion the  right  to  increase  the  capital  stock  to  the  extent  required 
in  the  fulfillment  of  the  contract  to  allow  the  bonds  to  be  con- 
verted into  stock.2 


i  A  street  railway  company  which 
has  purchased  shares  of  its  own  stock 
is  liable  for  the  price,  even  though 
the  stock  turns  out  to  be  worthless. 
Stock  so  purchased  by  the  company 
may  be  reissued  and  does  not  amount 
to  a  reduction  of  the  capital  stock. 
A  statute  prohibiting  street  railways 
from  owning  stock  relates  to  stock  in 
other  companies.  Leonard  v.  Draper, 
187  Mass.  536  (1905).  The  purchase 
by  a  corporation  of  its  own  stock  does 
not  necessarily  decrease  the  capital 
stock.  "It  might  or  might  not  have 
that  effect,  at  the  option  of  the  com- 
pany, and  would  require,  I  think, 
some  manifestation  of  such  an  intent 
to  produce  that  result."  Such  stock 
may  be  re-issued  at  any  time.  City 
Bank  v.  Bruce,  17  N.  Y.  507  (1858). 
Where  a  corporation  has  power  to  re- 
duce its  capital  stock  it  may  purchase 
from  one  of  its  stockholders  his  stock 
and  give  him  in  payment  therefor  his 
pro  rata  share  of  the  assets  of  the 
corporation,  the  corporation  being 
solvent.  This  amounts  to  a  reduction 
of  the  capital  stock,  and  a  subsequent 
creditor  of  the  corporation  cannot 
complain.  Shoemaker  v.  Washburn, 
etc.  Co.,  97  Wis.  585  (1897).  In  Lou- 
isiana the  purchase  by  a  corporation 
of  its  own  stock  cancels  the  stock 
until  re-issue.  If,  however,  in  the  re- 
issue the  corporation  gives  away  the 
stock,  the  parties  receiving  it  are  lia- 
ble to  subsequent  corporate  creditors. 


No  formal  contract  of  subscription  is 
necessary,  but  the  mere  taking  of  the 
stock  is  sufficient  to  render  them  lia- 
ble. Belknap  v.  Adams,  49  La.  Ann. 
1350  (1897).  A  purchase  by  the  cor- 
poration itself  does  not  amount  to  a 
reduction  of  the  capital  stock.  West- 
ern Imp.  Co.  v.  Des  Moines  Nat.  Bank, 
103  Iowa,  455  (1897).  See  §313,  in- 
fra, and  Hartridge  v.  Rockwell,  R.  M. 
Charlt.  (Ga.)  260  (1828).  In  an  early 
case  a  transfer  to  the  corporation 
seems  to  have  been  regarded  as  a  re- 
duction of  the  capital  stock  pro  tanto. 
Percy  v.  Millaudon,  3  La.  568,  587 
(1832).  It  is  important  to  note  in 
this  connection  that  the  purchase  of 
its  own  stock  by  a  corporation  is  an 
act  not  permitted  at  all  in  England, 
and  not  permitted  in  this  country 
when  corporate  creditors'  rights  would 
be  prejudiced  thereby.  See  §§  309- 
312,  infra.  It  was  held  in  New  Eng- 
land, etc.  Ins.  Co.  v.  Phillips,  141 
Mass.  535  (1886),  that  a  purchase  by 
a  corporation  of  certificates  of  in- 
debtedness effects  a  cancellation,  even 
though  the  certificates  have  a  voting 
power.  An  unincorporated  association 
may  purchase  its  own  stock,  and  the 
question  of  whether  a  reduction  of  the 
capital  stock  is  thereby  effected  is  a 
question  of  intention.  Booth  v.  Dodge, 
60  N.  Y.  App.  Div.  23  (1901). 

2  Belmont  v.  Erie  R.  R.,  52  Barb. 
637,  669  (1869);  Ramsey  v.  Erie  Ry., 
38  How.  Pr.  193,  216  (1869);  s.  c,  7 


772 


CH.   XVII.] 


INCREASE,  REDUCTION,  ETC.  OF  STOCK. 


[§   283. 


The  issue  of  a  bond  convertible  into  stock  must  comply  with  the 
rules  regulating  the  issue  of  stock,1  and  the  par  value  of  the  stock 
must  be  received  by  the  corporation.2  If  the  old  stockholders  have 
the  prior  right  to  subscribe  for  new  stock,  this  right  cannot  be  taken 
away  by  issuing  a  bond  convertible  into  stock.3  The  holder  of  the 
bonds  may  demand  stock  therefor  at  any  time;  and  even  though 
the  demand  is  made  just  before  a  dividend  is  declared,  he  is  en- 
titled to  the  stock  and  dividend.4  A  provision  in  a  bond,  however, 
that  the  holder  might  exchange  it  for  preferred  stock  at  any  time 
within  ten  days  after  a  dividend  was  declared,  lapses  where  the  holder 
does  not  make  the  demand  until  several  months  after  the  bonds 
become  due.5 


Abb.  Pr.  (N.  S.)  156.  When  bonds  are 
convertible  by  their  terms  into  stock, 
but  the  company  has  no  stock, 
specific  performance  will  not  be  de- 
creed, but  damages  given.  Chaffee 
v.  Middlesex  R.  R.,  146  Mass.  224 
(1888).  Where  the  stock  of  a  land 
corporation  is  convertible  into  land,  a 
stockholder  may  enforce  the  change 
by  bill  in  equity.  Franco-Texan  Land 
Co.  v.  Bousselet,  70  Tex.  422  (1888). 
The  bonds  may  provide  that  the  hold- 
er may  take  certain  lots  of  land  in 
satisfaction  thereof.  Chicago,  etc. 
Land  Co.  v.  Peck,  112  111.  408  (1885). 
i  Where  a  corporation  has  power 
to  increase  its  capital  stock,  it  may 
issue  bonds  at  fifty  per  cent,  of  their 
par  value,  convertible  into  stock  upon 
payment  of  the  other  fifty  per  cent. 
Van  Allen  v.  Illinois  Central  R.  R., 
7  Bosw.  515    (1861). 

2  Where  debentures  are  issued  at 
eighty  cents  on  the  dollar  and  by  their 
terms  the  holder  may  convert  them 
into  stock  equal  to  the  par  value  of 
the  debentures,  this  is  the  same  as  is- 
suing stock  at  a  discount  for  cash, 
and  may  be  enjoined  by  its  sharehold- 
ers. Moseley  v.  Koffyfontein  Mines, 
Ltd.,  [1904]   2  Ch.  108. 

3  A  stockholder  may  enjoin  his  com- 
pany from  issuing  mortgage  bonds 
convertible  into  stock  at  the  rate  of 
$500  par  value  of  stock  for  each  $1,000 
bond,  inasmuch  as  he  is  entitled  to 
subscribe  for  his  pro  rata  part  of  new 
stock.     Wall  v.  Utah  Copper  Co.,  70 


N.  J.  Eq.  17  (1905),  the  court  distin- 
guishing Meredith  v.  New  Jersey,  etc. 
Co.,  55  N.  J.  Eq.  211  (1897),  aff'd  56 
N.  J.  Eq.  454,  on  the  ground  that  in 
the  latter  case  the  complainants  held 
less  than  one  per  cent,  of  the  entire 
stock,  and  the  defendant  offered  at 
the  trial  to  allow  the  complainants  to 
purchase  their  proportion  of  the  new 
stock  at  par,  and  in  the  third  place 
the  property  was  worth  what  was 
paid  for  it.    See  also  §  286,  infra. 

4  Jones  v.  Terre  Haute,  etc.  R.  R., 
57  N.  Y.  196  (1874).  Where  bonds  are 
convertible  into  stock,  a  bondholder 
is  entitled  to  stock  equal  in  par  value 
to  the  par  value  of  his  bonds,  but  is 
not  entitled,  in  addition  thereto,  to 
past  stock  dividends  declared  on  such 
stock.  Sutliff  v.  Cleveland,  etc.  R.  R., 
24  Ohio  St.  147  (1873).  In  a  suit  by 
holders  of  bonds  convertible  into 
stock  against  the  corporation  for  re- 
fusal to  allow  such  conversion,  the 
plaintiffs  must  allege  that  they  still 
hold  the  bonds.  Denney  v.  Cleveland, 
etc.  R.  R.,  28  Ohio  St.  108  (1875). 
A  corporation  with  authority  to  in- 
crease its  capital  stock  may  lawfully 
issue  new  stock  and  receive  in  pay- 
ment therefor  the  bonds  of  the  cor- 
poration. Lohman  v.  New  York,  etc. 
R.  R.,  2  Sandf.  (N.  Y.  Super.  Ct.) 
39  (1848);  Reed  v.  Hayt,  51  N.  Y. 
Super.  Ct.  121  (1884);  aff'd,  109  N. 
Y.  659.    See  70  Atl.  Rep.  295. 

5  Loomis  v.   Chicago,    etc.    Ry.,    102 
Fed.  Rep.  233  (1900).    A  person  hold- 


773 


§   283.]  INCREASE,  REDUCTION,  ETC.   OF  STOCK.  [CII.    XVII. 

An  option  to  convert  stock  into  bonds  must  be  exercised  within 
a  reasonable  time  if  the  option  itself  contains  no  limit.1 

Where  bonds  are  convertible  into  stock,  the  holder  may  demand 
conversion  into  the  stock  of  a  new  consolidated  corporation  that 
has  assumed  all  the  claims  and  liabilities  of  the  eld.2  But  where  a 
bondholder  is  not  entitled  by  the  terms  of  his  bond  to  convert  it 
into  stock,  and  a  subsequent  statute  prescribes  that  it  may  be  con- 
verted into  stock,  but  such  conversion  is  not  made  and  the  com- 
pany consolidates  with  another  company,  the  right  to  so  convert 
the  bonds  into  stock  is  lost.3  Where  a  railroad  company  issues  a 
bond  convertible  by  its  terms  into  preferred  stock  at  the  end  of 
fifteen  years,  it  is  no  defense  that  it  had  no  preferred  stock  out- 
standing at  the  date  of  the  issue  of  the  bond,  such  preferred  stock 
having  been  issued  later,  and  if  it  refuses  to  .make  the  exchange,  it 
is  liable  in  damages  to  the  extent  of  the  market  value  of  the  pre- 
ferred stock.4 

ing  a  certificate  of  indebtedness  from  for  the  contracts  of  the  old  companies, 
the  corporation  payable  in  cash  or  at  it  must  issue  stock  in  exchange  for 
his  option  convertible  into  stock,  can-  bonds  of  the  old  company  which  were 
not,  after  he  has  received  payment,  re-  convertible  into  stock.  India  Mut. 
turn  the  money  and  claim  the  stock  Ins.  Co.  v.  Worcester,  etc.  R.  R.,  25 
on  the  ground  that  he  had  forgotten  N.  E.  Rep.  975  (Mass.  1890).  Where 
about  the  convertibility.  Johnson  v.  a  bondholder  has  a  right  to  convert 
Richmond,  etc.  R.  R.,  101  Va.  156  his  bonds  into  stock,  a  consolidation 
(1903).  Where  bonds  are  convertible  cannot  deprive  him  of  that  right  until 
into  preferred  stock  within  ten  days  after  he  has  been  notified  of  the  in- 
after  any  dividend  has  been  paid  on  tended  consolidation  and  given  an 
the  stock  upon  unmatured  coupons  be-  opportunity  to  exercise  his  rights, 
ing  delivered  up,  it  is  too  late  to  cle-  Rosenkrans  v.  Lafayette,  etc.  R.  R., 
mand  exchange  after  the  ten  days,  or  18  Fed.  Rep.  513  (1883).  In  Cayley 
after  the  coupons  have  matured  and  v.  Cobourg,  etc.  Co.,  14  Grant's  Ch. 
been  paid.  Carpenter  v.  Chicago,  etc.  Rep.  (Can.)  571  (1868),  where  the 
R  R.  119  N.  Y.  App.  Div.  169  (1907).  bondholders  of  a  railroad  company 
See  also  §  270,  supra.  had    a   right   to   convert   their   bonds 

1  Catlin  v.  Green,  120  N.  Y.  441  into  stock,  it  was  held  that  a  consoli- 
(1890).  Where  the  subscribers  for  dation  authorized  by  statute  did  not 
stock  have  an  option  to  exchange  destroy  this  right  of  the  bondholders, 
their  stock  for  bonds  of  the  company,  but  that  the  consolidated  company 
and  fail  to  exercise  that  option  for  must  issue  the  stock  in  exchange  for 
nine  years,  when  the  company  has  the  bonds.  Cf.  181  Fed.  Rep.  472. 
passed  into  the  hands  of  a  receiver  3  Parkinson  v.  West  End,  etc.  Ry., 
and  the  stock  become  worthless,  the  173  Mass.  446  (1899),  the  court  inti- 
right  is  gone.  The  option,  not  being  mating  further  that  the  right  of  a 
limited  in  time,  must  be  exercised  bondholder  to  convert  his  bonds  into 
within  a  reasonable  time.  Catlin  v.  stock  is  lost  upon  the  dissolution  of 
Green,  120  N.  Y.  441  (1890).  the  company. 

2  Day  v.  Worcester,  etc.  R.  R.,  151        4  Bratten    v.   Catawissa   R.   R.   Co., 
Mass.   302    (1890).     When   by  statute     211  Pa.   St.  21    (1905). 

the    consolidated    company    is    liable 

774 


CH.    XVII.] 


INCREASE,  REDUCTION,  ETC.  OP  STOCK. 


[§  284. 


§  284.  The  poiver  of  a  court  to  direct  an  increase  or  reduction.— 
The  courts  have  no  power,  by  mandate  or  decree  or  in  any  other 
manner,  to  effect  an  increase  or  reduction  of  the  capital  stock  of  a 
corporation.  Hence,  where  the  whole  capital  stock  has  been  issued, 
and  the  corporation,  by  reason  of  its  misconduct  or  mistakes,  is 
bound  to  issue  new  certificates  to  the  owner  of  the  stock  or  pay 
him  damages,  the  court  can  give  judgment  for  damages  only.  It 
cannot  order  the  corporation  to  issue  stock,  since  to  do  so  would  be 
to  direct  an  overissue.1 

In  Massachusetts  a  later  and  better  rule  prevails,  to  the  effect 
that  the  corporation  in  such  a  case  may  be  compelled  to  issue  the 
stock,  and  in  order  to  prevent  an  illegal  overissue  it  must  purchase 
an  equal  amount  of  stock  in  the  market.2 

Where  corporate  officers  enter  into  a  contract  to  pay  for  services 
or  property  wholly  or  partially  in  stock  of  the  corporation,  a  court 
will  not,  after  the  whole  amount  of  the  stock  has  been  issued,  de- 
cree a  specific  performance  of  the  contract,  but  the  aggrieved 
party  is  remitted  to  his  action  for  damages.3 


i  "When  a  corporation  has  issued 
certificates  of  stock  (which  are  valid 
and  not  void)  to  the  full  extent  of  all 
the  shares  which  by  law  and  the  con- 
stitution of  the  company  it  may  issue, 
no  court  can  order  the  issuance  of 
other  shares,  because  in  that  respect 
the  powers  of  the  corporation  have 
been  exhausted."  Smith  v.  North 
American  Min.  Co.,  1  Nev.  423  (1865) ; 
Williams  v.  Savage  Mfg.  Co.,  3  Md. 
Ch.  418  (1851);  Mechanics'  Bank  v. 
New  York,  etc.  R.  R.,  13  N.  Y.  599 
(1856);  Sewall  v.  Eastern  R.  R.,  63 
Mass.  5  (1851);  Gray  v.  Portland 
Bank,  3  Mass.  364  (1807).  See  also 
§  388,  infra.  In  an  action  for  the  con- 
version of  stock,  the  question  of  an 
increase  or  reduction  not  being  in- 
volved, it  was  said  that  "to  require 
a  new  issue  of  the  stock,  might,  in 
cases  like  this,  where  shares  have 
gone  into  the  hands  of  innocent  pur- 
chasers, involve  an  overissue  of  stock, 
which  would  be  illegal."  Baker  v. 
Wasson,  59  Tex.  140  (1883);  s.  a,  53 
Tex.  150  (1880). 

2  This  rule,  with  an  equitable  ad- 
justment of  the  conflicting  interests  of 
all   the   parties,   where   an   owner   of 


stock  was  deprived  of  it  by  forgery, 
was  established  by  the  supreme  judi- 
cial court  of  Massachusetts  in  the 
case  of  Machinists'  Nat.  Bank  v.  Field, 
126  Mass.  345  (1879).  See  also  Pratt 
v.  Machinists'  Nat.  Bank,  123  Mass. 
110  (1877);  Pratt  v.  Boston,  etc.  R. 
R.,  126  Mass.  443  (1879);  and  Boston, 
etc.  R.  R.  v.  Richardson,  135  Mass. 
473  (1883),  each  of  the  three  cases 
growing  out  of  the  same  transaction. 
See  also  §  327,  infra. 

3  Finley,  etc.  Co.  v.  Kurtz,  34  Mich. 
89  (1876).  In  this  case  the  court  said 
that,  where  the  capital  stock  may  be 
increased  by  vote  of  the  stockholders, 
"it  certainly  could  not  be  within  the 
implied  powers  of  any  corporate  offi- 
cer to  obligate  the  corporation  to  any 
such  increase,  and  thus  indirectly  do 
what  the  law  permits  to  be  done  only 
by  the  body  of  corporators  specially 
convened  for  the  purpose."  In  ac- 
tions against  corporations  for  conver- 
sion of  stock,  the  relief  demanded  is 
usually  in  the  alternative,  being  ei- 
ther for  an  issue  of  a  certificate  of 
stock,  or  damages  in  lieu  thereof. 
Even  though  a  stockholder  pledges 
his  stock  to  secure  a  debt  of  the  cor- 


775 


§  285.] 


INCREASE,   REDUCTION,  ETC.   OF  STOCK. 


[CII.    XVII. 


§  285.  Stockholders,  not  directors,  should  authorize  the  increase.  — 
An  increase  or  reduction  of  the  capital  stock  of  a  corporation  is 
such  a  fundamental  change  in  its  affairs  that,  although  it  has  been 
duly  authorized  by  act  of  the  Legislature  or  by  the  charter  of  in- 
corporation, it  cannot  lawfully  be  effected  merely  by  the  act  or  as- 
sent of  the  board  of  directors,1  but  must  be  authorized  by  tin- 
stockholders  at  a  corporate  meeting.2  Where,  however,  the  direct- 
ors have  made  the  change  and  the  stockholders  have  acquiesced 
therein,  they  are  as  fully  bound  as  though  the  increase  or  reduction 
had  been  expressly  authorized  at  a  corporate  meeting.  The  stock- 
holders' assent  to  the  change  may  be  shown  as  conclusively  by 
their  conduct  and  acquiescence  as  by  a  formal  vote.3  The  power  to 
increase  the  capital  stock  may  be  vested  in  the  directors.4  Although 
the  stockholders  have  regularly  voted  to  increase  the  capital  stock, 
in  pursuance  of  legislative  authority,  still,  inasmuch  as  the  increase 
is  not  accomplished  until  the  stock  is  actually  issued,  the  vote  may 
be  reconsidered  in  a  lawful  manner  at  any  time  before  the  stock  is 


poration,  and  such  stock  is  sold  out,  (1868);  Lane's  Case,  1  De  G.,  J.  &  S. 
yet  he  is  not  entitled  to  an  equal  504  (1863);  Payson  v.  Stoever,  2  Dill, 
amount  of  stock  from  the  corporation,  427  (1873) ;  s.  c.,  19  Fed.  Cas.  27.  See 
but  is  merely  a  creditor  of  it.  Demp-  also  ch.  XLVII,  infra,  relative  to  mort- 
ster  v.  Rosehill,  etc.  Co.,  206  111.  261  gages;  but  see  also  §  288,  infra.  An 
(1903).  allegation  of  ratification  must  not  be 
i  Percy  v.  Millaudon,  3  La.  568,  585  in  general  terms,  but  must  set  out 
(1832);  Eidman  v.  Bowman,  58  111.  specifically  the  facts  constituting  the 
444  (1871);  Finley,  etc.  Co.  v.  Kurtz,  ratification.  Eidman  v.  Bowman,  58 
34  Mich.  89  (1876);  Crandall  v.  Lin-  111.  444  (1871).  An  amendment  of 
coin,  52  Conn.  73,  99  (1884);  People  the  charter  which  allows  the  directors 
v.  Parker  Vein  Coal  Co.,  10  How.  Pr.  instead  of  the  stockholders  to  author- 
543  (1854).  See  also  Railway  Co.  v.  ize  an  increase  of  the  capital  is  not 
Allerton,  18  Wall.  233  (1873).  It  is  such  a  fundamental  change  in  the 
for  the  stockholders  to  increase  the  constitution  of  the  corporation  as  will 
capital  stock,  and  a  contract  of  the  operate  to  release  non-assenting  stock- 
directors  in  reference  to  making  an  holders  from  the  obligation  of  their 
increase  is  not  enforceable.     McNulta  stock.      Payson    v.    Withers,    5    Biss. 


v.  Corn  Belt  Bank,  164  111.  427  (1897). 
Cf.  Chicago  v.  Joney,  60  111.  383 
(1871);  Re  Wheeler,  2  Abb.  Pr.  (N. 
S.)    361    (1866);    People  v.  Twaddell, 


269  (1873);  s.  c,  19  Fed.  Cas.  29; 
Payson  v.  Stoever,  2  Dill.  427;  s.  c, 
19  Fed.  Cas.  27. 

4  Sutherland  v.  Olcott,  95  N.  Y.  93 


18  Hun,  427,  432  (1879) ;  State  v.  Mer-  (1884).     Their    resolution   that   "the 

chant,   37   Ohio   St.   251    (1881).     See  capital  stock  of  this  company  be  and 

also  §§  708,  etc.,  infra.  the  same  is  hereby  increased  to " 

2  Quoted  and  approved  in  Newport,  is  sufficient  to  effect  the  increase, 
etc.  Co.  v.  Mimms,  103  Tenn.  465  Sutherland  v.  Olcott,  95  N.  Y.  93 
(1899).  (1884). 

3  Sewell's  Case,  L.  R.  3  Ch.  App.  131 

776 


en.  xvii.] 


INCREASE,  REDUCTION,  ETC.  OF  STOCK. 


[§  286. 


finally  issued.1     The  courts  will  not  inquire  into  the  necessity  of  an 
increase.2 

§  286.  Prior  right  of  the  old  stockholders  to  buy  increased 
stock  when  issued  for  cash — Ride  when  new  stock  is  issued  for 
property  or  on  consolidation  — Are  stockholders  entitled  to  new  stock 
at  par  —  Remedies  for  refusal  of  corporation  to  recognize  rights  — 
Waiver  of  rights. — When  the  capital  stock  of  a  corporation  is  in- 
creased by  the  issue  of  new  stock,  each  holder  of  the  original  stock 
has  a  right  to  offer  to  subscribe  for  and  to  demand  from  the  cor- 
poration such  a  proportion  of  the  new  stock  as  the  number  of 
shares  already  owned  by  him  bears  to  the  whole  number  of  shares 
before  the  increase.  This  pre-emptive  right  of  the  stockholder  in 
respect  to  new  stock  is  well  recognized.3 


1  Terry  v.  Eagle  Lock  Co.,  47  Conn. 
141  (1879).  In  this  case  the  court 
said:  "It  cannot  be  said  that  the 
capital  is  actually  increased  until  the 
new  stock  is  subscribed  for,  at  least. 
Until  then  there  is  an  element  of  un- 
certainty about  it.  It  may  never  be 
taken.  It  is  very  clear  that  the  vote 
to  increase  is  not  per  se  an  increase." 

2  Jones  v.  Concord,  etc.  R.  R.,  67 
N.  H.  119  (1891);  s.  c,  67  N.  H.  234. 

3  Quoted  and  approved  in  Stokes  v. 
Continental  Trust  Co.,  186  N.  Y.  285 
(1906);    and   Electric   Co.   v.  Edison, 
etc.  Co.,  200  Pa.  St.  516  (1901);  Gray 
v.  Portland  Bank,  3  Mass.  364  (1807)  ; 
Eidman     v.     Bowman,     58     111.     444 
(1871);    Reese  v.  Bank  of  Montgom- 
ery,  31    Pa.    St.    78    (1855);    Jones   v. 
Morrison,  31  Minn.  140   (1883);  Bank 
of   Montgomery   v.   Reese,    26   Pa.    St. 
143    (1856);    Real  Estate,   etc.   Co.    v. 
Bird,  90  Md.  229    (1899).     Cf.  Curry 
v.  Scott,  54  Pa.  St.  270  (1867);  Miller 
r.   Illinois  Cent.   R.  R.,   24   Barb.  312 
(1857);   Wilson  v.  Bank  of  Montgom- 
ery  County,    29    Pa.    St.    537    (1857); 
Mason  v.   Davol   Mills,   132   Mass.   76 
(1882).     Where  a  corporation  is  au- 
thorized  to   issue   preferred   stock   it 
may  attach  such  conditions  thereto  as 
it  deems  best.    One  of  the  conditions 
may  be  that  the  corporation  may  re- 
tire the  stock  at  par  within  a  certain 
time.  In  retiring  such  preferred  stock 
the  corporation  may  issue  additional 


common  stock  to  the  holders  of  the 
old  common  stock  without  giving  any 
rights    to    the    holders    of    preferred 
stock.  Moreover,  even  if  the  preferred 
stockholders  had  a  right  to  a  part  of 
the  new  common  stock,  yet  the  rem- 
edy is  not  an  injunction  but  a  suit 
at   law   for    damages.     Even   though 
such   preferred    stock    is    retired    for 
cash,  yet  a  holder  of  preferred  stock 
cannot   object   that   this    impairs   the 
capital  of  the  company,  inasmuch  as 
he  ceases  to  have  an  interest  in  the 
company.     Such  stock  may  be  retired 
by  a  vote  of  the  directors  without  a 
vote  of  the  stockholders.     Hackett  v. 
Northern,  etc.  R.  R.,  36  N.  Y.   Misc. 
Rep.   583    (1901).     Where  a  corpora- 
tion   has    power    to    issue    preferred 
stock  on  such  terms  as  it  may  fix,  and 
also  has  power  to  borrow  money,  and 
it  does   issue  preferred  stock,  which 
by  its  terms  may  be  retired,  it  may 
issue    certificates   of   indebtedness   to 
retire  such  preferred  stock,  and   im- 
mediately thereafter  as  a  part  of  the 
transaction    issue    common    stock    to 
take  up  such  certificates  of  indebted- 
ness.   This  is  practically  the  same  as 
changing  the  preferred  into  common 
stock.     A  preferred  stockholder  can- 
not object  thereto  on  the  ground  that 
he  was  entitled  to  subscribe  for  his 
proportion  of  the  new  common  stock. 
Weidenfeld  v.  Northern,  etc.  Ry.,  129 
Fed.   Rep.  305    (1904).     Where  there 


777 


286.] 


INCREASE,  REDUCTION,  ETC.   OF  STO<  K. 


['II.    XVII. 


This  rule  docs  not  apply  to  a  sale  of  treasury  stock  by  the 
corporation,  inasmuch  as  that  is  a  mere  reissue  of  stock,  which 
has  already  been   issued   once.1     It  applies,  however,  to  fractional 


are  four   classes   of  stock  new   stock 
may  be  common  stock,   but  must  be 
offered  proportionately  to  all  classes 
and  where  two  companies  are  consoli- 
dated  and   their  stockholders   are   to 
receive  new  stock  in  exchange  for  old 
stock,   such  new  stock  to  be  of  four 
different  kinds,  with  preferences,  any 
increase  of  capital  stock  of  the  con- 
solidated   company    must    be    offered 
proportionately  to  all  the  stockholders 
making  the  exchange,  irrespective  of 
their   preference.     Jones   v.   Concord, 
etc.    R.   R.,    67    N.    H.    119;    s.    c,    67 
N.    H.    234     (1892).      See    also    §270, 
supra.     The  stockholders,  in  increas- 
ing the  capital  stock,  may  prescribe 
the    mode    of    issue.      Stephenson    v. 
Vokes,     27     Ont.     Rep.      (Can.)      691 
(1896).      A    stockholder    may    enjoin 
the  company  from  selling  to  the  high- 
est bidder,  on   sealed  bids,   increased 
capital    stock,    especially    where    the 
new  stock  might  change  the   control 
of  the  company.     The  court  said  that 
"the  tendency   of  such  method   is  to 
defeat    or    greatly    impair    the    right 
of  the  majority  stockholders  to  obtain 
their  fair  and   ratable   proportion   of 
the  new  stock  at  a  fair  and  reasonable 
price."     Electric   Co.   v.    Edison,    etc. 
Co.,    200  Pa.   St.   516    (1901).     An  in- 
corporator is  not  entitled  to  the   in- 
creased stock  as  a  gratuity;   he  must 
pay  for  it.     Brown  v.  Florida  South- 
ern Ry.,  19  Fla.  472  (1882).    A  stock- 
holder may  enjoin  his  company  from 
issuing    mortgage    bonds    convertible 
into    stock   at   the    rate    of   $500    par 
value  of  stock  for  each  $1,000  bond,  in- 
asmuch as  he  is  entitled  to  subscribe 
for  his  pro  rata  part  of  new  stock. 
Wall  v.  Utah  Copper  Co.,  70  N.  J.  Eq. 
17    (1905),    the    court    distinguishing 
Meredith  v.   New  Jersey,   etc.   Co.,   55 
N.  J.  Eq.   211    (1897),   aff'd   56   N.   J. 
Eq.    454,   on   the   ground   that   in   the 
latter  case  the  complainants  held  less 


than  one  per  cent,  of  the  entire  stock, 
and  the  defendant  offered  at  the  trial 
to  allow  the  complainants  to  pur- 
chase their  proportion  of  the  new 
stock  at  par,  and  in  the  third  place 
the  property  was  worth  what  was 
paid  for  it.  In  England  it  is  held 
that  a  contract  by  which  underwrit- 
ers for  the  increased  capital  stock 
are  given  the  absolute  right  to  take 
a  portion  thereof  at  the  same  price 
as  the  balance  is  offered  to  the  stock- 
holders, will  be  closely  scrutinized  by 
the  court.  Hence,  where  unissued 
shares  of  the  par  value  of  £1  each  are 
worth  about  £4  each,  and  a  portion 
thereof  are  offered  to  the  stockhold- 
ers at  £2  10s.  each,  and  an  option  on 
the  balance  is  given  to  the  underwrit- 
ers at  the  same  price,  in  considera- 
tion of  the  underwriters  agreeing  to 
take  such  of  the  stock  as  is  offered 
to  the  stockholders  and  is  not  taken 
by  the  latter,  a  minority  stockholder 
may  enjoin  the  carrying  out  of  such 
option  to  the  underwriters,  it  being 
in  violation  of  the  English  statute 
prohibiting  the  payment  of  a  commis- 
sion for  underwriting  subscriptions. 
Burrows  v.  Matabele,  etc.  Co.,  [1901] 
2  Ch.  23. 

In  an  early  Indiana  decision  it  is 
said  to  be  the  law  that  where,  in  the 
charter,  directors  are  given  full  power 
to  effect  an  increase  of  the  capital 
stocK  "on  such  terms  and  conditions 
and  in  such  manner  as  to  them  shall 
seem  best,"  they  may  authorize  the 
increase  without  the  consent  of  the 
stockholders;  that  as  to  such  increase 
there  is  no  pre-emptive  right,  and 
that  accordingly,  the  newly  issued 
shares  may  be  disposed  of  as  the  di- 
rectors determine.  Ohio  Ins.  Co.  v. 
Nunnemacher,  15  Ind.   294    (1860). 

i  State  r.  Smith,  48  Vt.  266   (1876)  ; 
Hartridge  v.  Rockwell,  R.  M.   Charlt. 
(Ga.)    260   (1828);   Curry  v.  Scott,  54 
7S 


CH.    XVII.]  INCREASE,  REDUCTION,  ETC.  OF  STOCK.  [§   286. 

shares  1  and  to  such  part  of  the  original  capital  stock  as  is  issued  long 
after  business  has  been  commenced  by  the  company.2  Especially  is 
this  the  rule  where  the  directors  issue  such  new  stock  to  themselves  or 
their   friends   in   order   to  control   an   election   or   make    a   pront. 

Pa    St    270    (1869),   in   which   Reese  advantage    of    the    company     but    in 

^Bank     r   Montgomery,   31   Pa.    St.  order  to  control  the  vote  at  a  meet 

78    (1855)    was  said  to  decide  "noth-  ing,   the   issue   may  he   set   aside   by 

ng    m"    '  than   that    untaken    stock  the  court,  and  pending  trial  the  court 

ing    moie    uictu           ________    .       .       ,  .,,    PTlim-n   the  holding  of  the  meet- 


is  held  by  the  corporation  in  trust 
for  the  corporators  and  must  be  dis- 
posed of  for  the  benefit  of  all;"  and 
it  was  held  that  a  stockholder  has 
no  greater  right  than  a  stranger  to 
subscribe  to  original  stock  untaken. 
See  also  §§65,  70,  supra,  and  §§614, 
653,  infra.    Treasury  stock,  when  sold, 


will  enjoin  the  holding  of  the  meet- 
ing. Punt  v.  Symons  &  Co.  Ltd., 
[1903]  2  Ch.  506.  A  dissenting  stock- 
holder may  cause  to  be  set  aside  a 
sale  of  unissued  stock  to  other  stock- 
holders at  a  grossly  inadequate  price 
to  enable  them  to  obtain  control.  Es- 
sex  v.   Essex,    141   Mich.    200    (1905). 


653,  infra.    Treasury  mock   wu«  ^»u  -~    -          majority    of    the    directors 

need  not  be  offered  proportionately  to  ^  here    a    majon ty 

the  stoeUhoUers     Cros*  ,  Stratto,  -e  — tocU^  £-£»£ 

17,Td~          0, \e  Chicago,  power  £  sot  aside  the  issue  and  also 

M  ,wauhee&   Bt   F»d  R-  B.  Co.  in  the  election     ^  ££*£,<%. 


sued  stock  equal  in  par  value  to  the 
par  value  of  all  the  fractional  shares 
united,  and  further  ordered  that  the 
amount   realized   on   such   sale,   after 


to  themselves  at  par  that  part  of  the 
original  capital  stock  which  never 
had  been  issued,  it  is  a  fraud  on  the 
remaining     stockholders.      Arkansas, 


»*"*"*—  ,         t       So(  Eichholtz,    45    Kan.    164 

deducting  the  par  va lue  of  the  stock     ete     Soc.    v  ^.^ 

be  distributed  in  cash  m  lieu  of  the       1891L     See   a^    ^^     ^^  ^ 
ntTyaVSp6rrtland  Bk.,  3  Mass.  364    rectors   have    issued  ^=; 

^^01^,556    (1882).     See    ^Z^^X^Z^ 
^o^tra^ed  in  Electric    StL-  between  the  ^.^j-J 

Actors  do  not   represent  a  majority  -^  fice  smce    ha    day^f or^small 

of  the  stock,  and  for  the  purpose  of  amounts  of  stocK .is 

obtaining     control     of     the    company  measure   of   damages.      Sha 

cause  treasury  stock  to  be  sold  among  land    ^00^  2  Cs^ft0  their  friendS 

their    friends,    the    sale    will    be    set  tors  i  sue  ne* ■  sto£  to 

aside  if  the  purchaser  knew  and  par-  at  les ,    ban  par  a  ^  ^ 

ticipated  in  the  unlawful  act    Ehurtt  it  to  the  exist    g  &  ^.^  ^ 

„.   Baker,   80  N.  E.  Rep.   450    (Mass.      ect   ^  be  enjoined  and 

1907).    Where  new  shares  are  issued  ^'^f^^    Way  „.  American, 

by  the  directors,  not  for  the  general  tne  issue  set  asm 


286.] 


INCREASE,  REDUCTION,  ETC.   OF  STOCK. 


[CII.    XVII. 


Any  stockholder  may  sell  his  right  to  subscribe  for  a  proportion  of 
new  stock.1 


etc.  Co.,  60  N.  J.  Eq.  263  (1900). 
Where  a  director  issues  to  himself,  at 
par,  stock  belonging  to  the  corpora- 
tion and  which  is  worth  more  than 
par,  the  transaction  is  voidable;  but 
if  all  the  stockholders  acquiesce 
therein  for  a  long  time,  the  acquies- 
cence of  the  executors  of  a  deceased 
stockholder  binds  the  estate.  St. 
Croix  Lumber  Co.  v.  Mittlestadt,  43 
Minn.  91  (1890).  In  the  case  Reese 
v.  Bank  of  Montgomery,  31  Pa.  St. 
78  (1855),  where  a  part  of  the  au- 
thorized capital  stock  remained  un- 
taken,  and  a  resolution  of  the  direc- 
tors was  carried  into  effect  by  which 
the  untaken  portion  of  the  stock  was 
issued  to  those  stockholders  not  in  ar- 
rears upon  stock  previously  taken,  to 
the  exclusion  as  to  the  new  stock,  of 
those  in  arrears  upon  the  original 
issue,  it  was  held  an  invalid  discrimi- 
nation and  an  unlawful  imposition  of 
a  penalty  upon  those  in  arrears.  In 
regard  to  the  right  to  subscribe  for 
the  unissued  portion  of  the  original 
capital  stock,  see  also  §  70,  supra, 
and  §§  614,  653,  infra.  Where  a  cor- 
poration has  an  authorized  capital  of 
$5,000,  but  only  $2,500  are  directed  by 
the  stockholders  to  be  issued,  it  is  il- 
legal and  fraudulent  to  issue  the  re- 
maining authorized  capital  without 
giving  the  existing  stockholders  a 
prior  right  to  subscribe  to  such  in- 
creased capital  pro  rata.  Directors 
elected  by  reason  of  such  illegal  is- 
sue will  be  enjoined  from  acting 
where  they  are  about  to  change  the 
whole  policy  of  the  company.  Hum- 
boldt, etc.  Assoc,  v.  Stevens,  34  Neb. 
528  (1892).  Where  de  facto  directors 
immediately  after  the  election,  order 
an  issue  of  a  large  amount  of  the  orig- 
inal unissued  capital  stock  of  the 
company  and  most  of  it  is  taken  by 
one  of  their  number,  who  thereby  ac- 
quires a  majority  of  the  stock  of  the 
company,  and  subsequently   the  elec- 


tion is  declared  illegal,  such  directors 
may  be  enjoined  from  voting  the  stock 
so  issued,  and,  if  they  have  sold  it, 
may  be  enjoined  from  voting  other 
stock  equal  in  amount  to  the  stock  so 
sold  by  them.  The  existing  stockhold- 
ers are  entitled  to  subscribe  for  their 
proportion  of  the  unissued  original 
capital  stock.  A  stockholder  who  was 
not  present  at  the  stockholders'  meet- 
ing is  not  bound  by  a  ratification  by 
such  meeting.  Morris  v.  Stevens,  178 
Pa.  St.  563  (1897).  Where  the  presi- 
dent of  an  unincorporated  association 
issues  treasury  stock  and  thereby  ob- 
tains control  of  the  association  and 
sells  it  out  to  a  corporation  organized 
by  himself,  the  minority  stockholders 
of  the  association  may  compel  him 
to  account  for  the  property.  As  re- 
gards the  person  to  whom  the  stock 
was  issued,  however,  a  general  alle- 
gation that  he  acted  in  connection 
with  the  president  is  not  sufficient  to 
render  him  liable  on  the  ground  of 
fraud.  Booth  v.  Dodge,  60  N.  Y.  App. 
Div.  23  (1901).  A  majority  of  the 
directors  cannot  issue  unissued  stock 
to  themselves,  thereby  obtaining  con- 
trol, without  first  offering  the  stock 
to  the  other  stockholders.  Whitaker 
v.  Kilby,  55  N.  Y.  Misc.  Rep.  337 
(1907).  Where  the  minority  have 
fraudulently  obtained  control  by  ob- 
taining increased  capital  stock  with- 
out the  majority  having  the  right  to 
subscribe  therefor,  a  court  of  equity 
will  compel  the  minority  to  turn  over 
such  stock  on  payment  therefor. 
Schmidt  v.  Pritchard,  112  N.  W.  Rep. 
801    (Iowa  1907). 

i  Quoted  and  approved  in  Hammond 
v.  Edison  111.  Co.,  131  Mich.  79  (1902) ; 
Jones  v.  Concord,  etc.  R.  R.,  67  N.  H. 
119  (1891) ;  s.  c,  67  N.  H.  234;  Stokes 
v.  Continental  T.  Co.,  186  N.  Y.  285, 
297  (1906).  Biddle's  Appeal,  99  Pa. 
St.  278  (1882).  A  sale  of  shares  of 
the  original  capital  stock  carries  with 
80 


CH.    XVII.] 


INCREASE,  REDUCTION,  ETC.  OP  STOCK. 


[§  283. 


A  person  having  merely  a  contract  right  to  convert  corporate 
notes  into  stock  cannot  claim  the  right  to  subscribe  for  a  portion  of 
new  increased  stock.1  The  presumptive  right  of  stockholders  to 
subscribe  for  new  stock  does  not  apply  to  an  issue  of  stock  in  pay- 
ment for  property,  where  the  statutes  provide  for  the  issue  of  stock 
in  payment  for  property.2     Neither  does  the  rule  apply  where  the 


it  as  an  incident  the  right  which  the 
vendor  had  previously  acquired  hy 
subscription  to  shares  of  increased 
capital  stock.  Baltimore,  etc.  Ry.  t'. 
Hambleton,  77  Md.  341  (1893).  The 
assignee  of  a  stockholder's  right  to 
take  new  stock  may  enforce  such 
right.  Schmidt  v.  Pritchard,  112  N. 
W.  Rep.  801   (Iowa  1907). 

i  Pratt  v.  American  Bell  Tel.  Co., 
141  Mass.  225  (1886),  where  one  who 
held  notes  convertible  into  stock  at  a 
future  time  sought  to  establish  his 
right  as  a  stockholder  to  an  equitable 
share  of  an  increase  of  capital  stock 
to  which  stockholders  had  a  first  right 
to  subscribe  upon  favorable  terms. 
The  court  held  that  the  suit  could 
not  be  maintained,  on  the  ground  that 
until  he  had  converted  the  notes  into 
stock  he  had  no  rights  as  stockholder. 
A  pledgee  of  stock  is  not  entitled  to 
this  right  to  take  up  new  stock.  The 
right  belongs  to  the  pledgor.  Miller 
v.  Illinois  Cent.  R.  R.,  24  Barb.  312 
(1857),  holding  also  that  a  stock- 
holder who  holds  a  receipt  from  a 
corporation  for  money  payable  on  de- 
mand in  cash,  or  at  his  option,  in  new 
stock  when  issued,  has  no  interest  in 
such  stock  as  a  stockholder  until  he 
has  elected  to  take  it  instead  of  the 
cash.  '  A  contract  by  which  a  person 
who  has  promoted  the  organization  of 
a  company  is  to  have  a  certain  per- 
centage of  the  capital  stock  and  five 
per  cent,  of  any  increase  of  the  capital 
stock,  such  contract  being  with  the 
corporation  itself,  is  legal,  and  may 
be  enforced  as  to  such  increase.  Hix 
v.  Edison  El.  L.  Co.,  10  N.  Y.  App. 
Div.  75  (1896),  and  27  N.  Y.  App.  Div. 
248;  aff'd,  163  N.  Y.  573.  The  case 
of  Hirsch  &  Co.  v.  Burns,  74  L.  T. 
Rep.   769    (1897),  was  affirmed  in  77 


L.  T.  Rep.  377,  to  the  effect  that  a 
person  having  an  option  to  purchase 
the  unissued  stock  of  a  company  has 
a  claim  for  damage  in  case  the  com- 
pany sells  the  business  of  the  com- 
pany to  another  company  without  pro- 
tecting such  option. 

2  Meredith  v.  New  Jersey,  etc.  Co., 
55  N.  J.  Eq.  211  (1897) ;  aff'd,  56  N.  J. 
Eq.  454.  See  also  dictum  in  Stokes 
v.  Continental  T.  Co.,  186  N.  Y.  285 
(1906).  Although  a  person  holds  a 
majority  of  the  stock  and  causes  his 
friends  to  be  made  directors,  yet  he 
may  sell  property  to  the  corporation 
and  take  stock  in  payment,  if  the 
transaction  is  a  fair  one.  Russell  v. 
Rock,  etc.  Co.,  184  Pa.  St.  102  (1898). 
In  this  case,  however,  the  point  that 
other  stockholders  had  been  deprived 
of  their  pre-emptive  right  was  not 
raised,  the  question  being  whether  the 
directors  committed  any  fraud  in  is- 
suing the  new  stock.  A  minority 
stockholder  cannot  enjoin  the  com- 
pany from  issuing  its  stock  in  pay- 
ment for  the  stock  of  other  similar 
companies  on  the  ground  that  the 
price  to  be  paid  is  excessive  and  that 
three  of  the  directors  are  interested 
as  stockholders  in  the  other  compa- 
nies, where  he  does  not  prove  that  the 
price  is  excessive,  and  it  appears  that 
the  stockholders  will  have  to  approve 
the  transaction  before  the  directors 
can  issue  the  stock,  and  it  appears 
also  that  the  plaintiff  owns  but  a  very 
small  amount  of  stock.  Geer  v.  Amal- 
gamated, etc.  Co.,  61  N.  J.  Eq.  364 
(1901).  The  fact  that  the  holders  of 
a  majority  of  the  stock  are  stock- 
holders in  another  contracting  cor- 
poration does  not  render  the  contract 
voidable.  Ziegler  v.  Lake  Street  El. 
R.  R.,  69  Fed.  Rep.  176,  182    (1895). 


781 


§  286.] 


INCREASE,  REDUCTION,  ETC.  OF  STOCK. 


[CII.    XVII. 


company  is  consolidated  with  another  and  the  entire  stock  of  the 
consolidated  company  is  divided  between  the  stockholders  of  both 
parties,  in  accordance  with  the  articles  of  consolidation,  as  provided 
by  statute.1 

The  question  now  arises  whether  the  corporation  in  offering  new 
stock  to  its  stockholders  is  bound  to  offer  it  to  them  at  par  or  whether 
it  may  fix  the  price  at  more  than  par.  In  Pennsylvania2  and 
Michigan  3  it  has  been  clearly  held  that  the  corporation  cannot  com- 


"Where  the  directors,  upon  an  increase 
of  the  capital  stock,  issue  a  part  of 
the  stock  for  worthless  notes,  the  di- 
rectors, upon  the  bank  becoming  in- 
solvent, are  liable  to  the  receiver  for 
the  par  value  of  such  stock,  unless 
they  can  show  the  stock  could  not 
have  been  otherwise  issued  or  sold. 
Cockrill  v.  Abeles,  86  Fed.  Rep.  505 
(1898). 

i  A  contract  of  a  corporation  that 
a  patentee  shall  have  a  certain  per- 
centage of  any  increase  of  stock  does 
not  apply  to  the  capital  stock  of  a 
consolidated  company,  although  the 
former  corporation  is  one  of  those 
making  up  the  consolidation.  Ein- 
stein v.  Rochester,  etc.  Co.,  146  N.  Y. 
46  (1S95).  A  stockholder  in  a  na- 
tional bank  which  consolidates  with 
another  national  bank,  as  allowed  by 
act  of  congress  cannot  object  that  a 
part  of  the  increased  capital  stock 
is  issued  to  the  stockholders  in  the 
other  bank,  instead  of  being  offered 
to  the  stockholders  in  his  bank,  inas- 
much as  the  consolidation  created  a 
new  corporation.  Bonnet  v.  First  Nat. 
Bank,  24  Tex.  Civ.  App.  613    (1900). 

2  Cunningham's  Appeal,  108  Pa.  St. 
546  (1885).  In  this  case  an  insurance 
company  offered  increased  capital 
stock  to  its  stockholders  at  twice  the 
par  value,  and  a  stockholder  brought 
suit  to  compel  the  company  to  issue 
his  proportion  to  him  at  par,  and  the 
court  did  so,  although  nearly  all  of 
the  remainder  of  the  stock  had  been 
paid  for  at  twice  par.  The  same  in- 
crease of  stock  was  involved  in  a  later 
case,  De  La  Cuesta  v.  Insurance  Co. 
of  North  America,  136  Pa.  St.  62,  658 

7 


(1890),  where  the  court  held  that  a 
similar  stockholder  who,  instead  of 
bringing  suit  in  the  first  instance, 
had  paid  for  the  new  stock  at  the 
price  demanded  by  the  company, 
namely,  twice  par,  could  not  recover 
back  one-half  of  the  money,  even 
though  he  paid  under  protest.  The 
court  said,  however:  "He  could  have 
tendered  the  par  of  the  stock  and  de- 
manded a  certificate.  If  the  company 
had  refused  to  issue  it,  he  could  have 
brought  suit  and  recovered  its  mar- 
ket value.  If  he  wanted  the  shares  ho 
could  have  bought  them  in  the  market 
and  recovered  from  the  company  what 
he  paid  in  excess  of  par.  ...  He 
had  to  do  only  with  the  company; 
and,  after  tender  of  the  par,  could 
have  brought  his  suit  and  recovered, 
as  above  stated,  the  market  value  of 
the  stock,  and  if  he  wanted  shares, 
with  the  money  thus  recovered  could 
have  bought  a  corresponding  amount 
of  other  shares." 

3  Hammond  v.  Edison  111.  Co.,  131 
Mich.  79  (1902).  In  this  case  the 
new  stock  was  offered  to  all  the  stock- 
holders at  twenty-five  per  cent,  over 
par.  A  stockholder  applied  to  the 
court  for  a  mandamus  to  compel  a 
corporation  to  issue  his  proportion 
to  him  at  par.  The  court  granted  the 
mandamus  and  said:  "Notwithstand- 
ing the  zeal  of  the  very  able  counsel 
engaged  in  the  case,  our  attention 
is  not  called  to  an  authority  which 
holds  that  an  original  stockholder  is 
not  entitled  to  his  pro  rata  share  of 
stock  upon  tendering  its  par  value. 
We  have  been  unable  to  find  such  an 
authority."  Where  by  its  charter  a 
82 


CH.   XVII.] 


INCREASE,  REDUCTION,  ETC.  OP  STOCK. 


[§   286. 


pel  the  old  stockholders,  upon  their  subscription  for  new  stock,  to 
pay  more  than  the  par  value  thereof.  They  are  entitled  to  it  at  par 
and  without  payment  of  any  sum  in  addition  to  par.  In  New  York 
this  whole  question  arose  and  was  carefully  considered  by  the  court 
of  appeals  in  1906.  The  lower  court  had  held  that  a  stockholder 
had  a  right  to  subscribe  for  his  proportion  of  new  stock  and  to 
subscribe  for  it  at  par.  The  intermediate  appellate  court  held  that 
he  had  no  prior  right  to  subscribe  for  his  proportion  of  new  stock, 
either  at  par  or  any  other  price.  The  highest  court, — the  court  of 
appeals, — held  that  he  had  a  prior  right  to  subscribe,  but  that  the 
stockholders  in  meeting  assembled  might  fix  a  higher  price  than  par, 
at  which  the  stock  should  be  issued.  The  court  held  that  "the  corpo- 
ration could  not  compel  the  plaintiff  to  take  new  shares  at  any  price," 
but  might  fix  a  reasonable  price,  not  less  than  par,  or  might  provide 
for  the  sale  of  the  stock  in  parcels  or  bulk  at  public  auction,  and  the 
court  intimated  that  the  proceeds  of  the  sale  at  public  auction  must 
be  distributed  among  the  stockholders,  after  deducting,  of  course, 
the  par  value,  which  would  be  retained  by  the  corporation.1 


terminal  and  union  depot  company 
is  obliged  to  allow  new  roads  to  de- 
mand and  pay  for  a  proportional  part 
of  the  former  company's  capital  stock, 
the  price  is  par  even  though  it  is 
worth  more.  St.  Paul,  etc.  Co.  v.  Min- 
nesota, etc.  R.  R.,  47  Minn.  154  (1891). 
It  has  been  held  in  Maryland  that 
a  subscriber  to  the  increased  capital 
stock  of  a  company  is  not  entitled  to 
a  certificate  until  he  has  paid  for  the 
stock  in  full,  and  such  subscriber  is 
not  entitled  to  the  rights  of  a  stock- 
holder until  he  has  paid  in  full.  The 
court  stated  that  such  stockholders 
are  not  entitled  to  dividends  equally 
with  other  stockholders.  The  basis 
of  the  decision  was  the  difference  be- 
tween original  stock  and  increased 
stock.  The  court  refused  to  compel 
the  corporation  to  issue  a  certificate. 
Baltimore,  etc.  Ry.  v.  Hambleton,  77 
Md.  341  (1893).  In  the  case  Attorney- 
General  v.  Boston,  etc.  R.  R.,  109 
Mass.  99  (1871),  the  court  held  that 
at  common  law  stock  might  be  issued 
at  par  to  the  old  stockholders  al- 
though it  was  worth  more  than  par  in 
the  market. 

i  Stokes   v.   Continental   Trust   Co., 


186  N.  Y.  285,  298  (1906).  The  court 
said:  "A  majority  of  the  stockholders, 
as  part  of  their  power  to  increase  the 
stock,  may  attach  reasonable  condi- 
tions to  the  disposition  thereof,  such 
as  the  requirement  that  every  old 
stockholder  electing  to  take  new  stock 
shall  pay  a  fixed  price  therefor,  not 
less  than  par,  however,  owing  to  the 
limitation  of  the  statute.  They  may 
also  provide  for  a  sale  in  parcels  or 
bulk  at  public  auction,  when  every 
stockholder  can  bid  the  same  as 
strangers."  The  sourt  said  also  (p. 
299):  "When  the  new  stock  is  issued 
for  money,  while  the  stockholders 
may  provide  that  it  be  sold  at  auction 
or  fix  the  price  at  which  it  is  to  be 
sold,  each  stockholder  is  entitled  to 
his  proportion  of  the  proceeds  of  the 
sale  at  auction,  after  he  has  had  a 
right  to  bid  at  the  sale,  or  to  his  pro- 
portion of  the  new  stock  at  the  price 
fixed  by  the  stockholders."  For  an  ar- 
ticle on  Stokes  v.  Continental  Trust 
Co.,  see  18  Harvard  Law  Review,  541. 
In  the  case  Re  Wheeler,  2  Abb.  Pr.  (N. 
S.)  361,  363  (1866),  it  was  said  that 
if  new  stock  is  not  apportioned  among 
old  stockholders  it  should  be  sold  at 


7S3 


§  286.] 


INCREASE,   REDUCTION,  ETC.   OF  STOCK. 


[CH.    XVII. 


It  would  seem  to  be  clear  that  this  decision,  however  just  it  may 
turn  out  to  be   in  its  workings,  is  contrary  to  precedent  in  some  re- 
spects, and  without  precedent  in  other  respects.     It  may  be  that  the 
court  was  correct  in  its  statement  that  "this  rule  is  just  to  all  and 
tends  to  prevent  the  tyranny  of  majorities  which  needs  restraint,  as 
well  as  virtual  attempts  to  blackmail  by  small   minorities  which 
should    be    prevented."      Furthermore,    it    is    likely    that    public 
policy  and  conservative  financing  and  the  real  interests  of  the  stock- 
holders may  favor  increasing  of  the  cash  assets  of   the  company 
by  issuing  new  stock  at  as  high  a  price  as  possible,  but  it  would 
seem  that  this  should  be  accomplished  by  statute  rather  than  by  a 
court  decision,  which   is  hardly  in  accord  with  the  common  law. 
In  Massachusetts  this  whole  subject  has  been  regulated  by  statute, 
so  that  any  increase  of  the  capital  stock  of  quasi  public  corporations 
shall  be  offered  to  the  stockholders,  at  its  market  value,  to  be  deter- 
mined by  state  commissioners,  but,  on  the  other  hand,  the  statutes 
in  that  state  prescribe  that  increased  capital  stock  of  manufacturing 
and  other  miscellaneous  corporations  shall  be  offered  to  the  stock- 
holders at  par.1     The  wisdom  of  the  Massachusetts  statute  requiring 
payment  of  more  than  par  has  well  been  doubted.2 


public  auction  to  the  highest  bidder 
so  that  all  may  share  in  the  gains 
resulting  from  its  sale.  In  the  case 
Re  Hoare  &  Co.,  Ltd.,  [1904]  2  Ch. 
208,  the  court  in  a  dictum  stated 
that  the  premium  paid  on  the  issue 
of  stock  at  a  price  greater  than  par 
might  be  used  for  a  dividend. 

lBy  Ch.  109,  §§30,  31  (p.  953) 
of  the  Mass.  Rev.  L.  (1902),  all  rail- 
road, gas,  electric  light,  water,  tele- 
graph and  telephone  companies  must 
offer  increased  capital  stock  to  their 
stockholders  at  its  market  value  to 
be  determined  by  state  commission- 
ers, but  at  not  less  than  par,  and  any 


par,  and  any  stock  not  taken  by  them 
is  to  be  disposed  of  as  the  stockhold- 
ers may  direct  at  not  less  than  par. 
By  Ch.  437,  §  40  of  the  Laws  of  1903 
(p.  437)  relative  to  the  increased  cap- 
ital stock  of  business  corporations  a 
majority  of  the  stockholders  shall  "de- 
termine the  terms  and  manner  of  the 
disposition  of  such  increased  stock." 
As  long  ago  as  1871  in  Massachusetts 
(Laws  1871,  Ch.  392),  railroads  in  is- 
suing increased  stock,  which  was 
worth  more  than  par,  were  obliged 
by  this  statute  to  sell  the  same  at 
public  auction. 

2  In  1908  a  special  commission  on 


portion  not  so  taken  is  to  be  sold  at    commerce  and  industry  in  Massachu- 

public  auction  at  not  less  than  par. 

In  Smith  v.  Franklin  Park,  etc.  Co., 

168  Mass.  345  (1897),  it  was  held  that 

a  sale  at  public  auction  must  be  in 

strict  accordance  with  the  statute.  By 

Ch.   109,   §29    (p.  952),  and   Ch.   110, 


setts  made  a  report  on  the  question  of 
allowing  the  New  York,  New  Haven 
&  Hartford  R.  R.  Co.  to  own  a  major- 
ity  of  the  stock  of  the  Boston  &  Maine 
R.  R.  Co.,  and  the  following  summary 
of  its  report  is  taken  from  the  Rail- 


§  34  (p.  965),  of  the  same  statutes  the  roa(j  Gazette  of  March  27,  1908: 
increased  capital  stock  of  manufactur-  "Another  point  of  wide  and  national  in- 
ing  and  Other  Classes  Of  corporations  terest  is  the  finding  of  the  commission 
must  be  Offered  to  the  stockholders  at     on    the     question    of    allowing    prosperous 

784 


CH.    XVII.] 


INCREASE,  REDUCTION,  ETC.  OP  STOCK. 


[§  286. 


The  remedy  of  a  stockholder  against  a  corporation  for  depriving 
him  of  his  right  to  subscribe  for  new  stock  presents  a  still  further 
difficulty.  It  would  seem  that  a  bill  for  an  injunction  should  lie 
against  the  coloration  issuing  his  proportion  of  the  stock  to  any  one 
else,  and  in  Pennsylvania,  Wisconsin  and  Iowa  it  has  been  held 
that  such  a  bill  will  lie.1     For  instance,  it  has  been  held  in  Penn- 


public  service  corporations  to  issue  new 
stock  at  par.  In  Massachusetts  prior  to 
1871  railroad  stock  could  be  offered  stock- 
holders at  par  ;  from  1871  to  1878  it  was  to 
be  sold  at  auction ;  from  187S  to  1S93  it 
could  again  be  offered  at  par,  and  since 
1893  it  and  new  street  railway  stock  have 
had  to  be  issued  at  or  above  par,  but  at 
market  price  as  fixed  by  the  state  railroad 
commission.  The  fifteen  years'  test  of  the 
law  convinces  the  special  commission  that 
the  old  'par'  plan  is  sane  and  expedient. 
The  commission's  main  argument  rests  up- 
on the  theorem  that  the  compulsory  mar- 
ket price  establishes  a  new  par  which  the 
state  must  adhere  to  as  a  basis  of  regu- 
lation. Probably  it  would  be  fairer  to  say 
that  it  establishes  really  two  'pars'  with 
very  confusing  results  to  the  relative 
rights  of  old  and  new  stockholders  when 
it  comes  to  a  matter  of  state  regulation, 
especially  if  based  on  dividends.  The  com- 
mission also  asserts  that  the  'market  price' 
law  has  deprived  the  state  of  the  new 
capital  needed  for  the  development  of  her 
transportation  systems.  The  subject  has 
been  and  will  always  be  a  complex  one 
with  arguments  on  both  sides,  and  it  be- 
comes especially  perplexing  in  a  period  of 
rapidly  fluctuating  and  falling  values — 
perplexing  not  only  to  the  state,  but  to 
the  corporations.  For  example,  the  New 
Haven  company  in  its  last  annual  report 
practically  announced  a  new  issue  of  stock 
at  $125  a  share,  and  rights  to  the  stock 
'to  be  delivered  when  as  and  if  issued' 
were  freely  sold  in  the  market.  A  rapidly 
falling  market  compelled  the  company  to 
drop  the  plan  and  an  issue  of  six  per  cent, 
debentures  were  substituted.  From  both 
the  public  and  corporative  viewpoint  evi- 
dently an  element  of  opportunism  thus 
enters  the  question,  resting  on  stable  or 
fluctuating  values.  But  what  cannot  be 
gainsaid  as  a  piece  of  objective  and  telling 
evidence  is  the  unqualified  approval  of  the 
'par'  plan  of  issue  by  an  intelligent  com- 
mission in  a  state  whose  policy  for  fifteen 
years  has  been  in  favor  of  the  market 
value    rule." 

The  commission  also  pointed  out 
that  it  was  bad  policy  for  the  state 
to  require  more  than  par  to  be  paid 


for  new  stock,  inasmuch  as  the  state 
would  thereafter  be  obliged  to  allow 
a  higher  rate  of  dividend  on  such 
stock  than  it  would  be  called  upon 
from  a  standpoint  of  business  ethics 
to  allow  for  stock  issued  at  par  and 
that  where  new  stock  was  issued  for 
more  than  par  it  raised  all  the  previ- 
ous stock  to  the  same  basis  so  far 
as  dividends  were  concerned. 

i  Cunningham's  Appeal,  108  Pa.  St. 
546  (1885).  In  Wisconsin  it  is  held 
that  an  injunction  will  lie.  "The  ef- 
fect of  such  an  action  (i.  e.,  the  ac- 
tion for  damages)  would  be  to  con- 
vert part  of  his  interest  as  a  share- 
holder into  a  judgment  for  damages; 
in  other  words,  to  sell  a  portion  of  his 
stock  to  the  corporation.  .  .  .  The 
judgment,  to  be  effectual,  must  be 
against  the  directors  personally,  who 
may  be  changed  from  time  to  time." 
Dousman  v.  Wisconsin,  etc.  Co.,  40 
Wis.  418  (1876).  In  this  case  it  is 
also  held  that  the  stockholder,  where 
the  stock  is  not  fully  issued,  may  have 
a  decree  in  a  court  of  equity  restrain- 
ing the  whole  issue,  or  else  that  there 
be  an  equitable  distribution;  and,  if 
the  stock  is  already  partially  distrib- 
uted, that  the  proper  amount  be  is- 
sued to  the  party  complainant.  A 
stockholder  who  has  applied  regularly 
for  his  part  of  the  increased  capital 
stock,  but  whose  application  has  been 
rejected,  may  by  a  bill  in  equity  com- 
pel the  company  to  issue  the  stock  to 
him  upon  payment  therefor,  and  if 
the  stock  has  been  already  issued  to 
parties  in  control  they  will  be  com- 
pelled to  give  it  up.  He  may  also 
enjoin  officers  and  directors  who  have 
been  illegally  elected  by  means  of 
such  stock,  from  acting,  pending  the 


(50) 


785 


286.] 


INCREASE,   REDUCTION,  ETC.  OF  STOCK. 


[CII.    XVII. 


sylvania  that  a  stockholder  may  enjoin  the  company  from  selling 
to  the  highest  bidder,  on  sealed  bids,  increased  capital  stock,  especi- 
ally where  the  new  stock  might  change  the  control  of  the  company.1 
The  usual  remedy,  however,  is  a  suit  at  law  against  the  corporation, 
in  which  the  plaintiff  demands  judgment  that  I  he  corporation  issue 
to  the  plaintiff  his  proportion  of  the  capital  stock  upon  his  paying 
therefor,  and  in  case  said  stock  cannot  be  delivered  to  him,  then 
that  ho  have  damages.2  In  New  -Jersey  it  is  held  that  the  legal 
remedy  is  exclusive  if  the  corporal  ion  is  responsible.3  Such  a  suit 
at  law  should  be  by  each  stockholder  separately,  inasmuch  as  the 
liability  of  the  corporation  is  several  and  not  joint.4 


decision  in  the  case.  Schmidt  v. 
Pritchard,  112  N.  W.  Rep.  801  (Iowa 
1907).  There  are  strong  reasons 
.why  a  court  of  equity  should  take  ju- 
risdiction of  such  a  case.  For  instance, 
in  the  recent  and  important  New  York 
case  mentioned  above,  Stokes  v.  Con- 
tinental T.  Co.,  186  N.  Y.  285  (1906), 
the  new  stock  at  the  time  when  it  was 
voted  and  sold  to  outsiders  at  $450 
a  share  was  worth  $550  a  share  in  the 
open  market,  and  at  the  time  of  trial 
it  had  risen  to  $700  a  share,  and  yet 
the  damages  allowed  the  plaintiff 
were  only  $100  a  share.  The  fact  is 
that  the  unknown  earning  capacity  of 
stock  enters  largely  into  its  value,  and 
stockholders  should  not  be  compelled 
to  go  into  a  court  of  law  and  collect 
damages,  instead  of  going  into  a 
court  of  equity  and  obtaining  the 
stock  itself.  The  courts  have  no  power 
to  compel  the  corporation  or  the  di- 
rectors to  issue  the  stock  to  the  party 
aggrieved,  if  the  whole  capital  stock 
is  already  out.  Sewall  v.  Eastern  R. 
R.,  63  Mass.  5  (1851).  The  corpora- 
tion may  possibly  be  compelled  to 
buy  stock  in  the  open  market.  See 
§  284,  supra.  In  the  case  Butler  v. 
Wright,  186  N.  Y.  259  (1906)  a  vendee 
of  stock  was  granted  specific  perform- 
ance of  the  contract  on  showing  that 
the  stock  had  never  been  listed  on 
any  exchange  and  had  no  quoted 
value  or  any  definite  market  price  or 
any  certain  value  capable  of  exact 
ascertainment,  and  that  the  defendant 


owned  ninety-two  per  cent,  of  the 
stock  and  controlled  the  balance.  The 
court  further  held  that  the  decision 
of  such  a  case  rests  in  the  sound  dis- 
cretion of  the  court.  On  this  subject 
see  SS  337,  338,  infra. 

i  The  court  said  "that  the  tendency 
of  such  method  is  to  defeat  or  greatly 
impair  the  right  of  the  majority  stock- 
holders to  obtain  their  fair  and  rata- 
ble proportion  of  the  new  stock  at  a 
fair  and  reasonable  price."  Electric 
Co.  v.  Edison,  etc.  Co.,  200  Pa.  St. 
516  (1901). 

2  Stokes  v.  Continental  T.  Co.,  186 
N.  Y.  285  (1906);  Gray  v.  Portland 
Bank,  3  Mass.  364  (1807);  Eidman 
v.  Bowman,  58  111.  444  (1871);  Real 
Estate,  etc.  Co.  v.  Bird,  90  Md.  229 
(1899);  Reese  v.  Bank  of  Montgom- 
ery, 31  Pa.  St.  78  (1855).  In  the  case 
Shellenberger  v.  Patterson,  168  Pa.  St. 
30  (1895),  it  is  held  that  where  the 
plaintiffs  have  not  offered  or  shown  a 
willingness  to  take  the  stock  at  par, 
and  it  is  not  alleged  that  it  would 
have  sold  for  more  than  par,  the  di- 
rectors cannot  cancel  the  first  sale 
nor  would  a  suit  in  equity  lie  at 
the  instance  of  a  stockholder  to  can- 
cel such  sale,  his  remedy  in  such  a 
case  being  at  law  for  damages. 

3  Meredith  v.  New  Jersey,  etc.  Co., 
55  N.  J.  Eq.  211  (1897);  aff'd,  56  N. 
J.  Eq.  454;  Hackett  v.  Northern,  etc. 
R.  R.,  36  N.  Y.  Misc.  Rep.  583  (1901). 

4  Dousman  v.  Wisconsin,  etc.  Co., 
40  Wis.  418  (1876). 


786 


CH.    XVII.]  INCREASE,  REDUCTION,  ETC.  OF  STOCK.  [§   286. 

The  measure  of  damages  in  such,  a  suit  at  law  depends  on  two 
questions,  first,  whether  the  court  holds  that  the  stockholder  was 
entitled  to  the  new  stock  at  par,  or  may  be  compelled  by  the  corpo- 
ration to  pay  a  higher  price.  If  he  is  entitled  to  the  stock  at  par, 
the  measure  of  damages  is  the  difference  between  par  and  the  market 
value  of  the  stock,  with  legal  interest  on  such  excess.1  If,  on  the 
other  hand,  the  corporation  legally  may  and  does  fix  the  price  of  the 
new  stock  at  more  than  par,  and  then  denies  to  a  particular  stock- 
holder his  right  to  subscribe  for  his  proportion  at  such  higher  price, 
his  measure  of  damages  is  the  difference  between  such  higher  price 
and  the  market  value  of  the  stock.2 

The  second  question  which  enters  into  the  measure  of  damages 
is  whether  such  market  value  shall  be  the  market  value  at  the  time 
when  the  stockholder  first  demanded  his  proportion  of  the  new  stock, 
or  should  be  the  market  value  at  the  time  of  trial,  or  should  be  the 
highest  market  value  between  those  two  dates.  This  question  is  fully 
considered  elsewhere.3 

In  Michigan  neither  of  the  above  remedies  need  be  resorted  to,  but 
the  court  at  the  instance  of  a  stockholder  will  grant  a  writ  of  man- 
damus commanding  the  corporation  to  issue  to  him  his  proportion  of 
the  stock  at  par.4 

A  stockholder  may  waive  his  right  to  subscribe  for  new  stock 
and  such  waiver  may  arise  by  express  agreement  or  by  laches  or  ac- 
quiescence or  by  acts  equivalent  to  an  express  waiver.  For  instance 
a  stockholder  who  voluntarily  pays  more  than  par  for  his  stock  can- 

i  Gray  v.   Portland   Bank,   3   Mass.  St.   143    (1856),   the  court   held  that 

364    (1807);    Reese  v.  Bank  of  Mont-  the  measure  of  damages  was  the  dif- 

gomery,   31   Pa.   St.    78    (1855);    Eid-  ference   between    the   par   value    and 

man  v.   Bowman,   58    111.   444    (1871).  the   highest   market   price   up   to   the 

In  all   of  these  cases  the  new  stock  date  of  trial.     In  this  case  the  new 

was   issued   at   par   and   a   particular  stock  was  issued  at  par.    In  England 

stockholder   who    was   not   given    his  it   has   been   held    that   where    direc- 

share  brought  suit  for  damages.  tors  have  issued  stock  to  themselves 

2  Stokes  v.  Continental  T.  Co.,  186  at  a  price  less  than  the  market  price 
N.  Y.  285  (1906).  they   may   be   held   liable   at   the   in- 

3  See  §§  581-583,  infra.  In  Pennsyl-  stance  of  a  stockholder  suing  for  the 
vania  the  courts  in  determining  the  benefit  of  the  corporation,  for  the  dif- 
measure  of  damages  for  refusal  of  ference  between  the  price  they  paid 
the  corporation  to  issue  to  a  stock-  and  the  price  of  the  stock  when  :t 
holder  his  proportion  of  new  stock,  was  issued  to  them.  The  highest 
held  that  the  proper  measure  was  the  market  price  since  that  day  for  small 
"market  value  after  the  new  stock  amounts  of  stock  is  no  basis  for  the 
was  subscribed."  Reese  v.  Bank  of  measure  of  damages.  Shaw  v.  Hol- 
Montgomery,  31  Pa.  St.  78   (1855).  In  land,  [1900]   2  Ch.  305. 

another    decision    in   the    same    case,        4  Hammond  v.  Edison  111.  Co.,  131 
Bank  of  Montgomery  v.  Reese,  26  Pa.    Mich.  79  (1902). 

787 


§  286J 


INCREASE,  REDUCTION,  ETC.   OF  STOCK. 


[CH.    XVII. 


not  compel  tlie  company  to  repay  to  him  the  excess,  even  though 
other  stockholders  paid  only  par,  it  being  shown  that  the  parties 
originally  agreed  on  the  payments  as  made.1  Moreover,  the  right  of 
existing  stockholders  to  subscribe  for  increased  capital  stock  must  be 
exercised  within  a  fixed  or  reasonable  time;  and  if  the  stockholder 
fails  to  avail  himself  of  it,  he  is  barred,  by  his  laches  or  acquies- 
cence   from  contesting  a  disposition  of  the  stock  to  some  one  else.2 


i  Esgen  v.  Smith,  113  Iowa,  25 
(1901).  He  should  have  tendered  par 
and  then  sued  for  refusal  of  the  corpo- 
ration to  accept  it.  De  La  Cuesta  v. 
Insurance  Co.  of  North  America,  136 
Pa.  St.,  62,  658    (1890). 

2  Terry  v.  Eagle  Lock  Co.,  47  Conn. 
141    (1879);    Hart  v.   St.   Charles  St. 
It.  R.,  30  La.  Ann.  758  (1878)  ;  Brown 
v.  Florida  Southern  Ry.,  19  Fla.  472 
(1882).    Where  a  stockholder  is  asked 
to  subscribe  for  increased  stock  and 
for  six  months  does  not  do   so,   and 
the  directors  then  take  the  stock  by 
reason  of  their  being  unable  to  sell  it 
elsewhere,  he  cannot  complain.     Hoyt 
v.  Shenango,  etc.  Co.,  207  Pa.  St.  208 
(1903).      Where    the    president    sub- 
scribes  for   the   untaken    or   original 
capital  stock  and  for  two  years  none 
of  the  stockholders  object,  it  is  legal. 
Shellenberger    v.    Patterson,    168    Pa. 
St.   30    (1895).     Where  the   directors 
sell  unissued  stock  at  a  discount  to  a 
party  who  resells  part  of  it  to  a  di- 
rector, other  stockholders  cannot,  ten 
years    afterwards,    hold    him    liable. 
Keeney    v.    Converse,    99    Mich.    316 
(1894).     Where  the  stockholders  are 
present  and  only  one  objects  to  the  is- 
sue of   unissued   stock  to  a   director 
whereby  he  acquires  control,  such  is- 
sue is  legal.    Christopher  v.  Noxon,  4 
Ont.  Rep.   (Can.)   672   (1883).     In  Re 
London,  etc.,  Ltd.,  77  L.  T.  Rep.  146 
(1S97),  there  were  one  hundred  and 
twenty  founders'  shares  of  £10  each, 
and  twelve  thousand  ordinary  shares 
of    £10    each.      The    founders'    shares 
Vv-ere  entitled  to  half  of  any  dividend 
which  might  remain  after  paying  ten 
per  cent,  on  the  ordinary  shares.    The 
directors  allotted  to  themselves  eighty 


of    these    founders'    shares,    and    the 
court     upheld     the     allotment.     The 
prospectus    stated    that    each    person 
taking  fifty  ordinary  shares  would  be 
entitled  to  take  one  of  the  founders' 
shares.    The  directors  caused  tbe  fifty 
ordinary  shares  for  each  of  the  eighty 
founders'  shares  to  be  taken  by  others. 
Where  a  director  issues  to  himself,  at 
par,   stock  belonging  to  the   corpora- 
tion and  which   is  worth   more  than 
par,  the  transaction  is  voidable;   but 
if  all  the  stockholders  acquiesce  there- 
in, for  a  long  time,  the  acquiescence 
of  the  executors  of  a  deceased  stock- 
holder   binds    the    estate.      St.    Croix 
Lumber  Co.  r.  Mittlestadt,  43  Minn.  91 
(1890).    Where  an  insolvent  corpora- 
tion which  has  never  issued  any  cer- 
tificates of  stock  resolves   by  a   vote 
of  its  stockholders  to  apply  its  assets 
to  the  extent  of  their  value  to  the  pay- 
ment of  the  debts,  and  that  new  stock 
be    issued   to    the    stockholders    upon 
their  paying  therefor  in  full,  and  one 
stockholder   sells  his   interest  in   the 
original  stock,  and  the  purchaser  for 
seven  years  does  not  complain,  he  can- 
not, after  the  corporation  has  become 
prosperous,  claim  that  he  is  entitled 
to  the  old  stock  or  any  interest  in  the 
corporation.    Stoddard  v.  Decatur,  etc. 
Co.,  184  111.  53  (1900).    A  stockholder 
who  is  not  present  at  a  stockholders' 
meeting   is   not   bound   by   a   vote   at 
that   meeting   to   waive   the   right   to 
subscribe.    Morris  v.  Stevens,  178  Pa. 
St.  563    (1897).     Even  though  in  an- 
ticipation of  an  increase  of  the  capital 
stock   the   stockholders   agree   among 
themselves  to  waive  their  prior  right 
to  subscribe  for  such  increased  capi- 
tal stock,  yet  a  lona  fide  purchaser  of 


788 


CH.  XVII.  j 


INCREASE,  REDUCTION,  ETC.  OP  STOCK. 


[§   286. 


It  has  been  held,  however,  that  a  tender  need  not  he  made  where  the 
stockholder  has  demanded  the  right  to  subscribe  for  his  proportion 
of  stock  and  the  corporation  has  refused  to  consider  the  demand  ;* 
but  if  the  stockholder  remains  silent  and  makes  no  request  or  protest, 
he  thereby  waives  his  rights.2  The  corporation  may  and  usually  does 
limit  the  time  within  which  the  stockholders  may  signify  their  inten- 
tion to  take  up  the  new  stock,  and  may  require  a  part  payment  upon 
the  stock  within  that  time.3  The  stockholder,  therefore,  who  brines 
his  action  against  the  corporation  for  damages  for  refusal  to  allow*- 
him  to  subscribe  for  the  new  stock,  or  for  selling  the  stock  to  some 
one  else,  or  for  depriving  him  in  any  other  way  of  it,  must  allege 
and  prove  that  he  demanded  the  stock  and  offered  to  subscribe  and 
pay  for  it  in  the  regular  way,  within  the  time  fixed  for  such  sub- 
scriptions.4    The  claim  of  a  stockholder  against  a  corporation  for 


a  certificate  of  stock  prior  to  such  in- 
crease is  not  bound  by  such  agree- 
ment and  may  claim  his  pro  rata 
share  of  the  increased  capital  stock 
at  par.  Real  Estate,  etc.  Co.  v.  Bird, 
90  Md.  229  (1899).  In  this  case  the 
purchaser  of  a  certificate  of  stock  ap- 
plied to  the  corporation  for  a  transfer 
prior  to  the  time  when  the  right  to 
subscribe  for  the  increased  capital 
stock  accrued,  such  time  being  the 
date  of  the  voting  of  the  increase. 
The  corporation  refused  to  make  the 
transfer  and  thereupon  the  purchaser 
sued  for  his  proportion  of  the  in- 
creased capital  stock,  and  the  court 
held  that  he  was  entitled  to  it. 

i  Stokes  v.  Continental  T.  Co.,  186 
N.  Y.  285  (1906).  A  mere  verbal  no- 
tice by  the  stockholder  to  the  corpora- 
tion that  he  will  take  his  proportion 
of  the  new  issue  under  an  increase 
is  held  in  Louisiana  not  to  be  suffi- 
cient to  render  the  company  liable  in 
damages  for  selling  the  stock  to  some- 
one else.  Hart  v.  St.  Charles  St.  R. 
R.,  30  La.  Ann.  758  (1878),  holding 
also  that  a  tender  must  be  made. 

2  Stokes  v.  Continental  T.  Co.,  186 
N.  Y.  285  (1906). 

3  Sewall  v.  Eastern  R.  R.,  63  Mass. 
5  (1851);  Hart  v.  St.  Charles  St.  R. 
R.,  30  La.  Ann.  758  (1878).  In  the 
case  of  Pearson  v.  London,  etc.  Ry., 
14  Sim.  541   (1845),  where  notices  to 


the  stockholders  were  sent  on  July 
25th  giving  them  the  right  to  sub- 
scribe for  new  stock  on  or  before  Aug- 
ust 10th,  it  was  held  that  a  stockhold- 
er who  did  not  subscribe  by  that  time 
lost  his  right,  even  though  he  resided 
abroad  and  did  not  receive  the  notice 
until  August  12th,  and  on  that  day 
wrote  to  the  company  making  his 
subscription.  Where  the  stockholders 
are  given  ten  days  to  apply  for  the 
increased  capital  stock,  nothing  being 
said  as  to  time  of  payment,  an  appli- 
cation within  ten  days  is  sufficient, 
even  though  payment  is  not  tendered 
until  later.  Schmidt  v.  Pritchard,  112 
N.  W.  Rep.  801  (Iowa  1907).  Even 
though  a  stockholder  does  not  tender 
payment  until  sixty  days  after  he 
subscribes,  yet  if  no  time  of  payment 
was  prescribed  and  others  have  not 
paid,  this  is  no  defense.  Schmidt  v. 
Pritchard,  112  N.  W.  Rep.  801  (Iowa 
1907). 

4  Wilson  v.  Bank  of  Montgomery,  29 
Pa.  St.  537  (1857).  Where  only  ten 
days  are  given  to  the  subscribers  to 
subscribe  to  the  new  stock,  the  repre- 
sentatives of  a  stockholder  who  was 
dead  at  the  time  of  the  issue,  and  to 
whose  address  no  notice  was  sent, 
may  claim  their  proportion  of  the 
stock  which  the  corporation  has  not 
yet  disposed  of,  although  they  applied 
about    a    year    after    the    ten    days 


789 


287,  288.]         INCREASE,  REDUCTION,  ETC.   OF  STOCK. 


[en.  XVII. 


refusal  to  issue  to  him  his  part  of  the  increased  capital  stock  is  barred 
by  the  six  years'  statute  of  limitations.1 

§  287.  Issue  of  new  stock  by  a  stock  dividend.  — A  frequent  method 
of  issuing  an  increase  of  the  capital  stock  is  by  a  stock  dividend. 
In  England  there  is  some  doubt  as  to  whether  such  dividends  may 
be  imposed  upon  stockholders  who  object  thereto,  and  demand  the 
money  dividend  in  lieu  of  which  the  stock  is  issued.2  In  this  country 
such  dividends  are  legal  unless  prohibited  by  constitutional  or  stat- 
utory provisions.3  But  in  all  cases  of  a  stock  dividend,  as  a  method 
of  issuing  an  increase  of  the  capital  stock,  there  must  be  in  the  pos- 
session of  the  corporation  an  amount  of  property,  over  and  above 
its  corporate  debts,  equal  to  the  whole  capital  stock,  including  the 
increase;  and  this  amount  cannot  afterwards  be  used  for  any  kind 
of  a  dividend. 

§  288.  Liability  of  the  stockholder  upon  an  increase  of  the  capital 
stock  —  Irregularities  in  increasing  the  stock. — A  stockholder  may 
maintain  a  suit  in  equity  to  enjoin  the  corporation  from  issuing  in- 
creased capital  stock,  where  the  statutory  proceedings  authorizing 
such  issue  have  not  been  complied  with.4  But  a  person  subscribing 
for  shares  of  stock  upon  an  increase  of  the  capital  stock  is  liable 
thereon  the  same  as  a  subscriber  to  the  orginal  capital  stock.     In 


elapsed,  they  not  having  heard  of  the 
matter  until  that  time.  James  v. 
Buena  Ventura,  etc.  Syndicate,  [1896] 
1  Ch.  456.  Where  the  life  tenant  re- 
fuses to  pay  for  increased  capital 
stock  which  is  issued  at  fifty  cents  on 
a  dollar,  the  remaining  fifty  cents  be- 
ing a  stock  dividend,  and  the  trustee 
takes  the  stock  for  himself,  and  ten 
years  have  elapsed  since  the  life  ten- 
ant claimed  the  stock,  the  statute  of 
limitations  is  a  bar  to  his  suit  to  com- 
pel the  trustee  to  account  for  the 
stock.  Matter  of  Smith,  66  N.  Y.  App. 
Div.  340  (1901);  aff'd,  179  N.  Y.  536. 
A  stockholder  suing  a  corporation  for 
failure  to  allow  him  to  subscribe  for 
new  stock  must  show  that  he  de- 
manded the  stock  and  offered  to  sub- 
scribe and  pay  for  the  same  in  the 
regular  manner.  Bonnet  v.  First,  etc. 
Bank,  24  Tex.  Civ.  App.  613  (1900). 

lWoodworth   &  Co.   v.   Carroll,   112 
In.  V.\  Rep.,  1054   (Minn.  1907). 

2  See  ch.  XXXII,  infra. 

3  See   ch.   XXXII,  infra;   also   §  51, 


supra;  Howell  v.  Chicago,  etc.  Ry., 
51  Barb.  378  (1868).  An  increase  of 
the  capital  stock  by  the  issue  of  new 
stock  and  the  sale  of  it  for  less  than 
its  par  value,  is  not  such  an  "issue 
of  fictitious  stock"  as  the  California 
state  constitution  forbids  (art.  XII, 
§11).  Stein  v.  Howard,  65  Cal.  616 
(1884).  Where  the  company  is  under 
obligations  to  issue  stock  to  represent 
interest  on  subscriptions  until  divi- 
dends are  declared,  a  stock  dividend 
does  not  stop  the  interest.  Hardin 
County  v.  Louisville,  etc.  R.  R.,  92 
Ky.  412  (1891). 

4  McDermont  v.  Anaheim,  etc.  Co., 
124  Cal.  112  (1899).  A  stockholder's 
suit  to  set  aside  an  alleged  illegal  is- 
sue of  new  stock  must  join  a  holder 
of  such  new  stock,  especially  where 
the  holder  is  a  holding  corporation 
which  it  is  alleged  has  been  buying 
the  stock  illegally.  Weidenfeld  v. 
Northern,  etc.  Ry.,  129  Fed.  Rep.  305 
(1904).     See  also  §  281,  supra. 


790 


CH.    XVII.]  INCREASE,  REDUCTION,  ETC.  OF  STOCK'. 

l 


[§  288. 


some  respects  be  cannot  set  up  defenses  that  an  original  subscriber 
might  have  set  up.  Thus,  a  subscriber  for  increased  stock  cannot 
defeat  an  action  to  enforce  his  subscription  by  setting  up  the  fail- 
ure of  the  corporation  to  obtain  subscriptions  for  the  whole  of  the 
authorized  increase.1  A  statute  that  a  corporation  cannot  enforce  a 
contract  unless  ten  per  cent,  of  its  capital  stock  has  been  paid  in  does 
not  apply  to  a  contract  made  when  that  part  of  the  original  capital 
stock  had  been  paid  in,  although  subsequently  the  capital  stock  was 


i  Quoted  and  approved  in  Pope  v. 
Merchants'  T.  Co.,  103  S.  W.  Rep.  79-2 
(Tenn.  1907);  McCoy  v.  World's,  etc. 
Exposition,  186  111.  356  (1900);  Clarke 
v.  Thomas,  34  Ohio  St.  40  (1877); 
Nutter  v.  Lexington,  etc.  R.  R.,  72 
Mass.  85  (1856);  Delano  v.  Butler, 
118  U.  S.  634  (1886);  Aspinwall  v. 
Butler,  133  U.  S.  595  (1890);  Avegno 
v.  Citizens'  Bank,  40  La.  Ann.  799 
(1889);  Pacific  Nat.  Bank  v.  Eaton, 
141  U.  S.  227  (1891),  rev'g  Eaton  v. 
Pacific  Nat.  Bank,  144  Mass.  260 
(1887);  Greenbrier,  etc.  Exposition  v. 
Ocheltree,  44  W.  Va.  626  (1898).  Even 
though  the  act  of  Congress  declares 
that  an  increase  in  the  capital  stock 
of  a  bank  shall  not  be  valid  until  the 
whole  amount  of  the  increase  has 
been  paid,  and  the  comptroller  of  the 
currency  has  certified  to  that  effect, 
nevertheless,  the  subscriber  for  a  por- 
tion of  the  increase  who  has  paid 
therefor  and  received  a  certificate  and 
also  dividends  and  appeared  as  a 
stockholder  upon  the  books  cannot  de- 
feat the  statutory  liability  by  the  de- 
fense upon  the  insolvency  of  the  bank 
that  the  full  increased  stock  had  not 
been  subscribed.  It  is  immaterial  that 
the  «bank  had  no  right  to  issue  the 
certificate  before  the  entire  increase 
was  paid  in.  Scott  v.  Deweese,  181 
U.  S.  202  (1901);  aff'g  Scott  v.  Lati- 
mer, 89  Fed.  Rep.  843.  Where  the 
comptroller  has  authorized  an  in- 
crease of  the  capital  stock  of  a  na- 
tional bank  and  part  of  the  increase 
is  subscribed  for  and  paid  in,  and 
three  years  thereafter  stockholders 
reduce  the  increase  to  the  amount  ac- 
tually paid  in  and  the  comptroller  ap- 


proves the  same,  stockholders  cannot 
avoid  their  statutory  liability  on  the 
ground    that    the    increase    was    not 
complete;    neither  can   a  stockholder 
avoid  his  liability  on  the  ground  that 
although  he  subscribed  for  increased 
stock   he   received    original    stock,    it 
appearing  that  he  waited  three  years 
before  complaining.    Bailey  v.  Tilling- 
hast,  99  Fed.  Rep.  801  (1900).  Where 
the  increased  capital  stock  is  not  all 
subscribed  for,  and  hence  not  effect- 
ive, a  subscriber  who  has  paid  for  a 
part    thereof   may    recover   back   the 
money;   he  may  also  recover  back  an 
assessment     which     the     comptroller 
levied   on   such   stock   and   which   he 
paid.     Brown  v.  Tillinghast,  84   Fed. 
Rep.  71    (1897).     Where  some  of  the 
stock   is  void,   a  subscriber  for  both 
kinds,  who  has  paid  in  part,  cannot 
have  the  payments  applied  altogether 
on   the   valid    stock.     Kampmann    v. 
Tarver,    29    S.    W.    Rep.    1144     (Tex. 
1895).     Where  the  increase  is  to  be 
$200,000,  but  the  comptroller  will  al- 
low   but    $150,000,    and,    before    any- 
thing is  done,  the  bank  becomes  in- 
solvent,  a   person   who   has   partially 
paid    for    some    of    the    proposed    in- 
crease may  recover  the  money  back. 
McFarlin  v.  First  Nat.  Bank,  68  Fed. 
Rep.     868     (1895).       Where,    by    the 
charter,  there  are  two  hundred  shares 
and   only  eleven  are   subscribed   and 
then  the  charter  is  amended,  increas- 
ing the  shares  to   two  hundred  and 
fifty  thousand  and  decreasing  the  par 
value  thereof,  this  is  not  an  increase 
of  the  capital   stock   within  the   rule 
that  such  increase  need  not  be  wholly 
subscribed  in  order  to  hold  the  sub- 


79X 


§  288.] 


INCREASE,  REDUCTION,  ETC.  OE  STOCK. 


[CH.   XVII. 


increased  and  that  percentage  was  not  paid  in.1  In  general,  a  sub- 
scriber to  an  increase  of  stock  cannot  interpose  defenses  to  his  sub- 
scription which  subscribers  to  the  original  stock  could  not  have  raised 
— such,  for  example,  as  technical  objections  to  the  validity  of  his 
contract  of  subscription.2  For  instance  where  the  stockholders  for- 
mally increase  the  capital  stock  and  certify  that  it  has  been  increased 
and  issue  mortgage  bonds  to  the  full  amount  of  such  increased  capital 
stock,  under  a  statute  which  prohibits  the  issue  of  bonds  in  excess  of 
the  capital  stock,  they  will  be  held  to  have  subscribed  pro  rata  to  such 
increased  capital  stock.3  Nor  can  the  subscriber  set  up  that  the 
increase  was  irregularly  effected.  It  is  for  the  state  alone  to  raise 
the  question  whether  the  corporate  capital  stock  has  been  lawfully 
and  regularly  increased.4  Especially  it  is  the  rule  that,  as  against 
corporate  creditors,  stockholders  who  have  subscribed  for  the  in- 
creased stock,  accepted  the  certificate,  and  received  dividends  thereon, 


scribers  liable.    Gettysburg,  etc.  Bank 
v.  Brown,  95  Md.  367  (1902). 

i  Fishback  v.  Fond  Du  Lac,  etc.  Co., 
158  Fed.  Rep.  88   (1907). 

2  Kansas  City  Hotel  Co.  v.  Hunt, 
57  Mo.  126  (1874).  See  also  cbs.  IV 
and  X,  supra. 

3  Kreisser  v.  Asbtabula,  etc.  Co., 
Ohio  Circuits  (1903),  p.  313. 

4  Pullman  v.  Upton,  96  U.  S.  328 
(1877).  Tbe  executory  contract  of  a 
person  to  take  and  pay  for  increased 
capital  stock  cannot  be  enforced  with- 
out proof  of  tbe  capital  being  in- 
creased regularly  or  a  proper  ratifica- 
tion of  an  irregular  increase.  Pacific 
Mill  Co.  v.  Inman,  etc.  Co.,  90  Pac. 
Rep.  1099  (Ore.  1907).  It  is  no  de- 
fence to  liability  on  increased  capital 
stock  that  a  certificate  was  not  filed 
with  the  secretary  of  state  as  required 
by  statute.  Man  v.  Boykin,  60  S.  E. 
Rep.  17  (S.  C.  1908).  A  party  pur- 
chasing a  certificate  of  stock  not  un- 
der seal  nor  signed  by  the  president 
must  take  notice,  and  cannot  after- 
wards complain  that  it  was  an  irregu- 
lar increase  of  stock.  Byers  v.  Rol- 
lins, 13  Colo.  22  (1889).  Stockholders 
participating  in  an  irregular  increase 
of  stock  cannot  afterwards  object  to 
it.  Poole  v.  West  Point,  etc.  Assoc, 
30  Fed.  Rep.  513  (1887).  Irregulari- 
ties  in   the   increase   of   the   capital 


stock  will  be  disregarded  as  between 
the  stockholders  wbo  participate. 
Bailey  v.  Champlain,  etc.  Co.,  77  Wis. 
453  (1890);  Bard  v.  Banigan,  39  Fed. 
Rep.  13  (1889);  aff'd,  Banigan  v. 
Bard,  134  U.  S.  291.  A  stockholder  in 
a  national  bank  cannot  recover  back 
a  payment  which  he  has  made  on  in- 
creased capital  stock,  on  the  theory 
that  the  increase  was  irregularly 
made.  The  certificate  of  the  comp- 
troller fixing  the  increase  is  conclu- 
sive as  to  the  regularity  of  all  pro- 
ceedings. Columbia  Nat.  Bank  v.  Mat- 
hews, 85  Fed.  Rep.  934  (1898),  rev'g 
Matthews  v.  Columbia  Nat.  Bank,  79 
Fed.  Rep.  559,  and  77  Fed.  Rep.  372. 
To  same  effect,  Tillinghast  v.  Bailey, 
86  Fed.  Rep.  46  (1897);  aff'd,  99  id. 
801.  A  proxy  authorizing  the  holder 
to  vote  "in  the  same  manner  as  I 
should  do  were  I  there  personally 
present,"  estops  the  stockholder  giv- 
ing the  proxy  from  questioning  the 
call  of  the  meeting  or  the  irregularity 
of  an  increase  of  stock  voted  for  at 
such  meeting.  Columbia  Nat.  Bank  v. 
Mathews,  85  Fed.  Rep.  934  (1898). 
A  constitutional  provision  prescrib- 
ing the  procedure  for  increasing  the 
capital  stock  repeals  prior  statutes 
which  prescribe  a  different  procedure, 
Ewing  v.  Oroville  Min.  Co.,  56  Cal. 
649  (1880). 


792 


CH.   XVII.] 


INCREASE,  REDUCTION,  ETC.  OF  STOCK. 


[§  288. 


are  estopped  from  defeating  an  action  on  their  subscription  by  set- 
ting up  that  the  stock  was  increased  in  an  irregular  or  unlawful 
manner.1     Subscribers  to  increased  capital  stock  cannot  escape  lia- 

i  Chubb  v.  Upton,  95  U.  S.  665  by  the  corporation  on  increasing  its 
(1877);  Re  Miller's  Dale,  etc.  Co.,  L.  stock.  Peck  v.  Elliott,  79  Fed.  Rep. 
R.  31  Ch.  D.  211  (1885),  in  which  a  10  (1897).  Where,  upon  the  increase 
subscriber  to  new  shares  was  not  per-  of  the  capital  stock,  $3,000  of  stock  is 
mitted  to  plead,  as  against  creditors,  issued  to  a  party  for  a  patent-right, 
that  the  issue  was  irregular  because  and  in  about  six  months  the  patent- 
only  thirteen  days  had  elapsed  be-  right  is  assigned  back  to  him  for  $1, 
tween  the  passing  of  the  resolution  to  he  will  be  held  liable  for  the  $3,000 
increase  the  capital  and  the  confirm-  in   case  the   corporation   becomes   in- 


ing  of  it,  when  the  law  required  four- 
teen days.  Kansas  City  Hotel  Co.  v. 
Harris,  51  Mo.  464  (1873);  and  see 
McCarthy    v.    Lavasche,    89    111.    270 


solvent.  Peck  v.  Elliott,  79  Fed.  Rep. 
10  (1897).  A  holder  of  increased 
capital  stock  of  a  national  bank  can- 
not defeat  the   statutory  liability  on 


(1878);  Veeder  v.  Mudgett,  95  N.  Y.  the  ground  that  the  increase  was  ir- 
295  (1884)— the  last  case  holding  that  regularly  made,  and  was  fraudulently 
a  statute  allowing  increase  to  be  made,  in  that  the  directors  issued  it  to 
made  by  stockholders  in  meeting  as-  themselves  without  paying  therefor, 
sembled  on  a  specified  notice  is  in-  Latimer  v.  Bard,  76  Fed.  Rep.  536 
valid  if  the  notice  did  not  conform  (1896).  Even  after  the  corporation 
to  the  statute,  but  that  the  stockhold-  had  passed  into  the  hands  of  a  re- 
ers  are  liable  nevertheless  to  corpo-  ceiver,  a  subscriber  for  stock  may  re- 
rate  creditors  on  such  stock.  Sewell's  scind  and  sue  for  money  paid,  fraudu- 
Case,  L.  R.  3  Ch.  App.  131  (1868);  lent  representations  having  been 
Upton  v.  Jackson,  1  Flip.  413  (1874);  made  as  to  the  condition  of  the  com- 
s.  c,  28  Fed.  Cas.  844;  Kansas  City  pany,  the  subscription  being  for  in- 
Hotel  Co.  v.  Hunt,  57  Mo.  126  (1874).  creased  stock,  and  the  increase  not 
In  such  a  case  the  state  alone  can  having  been  made  until  sometime  af- 
properly   raise   the   question   whether  ter     the    subscription.     Newbegin    v. 


the  corporate  stock  had  been  regu- 
larly and  lawfully  increased.  Pull- 
man v.   Upton,    96   U.   S.   329    (1877). 


Newton  Nat.  Bank,  66  Fed.  Rep.  701 
(1895);  aff'd,  Newton  Nat.  Bank  v. 
Niewbegin,   74   Fed.   Rep.    135    (1896). 


(1877).     Re  Reciprocity  Bank,  22  N. 
Y.    9    (1860).      See   also   Peckham   v. 


See  Clarke  v.  Thomas,  34  Ohio  St.  46    Even    though    a    corporation    cannot 

give  a  mortgage  for  more  than  one- 
half  of  its  capital  stock,  the  validity 
Smith,  9  How.  Pr.  436  (1854).  In-  of  the  mortgage  cannot  be  questioned 
creased  capital  stock  is  legal,  al-  on  the  ground  that  the  capital  stock 
though  it  was  issued  to  a  person  who  had  been  irregularly  increased.  First 
was  treasurer  of  a  city  and  who  paid    National  Bank  v.  Wyoming,  etc.  Co., 


for  the  stock  out  of  the  city  funds, 
the  corporation  not  knowing  thereof. 
Olson  v.  State  Bank,  67  Minn.  267 
(1897).  One  who  has  accepted  in- 
creased capital  stock  of  a  corporation, 


136  Fed.  Rep.  466  (1905).  In  Farm- 
ers' L.  &  T.  Co.  v.  Forest  Park,  etc. 
R.  R.,  65  Fed.  Rep.  882  (1895),  a 
mortgagee,  who  had  not  been  made  a 
party  defendant  in  the  foreclosure  of 


and  has  taken  the  office  of  president  mechanics'  liens,  attempted  to  fore- 
of  such  corporation  by  virtue  alone  of  close  its  mortgage  and  claim  that  the 
such  stock,  is  estopped  to  question  mechanic's-lien  foreclosure  sale  was 
its  validity  on  the  ground  of  the  non-  subject  to  the  mortgage.  The  mort- 
payment  of  a  tax  required  to  be  paid    gage  was  illegal  when  issued,  because 

793 


§  288.] 


INCREASE,  REDUCTION,  ETC.  OP  STOCK. 


[cn.  xvii. 


bility  therefor  by  setting  up  that  the  notice  of  the  increase  was  not 
published,  or  filed/  as  required  by  statute.2 

Even  though  the  constitution  and  statutes  require  that  the  capital 
stock  shall  not  be  increased,  except  upon  a  majority  vote  of  the  stock- 
holders at  a  meeting  called  for  the  purpose,  on  sixty  days'  public 
notice,  yet  the  stockholders  may  unanimously  waive  such  notice  and 


it  exceeded  the  amount  of  the  capital 
stock  in  violation  of  the  statute.  Reso- 
lutions to   increase  the  capital  stock 
had  been  passed,  but  the  papers  had 
not  been  filed,  nor  the  statutory  fees 
to  the  state  paid,  until  after  the  fore- 
closure of  the  mechanics'  liens.     The 
company  had   received  nothing   from 
the  bonds.  The  purchasers  at  the  first 
foreclosure  sale   had   expended   large 
sums  of  money.  Speculators,  who  long 
afterwards  bought  the  bonds  with  the 
knowledge  of  the  facts,  bought  them 
for   a   small   sum   in    order   to   bring 
this  suit.     The  suit  failed.     It  is  no 
defense  to  a  mortgage  that  a  consoli- 
dation was  irregular,  or  that  the  debt 
exceeded   the   capital   stock,   contrary 
to    statute,    or    that    an    increase    of 
stock  was  irregular,  or  that  there  had 
been  an  overissue  of  bonds,  all  parties 
having  concurred  therein  and  interest 
having    been    paid    for    three    years. 
Farmers'  L.  &  T.  Co.  v.  Toledo,  etc. 
Ry.,    67    Fed.   Rep.   49    (1895).      This 
same   principle   has   arisen    in   many 
municipal-bond  cases,  holding  that,  al- 
though the  bonds  are  not   issued  in 
conformity   with   the   statute,   yet,   if 
the  municipality  had  the  benefit  of  the 
money,    it    is    bound.      See    also    the 
principles  and   cases  in   §  298,   infra. 
The   invalidity  or   irregularity  of  an 
increase  of  stock  may  be  set  up  by 
the    subscribers    therefor    as    against 
creditors  who  were  stockholders  and 
managers  of  the  company.     Sayles  v. 
Brown,  40  Fed.  Rep.  8   (1889).    Even 
though   a  gas   company   issues   stock 
without  the  consent  of  a  state  board, 
as  required  by  statute,  yet  this  is  no 
defense  to  a  tax  levied  on  the  corpora- 
tion based  on  the  amount  of  its  capi- 
tal stock,  including  such  stock.    Attor- 


ney-General   v.    Mass.,    etc.    Co.,    179 
Mass.  15    (1901). 

l  A  subscriber  to  increased  capital 
stock  cannot,  after  the  company  be- 
comes insolvent,  have  the  subscription 
canceled  and  the  money  repaid  to  him 
on  the  ground  that  the  certificate  of 
the  increase  had  not  been  filed  with 
the  secretary  of  state  and  the  town 
clerk,    as    required    by    statute,    even 
though  the  only  step  towards  increas- 
ing the  stock  was  merely  a  vote  of  the 
stockholders    that    it    should    be    in- 
creased, especially  where  for  six  years 
he    attended    meetings    and    accepted 
dividends  without  investigating  or  ob- 
jecting.     Barrows    v.    Natchaug,    etc. 
Co.,    72   Conn.   658    (1900).     A   stock- 
holder who  votes  to  increase  the  capi- 
tal stock  and  becomes  a  director  and 
takes  his  proportion  of  the  increase 
and  pays  therefor,  and  two  years  af- 
terwards,  when   the  company   is   em- 
barrassed,  discovers  that  the   certifi- 
cate of  increase  was  not  recorded  as 
required    by    statute,    cannot    tender 
back   his   certificate   and   demand   re- 
payment of  the  money.    The  omission 
to  file  and  record  the  certificate  was 
no  damage  to  him.     Hoeft  v.  Kock, 
123  Mich.  171  (1900). 

2Handley  v.  Stutz,  139  U.  S.  417 
(1891).  Holders  of  increased  capital 
stock  cannot  defeat  their  liability  for 
the  subscription  price  by  alleging 
that  the  increase  was  made  by  a  stock- 
holders' meeting  held  out  of  the  state, 
or  that  proper  notice  of  the  meeting 
was  not  given,  or  that  the  required 
statutory  publication  of  the  increase 
was  not  made.  Stutz  v.  Handley,  41 
Fed.  Rep.  531  (1890);  rev'd  on  an- 
other ground  in  Handley  v.  Stutz,  139 
U.  S.  417.     If  the  stockholders  have 


794 


CH.   XVII.] 


INCREASE,  REDUCTION,  ETC.  OF  STOCK. 


[§  288. 


the  expiration  of  such  time.1  But  a  contrary  rule  prevails  as  re- 
gards essential  steps  in  the  increase.2  If  a  statute  authorizing  an  in- 
crease of  stock  is  unconstitutional  the  subscribers  therefor  are  not 


knowledge  of  the  intention  to  increase 
the  stock,  the  failure  to  give  statu- 
tory notice  cannot  be  taken  advantage 
of  by  one  not  injured  by  such  want  of 
notice.  Columbia  Nat.  Bank's  Appeal, 
16  W.  N.  Cas.  357;  42  Leg.  Int.  226 
(1885).  Irregularity  of  notice  of  a 
meeting  to  increase  the  capital  stock 
has  been  held  to  be  fatal.  Re  Wheeler, 
2  Abb.  Pr.  (N.  S.)  361  (1866).  In 
the  case  of  Riesterer  v.  Horton,  etc. 
Co.,  160  Mo.  141  (1901),  holding  that 
a  constitutional  provision  requiring 
the  stockholder's  assent  to  a  corporate 
mortgage  on  sixty  days'  notice  might 
be  waived  by  the  stockholders,  the 
court  expressly  overruled  State  v.  Mc- 
Grath,  86  Mo.  241.  See  also  §  599, 
infra.  Concerning  the  failure  to  give 
the  requisite  notice,  see  also  chs. 
XXXVI  and  XLVI,  infra.  Where  a 
person  subscribes  to  the  proposed  in- 
creased capital  stock,  and  the  officers 
surreptitiously  transfer  some  of  their 
own  old  stock  to  him,  he  is  not  liable 
on  the  statutory  liability  thereon, 
even  though  he  accepted  the  stock,  be- 
ing ignorant  of  the  fraud  practiced 
upon  him.  Stephens  v.  Follett,  43 
Fed.  Rep.  842  (1890).  Where  the  in- 
crease of  the  capital  stock  is  not  pub- 
lished as  required  by  the  statute,  a 
corporate  creditor  who  cancels  his 
debt  in  consideration  of  a  part  of 
such  new  stock  may  be  restored  to  his 
original  position,  except  as  to  other 
corporate  creditors  who  became  such 
on  the  faith  of  the  increase,  and  it  is 
presumed  that  all  creditors  after  such 
increase  became  such  on  the  faith 
thereof.  Palmer  v.  Bank,  etc.,  72 
Minn.  266  (1898).  The  holder  of  stock 
in  a  national  bank  cannot  avoid  his 
statutory  liability  thereon  on  the  plea 
that  he  supposed  he  was  purchasing 
increased  capital  stock  which  after- 
wards turned  out  to  have  been  unau- 
thorized by  the  comptroller,  whereas 


as  a  matter  of  fact  he  had  purchased 
a  part  of  the  original  capital  stock, 
five  years  having  elapsed.  Rand  v. 
Columbia  Nat.  Bank,  etc.,  94  Fed.  Rep. 
349    (1899). 

i  State  v.  Cook,  178  Mo.  189  (1903). 
In  California  an  increase  of  capital 
stock  must  be  after  sixty  days'  notice 
and  this  cannot  be  waived  by  consent 
of  all  the  stockholders,  inasmuch  as 
the  provision  is  in  the  constitution 
and  by  another  provision  of  the  con- 
stitution all  its  provisions  are  de- 
clared to  be  mandatory  and  prohib- 
itory unless  otherwise  provided.  Nav- 
ajo, etc.  Co.  v.  Curry,  147  Cal.  581 
(1905). 

2  Where  creditors'  rights  do  not  in- 
tervene, a  subscriber  for  increased 
capital  stock  may  defend  against  the 
subscription  on  the  ground  that  the 
increase  had  not  been  made  in  ac- 
cordance with  the  statutes,  and  may 
do  so  even  though  he  has  paid  part 
of  the  subscription  and  was  one  of 
the  directors.  Such  subscriber  may 
recover  back  such  part  of  the  money 
as  he  has  paid,  corporate  creditors' 
rights  not  being  prejudiced.  In  this 
case  the  company  had  not  registered 
the  increase  of  stock  as  required  by 
statute.  Union  Ry.  v.  Sneed,  99  Tenn. 
1  (1897).  Where  the  charter  provided 
that  the  capital  stock  may  be  in- 
creased after  the  existing  capital 
stock  is  paid  up,  an  increase  before 
such  payment  is  irregular,  and  a  sub- 
scriber to  an  increase  so  made  is  not 
liable.  Page  v.  Austin,  10  S.  C.  Rep. 
(Can.)  132  (1884).  The  annual  meet- 
ing cannot  vote  an  increase  of  the 
capital  stock  unless  special  notice  of 
that  business  has  been  given,  even 
though  the  by-laws  provide  that  any 
business  may  be  transacted  at  the  an- 
nual meeting  without  special  notice; 
the  statute,  however,  prescribing  that 
an  increase  of  capital  stock  may  be  at 


795 


§  288.] 


INCREASE,  REDUCTION,  ETC.  OF  STOCK. 


[CH.   XVII. 


liable.1  Or  if  there  is  no  vote  of  the  stockholders  as  required  by  stat- 
ute, they  are  not  liable  on  the  stock.2  Stockholders  of  the  original 
capital  stock  are  of  course  not  liable  for  the  defaults  of  subscribers 
to  the  increased  capital  stock.3  Where  a  corporation  receives  money 
in  payment  for  increased  capital  stock  to  be  issued  and  never  in- 
creases its  stock,  and  the  money  has  been  used  in  the  business  and  the 
corporation  becomes  insolvent,  the  subscriber  is  not  entitled  to  repay- 
ment in  preference  to  other  creditors.4  Mere  payment  of  money  to 
a  corporation  for  increased  capital  stock  to  be  thereafter  voted  and 


"any  meeting  called  for  the  purpose." 
Jones  v.  Concord,  etc.  R.  R.,  67  N.  H. 
234   (1892). 

i  Marion  T.  Co.  v.  Bennett,  82  N.  E. 
Rep.  782   (Ind.  1907). 

2  The   receiver  of   a  national   bank 
cannot  hold  stockholders  liable  on  in- 
creased   stock    where    such    increase 
was   not   authorized   by   a   two-thirds 
vote  of  the  stockholders.     Winters  v. 
Armstrong,  37  Fed.  Rep.  508    (1889). 
In  American   Tube  Works  v.   Boston 
Machine  Co.,   139   Mass.  5    (1885),   it 
was    held   that    a    creditor    who    had 
taken  irregularly  issued  stock  in  pay- 
ment of  his  debt  might  over  two  years 
thereafter,  and  after  the  corporation 
became  insolvent,  repudiate  the  stock 
and  again  become  a  creditor.    Where 
the  president  issues  increased  capital 
stock  to  himself  and   pays  for  it,   it 
seems  that  upon  the  insolvency  of  the 
company  he  cannot  rescind  the  trans- 
action   on    the    ground    that    the    in- 
creased stock  had  never  been  voted  by 
the  stockholders  or  authorized  by  the 
comptroller  of  the  currency.    Western 
Nat.  Bank  v.  Armstrong,  152  U.  S.  346 
(1893).    A  person  who  subscribes  and 
pays  for  stock  in  a  corporation  may 
return    the    stock    and    recover    back 
his    subscription    where    such    stock 
subscribed  for  by  him  was  increased 
capital    stock,   but   the   increase   was 
not  made  according  to  law.     In  this 
case  the  stockholders  had  voted  the 
increase    but    had    not    given    thirty 
days'  public  notice,  and  had  not  filed 
a    certificate    with    the    secretary    of 
state  as  required  by  statute.    Lincoln 
v.  New  Orleans  Exp.  Co.,  45  La.  Ann. 


729  (1893).  A  stockholder  in  a  na- 
tional bank  cannot  defend  against  his 
liability  on  increased  capital  stock  by 
setting  up  that  the  requisite  amount 
of  stock  did  not  vote  for  such  in- 
crease. Bailey  v.  Tillinghast,  99  Fed. 
Rep.  801    (1900). 

3  Veeder  v.  Mudgett,  95  N.  Y.  295 
(1884).  See  also  §§  215,  218,  supra.  A 
stockholder  not  participating  is  not  li- 
able for  fraud  in  the  increase  of  stock 
where  the  directors  received  pay 
therefor  in  notes  which  are  worth- 
less. So  held  under  the  Iowa  statute. 
Miller  v.  Bradish,  69  Iowa,  278 
(1886).  See  also  Delano  v.  Butler,  118 
U.  S.  634  (1886).  A  statutory  re- 
quirement that  a  certificate  shall  be 
filed  when  stock  is  fully  paid  does  not 
render  old  stockholders  liable  for  fail- 
ure to  file  as  to  increased  stock.  Sayles 
v.  Brown,  40  Fed.  Rep.  8  (1889).  A 
liability  imposed  until  a  specified  cer- 
tificate is  filed  is  not  revived  by  an  in- 
crease of  the  capital  stock.  Veeder  v. 
Mudgett,  95  N.  Y.  295  (1884).  See 
also  Ochiltree  v.  Railroad  Co.,  21  Wall. 
249  (1874),  as  to  liability  on  increase 
cf  capital  stock.  As  to  the  liability 
on  a  reduction  of  the  capital  stock 
end  the  constitutionality  thereof,  see 
Dane  v.  Young,  61  Me.  160  (1872); 
also  §  497,  infra.  In  suing  a  stock- 
holder on  a  statutory  liability  for 
failure  to  file  a  certificate  upon  an  in- 
crease in  the  capital  stock,  only  those 
who  hold  the  increased  capital  stock 
are  liable.  Griffith  v.  Green,  129  N.  Y. 
517  (1892). 

4  Bircher  v.   Walther,   163   Mo.    461 
(1901). 


796 


CH.    XVII.] 


INCREASE,  REDUCTION,  ETC.  OP  STOCK. 


[§  289. 


issued  is  not  binding  on  either  party,  and  the  money  may  be  recov- 
ered back.1 

§  2S9.  Rights  and  liabilities  of  the  stockholders  upon  a  reduction 
of  the  capital  stock. — Upon  an  authorized  reduction  of  the  capital 
stock  of  an  incorporated  company,  regularly  effected,  the  amount 
of  corporate  assets,  over  and  above  the  amount  of  the  capital  stock 
as  reduced  and  the  debts,  is  equivalent  to  surplus  profits,  and  may 
be  treated  as  such  by  the  corporation.  It  may  be  set  aside  as  sur- 
plus, or  it  may  be  divided  among  the  stockholders  proportionally, 
inasmuch  as  the  rights  of  previous  corporate  creditors  are  not  in- 
jured.2    "Where  a  holding  corporation  has  been  declared  illegal  and 


i  Wolf  v.  Chicago,  etc.  Co.,  84  N.  E. 
Rep.  614    (111.  1908). 

2  Cited  and  approved  in  Kassler  v. 
Kyle,  28  Colo.  374    (1901).     Strong  v. 
Brooklyn  Crosstown  R.  R.,  93   N.  Y. 
426      (1883),     where     a     corporation, 
whose  capital  had  been  reduced  one- 
half,    issued   certificates   of   indebted- 
ness bearing  interest  to  stockholders 
for  the  excess.     The  application  of  a 
dissenting   holder   to   have    them   de- 
clared illegal,  and  to  restrain  the  cor- 
poration  from   paying  them,  was  re- 
fused; Seeley  v.  New  York,  etc.  Bank, 
8   Daly,   400    (1878);    aff'd,    78    N.   Y. 
608     (1879);    McCann    v.    First    Nat. 
Bank,  112  Ind.  354   (1887),  approving 
the    text    herein,    and    holding    that 
where,    by   reason   of  bad   debts,   the 
capital  stock  is  reduced,  a  subsequent 
collection  of  such  debts  does  not  sus- 
tain  an  action   by  a  stockholder  for 
his    proportion    thereof.      Where    the 
capital  stock  is  reduced  by  reason  of 
certain  doubtful  securities,  the  securi- 
ties  should   not   be   withdrawn   from 
the  assets  of  the  bank  and  put  into  a 
trust.      McCann   v.    First   Nat.    Bank, 
131  Ind.  95   (1892).     If  an  increase  of 
capital  stock  is  afterwards  canceled,  a 
corporate  creditor  who  was  such  pre- 
vious to  the  increase  cannot  complain. 
Coit  r.  Gold  Amal.  Co.,  119  U.  S.  343 
(1886).     Where  the  capital   stock   is 
reduced   and    the    corporate   property 
over   and   above   the   reduced  capital 
stock  is  distributed  among  the  stock- 
holders, this  is  not  a  dividend  within 


797 


the  meaning  of  the  New  York  tax  stat- 
ute.    People,  etc.  v.  Roberts,  41  N.  Y. 
App.  Div.,   21    (1899).     For  the  rules 
herein  relative  to  life  estates  and  re- 
mainders in  stock,  see  §§  559,  560,  in- 
fra,    A   stockholder   may   enjoin   the 
corporation  from  reducing  its  capital 
stock,  as  allowed  by  statute;   calling 
in    all    certificates    of   stock;    issuing 
new   certificates   proportionately;    de- 
claring a  dividend  of  the  surplus  over 
the  reduced  capital  stock,  and,  on  ac- 
count of  the  corporate  property  being 
invested,    borrowing    money    to    pay 
that  dividend.     Coquard  v.  St.  Louis, 
etc.  Co.,  7  S.  W.  Rep.  176   (Mo.  18SS). 
And  in  general,  see  also  Re  State  Ins. 
Co.,  14  Fed.  Rep.  28  (1882);  Excelsior 
Petrol.    Co.    v.    Lacey,    63    N.    Y.    422 
(1875).     A   by-law   cannot  compel   a 
stockholder   to    sell    his  stock   to   the 
corporation    for    the    purpose    of    re- 
tiring it.     Bergman  v.   St.  Paul,   etc. 
Assoc,  29  Minn.  275  (1882).     In  Eng- 
land  it   is   the   rule   that,   when    the 
assets  are  already  reduced  by  losses, 
the  corporation  cannot  effect  a  reduc- 
tion   of    the    capital   stock    so    as    to 
cover  up   the  losses.     Re  Ebbw  Vale 
Steel,    etc.    Co.,    L.    R.    4    Ch.    D.    827 
(1877).     A.nd  yet  it  would  seem  that 
a  greater  injury  would  be  worked  up- 
on the  public  by  continuing  business 
with  an  impaired  capital  than  to  re- 
duce it  openly  to  what  it  actually  is. 
Cf.  Re  Kirkstall  Brewery  Co.,  L.  R.  5 
Ch.   D.   535    (1877).     In   England,   by 
statute,  a  plan  for  reducing  the  capi- 


289.] 


INCREASE,   REDUCTION,  ETC.   OF  STOCK. 


[CII.    XVII. 


a  distribution  to  its  stockholders  ordered,  the  stockholders  are  not 
entitled  to  the  stock  which  they  turned  in  originally,  but  are  entitled 
only  to  their  fro  rata  share  of  the  assets  existing  at  the  time  of  the 
injunction  and  decree  of  distribution,  the  capital  stock  having  bei  n 
reduced  for  that  purpose.  The  assets  may  be  distributed  in  kind 
pro  rata  among  the  stockholders,  or  may  be  sold  for  cash,  and  the 
company  may  by  vote  adopt  the  former  plan,  thus  avoiding  the 
disastrous  consequences  of  a  forced  sale.1  Under  certain  circum- 
stances the  surplus  may  be  used  to  buy  outstanding  shares  of  stock.2 
But  it  is  not  the  rule  that  the  reduction  of  the  capital  stock  of  a 
corporation  always  authorizes  the  distribution  among  the  stockholders 
of  a  sum  equal  to  the  difference  between  the  original  and  the  re- 
duced amount  of  capital.  Such  a  distribution  is  lawful  only  when 
it  appears  that  the  original  capital  stock  was  unimpaired  at  the  time 
of  the  decrease.  The  corporation  can  divide  among  its  stockholders 
only  such  a  sum  as  will  leave  with  the  corporation  an  amount  equal 
to  the  reduced  capital  stock  in  addition  to  the  amount  of  the  debts.3 
Where  on  the  reduction  of  the  capital  stock  the  surplus  resulting 
therefrom  is  disposed  of  by  charging  off  certain  bad  debts  which 


tal  stock  must  be  presented  to  and 
approved  by  tbe  courts.  Re  Direct, 
etc.  Co.,  L.  R.  34  Ch.  D.  307  (1886) 
And  a  distribution  of  part  of  the  cap- 
ital stock  among  tbe  stockholders  pro- 
portionally is  an  unauthorized  reduc- 
tion, and  the  stock  so  distributed  will 
be  ordered  to  be  returned.  Holmes  v. 
Newcastle,  etc.  Co.,  L.  R.  1  Ch.  D. 
G82  (1875).  A  stockholder  cannot 
hold  a  corporation  liable  for  fraud 
in  inducing  him  to  cancel  a  part  of 
his  stock  upon  a  reduction  of  the 
capital  stock,  if  all  the  other  stock- 
holders did  the  same,  inasmuch  as  no 
actual  damage  resulted,  each  stock- 
holder having  the  same  proportion- 
ate interest  after  the  reduction.  Pot- 
ter v.  Necedah,  etc.  Co.,  105  Wis.  25 
(1899). 

l  Harriman  v.  Northern  Securities 
Co.,  197  U.  S'.  244  (1905).  Where  a 
holding  company  has  illegally  pur- 
chased the  stock  of  competing  rail- 
roads and  is  compelled  by  decree  of 
the  court  to  return  the  same  to  its 
stockholders,  the  stockholders  are  not 
entitled  to  the  particular  stocks  which 


they  turned  in,  but  are  entitled  to  a 
pro  rata  interest  in  all  the  stocks  so 
distributed.  Such  distribution  may 
be  in  kind.  Continental,  etc.  Co.,  v. 
Northern,  etc.  Co.,  66  N.  J.  Eq.  274. 
(1904).  In  reducing  its  capital  stock 
a  corporation  may  distribute  such 
portion  of  its  assets  as  are  in  excess 
if  its  liabilities  and  remaining  capi- 
tal stock,  and  such  distribution  may 
be  in  kind  instead  of  being  in  cash. 
Continental,  etc.  Co.  v.  Northern,  etc. 
Co.,  66  N.   J.  Eq.  274    (1904). 

2  See  §282,  supra,  and  §§311,  312, 
infra. 

3  Strong  v.  Brooklyn  Crosstown  R. 
R.,  93  N.  Y.  426  (1883).  Where,  upon 
the  reduction  of  the  capital  stock  of 
a  bank,  certificates  of  deposit  are  is- 
sued to  the  stockholders  to  the 
amount  of  the  reduction  of  the  capi- 
tal stock,  such  certificates  of  deposit 
can  be  enforced  only  to  the  extent 
that  the  actual  assets  of  the  bank 
exceeded  its  liabilities  and  reduced 
capital  stock.  Kassler  v.  Kyle,  28  Colo. 
374    (1901). 


79S 


CH.    XVII.] 


INCREASE,  REDUCTION,  ETC.  OP  STOCK. 


[§  289. 


are  then  placed  to  a  fund  for  the  benefit  of  the  stockholders,  it 
belongs  to  the  stockholders  then  of  record  and  not  to  their  trans- 
ferees, unless  specifically  transferred.1  If  the  original  subscriptions 
were  not  paid  in  full,  corporate  creditors  who  were  such  before  the 
reduction  may  disregard  the  reduction  and  enforce  payment  of  their 
debts  from  such  original  unpaid  subscriptions,  as  though  no  reduction 
had  taken  place.2  Owners  of  claims  not  yet  due  may,  in  certain  cir- 
cumstances, prevent  a  distribution  of  capital  stock  upon  a  reduction 
thereof,  unless  security  is  given.3  But  creditors  whose  debts  were 
contracted  subsequently  to  the  reduction  can  look  only  to  the  capital 
stock,  as  reduced,  for  security.  They  will  be  held  to  have  given 
credit  upon  the  faith  of  that  amount  of  stock  alone.4 


i  Where  on  a  reduction  of  the  capi- 
tal stock  certain  bad  debts  are  set 
aside  for  the  express  benefit  of  the 
then  existing  stockholders  of  record, 
they  are  entitled  to  the  same,  even 
though  they  are  not  stockholders  of 
record  when  the  corporation  is  dis- 
solved later.  Jerome  v.  Cogswell,  204 
U.  S.  1  (1907);  aff'g  Cogswell  v. 
Second  Nat.  Bank,  78  Conn.  75  (1905), 
holding  also  that  on  a  reduction  of 
the  capital  stock  of  a  national  bank 
the  Comptroller  of  the  Currency  may 
order  that  certain  assets  which  are 
charged  off  as  being  worthless  shall 
be  set  aside  for  the  benefit  pro  rata 
of  the  then  existing  stockholders. 

2  Re  State  Ins.  Co.,  14  Fed.  Rep.  28 
(1882);  Bedford  R.  R.  v.  Bowser,  48 
Pa.  St.  29  (1864).  Stockholders  have 
no  power  to  avoid  liability  on  their 
stock  by  reducing  either  the  amount 
of  it  or  the  par  value  of  the  shares. 
Dane  v.  Young,  61  Me.  160  (1872). 
Of.  Bedford  R.  R.  v.  Bowser,  48  Pa. 
St.  29  (1864).  A  subscriber  for  $1,000 
of  stock  who  pays  in  $200,  being 
twenty  per  cent,  and  then  transfers 
$200  of  full-paid  stock  to  another,  is 
still  liable  for  the  remaining  $800.  It 
is  immaterial  that  the  old  certificates, 
showing  that  twenty  per  cent,  had 
been  paid,  were  returned  to  the  cor- 
poration, and  only  $200  of  stock  re- 
issued. This  does  not  amount  to  a 
reduction  of  the  stock  to  twenty  per 
cent.     Putnam   v.   Hutchison,    4   Can. 


App.  273  (1896).  Upon  a  reduction  of 
the  capital  stock  it  is  legal  to  pay  to 
the  stockholders  only  such  part  of 
the  assets  as  exceeds  in  value  the 
actual  liabilities  plus  the  remaining 
capital  stock,  and  if  the  assets  are 
overvalued  and  certificates  of  indebt- 
edness are  issued  to  the  stockholders, 
they  are  not  legal.  State  v.  Bank  of 
Ogallala,  >65  Neb.  20  (1902).  As  to 
existing  corporate  creditors  the  stock- 
holders cannot  avoid  liability  on  a 
part  of  their  subscriptions  by  reduc- 
ing the  par  value  of  the  stock,  but 
the  purchaser  of  such  reduced  stock 
is  not  liable  for  the  old  par  value. 
Cammack  v.  Levy,  45  S.  Rep.  925  (La. 
1908). 

3  Re  Telegraph  Const.  Co.,  L.  R.  10 
Eq.   384    (1870). 

4  Hepburn  v.  Exchange,  etc.  Co.,  4 
La.  Ann.  87  (1849);  Palfrey  v.  Pauld- 
ing, 7  La.  Ann.  363  (1852) ;  Cooper  v. 
Frederick,  9  Ala.  738,  742  (1846). 
Cf.  Re  State  Ins.  Co.,  14  Fed.  Rep.  28 
(1S82).  In  the  case  Re  Welsbach,  etc. 
Co.,  Ltd.,  [1904]  1  Ch.  87,  the  court 
said:  "Broadly  speaking,  a  reduc- 
tion of  capital  by  writing  off  loss  is,  I 
repeat,  not  to  the  injury,  but  to  the 
benefit  of  the  shareholder.  The  per- 
sons whom  it  may  injure  are  the 
creditors  (if  any).  The  result  of 
writing  off  the  loss  is,  that  the  com- 
pany is  no  longer  bound  to  keep  to 
the  balance  of  its  debit,  in  respect  of 
capital,  as  large  a  sum;   but,  to  the 

99 


289.] 


INCREASE,  REDUCTION,  ETC.   OF  STOCK. 


[CH.    XVII. 


Where  the  preferred  stock  is  reduced,  a  preferred  stockholder,  who 
accepts  the  reduced  amount  of  preferred  stock  and  turns  in  the  old 
certificate,  may  claim  the  accumulated  dividends  on  the  amount  can- 
celed by  the  reduction,  but  if  the  reduction  resulted  in  a  surplus 
over  the  reduced  capital  stock,  such  surplus  may  be  used  for  dividends 
on  both  classes  of  stock,  because  it  is  not  "surplus  profits."  x  Under 
the  English  statute  a  reduction  of  the  capital  stock,  when  approved 
by  the  court,  is  binding,  and  the  court  may  approve  a  reduction  which 
pays  off  the  founders'  shares  at  par,  even  though  the  reserve  is  more 
than  sufficient  therefor,  it  appearing  that  the  founders'  shares  have 
no  commercial  value.2  As  between  preferred  and  common  stock 
where  the  preferred  stock  was  to  have  five  per  cent,  and  the  common 
stock  seven  per  cent.,  and  the  remaining  profits  were  to  go  equally 
to  the  common  stock  and  to  founders'  shares,  and  a  reduction  of 
capital  is  made  by  reason  of  losses,  the  reduction  may  be  made  by 
cancelling  the  founders'  shares  and  part  of  the  common  stock.3  Where 
a  part  of  the  capital  stock  was  issued  as  full  paid  for  property,  and 
the  remaining  part  was  issued  for  cash,  one-half  of  which  was  paid 
in,  the  majority  stockholders  cannot  as  against  the  minority,  reduce 
the  capital  stock  by  canceling  one-half  of  the  stock  which  was  issued 


extent  to  which  it  resumes  paying 
dividends  at  an  earlier  date,  of  course 
the  creditors  lose  assets  to  which 
they  would  otherwise  be  entitled." 
i  Roberts  v.  Roberts-Wicks  Co.,  184 
N.  Y.  257   (1906). 

2  Poole  v.  National  Bank  of  China, 
96  L.  T.  Rep.  889  (1907),  disapprov- 
ing Re  Anglo-French  Ex.  Co.,  [1902] 
2  Ch.  845. 

3  Re  London,  etc.  Inv.  Corporation, 
[1895]  2  Ch.  860,  the  court  saying  that 
"where  there  are  different  classes  of 
shares  the  loss  on  a  reduction  ought 
to  fall  on  those  who  would  have  to 
bear  it  if  there  was  a  winding  up." 
See  also  §  278,  supra.  Under  the  Eng- 
glish  statutes,  where  the  capital  stock 
consists  of  stock  and  deferred  stock, 
the  former  being  practically  pre- 
ferred stock  and  the  latter  common 
stock,  a  reduction  of  the  whole  capi- 
tal stock  may  be  effected,  with  the 
consent  of  the  common  stockholders, 
by  canceling  a  part  of  the  common 
stock    and  having  the  remainder  be- 


come preferred  stock  (in  other  words, 
by  wiping  out  all  preferences),  even 
though  some  of  the  preferred  stock- 
holders objected,  there  being  origi- 
nally no  preferences  as  to  assets.  Re 
Hyderabad  Co.,  75  L.  T.  Rep.  23 
(1896).  Even  though  there  are  dif- 
ferent classes  of  stock,  a  reduction  of 
the  capital  may  be  made  on  a  differ- 
ent basis  from  the  basis  specified  as 
applicable  upon  a  dissolution  and 
winding  up.  Re  Credit  Assurance, 
etc.  Corp.,  [1902]  2  Ch.  601.  Where 
the  property  of  the  corporation  con- 
sists of  a  mine,  and  it  has  been  large- 
ly worked  out,  and  the  corporation 
applies  to  the  court  to  sanction  a  re- 
duction of  both  preferred  and  com- 
mon stock  by  canceling  one-half,  the 
court  will  refuse  where  it  is  shown 
that  a  large  sum  had  been  passed  to 
a  reserve  fund  and  profit  and  loss.  Re 
Barrow,  etc.  Co.,  Ltd.,  [1902]  2  Ch.  746. 
Under  the  English  statute  a  reduc- 
tion of  the  capital  stock  reduces  the 
preferred    as    well    as    the    common 


800 


CH.    XVII.]  INCREASE,  REDUCTION,  ETC.  OF  STOCK.  [§    290, 

for  cash.  This  would  be  unfair  to  the  remaining  stockholders.1  The 
by-laws  may  provide  that  any  surplus  carried  to  the  reserve  may 
subsequently  be  used  for  dividends  to  make  good  lost  capital,  or  to 
apply  to  any  other  purpose  within  the  charter  powers  of  the  company. 
Such  reserve  need  not  be  represented  by  specific  property  set  apart, 
but  may  be  a  part  of  the  general  assets.  In  case  of  a  loss,  a  part  of 
the  reserve  may  be  used  to  cancel  the  loss,  and  part  may  be  cancelled 
by  reducing  the  capital  stock,  although  this  process  will  leave  a  re- 
serve available  at  once  for  dividends  after  the  loss  has  been  charged 
off.  A  reserve  differs  from  a  reserve  fund  in  that  the  latter  repre- 
sents specific  property  set  apart  and  the  former  does  not.2 

A  reduction  of  the  capital  stock  is  effected  only  when  all  statu- 
tory formalities  have  been  complied  with.3  But  corporate  creditors 
who  become  such  after  a  reduction  of  the  capital  stock  has  been 
made  cannot  claim  that  such  reduction  was  irregularly  made  and 
that  the  holders  of  the  canceled  capital  stock  are  consequently  liable 
still.4 

§  290.  Change  in  the  number  or  par  value  of  the  shares. — It  is  a 
well-settled  principle  of  law  that  the  number  of  shares  into  which 
the  capital  stock  has  been  divided,  and  the  par  value  of  those  shares, 
can  neither  be  increased  nor  diminished  without  express  warrant  of 
authority  either  from  the  legislature  or  the  charter  of  the  company.5 

stock.     Bannatyne  v.  Direct,  etc.  Co.,  capital   stock  has  been  regularly  re- 

L.  R.  34  Ch.  D.  287  (1886).     See  also  dueed,  such  certificate  cannot  be  ques- 

§  641,  infra.  tioned,  even  though  the  reduction  was 

i  Theiss     v.     Durr     125     "Wis.     651  not  made  in  accordance  with  the  stat- 

(1905).  ute.     Ladies',  etc.  Assoc,  Ltd.  v.  Pul- 

2  Re  Hoare  &  Co.  Ltd.,  [1904]  2  Ch.  brook,    81    L.    T.    Rep.    300     (1899); 
208.  aff'd,  [1900]  2  Q.  B.  376. 

3  See  Moses  v.  Ocoee  Bank,   1  Lea  4  Gade  v.  Forest,   etc.   Co.,   165   111. 
(Tenn.),     398     (1878),    holding    that,  367    (1897). 

where  a  corporation  has  power  under  5  Salem  Mill-dam  Corp.  v.  Ropes,  23 

its  charter  to  reduce  its  capital  stock,  Mass.  23  (1827);  Re  Financial  Corpo- 

it    must    clearly    appear    that    it   has  ration   (Holmes's  Case),  L.  R.   2  Ch. 

ordered   the    reduction    to    be    made;  App.  714,  733   (1867);   Droitwich  Salt 

neither  equivocal  acts  nor  inferences  Co.  v.   Curzon,  L.  R.  3   Exch.   35,   42 

nor  unauthorized  acts  of  a  president  (1867);    Smith  v.   Goldsworthy,  4  Q. 

or  director  will   be  sufficient;    Ferris  B.  430   (1843).     Cf.  Sewell's  Case,  L. 

v.   Ludlow,   7   Ind.   517    (1856),   hold-  R.  3  Ch.  App.  131  (1868).    A  corpora- 

ing    that    where    the    records    of    a  tion  has  no  implied  power  to  change 

company  showed  that  propositions  to  the  number  or  par  value  of  its  stock, 

reduce  its  stock  had  been  made,  but  The  stock  as  so  changed  is  void,  and 

failed  to  show  any  acceptance,  there  the    holders    are    not    liable    thereon 

was  no  reduction.    See  also  Grangers',  even     to     corporate     creditors,     and 

etc.   Ins.  Co.  v.  Kamper,  73  Ala.  325  even  though  the  money  paid  by  them 

(1882).     Where  by  statute  an  official  for   the   stock   has   been   returned   to 

certificate  is  conclusive  proof  that  the  them.     Tschumi  v.  Hills,  6  Kan.  App. 
(51)                                               801 


§   291.]  INCREASE,  REDUCTION,  ETC.  OF  STOCK.  [CH.   XVII. 

When,  however,  the  charter  does  not  fix  the  number  or  amount  of  the 
shares,  it  devolves  upon  the  stockholders  or  directors  to  fix  them ; 
and  in  such  a  case  it  seems  that  the  limit  established  might  lawfully 
be  changed  without  special  authority.1 


B.  ILLEGAL  INCREASE  OF  STOCK,  BEING  OVERISSUED  STOCK. 

§  291.  Unauthorized  increase  of  stock  may  amount  to  overissued 
stocks — Where  the  full  capital  stock  of  a  corporation  has  been  issued, 
and  there  is  no  statute  or  charter  provision  authorizing  an  increase  of 
the  stock,  it  is  clear  that  any  issue  of  stock  in  excess  of  the  capital 
stock  is  not  a  legitimate  increase  of  the  capital  stock.  It  is  unautho- 
rized and  illegal,  and  is  termed  in  law  an  overissue  of  stock.  There  is 
a  clear  distinction  between  overissued  stock  and  an  irregular  increase 
of  stock.  The  former  is  where  an  attempted  increase  of  the  stock  is 
made,  although  no  increase  is  authorized  by  the  charter  or  by  statute. 
The  latter  occurs  when  there  is  a  statutory  or  charter  provision 
authorizing  an  increase  of  the  stock,  but  the  formalities  prescribed  for 
making  that  increase  have  not  been  strictly  complied  with.  Over- 
issued stock  is  void,  while  an  irregular  increase  of  stock  is  merely 
voidable. 

The  issue  by  a  corporation  of  new  certificates  of  stock  in  place 
of  lost  certificates  does  not  constitute  an  overissue  of  stock.2  x\n 
overissue  of  stock  often  arises  by  forgery  on  the  part  of  an  officer 

549    (1897).     "A   corporation   with,   a  wealth  v  Central  Transp.  Co.,  145  Pa. 

fixed  capital,  divided  into  a  fixed  num-  St.  89  (1891).    A  reduction  of  the  par 

ber  of  shares,  can  have  no  power  of  value  of  the  common   stock  and  not 

its  own  volition,  or  by  any  act  of  its  of   the   preferred    is   not    allowed    in 

officers  and  agents,  to  enlarge  its  cap-  England.     Re  Union,  etc.   Co.,   L.  R. 

ital  or  increase  the  number  of  shares  42  Ch.  D.  513  (1889). 

into  which  it  is  divided.    The  supreme  i  Somerset,   etc.   R.   R.   v.   Cushing, 

legislative    power    of    the    state    can  45  Me.   524    (1858);    Ambergate,    etc. 

alone  confer  that  authority."     It  can-  Ry.  v.  Mitchell,  4  Exch.  540    (1849); 

not   be   increased   "by   the   covert   or  Re  European  Cent.  Ry.,  L.  R.   8  Eq. 

fraudulent  efforts  of  one  or  more  of  438   (1869).     It  has  been  held  allow- 

the  agents  of  the  corporation."     New  able   for   the   company   to   allow   the 

York,   etc.   R.   R.   v.   Schuyler,   34   N.  holders   of   paid-up   shares  to   return 

Y.    30,     49     (1865).      Cf.     Scovill    v.  them  and  take  in  exchange  shares  of 

Thayer,  105  U.  S.  143  (1881).    Where  double  the  par  value  as  half  paid  up, 

all  the  shares  are  reduced  in  par  value  and   vice  versa,  both   kinds   of  stock 

from  $50  to   $38,  and  the  $12  differ-  being  authorized.     Teasdale's  Case,  L. 

ence   is   paid   to   the   stockholders   in  R.  9  Ch.  App.  54  (1873). 

cast,    this   is   a   reduction    of   capital  2  Kinnan  v.  Forty-second,  etc.  R.  R., 

stock  and  not  a  dividend,  and  cannot  21  N.  Y.  Supp.  789   (1893);   aff'd,  140 

be    taxed    as    a    dividend.      Common-  N.  Y.  183.     See  also  §§  358-362,  infra. 

S02 


en.   XVII.]  increase]* REDUCTION,  ETC.  OF  STOCK.  [§§  292,  293. 

of  the  corporation  who  forges  the  necessary  names  of  the  corporate 
officers  to  a  certificate  and  puts  it  in  circulation.1 

§  292.  Overissued  stock  is  absolutely  void.— By  overissued  stock 
is  to  be  understood  stock  issued  in  excess  of  the  amount  limited  and 
prescribed  by  the  act  of  incorporation.  Certificates  of  stock  issued 
in  excess  of  the  certificates  that  represent  the  full  authorized  capi- 
tal stock  of  the  corporation  represent  overissued  stock.  Such  stock 
is  spurious  and  wholly  void.  This  is  the  settled  law,  and  it  prevails 
equally  whether  the  overissue  is  the  result  of  accident  or  mistake, 
or  want  of  knowledge  of  the  law,  or  is  due  to  fraud  and  intentional 
wrong-doing.  The  animus  or  intent  of  the  parties  to  the  overissue 
is  not  material.  Overissued  stock,  no  matter  how  overissued,  rep- 
resents nothing,  and  is  wholly  and  entirely  valueless  and  void.2  So 
rigid  and  well  established  is  this  rule  that  not  even  a  bona  fide  holder 
of  such  stock  can  give  to  it  any  validity  or  vitality.  Overissued  or 
spurious  stock  may,  however,  it  seems,  be  legalized  by  a  subsequent 
legal  increase  of  the  capital  stock.3 

§  293.  Liability  of  the  corporation  as  to  overissued  stock  —  Who 
is  a  bona  fide  holder. — Although  it  is  settled  law  that  overissued 
stock  is  void  and  valueless,  and  that  no  action  lies  either  to  compel 
the  corporation  to  recognize  the  holder  as  a  stockholder,  or  to  issue 
in  place  thereof  a  valid  certificate,  yet  where  overissued  certificates 
of  stock,  signed  or  purporting  to  be  signed  by  the  corporate  officers 
having  the  authority  to  issue  stock,  and  actually  issued  by  such  offi- 
cers, are  purchased  by  any  person,  or  are  taken  in  any  manner  in  good 

i  See  §  293,  infra.  not  refuse  to  recognize  a  stockholder 

2  Quoted  and  approved  in  First  Ave.  of    record    as    a    stockholder    on    the 

etc.  Co.  v.  Parker,  111  Wis.  1   (1901).  ground  that  the  certificate  to  him  was 

The-  leading  case   on  this  subject   is  an    over-issue   where   the   transferrer 

New  York,  etc.  R.  R.  v.  Schuyler,  34  owned  that  amount  of  stock  and  trans- 

N.  Y.  30    (1865);   Hayden  v.  Charter  ferred  the  same  to  such  stockholder 

Oak     Driving     Park,     63     Conn.     142  of  record,  even  though  the  corporation 

(1893).     Cf.  Mechanics'  Bank  v.  New  subsequently  issued  the  same  amount 

York,  etc.  R.  R.,  13  N.  Y.  599    (1856).  of  stock  to  other  parties  on  transfers 

See  also  as  to  the  point  that  overis-  from  the  original  holder.    Richardson 

sued  stock  is  void  even  in  the  hands  v.  Longmont,  etc.  Co.,   19  Colo.  App. 

of  bona  fide  holders.     People's  Bank  483    (1904). 

v.  Kurtz,  99  Pa.  St.  344  (1882) ;  Bruff        3  Sewell's  Case  L.  R.  3  Ch.  App.  131 

v.  Mali,  36  N.  Y.  200    (1867);    People  (1868);     New    York,    etc.    R.    R.    v. 

v.  Parker  Vein  Coal  Co.,  10  How.  Pr.  Schuyler,  34  N.  Y.  30,  56,  57    (1865). 

543  (1854);   Sewell's  Case,  L.  R.  3  Ch.  A     reorganized     company     may     be 

App.    131,   138    (1868);    Wright's  Ap-  charged  with  notice  of  the  reorganiza- 

peal,  99  Pa. 'St.  425  (1882);  Scovill  v.  tion  agreement,  and  may  be  estopped 

Thayer,   105    U.    S.    143    (1881).      See  from  complaining  that  a  part  of  the 

also  §  281,  supra.    A  corporation  can-  securities  issued   by  the  old  corpora- 
SOS 


§   293.]                        INCREASE,  REDUCTION,  ETC.  OF  STOCK.  [cil.    XVII. 

faith  and  for  value,  such  bona  fide  holder  may  sue  the  corporation 
and  recover  damages.1 

tion    were    overissues.      Davidson    v.  the  corporation  refuses  to  transfer  the 
Mexican  National  R.  R.,  11  N.  Y.  App.  same  on  the  ground  that  it  was  over- 
Div.  28  (1896).  issued   stock,   the   vendee   has   no   re- 
i  Quoted  and  approved  in  First  Ave.  course  against  the  corporation  if  he 
etc.  Co.  v.  Parker,  111  Wis.  1   (1901).  delivers  the  notes  to  the  vendor  after 
New  York,  etc.  R.  R.  v.  Schuyler,  34  receiving  such  information  from  the 
N.  Y.  30,  49,  60  (1865);  Bruff  v.  Mali,  corporation.     In  this  case  the  vendor 
36  N.  Y.  200    (1867);    Titus  v.  Great  was  president  of  the  corporation.  Hay- 
Western  Turnp.,  5  Lans.  250   (1872);  den  v.  Charter  Oak  Driving  Park,  63 
s.  c,  61  N.  Y.   237    (1874);    Bank  of  Conn.   142    (1893).     Where  the  secre- 
Kentucky  v.  Schuykill  Bank,  1  Pars,  tary  of  a  company  fraudulently  makes 
Sel.   Cas.  180,  216    (1846).     This  was  out  a  transfer  of  stock  and  delivers 
a  suit   in   equity   by  a  bank   against  it  to  a  bona  fide  purchaser,  and  the 
another    bank    which,    acting    as    its  company  recognizes  the  transfer  at  a 
transfer  agent,  had  made  a  large  over-  board  meeting  and  issues  a  new  cer- 
issue  of  its  stock.     Tome  v.  Parkers-  tificate    and    pays    dividends    on    the 
burg  Branch  R.  R.,  39  Md.  36  (1873);  stock,   the   company   is   liable   to   the 
Willis  v.   Philadelphia,   etc.   R.   R.,   6  person  to  whom  the  stock  was  so  is- 
W.  N.  Cas.  461  (1878);  Willis  v.  Fry,  sued.      Dixon    v.    Kennaway    &    Co., 
13    Phila.    33    (1879);    People's   Bank  [1900]  1  Ch.  833.     Frequently  the  de- 
r.  Kurtz,  99  Pa.  St.  344    (1882).     See  cision     turns     on     the     question     of 
also  Daly  v.  Thompson,   10  M.  &  W.  whether    the    holder    is    a    bona   fide 
309   (1842);  Re  Bahia,  etc.  Ry.,  L.  R.  holder.    A  bond  or  debenture  payable 
3    Q.    B.    584,    595    (1S68);    Simm    v.  to  bearer,  unless  registered,  is  a  ne- 
Anglo-Amer.  Tel.  Co.,  L.  R.  5  Q.  B.  D.  gotiable  instrument,  and  a  bona  fide 
188    (1879);    Waterhouse   v.   London,  pledgee  of  the  same  from  the  secre- 
etc.   Ry.,   41   L.   T.   Rep.   553    (1879);  tary  of  the  company  is  protected,  even 
Mandlebaum  v.  North  Am.  Min.  Co.,  4  though     the     secretary     fraudulently 
Mich.   465    (1857);    Wright's   Appeal,  stole    the    bond    from    the    company 
99   Pa.   St.   425    (1882).     In  many  of  itself.     Bechuanaland,  etc.  Co.  v.  Lon- 
these  cases  the  overissue  was  due  to  a  don,   etc.   Bank  2    Q.    B.    658    (1898), 
mistake  of  the  corporation   in  allow-  the   court  refusing  to  follow   Crouch 
ing  a  transfer  of  stock.     The  failure  v.  Credit  Foncier  of  England,  L.  R.  8 
to   surrender   an   old   certificate   does  Q.  B.     Where  a  trustee  has  deposited 
not  give  a  purchaser  of  stock  notice  funds  with  a  bank  as  trustee  for  a 
that    an    overissue    is    being    made,  long    time,    and    obtains    a    loan    as 
Allen  v.  South  Boston  R.  R.,  150  Mass.  trustee  and  pledges  bonds  as  security, 
200    (1889).    A  party  who  purchases  the  bank  may  be  a  bona  fide  holder  of 
overissued   stock,   but    is   not   a   pur-  the  same,  even  though  the  bonds  have 
chaser   in   good  faith   for   full   value,  been    stolen    and    have    been    issued 
cannot  hold  the  company  liable  where  twenty   years   prior    thereto   and   the 
the  stock  was  issued  by  the  executive  corners  appear  to  have  been  burned, 
committee  without  authority.     Ryder  Depositing  funds  as  "trustee"  did  not 
v.    Bushwick    R.    R.,    134    N.    Y.    83  give   notice    that   he   was   acting   for 
(1892);     aff'g    10    N.    Y.    Supp.    748.  others  and  did  not  require  an  investi- 
Where   a   party   contracts   to    deliver  gation  as  to  his  authority.     Manhat- 
notes    for   stock    and   before    the    de-  tan  Sav.  Inst.  v.  N.  Y.  etc.  Bank,  170 
livery  of  the  notes  the  stock  is  sent  N.  Y.  58    (1902).     A  purchaser  with 
to  the  corporation  for  transfer,   and  notice  from  a  bona  fide  purchaser  is 

804 


CH.    XVII.]  INCREASE,  REDUCTION,  ETC.  OF  STOCK.  [§   293. 

There  is,  however,  a  very  important  limitation  to  this  rule.  It 
is  well  established  that  a  person  dealing  with  an  officer  of  a  cor- 
poration in  a  matter  in  which  the  officer  is  personally  interested  is 
not  a  bona  fide  holder  of  corporate  securities  received  by  him  from 
the  officer  in  that  transaction.  He  is  bound  to  inquire  into  the 
legality  of  any  stock  or  corporate  note  which  such  officer  issues  or 
transfers  to  him  in  the  officer's  personal  business,  and  is  chargeable 
with  notice  of  illegalities  in  the  issue.1  This  rule  applies  particu- 
larly to  overissued  or  fraudulently-issued  stock.  A  person  receiv- 
ing stock  from  a  corporate  officer  as  collateral  security  for  a  per- 
sonal obligation  of  such  officer,  or  purchasing  stock  from  such  officer, 
is  bound  to  inquire  into  the  legality  of  the  issue.  He  is  not  a  bona 
fide  holder,  and  cannot  hold  the  corporation  liable  on  the  ground  that 
the  stock  was  spurious.2 

protected  as  a  bona  fide  purchaser  (1905).  The  holder  of  the  personal 
himself.  Board  of  Commissioners,  note  of  the  treasurer  of  a  corporation 
etc.  v.  Sutliff,  97  Fed.  Rep.  270  (1899).  who  takes  from  him  a  corporate 
In  Montana  a  strange  decision  was  check  in  payment  thereof  is  bound  to 
rendered  that  a  purchaser  of  a  cer-  investigate.  Manhattan  Web  Co.  v. 
tificate  of  stock  endorsed  in  blank,  Aquidneck  Nat.  Bank,  133  Fed.  Rep. 
the  vendor  not  being  the  original  76  (1904).  Where  the  selling  agents 
owner,  was  not  a  bona  fide  purchaser,  of  a  corporation,  the  principal  part- 
Barker  v.  Montana,  etc.  Co.,  89  Pac.  ner  in  which  agency  was  the  presi- 
Rep.  66   (Mont.  1907).  dent  of  the  corporation,  discounts,  at 

i  Quoted    and    approved    in    In   Re  a  bank,  drafts  by  the  corporation  on 

Troy  etc.  Co.,  136  Fed.  Rep.  420,  433,  such     selling     agents,     the     bank     is 

(1905);   aff'd  142  Fed.  Rep.  1038.  chargeable  with  notice  that  the  paper 

2  Farrington  v.  South  Boston  R.  R.,  was  accommodation  paper.  Cook  v. 
150  Mass.  406  (1890);  Moores  v.  Cit-  American,  etc.  Co.,  65  Atl.  Rep.  641 
izens'  Nat.  Bank,  111  U.  <S.  156  (R.  I.  1905).  Where  a  corporation 
(1884);  Wilson,  v.  Metropolitan  El.  issues  a  promissory  note  to  a  di- 
Ry.,*  120  N.  Y.  145  (1890).  See  also  rector,  a  purchaser  thereof  is  bound 
§§  7?7  and  766,  infra.  Where  the  to  investigate.  Orr  v.  South  Amboy, 
president  of  a  bank  signs  certificates  etc.  Co.,  47  N.  Y.  Misc.  Rep.  604 
of  stock  in  blank  and  endorses  them  (1905).  A  bank  loaning  money  to  a 
to  the  cashier  and  the  cashier  also  firm  and  taking  negotiable  bonds  as 
signs  them  and  fraudulently  pledges  security  is  not  chargeable  with  notice 
them  for  his  own  debt,  the  bank  is  that  the  bonds  were  improperly  is- 
liable  to  the  pledgee,  even  though  the  sued,  even  though  two  of  the  mem- 
stock  was  made  out  to  the  cashier  and  bers  of  the  firm  are  directors  in  the 
was  endorsed  by  him  in  blank.  Ha-  corporation  which  issued  the  bonds, 
vens  v.  Bank  of  Tarboro,  132  N.  C.  214  Farmers',  etc.  Co.  v.  Madison  Mfg.  Co., 
(1903).  A  bona  fide  purchaser  of  an  153  Fed.  Rep.  310  (1906).  It  is  to  be 
accommodation  corporate  note  may  borne  in  mind  that  a  certificate  of 
enforce  the  same,  even  though  it  is  stock  is  not  a  negotiable  instrument 
endorsed  to  a  co-partnership  in  which  like  a  bond  or  note,  and  although  cer- 
two  of  the  officers  are  interested,  and  tificates  of  stock  have  been  given 
then  they  endorse  it  personally.  In  many  of  the  elements  of  negotiability 
Re  Troy,  etc.  Co.,  136  Fed.  Rep.  420  in  America  by  application  of  the  law 

805 


§   293.]  INCREASE,   REDUCTION,  ETC.   OP  STOCK.  [CH.    XVII. 

It  is  to  be  borne  in  mind  also  that  a  purchaser  of  negotiable 
paper  without  notice  to  be  entitled  to  protection,  must  not  only  be 

of    estoppel,    yet   there   are   some    in-  the   proper   person   to   deliver   certifi- 

stances  in  which  a  certificate  of  stock  cates  to  shareholders.     Ruben,  etc.  v. 

falls  short  of  full  negotiability.     See  Great,    etc.    Co.,    95    L.    T.    Rep.    214 

§§411,    412,    infra.      The    corporation  (1906),  aff'g  [1905]  2  K.  B.  712;  rev'g 

waives  its  claim  against  a  person  tak-  [1904]    1  K.   B.   650,  and  questioning 

ing  a  corporate  check  from  the  presi-  Shaw  v.  Port  Philip,  etc.  Co.,  13  Q.  B. 

dent    in   payment   of    the    president's  D.     103.      Where     a    corporate    note 

personal    obligation,    if    the    corpora-  signed  by  the  president  is  payable  to 

tion    has    settled    the    matter   by    ac-  the  order  of  the  president  himself  this 

cepting  the  obligation  of  a  third  per-  is   "a   danger   signal    which   the    dis- 

son  in  payment  of  the  president's  ob-  counter    or    purchaser    disregards    at 

ligation.      Security,    etc.    Co.    v.    Am.,  his  peril."     Capital,  etc.  Co.  v.  Jack- 

etc.   Bank,    US   N.   Y.  App.  Div.,    350  son,  59  S.  E.  Rep.  92  (Ga.  1907).  The 

(1907).    The  rule  that  a  person  taking  person  purchasing  stock  from  the  sec- 

a  corporate  note  from  an  officer  in  a  retary   as   an    individual,    or   loaning 

matter  personal  to  him  is  bound  to  in-  money  to  the  secretary  as  an  individ- 

vestigate   as   to    whether   the   papers  ual  on  similar  spurious  forged  stock, 

authorize  it,  does  not  apply  to  a  note  cannot  hold  the  corporation  liable.  Lu- 

taken  from  a  director.    Orr  v.  South  cile,  etc.  Co.  v.  Willard,  89  Pac.  Rep. 

Amboy,  etc.  Co.,  113  N.  Y.  App.  Div.  935    (Wash.  1907).    Even  though  the 

103    (1906).  Where  corporate  officers,  president  and  secretary-treasurer  of  a 

who  are  authorized  to  sign  an  issue  of  manufacturing  company  own  all  the 

certificates    of    stock,    sign    them    in  stock,  yet  if  the  president  uses  a  check 

blank  and  entrust  them  to  the  chief  of  the  corporation,  payable  to  its  own 

executive   officer   to   be   filled   in   and  order  and  endorsed  by  it,  to  pay  his 

delivered   to   persons,   who   surrender  personal     debt,     corporate     creditors, 

certificates  for   transfer,   and  he  fills  upon  the  insolvency  of  the  corporation, 

in    his   own   name   and   then   pledges  may  compel  the  trust  company  that 

the    certificate    for    a    personal    loan  cashed  the  check  to  refund  the  money, 

to     himself,     the     pledgee,     if     bona  Ward  v.  City  Trust  Co.,  192  N.  Y.  61 

fide,   is   protected   and   may   hold   the  (1908),  rev'g  117  N.  Y.  App.  Div.  130, 

corporation     liable    for    the    market  the   court   intimating   that   the   trust 

value  of  similar  stock.    American  Ex-  company  would  have   been   protected 

change  Nat.  Bank  v.  Woodlawn  Ceme-  if     inquiry     by     it     would     not    have 

tery,  120  N.  Y.  App.  Div.  119    (1907).  resulted     in     developing     the     actual 

A  pledgee  of  bonds  of  a  corporation  facts. 

from   an  officer  of  a  corporation  for  A    person    who    accepts    from    the 

his  personal  debt,  is  not  protected  and  treasurer  of  a  corporation  the  check 

is  liable    if  he   sells  the  bonds   to  a  of   the   company   in   payment   of   the 

bona  fide  purchaser.    Medina,  etc.  Co.  treasurer's  individual   debts,   he  hav- 

v.  Buffalo,  etc.  Co.,  119  N.  Y.  App.  Div.  ing   no   apparent   authority   to    make 

245    (1907).     A   person   taking   from  such  check,  may  be  compelled  to  re- 

the  secretary  of  the  company  as  se-  pay    the    money    to    the    corporation 

curity   for   a   personal    loan    to   him,  where  the  payment  was  illegal.  Roch- 

certificates  which  he  had  forged,  can-  ester,   etc.   Co.  v.   Paviour,   164   N.  Y. 

not    hold    the    company    liable,    even  281    (1900).     Where  the  trustee  of  a 

though   the   certificates   were   regular  mortgage  the  day  after  the  mortgage 

as  to  form,  and  were  sealed  with  the  is     executed     accepts     some     of     the 

corporate  seal  and  the  secretary  was  mortgage  bonds  from  the  secretary  as 

806 


CH.    XVII.] 


INCREASE,  REDUCTION,  ETC.  OP  STOCK. 


[§  293. 


so  at  the  time  of  the  contract,  but  also  at  the  time  of  the  payment  of 
the  purchase  money,  and  if  he  receives  notice  of  defenses  after  he 


collateral  security  for  a  personal  loan    Reynolds,  etc.  Co.  v.  Merchants',  etc. 


to  the  secretary  and  it  transpires  that 
such  pledge  was  in  breach  of  trust  by 
the  secretary,  the  trustee  is  not  pro- 
tected as  pledgee.  Buffalo,  etc.  Co.  v. 
Medina,  etc.  Co.,  162  N.  Y.  67  (1900). 
A  party  taking  from  the  president,  as 
security  for  a  loan  to  him  personally, 
warehouse  receipts  issued  by  the  cor- 
poration is  not  a  bona  fide  holder. 
Bank  of  N.  Y.  etc.  Assoc,  v.  Ameri- 
can Dock,  etc.  Co.,  143  N.  Y.  559 
(1894).  Cf.  Hanover  Nat.  Bank  v. 
American  Dock  Co.,  75  Hun,  55 
(1894).  Where  a  corporate  note  is 
issued  to  a  third  person  and  then 
passes  into  the  hands  of  an  officer, 
the  person  taking  it  from  the  officer  is 
not  affected  by  the  rule  that  a  person 
taking  corporate  paper  in  its  original 
issue  by  a  corporation  is  bound  to  as- 
certain the  facts  if  the  officer  is  per- 
sonally interested  in  the  transaction. 
Cheever  v.  Pittsburgh,  etc.  R.  R.,  150 
N.  Y.  59  (1896).  A  purchaser  or 
pledgee  of  bonds  from  a  director  may 
be  a  bona  fide  holder,  even  though  he 
knew  that  he  was  dealing  with  a  di- 
rector, inasmuch  as  a  director  may 
be  a  lawful  holder  of  such  bonds. 
Duncomb  v.  N.  Y.  etc.  R.  R.,  84  N.  Y. 
190  (1881).  See  also  Claflin  v.  Farm- 
ers', etc.  Bank,  25  N.  Y.  293  (1862), 
where  the  certification  of  his  personal 
check  by  the  president  of  a  bank  was 
considered  to  constitute  such  a  sus- 
picious circumstance  as  should  put  a 
purchaser  upon  his  guard  and  render 
the  certification  invalid  even  in  the 
hands  of  a  bona  fide  holder  for  value. 
A  bank  may  be  a  bona  fide  pledgee  of 
stock  from  its  cashier,  even  though 
such  stock  is  in  the  name  of  a  third 
person  and  is  indorsed  by  the  latter. 
Brady  r.  Mount  Morris  Bank,  65  N. 
Y.  App.  Div.  212  (1901).  Where  the 
president  pays  his  personal  debt  by  a 
check  on  the  corporation  the  payee  is 
bound   to   investigate    such   payment. 


Bank,  55  N.  Y.  App.  Div.  1  (1900).  A 
person  taking  the  note  of  a  railroad 
company  payable  to  the  order  of  the 
private  secretary  of  the  president  and 
indorsed  by  such  private  secretary  is 
bound  to  inquire  into  the  issue  of  the 
note.  Cheever  v.  Pittsburgh,  etc.  R. 
R.,  28  N.  Y.  App.  Div.  81  (1898).  A 
person  taking  bonds  from  a  corpora- 
tion to  secure  a  private  debt  is  bound 
to  ascertain  the  right  of  the  officer  to 
so  issue  the  bonds.  Germania,  etc.  Co. 
v.  Boynton,  71  Fed.  Rep.  797  (1896). 
In  the  federal  courts  a  person  taking 
from  the  president  of  a  corporation 
a  note  signed  by  the  corporation  and 
indorsed  by  him  is  not  bound  to  in- 
quire into  the  consideration.  Doe  v. 
Northwestern  Coal,  etc.  Co.,  78  Fed. 
Rep.  62  (1896).  Bankers  receiving  a 
draft  of  the  president  of  a  bank  on 
the  bank  itself  for  margins  may  be 
compelled  to  refund  the  money  to  the 
bank.  Lamson  v.  Beard,  94  Fed.  Rep. 
30  (1899).  Brokers  receiving  bank 
drafts  from  the  president  in  settle- 
ment of  his  private  account  are  bound 
to  investigate.  Beard  v.  Milmine,  88 
Fed.  Rep.  868  (1898).  A  person  tak- 
ing from  the  president  the  corporate 
note  running  to  the  president  and  in- 
dorsed by  him  is  not  a  bona  fide  hold- 
er. Park  Hotel  Co.  v.  Fourth  Nat. 
Bank,  86  Fed.  Rep.  742  (1898). 
Where  a  purchaser  of  bonds  knows 
that  he  is  purchasing  from  an  agent 
of  the  corporation,  and  that  the  agent 
intends  to  use  the  proceeds  for  his 
private  purposes,  he  is  not  a  bona  fide 
purchaser.  Chew  v.  Henrietta,  etc. 
Co.,  2  Fed.  Rep.  5  (1880).  A  principal 
taking  bonds  as  collateral  security  to 
a  note  sent  to  him  by  his  agent  is  not 
chargeable  with  notice  of  the  fact 
that  the  agent,  as  the  agent  of  a  cor- 
poration, has  fraudulently  put  the 
bonds  into  circulation.  Thomson- 
Houston  Electric  Co.  v.  Capitol  Elec- 


S07 


§  203.] 


INCREASE,   REDUCTION.  ETC.   OF  STOCK. 


[ch.  xvn. 


has  partly  paid  the  purchase  price,  he  is  protected  only  to  the  extent- 


trie  Co.,  56  Fed.  Rep.  849  (1893).  But 
overissued  stock  issued  by  the  presi- 
dent  to   his    private   debtor,    in    pay- 
ment  of   his   private   debt,    has   been 
held  not  to  confer  on  such  debtor  a 
right  to  hold  the  corporation  respon- 
sible.     Wright's    Appeal,    99    Pa.    St. 
425    (1882).     In  this   case   the   court 
assumes    that    the    debtor    could    not 
be    heard   to    claim    tona    fides.     Al- 
though the  husband  is  in  possession 
of  a  certificate  of  stock  running  to  his 
wife  and  transferred  in  blank  by  her, 
yet  he  cannot  deliver  the  same  in  pay- 
ment of  his  personal  debt.     The  pur- 
chaser is  not  a  bona  fide  purchaser. 
Wilson  v.  Wilson-Rogers,  181  Pa.   St. 
80  (1897).    The  fact  that  stock  stands 
in  the  name  of  the  wife  and  is  trans- 
ferred by  her  in  blank  and   is  then 
pledged  by  her   husband   for  his   in- 
dividual_debt  does  not  put  the  pledgee 
on  notice  that  the  husband  is  misap- 
propriating   the    wife's    stock.      Mc- 
Manus   p.   Laughlin,    186   Pa.   St.   498 
(1898).      A   person    taking   from    the 
treasurer  of  a  corporation  its   check 
in  payment  of  the  treasurer's  personal 
debt  must  inquire  whether  the  treas- 
urer was  authorized  to  use  the  money 
for  that  purpose.     Mt  Verd,  etc.  Co. 
r.  McElwee,  42  S.  W.  Rep.  465  (Tenn. 
1897).     A  person  taking  a  corporate 
note   from   an   officer   for   a   personal 
liability  is  protected,  even  though  the 
issue  of  the  note  was  not  legal,  if  it 
turns  out  that  the  books  showed  that 
the  company  authorized  the  note  and 
afterwards  affirmed  it.     St.   Joe,  etc. 
Co.  p.  First  Nat.  Bank,  10  Colo.  App. 
339    (1897).     A  bank   taking   a  note 
of  a  corporation  payable  to  its  presi- 
dent and  indorsed  by  him  to  the  bank 
cannot  collect  the  note  as  against  the 
corporation   if   it  was  merely  an   ac- 
commodation   note,    but    where    the 
note  was   indorsed   by   two   directors 
they    are    liable    to    the    bank,    even 
though  the  corporation  is  not.    Klein 
r.    German    Nat.    Bank,    69    Ark.    140 
(1901).    A  bank  is  not  liable  for  the 


proceeds  of   a   note  which   it   credits 
to  an  agent  of  a  corporation  on  paper 
signed     by     the     corporation,     even 
though    such   agent   is   the   president 
of    the    bank,    and    even    though    the 
agent    had    no    right    to    have     the 
proceeds    so     credited    to    him     per- 
sonally.    City,   etc.   Co.    v.   First  Nat. 
Bank,  65  Ark.  543    (1898).     The  fact 
that   the   treasurer   of   a   corporation 
pledges  certain  of  its  bonds  as  secur- 
ity for  his  note  is  not  notice  that  he 
had  obtained  the  bonds  fraudulently. 
Rockville,  etc.  Bank   r.   Citizens',  etc. 
Co.,  72  Conn.  576   (1900).    A  creditor 
of  an  officer  of  a  corporation  receiv- 
ing   the   securities    of    such    corpora- 
tion as  security  for  his  debt  is  charge- 
able  with   notice   of   any   fraud    con- 
nected therewith.     Wheeler  p.  Home, 
etc.      Bank,      188      111.      34       (1900). 
A  note  of  a  corporation  payable  to  the 
order   of   its   president   and   indorsed 
by  him  is  presumed  to  be  illegal  and 
is  not  binding  on  the  corporation  un- 
less it  is  proved  that  it  was  for  the 
benefit  of  the  corporation.     Porter  p. 
Winona,  etc.  Co.,  78  Minn.  210  (1899). 
A  person  taking  from  the  treasurer  a 
note  of  the  corporation  payable  to  the 
order  of  the  treasurer   and   indorsed 
by  him  is  bound  to   inquire  into  the 
legality  of  the  note  where  such  note 
is  taken  for  a  personal   debt  of  the 
treasurer.     Randall   p.  Rhode  Island, 
etc.   Co.,   20   R.   I.   625    (1898).     Even 
though  the  president  of  a  company  is 
the  maker   of   a  note   the  holder   of 
such  note  is  not  chargeable  with  no- 
tice thereby  that  the  corporation  was 
an    accommodation    indorser    of    the 
same.      Hiawatha,    etc.    Co.    v.    John 
Strange,  etc.  Co.,  106  Wis.  Ill  (1900). 
Where    the    president,    who    is    also 
managing   director,   presents   for   dis- 
count a  note  running  to  himself  and 
indorsed  both  by  him  and  the  corpora- 
tion, and  states  that  the  proceeds  are 
to  be  used  to  pay  a  corporate  obliga- 
tion, the  purchaser  of  the  note  is  pro- 
tected.     Orvis    v.    Warner   &   Co.,    75 


808 


CH.    XVII.] 


INCREASE,  REDUCTION,  ETC.  OF  STOCK. 


[§  293. 


of  the  payment  already  made.1  An  assignment  or  bill  of  sale  of 
bonds  and  coupons  to  a  person  who  knows  nothing  thereof  until 
nine  years  thereafter,  the  purpose  being  solely  to  enable  him  to  bring 
suit  in  his  name  in  the  United  States  court,  conveys  no  title.2  It  is  a 
question  whether  a  person  purchasing  bonds  of  a  newly  formed 
corporation  at  par,  with  a  bonus  of  stock,  is  a  bona  fide  purchaser, 
even  though  he  made  such  purchase  not  from  the  corporation,  but  from 
a  third  person.3  Where  a  certificate  of  stock  is  forged  by  persons 
other  than  the  corporate  officers,  the  corporation  is  of  course  not  liable 
thereon  unless  it  has  recoernized  such  certificate  in  some  way.4  But 
where  the  forgery  was  by  a  corporate  officer,  or  has  been  recognized 
in  some  way  by  the  corporation,  difficult  questions  arise.  The  law 
on  the  subject  is  somewhat  unsettled,  and  at  present  each  case 
seems  to  turn  largely  on  the  facts  in  that  case.  In  Massachusetts 
the  rule  seems  to  be  that  the  corporation  is  not  liable  if  forgery  enters 
into  the  transaction.5  In  England  the  same  rule  seems  to  prevail  6 
and  in  New  York  the  latest  decision  is  to  the  effect  that  the  corpo- 
ration is  not  liable.7     Where  a  certificate  of  stock  provides  on  its 


N.  Y.  App.  Div.  463  (1902).  On  this 
subject  of  notice,  and  who  is  a  bona 
fide  purchaser,  see  also  §§  473,  716, 
767,  infra. 

i  Dresser  r.  Missouri,  etc.  Co.,  93  U. 
S.  92  (1876);  Lytle  P.  Lansing,  147 
U.  S.  59   (1893). 

2  Lake  Co.,  etc.  v.  Dudley,  173  U.  S. 
243  (1899). 

3  See  §  49,  supt-a. 

4  See  §  366,  infra. 

5  Where  the  signatures  of  the  presi- 
dent and  treasurer  to  certificates  are 
required,  and  the  president  issues 
fraudulent  certificates  to  himself  and 
forges  the  treasurer's  name  thereto, 
the  corporation  is  not  liable  therefor 
even  to  bona  fide  purchasers.  Hill  v. 
Jewett  Pub.  Co.,  154  Mass.  172  (1891). 

6  A  corporation  is  not  liable  on  a 
certificate  of  stock  issued  by  the  secre- 
tary and  signed  by  him,  even  though 
the  necessary  names  of  two  directors 
were  forged  thereto  and  the  seal  was 
unlawfully  attached,  and  even  though 
the  old  certificate,  which  was  pur- 
ported to  be  transferred,  was  forged, 
and  the  name  of  the  transferrer  was 
forged,  and  even  though  the  secre- 
tary borrowed  money  on  the  new  cer- 


tificate for  his  own  uses,  and  the 
lender  and  transferee  did  not  know 
that  he  was  secretary  until  the  new 
certificate  was  handed  to  them.  Ru- 
ben v.  Great  Fingall,  etc.,  [1904]  2  K. 
B.  712,  rev'g  [1904]  1  K.  B.  650,  cf. 
Shaw  v.  Port  Philip,  etc.  Min.  Co.,  L. 
R.  13  Q.  B.  D.  103  (1SS4),  where  the 
corporation  was  held  liable  on  a  cer- 
tificate signed  and  issued  by  the  secre- 
tary of  the  corporation,  but  who  had 
forged  thereto  the  names  of  the  other 
corporate  officers  whose  signatures 
were  necessary  to  the  issue  of  a  cer- 
tificate of  stock.  Cf.  Duncan  v.  Lunt- 
ley,  2  Macn.  &  G.  30    (1S49). 

7  Where  a  person,  who  formerly  was 
a  transfer  agent,  but  has  since  ceased 
to  be,  takes  a  certificate  of  stock 
which  had  been  signed  by  the  former 
president  of  the  company  without  any 
name  being  filled  into  the  certificate, 
and  forges  the  name  of  the  former 
treasurer  to  the  certificate,  and  fills 
in  his  own  name  as  the  stockholder, 
the  paper  is  a  forgery  as  to  all  of  the 
officers,  and  does  not  render  the  cor- 
poration liable  thereon.  The  fact  that 
the  party  committing  the  forgery  was 
the   president  at   the   time  he   trans- 


S09 


293.] 


INCREASE,   REDUCTION,  ETC.   OP  STOCK. 


[CH.    XVII. 


face  that  it  must  be  signed  by  a  transfer  agent  the  corporation  is 
nut  liable  on  a  certificate  to  which  the  transfer  agent's  name  had 


ferred  the  stock  does  not  bind  the  cor-  inquires   of   the   first   pledgee    in    re- 

poration.    In  issuing  the  stock  he  was  gard    to   the   validity    of    the    certifi- 

not     apparently     acting     within     the  cate,    and    is    given    the    information 

scope    of   his    authority.     Representa-  which  the  first  pledgee  obtained  from 

tions  by  him  that  the  stock  was  good  the    corporation,    may   also    hold   the 

do  not  bind  the  company,   the  stock  company    liable,    the    second    pledgee 

having    been    negotiated    by    him    in  having  taken  up  the  loan  of  the  first 

business   other   than   the   business   of  pledgee.     Mutual  L.  Ins.  Co.  v.  Forty- 

the  corporation.     The  stock  was  nego-  second,  etc.  R.  R.,  74  Hun,  505  (1893). 

tiated  in  a  personal  transaction  of  the  Where  corporate  officers,  who  are  au- 

officer.     Manhattan  L.  Ins.  Co.  v.  For-  thorized   to    sign    an    issue   of   certifi- 

ty-second,   etc.   R.    R.,    139    N.   Y.    146  cates  of  stock,  sign  them  in  blank  and 

(1893).     But  where  the  secretary  and  entrust   them   to   the   chief   executive 

treasurer  of  a  corporation,  who  is  also  officer  to  be  filled  in  and  delivered  to 

its  agent  for  the  transfer  of  stock,  and  persons,  who  surrender  certificates  for 

authorized   to   countersign   and   issue  transfer,  and  he  fills  in  his  own  name 

stock  when  signed   by  the  president,  and  then  pledges  the  certificate  for  a 

forges    the    name    of    the    latter    and  personal  loan  to  himself,  the  pledgee, 

fraudulently    issues    a    certificate    of  if  hona  fide,  is  protected  and  may  hold 

stock,   the  corporation  is  liable  to   a  the  corporation  liable  for  the  market 

bank  which  has  accepted  such  certifi-  value  of  similar  stock.    American  Ex- 

cate  in  good  faith  as   security   for  a  change  Nat.  Bank  v.  Woodlawn  Ceme- 

loan.      In  this  case   the  bank  caused  tery,  120  N.  Y.  App.  Div.  119    (1907). 

inquiry   to   be   made   at   the   office   of  Where  the   treasurer  of  a  charitable 

the    railroad    company,    and    was    in-  corporation  forges  a  resolution  of  the 

formed  by  the  secretary  and  treasurer  board  of  trustees  authorizing  him  to 

that  the  certificate  was  genuine.    The  sell  bonds  registered  in  the  name  of 


bank  was  allowed  to  recover,  although 
it  had  sold  the  forged  stock,  but  had 
taken  it  back  upon  the  forgery  be- 
coming known.     Fifth  Avenue  Bank 


the  corporation,  and  he  executes 
fraudulently  a  power  of  attorney  from 
the  corporation  to  him  as  treasurer 
to    make    such    sale,    the    corporation 


v.  Forty-second  Street,  etc.  R.  R.,  137  which  issued  the  bonds  and  then  al- 
N.  Y.  231  (1893).  Where  certificates  lowed  a  transfer  on  such  forged  reso- 
of  stock  are  to  be  signed  by  the  trans-  lution  is  liable  to  the  charitable  cor- 
f er  agent  and  secretary,  and  the '  poration  for  so  doing.  The  charitable 
president  and  treasurer,  if  the  presi-  corporation  may  hold  liable  a  broker 
dent  signs  the  certificates  in  blank  who  witnessed  the  power  of  attorney 
and  delivers  them  to  the  secretary  even  in  good  faith.  If  the  corporation 
and  transfer  agent,  and  the  latter  which  issued  and  registered  the  bonds 
forges  the  name  cf  the  treasurer  to  is  held  liable  it  has  recourse  against 
the  certificate  and  issues  the  certifi-  the  broker  by  reason  of  the  stock  ex- 
cate,  a  person  who  loans  money  on  change  rules  which  renders  liable  a 
the  faith  of  such  certificate  after  in-  broker  who  witnesses  signatures  to 
quiring  of  the  company  whether  the  transfers  of  stock  or  bonds.  Clark- 
certificate  is  genuine,  and  being  in-  son  Home  v.  Missouri,  etc.  R.  R.,  182 
formed  by  the  secretary  that  it  is  N.  Y.  47  (1905).  Even  though  by  res- 
genuine,  may  hold  the  company  lia-  olution  of  the  board  of  directors,  the 
ble  in  damages  for  refusal  to  trans-  signature  of  the  general  manager  is 
fer  the  stock.    A  second  pledgee  who  necessary  to  a  note  and  the  treasurer 

810 


CH.    XVII.] 


INCREASE,  REDUCTION,  ETC.  OF  STOCK. 


[§    293. 


been  forged  by  an  employee  of  the  corporation.1  Inasmuch  as  the 
president  of  a  corporation  has  no  inherent  authority  to  issue  its  stock, 
the  corporation  is  not  liable  if  he  issues  fraudulent  stock,  the  presi- 
dent having  kept  the  money  received  for  the  stock,  and  it  appearing 
that  the  forged  certificates  did  not  even  resemble  the  genuine  stock, 
and  the  signatures  of  the  secretary  and  treasurer  had  been  forged 
by  the  president.2  But  where  the  treasurer  is  the  proper  agent  to 
issue  stock,  and  the  president  entrusts  him  with  certificates  signed  in 
blank,  the  corporation  is  liable  for  overissued  stock  issued  and  sold 
by  the  treasurer  for  his  own  benefit,  even  though  no  old  certificate 
was  surrendered.3 


forges  such  signature,  yet  if  the  secre- 
tary attaches  the  seal  and  attests  to 
the  same,  the  note  is  good  in  bona 
fide  hands.  Merchants',  etc.  Co.  v. 
Lufkin,  etc.  Bank,  34  Tex.  Civ.  App. 
551    (1904). 

On  this  subject,  see  also  §§  294,  3G5, 
infra. 

1  Dollar,  etc.  Co.  v.  Pittsburgh,  etc. 
Co.,  213  Pa.  St.  307   (1906). 

2  Rogers  v.  Southern  Fiber  Co.,  44 
S.  Rep.  442    (La.  1907). 

3  Allen  v.  South  Boston  R.  R.,  150 
Mass.  200  (1889).  See  also  Manhat- 
tan Beach  Co.  v.  Harned,  27  Fed.  Rep. 
484  (1886),  where  the  corporate  offi- 
cers issued  stock,  not  in  excess  of  the 
capital  stock,  but  a  part  of  the  un- 
issued original  capital  stock.  They 
issued  it  for  their  own  benefit.  Where 
an  officer  of  a  corporation  fraudulent- 
ly issued  stock  for  his  own  use,  con- 
trolled all  the  books  relating  to  the 
stock,  and  countersigned  all  the  cer- 
tificates, the  corporation  was  held 
liable  for  the  spurious  stock.  Tome 
v.  Parkersburg  Branch  R.  R.,  39  Md. 
36  (1873).  So  also  where  overissued 
stock  is  issued  under  the  genuine  seal 
of  the  corporation,  the  corporation  is 
liable.  People's  Bank  v.  Kurtz,  99  Pa. 
St.  344  (1882).  Where  the  secretary 
of  the  company  has  made  fraudulent 
transfers  of  stock  and  falsified  the 
share  register,  and  fraudulently  in- 
duced two  of  the  directors  to  affix  the 
seal  of  the  company  to  the  certificates, 
the  company  is  liable  to  a  purchaser 


of  the  certificates.  The  measure  of 
damages  is  the  price  paid  by  the  pur- 
chaser for  the  certificate  with  interest 
thereon,  the  application  for  transfer 
having  been  made  to  the  company  on 
that  same  day.  Re  Ottos,  etc.  Mines, 
L1S93]  1  Ch.  618.  In  the  case  of  Swain 
v.  West  Philadelphia  Pass.  Ry.  (see 
127  Pa.  St.  616),  the  supreme  court 
of  Pennsylvania  held  a  corporation 
liable  for  a  fraudulent,  false,  spurious, 
and  void  issue  of  stock  by  its  presi- 
dent. "The  liability  of  the  railway 
company  arises  on  the  principle  of 
estoppel,  which  the  necessities  of 
trade  and  commerce  require.  Stock 
certificates  issued  by  a  corporation 
having  power  to  issue  are  a  continu- 
ing affirmation  of  the  ownership  of 
the  special  amount  of  stock  by  the 
person  designated  therein,  or  his  as- 
signee, and  the  purchaser  has  a  right 
to  rely  thereon  and  claim  the  benefit 
cf  an  estoppel  in  his  favor  as  against 
the  corporation."  See  also  Jeanes's 
Appeal,  116  Pa.  St.  573  (1887);  Mount 
Holly  Paper  Co.'s  Appeal,  99  Pa.  St. 
513  (1882).  Where  a  transfer  clerk 
of  a  corporation  makes  out  a  spurious 
and  overissued  certificate  of  stock  in 
the  name  of  a  fictitious  person,  and 
causes  the  genuine  signatures  of  the 
president,  assistant  treasurer,  and 
registrar  to  be  signed  thereto  by  them, 
and  then  indorses  under  the  blank 
form  of  transfer  on  the  back  thereof 
the  name  of  the  fictitious  person,  and 
attests  the  same  himself  as  a  witness, 


811 


§  293.] 


INCREASE,  REDUCTION,  ETC.   OP  STOCK. 


[CH.    XVII. 


And  where  the  president  signs  a  large  number  of  the  blank 
certificates  of  stock,  and  the  secretary  fraudulently  fills  in  the  blanks, 
including  his  own  name  as  the  owner  of  the  stock,  and  signs  the 
certificate  as  secretary,  and  attaches  the  corporate  seal,  and  nego- 
tiates them  by  indorsing  them,  the  corporation  is  liable  to  the  bona 
fide  purchaser  of  said  stock  from  the  secretary,  although  the  stock 
is  overissued  and  spurious.1  But  "a  secretary  is  a  mere  servant.  His 
position  is  that  he  is  to  do  what  he  is  told,  and  no  person  can  assume 
that  he  has  any  authority  to  represent  anything  at  all."  Hence  a  re- 
ceipt by  the  secretary  that  certificates  of  stock  had  been  actually 
lodged  in  the  corporate  office  for  transfer  does  not  bind. the  corpora- 
tion where  they  were  not  actually  lodged,  and  the  receipt  was  a  part 
of  a  fraud.2     A  building  association  is  not  liable  on  a  certificate  of 


and  then  delivers  the  same  to  a  broker 
to  sell  on  account  of  such  transfer 
clerk,  and  the  broker,  before  selling, 
inquires  of  the  registrar  of  transfers, 
and  also  of  the  company  itself,  as  to 
whether  the  stock  is  genuine  and  ac- 
ceptable for  transfer,  and  is  told  that 
it  is  all  right,  such  broker  is  protect- 
ed under  his  sale  of  the  stock;  and 
where  the  broker  sells  the  stock,  and 
by  the  rules  of  the  stock  exchange  is 
thereafter  obliged  to  take  it  back,  he 
may  hold  the  corporation  liable.  Jar- 
vis  r.  Manhattan  Beach  Co.,  148  N.  Y. 
652  (1896).  In  Knox  v.  Eden  Musee 
Co.,  148  N.  Y.  441  (1896),  certificates 
of  stock  had  been  delivered  to  the  cor- 
poration for  transfer,  and  the  new 
certificates  had  been  duly  issued.  The 
old  certificates  were  put  in  a  safe  un- 
canceled, and  were  illegally  abstract- 
ed by  an  employee  and  sold.  The 
court  held  that  the  company  was  not 
liable  on  such  certificates  to  a  per- 
son who  took  them  in  pledge  from 
such  employee.  The  court,  however, 
based  its  decision,  not  on  the  fact 
that  the  pledgee  took  with  notice,  but 
on  the  principle  of  law  that  no  one 
could  acquire  title  to  stolen  certifi- 
cates of  stock.  This  case  came  before 
the  court  again  in  17  N.  Y.  App.  Div. 
365  (1897).  Where  the  corporation 
is  held  liable,  it  of  course  has  re- 
course against  the  officer  guilty  of  the 
fraud.     Brooklyn  Crosstown  R.  R.  v. 


Strong,  75  N.  Y.  591  (1878).  Where 
stock  is  treated  as  canceled  by  all 
parties,  including  the  holder,  a  sub- 
sequent transferee  of  the  certificates 
from  him  cannot  hold  the  company 
liable,  unless  the  transferee  is  a  hold- 
er in  good  faith  for  value.  Miller  v. 
Houston,  etc.  St.  Ry.,  69  Fed.  Rep.  63 
(1895).  The  liability  of  the  corpora- 
tion to  a  bona  fide  holder  of  overis- 
sued stock  cannot  be  avoided  by  a  re- 
ceiver purchasing  and  canceling  an 
equal  amount  of  valid  stock.  Archer 
v.  Dunham,  89  Hun,  387   (1895). 

i  Cincinnati,    etc.    Ry.    v.    Citizens' 
Nat.  Bank,  56  Ohio  St.  351  (1897). 

2  George  Whitechurch,  Ltd.  v.  Cava- 
nagh,  [1902]  A.  C.  117.  A  stockhold- 
er who  sends  his  stock  to  a  broker 
with  directions  to  have  the  corpora- 
tion issue  new  certificates,  cannot  hold 
the  corporation  liable  if  the  broker 
embezzles  the  stock,  even  though  the 
broker  afterwards  becomes  secretary 
of  the  company,  and  issues  spurious 
stock  to  such  customer  by  forging 
the  president's  name  thereto.  But 
other  similar  stock  which  such  per- 
son purchases  in  the  open  market  and 
sends  to  such  secretary  to  transfer, 
he  may  hold  the  corporation  liable 
for,  if  the  secretary  embezzles  the 
same  and  sends  similar  spurious  and 
forged  certificates  in  exchange  there- 
for. As  to  other  stock  which  the 
secretary  is   instructed  to   buy  as  a 


812 


CH.    XVII.]  INCREASE,  REDUCTION,  ETC.  OP  STOCK.  [§§   294,  295. 

its  stock  forged  and  issued  by  its  secretary,  even  though  the  treas- 
urer has  received  payments  thereon,  but  without  notice  of  the  for- 
gery.1 

If  an  innocent  holder  of  overissued  stock  brings  an  action  in  equity 
to  compel  the  corporation  to  record  the  transfer,  he  may  be  denied 
that  relief,  but  may  have,  in  lieu  thereof,  damages  at  law.2  The  better 
remedy  in  such  case  is  an  action  at  law,  and  the  measure  of  dam- 
ages is  the  market  value  of  the  stock  at  the  time  the  transfer  was 
demanded.3 

§  294.  Defenses  of  the  corporation  to  such  actions.  — It  frequently 
happens  that  an  overissue  of  stock  is  made  without  a  strict  com- 
jDliance  with  the  formalities  of  an  issue  of  genuine  stock.  Gener- 
ally, certificates  of  stock  must,  according  to  the  by-laws  of  the  cor- 
poration, be  signed  by  certain  specified  corporate  officers.  Accord- 
ingly, when  action  is  brought  against  a  corporation  on  overissued 
stock,  the  defense  is  sometimes  set  up  that  the  certificates  were  not 
signed  by  the  proper  officers,  or  were  not  issued  with  the  usual  for- 
malities, and  consequently  that,  the  purchaser  having  had  notice 
of  the  infirmity,  the  corporation  is  not  liable.  Such  a  defense  is 
not  favored  by  the  courts.4  Where,  however,  the  charter  provides 
that  certificates  of  stock  shall  be  signed  by  the  president,  directors, 
and  treasurer,  fraudulent  overissues  signed  by  the  president  and 
treasurer  alone  are  not  sufficient  to  charge  the  corporation.5 

§  295.  Personal  liability  of  the  officers  of  the  corporation  on  over- 
issued  stock. — The  officers  of  a  corporation  who  take  part  in  the 
issue  of  overissued  stock  are  liable  in  tort,  both  to  the  immediate 
purchaser  from  them  of  spurious  stock  falsely  and  fraudulently  cer- 
tified by  them,  and  also  to  any  subsequent  purchaser  buying  upon 

broker  and  which  is  also  embezzled,  344    (1882);    Willis    v.    Philadelphia, 

and   for   which    spurious   new   certifi-  etc.  R.  R.,  6  W.  N.  Cas.  461    (1878); 

cates   are   issued,   the    corporation   is  Tome  v.  Parkersburgh  Branch  R.  R., 

not    liable.      The    person    purchasing  39  Md.  36   (1873).     It  is,  however,  a 

stock    from    the   secretary   as   an    in-  condition    precedent    to    maintaining 

dividual,    or    loaning    money    to    the  such  an  action  that  the  holder  of  the 

secretary  as  an  individual  on  similar  overissued   stock   discharge   any   lien 

spurious  forged  stock,  cannot  hold  the  upon   it    which   would   have   properly 

corporation  liable.     Lucile,  etc.  Co.  v.  attached  to  genuine  stock  under  the 

"Willard,    89    Pac.    Rep.    935     (Wash,  same  conditions.    Mount  Holly  Paper 

1907).  Co.'s  Appeal,  99  Pa.  St.  513   (1882). 

i  Columbia,     etc.     v.     Belmar,     etc.  4  See  §  293,  supra. 

Ass'n,  54  Atl.  Rep.  142    (N.  J.  1903).  5  Holbrook  v.  Fauquier,  etc.  Tump. 

2  Willis  v.  Philadelphia,  etc.  R.  R.,  Co.,  3  Cranch,  C.  C.  425  (1829);  s.  c, 
6  W.  N.  Cas.  461  (1878);  People's  12  Fed.  Cas.  322.  See  also  cases  in 
Bank  v.  Kurtz,  99  Pa.  St.  344   (1882).  notes  to  §293,  supra. 

3  People's  Bank  v.  Kurtz,  99  Pa.  St. 

813 


296.] 


INCREASE,   REDUCTION,  ETC.   OF  STOCK. 


[CH.    XVII. 


the  faith  of  the  false  certificate,  and  sustaining  damage  thereby.1 
There  may  be  a  joint  action  against  the  corporation  and  the  cor- 
porate agents  issuing  the  stock,  or  a  separate  action  against  either.2 
Moreover,  the  corporation  may  sue  in  assumpsit  its  treasurer,  who 
has  illegally  issued  excessive  stock  and  converted  the  proceeds  to 
his  own  use.3 

§  296.  Liability  of  the  vendor  of  overissued  stock. — In  the  ab- 
sence of  fraud  the  purchaser  of  overissued  and  spurious  stock  cannot 
hold  his  vendor  liable  thereon.  The  bona  fide  vendor  can  be  held  to 

1  Bruff  v.  Mali,  36  N.  Y.  200  (1867) ;  of  stock.  Cary  v.  Leszynsky,  184  Mass. 
Seizer  v.  Mali,  41  N.  Y.  619  (1869),  44  (1903).  Even  though  the  presi- 
reversing  s.  c'.,  32  Barb.  76  (1860);  dent  sells  and  transfers  a  part  of  his 
11  Abb.  Pr.  129;  Cazeaux  v.  Mali,  25  stock  to  another  person  and  then  ob- 
Barb.  578  (1857).  And  the  holder  of  tains  from  the  corporation  a  new  cer- 
genuine  stock  has  an  action  against  tificate  to  himself  representing  the 
them  for  the  depreciation  of  its  value  stock  so  sold  and  transferred,  there- 
by reason  of  the  overissue.  Shotwell  by  making  an  overissue,  he  is  not 
v.  Mali,  38  Barb.  445  (1862).  A  per-  liable  as  for  a  conversion  at  the  in- 
son  receiving  stock  from  the  directors  stance  of  the  first  transferee.  O'Dwyer 
of  a  corporation,  in  pledge  for  a  loan  v.   Verdon,    115    N.    Y.   App.    Div.    37 


to  it,  they  knowing  that  the  stock  was 
overissued,  may  sue  the  directors  for 
damages  in  an  action  for  deceit. 
Whitehaven,   etc.   Co.   v.  Reed,    54   L, 


(1906). 

2  Bruff  v.  Mali,  36  N.  Y.  200  (1867). 
And  when  the  action  is  against  the 
officers  responsible  for  the  fraudulent 


T.   Rep.   360    (1886);    National  Exch.  overissue,  if  the  evidence  shows  that 
Bank   v.    Sibley,   71    Ga.    726    (1883).  the   entire  capital  stock  of  the  corn- 
See  also  Daly  v.  Thompson,  10  M.  &  pany   had   been    issued   prior    to   the 
W.  309    (1842).     By  statute  in  many  dates  of  the  certificates  purchased  or 
of'  the   states   and  in  England   such  held  by  the  plaintiff,  and  if  it  appears 
forgeries  are  made  a  special  criminal  that  the  defendants  prior  thereto  had, 
offense.     Regina  v.  Nash,  2  Den.  Cr.  as  officers  of  the  corporation,   issued 
C.  493  (1852);  N.  Y.  Pen.  Code,  §  591.  spurious    certificates    of    stock,    then 
Concerning  the  requirements  of  an  in-  there  is  a  presumption  of  law  that  the 
dictment  for  issuing  fraudulent  stock,  certificates   in    controversy    are   false 
see  West  v.  People,  137  111.  189  (1891).  and    fraudulent,    and    the    burden    is 
A  criminal  statute  against  fraudulent-  upon    the    defendants    to    show    that 
ly  issuing  stock  does  not  apply  to  a  these   particular   certificates  were   is- 
transaction   where   the   treasurer   ob-  sued,  either  upon  the  surrender  of  cer- 
tained   a   certificate   which  he   as   an  tificates  of  genuine  stock,  or  upon  the 
individual  had  pledged,  and  after  ob-  transfer  on  the  books  of  the  company 
taining  it  canceled  it  as  treasurer  and  of  such  stock— facts  peculiarly  within 
issued  a  new  certificate  to  himself  in  the  knowledge   of  the  corporate   offi- 
place  thereof.     State  v.  Moore,  69  N.  cers.     Shotwell  v.  Mali,  38  Barb.  445, 
H.  99  (1896).    A  member  of  a  pool  is  469    (1862),    a    well-considered    case; 
entitled  to  his  share  of  the  stock  upon  Bruff  v.  Mali,  36  N.  Y.  200   (1867). 
its  termination,  even  though  he  was  3  Rutland   R.   R.   v.   Haven,    62   Vt. 
a   trustee    of   the    pool    and    was    an  39   (18S9).     See  also  Brooklyn  Cross- 
officer   of  the   company   the   stock   of  town  R.   R.  V.   Strong,  75   N.  Y.  591 
which  had  been  purchased,  and  even  (1878). 
though  there  had  been  an  overissue 

814 


CH.    XVII.] 


INCREASE,  REDUCTION,  ETC.  OF  STOCK. 


[§  297. 


warrant  only  his  own  title  to  the  shares,  not  the  right  of  the  corpo- 
ration to  issue  them.  If  he  came  hy  them  honestly  and  sells  them 
in  good  faith,  there  is  no  recourse  to  him,  even  though  they  turn 
out  to  be  spurious.1  The  supreme  court  of  the  United  States  holds, 
however,  that  a  purchaser  without  notice  of  a  forged  bond  may  re- 
cover back  the  price  paid  by  him  to  the  vendor,  even  though  the 
vendor  was  himself  a  bona  fide  purchaser  and  without  notice  of  the 
illegality  of  the  bond.  There  is  an  implied  warranty  of  identity  of 
the  thing  sold.2  A  broker  is  not  responsible  where  he  in  good  faith 
loans  his  customers  money  in  compliance  with  his  authority,  on 
certificates  of  stock  as  collateral,  even  though  they  turn  out  to  be 
forged,  provided  he  was  not  guilty  of  negligence.3  A  broker,  how- 
ever, who  witnesses  a  forged  signature  to  a  transfer  of  registered 
bonds  is  liable  to  the  corporation,  which  has  allowed  the  transfer  by 
reason  thereof,  even  though  the  broker  acted  in  good  faith.4 

§  297.  Equity  will  enjoinvoting,  transferring,  or  dividends  on  such 
stock,  and  will  adjust  the  rights  of  all  parties. — A  court  of  equity 
will,  upon  a  proper  application,  grant  an  injunction  to  prevent  the 
transfer  of  illegally-issued  stock,  or  the  payment  of  dividends  thereon, 
or  voting  thereof  by  the  pretended  owners  of  such  stocks.5    The  most 


1  State  v.  North  Louisiana,  etc.  R. 
R.,  34  La.  Ann.  947  (1882) ;  People's 
Bank  v.  Kurtz,  99  Pa.  St.  344  (1882) ; 
Seizer  v.  Mali,  41  N.  Y.  619  (1869), 
reversing  32  Barb.  76  (1860).  In  Titus 
v.  Poole,  73  Hun,  383  (1893),  there  is 
a  dictum  that  the  vendor  of  a  certifi- 
cate of  stock  impliedly  warrants  the 
genuineness  thereof;  aff'd  on  the 
ground  of  an  express  warranty  in  145 
N.  Y.  414. 

2  Meyer  v.  Richards,  163  U.  S.  3S5 
(1896).      The    court    said    (p.    405): 
"Both  in  England  and  in  the  United 
States  the  doctrine  is  universally  rec- 
ognized that  where  commercial  paper 
is  sold  without  indorsement  or  with- 
out express  assumption  of  liability  on 
the  paper  itself,  the  contract  of  sale 
and  the  obligations  which  arise  from 
it,  as  between  vendor  and  vendee,  are 
governed  by  the  common  law,  relat- 
ing to  the  sale  of  goods  and  chattels. 
So,  also,  the  undoubted  rule  is  that 
in  such  a  sale  the  obligation  of  the 
vendor  is  not  restricted  to  the  mere 
question  of  forgery  vel  non,  but  de- 
pends upon  whether  he  has  delivered 
that  which  he  contracted  to  sell,  this 


rule  being  designated,  in  England,  as 
a  condition  of  the  principal  contract, 
as  to  the  essence  and  substance  of 
the  thing  agreed  to  be  sold,  and  in 
this  country  being  generally  termed 
an  implied  warranty  of  identity  of  the 
thing  sold."  In  Tennessee  it  has  been 
held  that  a  sale  of  bonds  is  not  re- 
vocable even  though  the  bonds  are 
invalid  and  the  vendor  innocently 
stated  that  they  were  valid.  Ruohs 
v.  Third  Nat.  Bank,  94  Tenn.  57 
(1894). 

3  The  question  of  negligence  is  a 
question  for  the  jury,  and  the  burden 
of  proof  is  on  the  broker.  The  broker 
is  not  bound  to  present  the  certificates 
to  the  company  for  verification.  Isham 
v.  Post,  141  N.  Y.  100  (1894).  As 
to  the  liability  of  brokers  for  the 
forgery  of  their  employees  in  deliver- 
ing spurious  stock  to  a  customer,  see 
Andrews  v.  Clark,  72  Md.  396  (1890). 
Compare  §  366,  infra.  See  also  §  452, 
infra. 

■i  Clarkson   Home   v.   Missouri,    etc. 
R.  R,  182  N.  Y.  47  (1905). 

5  A  stockholder  may   object  to  the 
voting    of    overissued    stock    in    the 
815 


297.] 


INCREASE,   REDUCTION,  ETC.   OF  STOCK. 


[CH.    XVII. 


effectual  remedy  in  these  cases  is  a  suit  in  equity,  instituted  by  the 
corporation,  whereby,  in  one  proceeding,  the  rights  and  liabilities 
of  all  persons  concerned  with  the  overissue  of  the  stock  are 
fully  and  finally  determined  and  adjudicated,  and  the  overissued 
stock  itself  is  retired  and  destroyed.  Such  a  proceeding  is  in  the 
nature  of  a  bill  to  quiet  title,  or  to  remove  a  cloud  from  the  title 
of  the  genuine  stock.  Spurious  or  overissued  stock,  issued  by  cor- 
porate officers  having  the  apparent  authority,  and  outstanding  in 
the  hands  of  numerous  holders,  is  a  cloud  upon  the  title  to  the 
genuine  stock.  It  is  a  cloud  which  a  court  of  equity  will  remove; 
and  a  suit  to  that  end  may  be  commenced,  either  by  the  corpora- 
tion *  or  by  the  stockholders  themselves  in  their  own  behalf,  where 


hands  of  the  party  to  whom  it  was 
originally  issued,  even  though  he 
voted  to  issue  such  stock,  and  he  may 
maintain  an  action  to  have  the  stock 
canceled.  Haskell  v.  Read,  68  Neb. 
107  (1903).  Where  in  a  suit  by  a 
stockholder  to  enjoin  elections,  etc., 
pending  an  adjustment  as  to  what 
stock  is  genuine  and  what  is  spurious, 
another  stockholder  intervenes,  the 
latter  cannot  take  an  appeal  unless 
notice  of  the  appeal  is  served  also 
upon  the  corporation.  Willard  v.  Fish- 
er, 36  Wash.  229  (1904).  Even  though 
a  court  of  equity  has  power  to  cancel 
illegal  stock  it  cannot  incidentally 
thereto  pass  upon  the  legality  of  a 
subsequent  election.  Crow  v.  Florence, 
etc.  Co.,  143  Ala.  541  (1905).  A  pledgee 
of  stock  may  not  have  a  receiver  of 
stock  appointed  on  the  ground  that 
there  has  been  an  overissue  of  stock. 
Virginia,  etc.  Co.  v.  Provident,  etc. 
Soc,  126  Ga.  50  (1906).  A  corpora- 
tion which  for  a  long  time  was  aban- 
doned and  which  is  unable  to  tell  who 
its  stockholders  are  may  file  a  bill  in 
equity  to  ascertain  who  its'  stockhold- 
ers are  and  to  cancel  illegal  certifi- 
cates and  determine  the  rights  of  con- 
flicting claims  to  the  stdck.  Geneva, 
etc.  Co.  v.  Steele,  111  N.  Y.  App.  Div. 
706  (1906).  See  Kent  v.  Quicksilver 
Min.  Co.,  78  N.  Y.  159  (1879).  Four 
years  after  preferred  stock  had  been 
issued,  the  common  stockholders 
brought  suit  to  have  the  pre- 
ferred     stock       canceled,      on      the 


ground  that  the  corporation  had  no 
power  to  issue  such  preferred 
stock,  except  by  unanimous  consent 
of  the  stockholders.  The  case  involved 
not  an  overissue  of  stock,  but  an  is- 
sue of  preferred  stock  after  the  com- 
mon stock  had  already  been  issued. 
The  court  held  that  the  suit  could 
have  been  maintained,  if  the  stock- 
holders had  not  been  guilty  of  laches. 
And  where  a  corporate  officer  issues 
illegal  and  unauthorized  stock,  he 
may  be  enjoined  from  allowing  a 
transfer  of  it  if  proof  is  given  of  its 
illegal  character  and  of  a  proposed 
transfer.  Sherman  v.  Clark,  4  Nev. 
138  (1869). 

l  New  York,  etc.  R.  R.  v.  Schuyler, 
17  N.  Y.  592  (1858).  In  this  cele- 
brated litigation  $2,000,000  of  overis- 
sued stock  had  been  issued  and  had 
passed  into  the  hands  of  many  hold- 
ers, most  of  whom  were  bona  fide 
holders.  Many  suits  were  instituted 
against  the  corporation  by  the  holders 
of  these  certificates,  some  claiming 
that  they  were  stockholders,  and  oth- 
ers that  they  were  either  stockhold- 
ers or  had  a  cause  of  action  against 
the  corporation  for  their  losses.  There- 
upon the  corporation  itself  filed  a  bill 
in  equity  against  all  of  the  alleged 
owners  or  holders  of  this  overissued 
stock,  and  prayed  that  the  certificates 
might  be  ordered  delivered  up  and 
canceled,  and  all  lawsuits  stayed  or 
enjoined  or  consolidated  with  this 
main  suit.  The  court  sustained  the 
16 


CH.   XVII.] 


INCREASE,  REDUCTION,  ETC.  OF  STOCK. 


[§  298. 


the  corporation  fails  or  refuses  to  institute  it,1  A  court  of  equity 
has  power  to  decree  the  return  and  cancellation  of  certificates  of 
stock  fraudulently  issued.2  In  a  suit  by  a  corporation  to  cancel 
overissued  stock,  the  defendant  holders  may  counter-claim  for  dam- 
ages.3 

§  298.  Subscriber's  right  to  defeat  a  subscription  to  overissued 
stock,  and  to  recover  back  money  paid  thereon.  — In  addition  to  the 
remedy  in  equity,  the  holder  of  overissued  stock  has  the  further 


bill  and  said  (pp.  602,  603)  that  the 
corporation  is  "the  organ  through 
which  the  shareholders  are  to  be 
heard  when  legal  wrongs  are  to  be 
redressed  or  equitable  remedies  are  to 
be  invoked.  If,  therefore,  I  have  been 
successful  in  showing  that  the  fraud- 
ulent certificates  of  stock  are  instru- 
ments of  such  annoyance  and  vexa- 
tion, in  depressing  values  and  disturb- 
ing the  fair  enjoyment  of  rights,  that 
they  ought  not  to  be  allowed  to  stand, 
then  this  suit  by  the  corporation 
rests  firmly  upon  that  branch  of  eq- 
uity jurisdiction  which  includes  the 
cancellation  of  such  instruments."  A 
suit  to  determine  what  stock  is  wa- 
tered (alleged  to  be  overissued  stock), 
and  also  to  set  aside  transactions  by 
which  the  corporate  property  has  been 
misapplied,  is  multifarious.  Church 
v.  Citizens'  Street  R.  R.,  78  Fed.  Rep. 
526    (1897). 

i  Quoted  and  approved  in  Hutton  v. 
Bancroft,  etc.  Co.,  83  Fed.  Rep.  17 
(1897);  Dewing  v.  Perdicaries,  96  U. 
S.  193  (1877),  aff'g  Perdicaris  v. 
Charleston  Gaslight  Co.,  Chase's  Dec. 
435  (1869);  s.  c,  19  Fed.  Cas.  217; 
Wood  v.  Union,  etc.  Assoc,  63  Wis.  9 
(1885).  Cf.  Taylor  v.  South,  etc.  R. 
R.,  13  Fed.  Rep.  152  (1S82),  where  the 
subscriber  acquiesced  ten  years.  The 
court  denied  any  relief.  In  an  action 
to  cancel  illegally  increased  stock  the 
plaintiff  must  offer  to  surrender  the 
part  held  by  himself.  Byers  v.  Rol- 
lins, 13  Colo.  22  (1889).  In  the  case 
State  v.  Kennan,  35  Wash.  52  (1904), 
it  appears  that  a  mining  company  had 
a  capital  stock  of  $50,000  divided  into 
1,000,000  shares  of  the  par  value  of 
five  cents  each  and  that  the  secretary 

(52)  817 


issued  over  1,000,000  spurious  shares. 
The  court  sustained  a  bill  in  equity 
by  a  stockholder  against  the  corpora- 
tion and  all  its  stockholders  to  deter- 
mine which  held  the  genuine  stock, 
and  enjoined  any  meetings  or  transac- 
tion of  any  business  in  the  meantime. 

2  Gibson  v.  Thornton,  112  Ga.  328 
(1900).  A  stockholder  may  maintain 
a  bill  in  equity  to  cancel  stock  issued 
in  payment  for  property  overvalued 
and  also  misrepresented  as  to  the 
price  which  had  been  paid  for  it,  and 
especially  may  such  a  bill  be  main- 
tained when  the  stock  really  goes  to 
the  president  of  the  company  in  order 
that  he  may  maintain  control,  and  the 
stock  is  also  overissued  stock.  Crow 
v.  Florence,  etc.  Co.,  143  Ala.  541 
(1905).  A  corporation  may  maintain 
a  suit  to  cancel  sBck  which  the  direc- 
tors and  president  voted  to  themselves 
as  commissions  for  selling  the  stock 
of  the  company.  Central,  etc.  Co.  v. 
Madden,  68  Atl.  Rep.  777  (N.  J. 
1908).  Where  stock  is  issued  for 
property  and  the  transaction  is  set 
aside,  a  suit  lies  by  the  receiver  of  the 
company  to  have  the  stock  canceled. 
McMaster  v.  Drew,  68  Atl.  Rep.  771 
(N.  J.  1908).  A  corporation  cannot 
maintain  a  suit  for  the  cancellation 
of  illegally  issued  certificates  of  stock 
unless  it  alleges  that  it  had  the  right 
to  issue  certificates  of  stock  and  that 
the  certificates  complained  of  will  in- 
jure the  corporation  or  its  "bona  fide 
stockholders  in  some  way.  Reno,  etc. 
Co.  v.  Culver,  60  N.  Y.  App.  Div.  129 
(1901). 

3  Lucile,  etc.  Co.  v.  Willard,  89  Pac. 
Rep.  935   (Wash.  1907). 


§  298  ]  INCREASE,  REDUCTION,  ETC.  OF  STOCK.  [CH.    XVII. 

right  at  law  to  defeat  an  action  on  his  subscription  therefor;  and 
that,  too,  even  though  he  knew  it  to  be  overissued  at  the  time  the 
subscription  was  made.     There  can  be  no  estoppel  in  such  a  case; 
and  not  even   creditors  can  enforce  any  liability   on   spurious  or 
overissued  stocks,  inasmuch  as  the  corporation  could  not  perform 
its  part  of  the  contract  and  issue  the  stock.1      Where  also  a  sub- 
scriber has   paid   an   instalment  on  his   subscription,    although   he 
knew  when  he  made  the  subscription  and  paid  the  money  that  it 
was  an  illegal  and  unauthorized  issue,  he  may  rescind,  and  recovc  r 
back  what  he  has  paid.2     Nevertheless,  although  a  corporation  has 
taken  more  subscriptions  than  its  capital  stock  and  has  issued  cer- 
tificates  therefor,   yet  this   does  not  release  subscribers  up  to  the 
correct   amount,3      In   Iowa   it  has  been  held   that   payment   of   a 
note  given  for  overissued  stock  cannot  be  enforced  where  the  con- 
sideration was  expressed  in  the  note  to  be  the  stock  of  the  corpora- 
tion to  which  the  note  was  given,  and  the  directors  subsequently 
made  an  illegal  and  unauthorized  increase  in  the  stock,  the  maker 
of  the  note  having  had  notice  that  a  large  amount  of  illegal  stock 
had  been  issued,  and  that  the  illegal  and  valid  stock  could  not  be 
distinguished.4     But  it  is  held  that  one  who  subscribes  for  over- 
issued stock,  bona  fide,  upon  discovering  that  the  stock  is  spurious 
cannot  have  a  receiver  appointed,  pending  an  inquiry  into  the  le- 
gality of  the  stock,  to  the  end  that,  in  case  the  stock  is  judicially 
declared  invalid,   such  subscriber  may  recover  back  from  the  cor- 
poration the  money  so  paid  for  the  spurious  stock,  where  the  money 
received  by  the  company  had  not  been  kept  separate  from  its  general 
funds    and  could  not  be  traced  and  identified.5     A  holder  of  over- 
issued stock  is  not  liable  on  the  statutory  liability.6 

i  Scovill   v.   Thayer,   105   U.   S.   143  3  Cartwright  v.  Dickinson,  88  Tenn. 

(1881);  Page  v.  Austin,  10  Can.  Sup.  476  (1890). 

Ct.   132    (1884);    Clark  v.  Turner,  73  4  Merrill   v.    Gamble,    46    Iowa,    615 

Ga    1    (1884).  (1S77);    Merrill    v.    Beaver,    46    Iowa, 

J2Knowlton    v.    Congress,    etc.    Co.,  646     (1877);     Merrill    v.    Reaver,    50 

14  Blatchf.  364   (1877);   s.  c,  14  Fed.  Iowa,  404  (1879). 

Cas  797-  aff'd,  Spring  Co.  v.  Knowl-  5  Whelpley  v.  Erie  Ry.,  6  Blatchf. 
ton  103  U.  S.  49  (1880) ;  Reed  v.  Bos-  271  (1868) ;  s.  c,  29  Fed.  Cas.  918. 
tonMachine  Co.,  141  Mass.  454  (1886).  6  Burt  v.  Richmond,  107  Fed.  Rep. 
See  the  dissenting  opinion  of  Dwight,  387  (1901).  The  holders  of  stock  can- 
Com'r,  in  Knowlton  v.  Congress,  etc.  not  escape  the  statutory  liability 
Co  57  N.  Y.  518,  540  (1874).  This  thereon,  even  though  when  the  trans- 
case,  however,  was  not  strictly  a  case  fer  of  the  stock  to  them  was  made 
of  overissued  stock.  A  different  class  the  old  certificates  were  not  canceled, 
of  cases  exists  where  an  increase  of  but  were  abstracted  by  a  corporate  of- 
canital  stock  is  authorized,  but  is  ir-  ficer  and  hypothecated  by  him,  there- 
regularly  made.  A  subscriber  is  then  by  creating  an  overissue.  Burt  v. 
liable.    See  §  288,  supra.  Bailey,  73  Fed.  Rep.  693   (1896).     See 

also  §  281,  supra. 
818 


PART  II. 


TRANSFERS  OF  STOCK. 


CHAPTER  XVIII. 


LEGACIES  AND  GIFTS  OF  STOCK. 


§  299.  Definitions  of  general,  specific, 
and  demonstrative  legacies 
of  stock. 

300,  301.  Importance  of  the  differ- 
ence between  general  and 
specific  legacies. 

302,  303.  Legacies  of  stock  are  con- 
strued to  be  general  if  the 
language  will  permit. 


!§304,  305.  Amount  of  stock  conveyed 
by  certain  legacies. 
30G.  Ademption    or   revocation  of   a 
legacy  of  stock,   and  abate- 
ment. 

307.  Duty  of  executor  as  regards  spe- 

cific or  general  legacies. 

308.  Gifts  of  stock. 


§  299.  Definitions  of  general,  specific,  and  demonstrative  legacies 
of  stock. — A  general  legacy  of  stock  is  a  legacy  whereby  it  becomes 
the  duty  of  the  executor  or  administrator  to  give  to  or  procure  for 
the  legatee  a  certain  amount  of  stock,  as  indicated  by  the  will, 
there  being  nothing  in  the  will  itself  to  indicate  that  the  legacy  is 
to  be  satisfied  from  stock  actually  owned  by  the  testator.  A  spe- 
cific legacy  of  stock  arises  when  the  testator,  in  his  will,  directs  or 
clearly  indicates  that  the  legacy  is  to  be  satisfied  from  stock  which 
he  Owns.  A  demonstrative  legacy  of  stock  is  the  same  as  a  gen- 
eral legacy,  except  that  it  is  to  be  purchased  from  a  particular  fund 
of  the  estate.  Demonstrative  legacies  of  stock  are  of  little  impor- 
tance as  compared  with  the  other  two  kinds.1 

l  That  a  legacy  of  stock  may  be  de-  ferred  to  a  particular  fund  or  source 
monstrative,  see  Ives  v.  Canby,  48  of  payment."  A  bequest  to  a  wife  of 
Fed.  Rep.  718  (1891).  That  legacies  "the  sum  of  $8,000  invested  in  stocks, 
of  stock  may  be  demonstrative  has  the  interest  to  be  paid  to  her  during 
been  assumed  by  the  cases.  In  the  her  life,"  is  a  demonstrative  legacy, 
case,  however,  of  Eckfeldt's  Estate,  Johnson  v.  Conover,  54  N.  J.  Eq.  333 
7  w!  N.  Cas.  19  (1879),  the  court  says  (1896).  In  the  case  Blair  v.  Seribner, 
that  a  legacy  of  stock  "may  be  either  65  N.  J.  Eq.  498  (1904),  the  court 
specific  or  general,  according  to  the  carefully  considered  the  difference  be- 
circumstances.  It  is  never  demonstra-  tween  specific,  general  and  demonstra- 
tive. A  demonstrative  legacy  is  al-  tive  legacies.  The  decision,  however, 
ways  pecuniary— differing,  however,  was  reversed  in  67  N.  J.  Eq.  583. 
from  an  ordinary  legacy  in  being  re- 

819 


§  300.]  LEGACIES   AND   GIFTS   OF   STOCK.  [CH.   XVIII. 

§  300.  Importance  oj  the  difference  between  general  and  specific 
legacies. — It  is  frequently  of  the  greatest  importance  whether  a 
legacy  be  a  general  or  a  specific  one.  A  large  number  of  decisions, 
running  back  for  nearly  two  hundred  years,  have  been  made  in 
endeavoring  to  lay  down  rules  on  this  subject.  The  complications, 
contradictions,  inconsistent  decisions,  and  doubts  that  have  arisen 
from  the  inherent  difficulties  of  the  subject  are  frequently  adverted 
to  and  deplored  by  successive  generations  of  judges. 

The  importance  of  determining  whether  a  legacy  of  stock  is  gen- 
eral or  specific  rests  in  the  fact  that  if  it  is  specific  it  is  entitled  to 
certain  advantages,  and,  on  the  other  hand,  is  exposed  to  certain 
perils,  while,  if  it  is  general,  it  is  without  those  advantages,  but  is 
also  free  from  the  perils.  The  advantages  of  a  specific  legacy  of 
stock  are  that  debts  of  the  estate  are  to  be  paid  from  other  funds; 
the  specific  legacy  passes,  though  other  legacies  fail  partially  or 
wholly  by  reason  of  deficiencies  in  the  estate,1  and  the  specific  leg- 
atee is  entitled  to  all  dividends  declared  after  the  testator's  death, 
instead  of  losing  the  first  year's  dividends,  as  in  case  of  a  general 
legacy  of  stock.  General  legacies  of  stock  have  none  of  these  ad- 
vantages. On  the  other  hand,  a  specific  legacy  of  stock  is  open  to 
the  great  danger  of  being  revoked  by  the  acts  of  the  testator,  and 
frequently  so  when  the  testator  has  no  intention  of  revoking  the 
legacy.2  This  revocation,  arising  by  implication  from  the  acts  of 
the  testator — such  as  selling  the  stock  bequeathed,  or  using  it  in  any 

1  A  specific  legacy  of  stock  is  not  different  classes,  but  that  he  must  pay- 
second  to  a  money  legacy.  In  re  calls  on  the  stock  due  at  the  time  of 
Klenke's  Estate,  210  Pa.  St.  575  the  testator's  death,  but  not  paid.  In 
(1905).  Mullins   v.   Smith,   1   Dr.    &   Sm.    204 

2  Kenkel  v.  Macgill,  5'6  Md.  120  (I860),  the  difference  between  a  spe- 
(1880),  the  court  saying:  "If  the  cific  and  demonstrative  legacy  is  thus 
legacy  is  to  be  considered  specific,  described:  "The  points  of  difference 
then,  in  the  event  of  the  testator's  between  specific  and  demonstrative 
parting  with  the  thing  or  property  be-  legacies  are  these:  A  specific  legacy  is 
queathed,  or  if  from  any  cause  it  not  liable  to  abatement  for  the  pay- 
should  be  lost  or  destroyed,  the  legacy  ment  of  debts,  but  a  demonstrative 
fails.  Then,  again,  such  legacies  are  legacy  is  liable  to  abate  when  it  be- 
not  liable  to  abatement  with  general  comes  a  general  legacy  by  reason  of 
legacies,  nor  are  they  liable  to  contri-  the  failure  of  the  fund  out  of  which 
bution  towards  the  payment  of  debts."  it  is  payable.  A  specific  legacy  is  li- 
Where  evidently  the  intent  was  to  able  to  ademption,  but  a  demonstra- 
give  specific  bonds,  it  was  so  decreed,  tive  legacy  is  not.  A  specific  legacy, 
Davies  v.  Fowler,  L.  R.  16  Eq.  308  if  of  stock,  carries  with  it  the  divi- 
(1873);  "Walton  v.  Walton,  7  Johns,  dends  which  accrue  from  the  death  of 
Ch.  257  (1823);  Jacques  v.  Chambers,  the  testator,  while  a  demonstrative 
2  Coll.  435  (1846),  holding  also  that  legacy  does  not  carry  interest  from 
the  legatee  may  select  his  stock  from  the  testator's  death." 

820 


CH.   XVIII.  ]  LEGACIES   AND   GIFTS   OP   STOCK.  [§§   301,  302. 

way  inconsistent  with  the  idea  of  its  passing  under  the  will — is  a 
danger  that  does  not  exist  if  the  legacy  is  a  general  one,  since  gen- 
eral legacies  of  stock  may  be  carried  out  by  the  executor's  pur- 
chasing the  stock  for  the  purpose  of  the  legacy. 

§  301.  If  a  specific  legacy  will  apply  equally  to  paid-up  stock 
and  to  stock  not  paid  up,  the  legatee  may  take  the  former.1  If  the 
testator  has  made  payments  on  the  stock  before  calls  have  been 
made,  the  legatee  is  entitled  to  the  benefit.2  If  there  is  both  a' 
specific  and  a  general  legacy  of  the  same  stock,  the  specific  is  to* 
be  first  satisfied.3  The  specific  legatee  takes  all  the  dividends  on 
the  stock.4  It  has  been  held,  however,  that  a  dividend  declared 
before  but  payable  after  the  testator's  death  belongs  to  the  estate.5 
The  general  legatee  takes  only  the  dividends  payable  twelve  months 
after  the  testator's  death.6  The  specific  legatee  takes  the  stock,  al- 
though there  will  then  be  no  property  left  to  pay  pecuniary  lega- 
cies.7 However,  he  can  have  only  so  much  stock  of  that  kind  as 
the  testator  dies  possessed  of ;  8  and  if  the  latter  dies  possessed  of 
none,  the  specific  legatee  takes  none.9  The  specific  legatee  does 
not  take  dividends  declared  and  due  before  the  testator's  death,  al- 
though such  dividends  have  not  been  collected.10 

§  302.  Legacies  of  stock  are  construed  to  be  general  if  the  lan- 
guage will  permit — It  is  the  policy  of  courts  of  justice  to  uphold 
and  carry  out  a  legacy,  and  implied  revocations  are  not  looked 
upon  with  favor.  Accordingly,  in  order  to  avoid  the  danger  of 
ademption,  to  which  specific  legacies  are  subject,  the  rule  has  be- 
come established  that  general   legacies   are  to   be   favored   by  the 

i  Millard  v.  Bailey,  L.  R.  1  Eq.  378  283   (1867).     Of.  Brown  v.  Collins,  L. 

(1866);   Jacques  v.  Chambers,  2  Coll.  R.    12   Eq.   586,   594    (1871);    Lock  v. 

435  (1846).  Venables,   27   Beav.   598    (1859).     See 

2  Tanner   v.    Tanner,    11    Beav.    69  also  Cogswell  v.  Cogswell,  2  Edw.  Ch. 
(1848).  231   (1834);  Abercrombie  v.  Riddle,  3 

3  Barton   v.   Cooke,   5   Ves.   Jr.    461  Md.  Ch.  320  (1850);  Wright  v.  Tuck- 
(1800).  ett,  1  Johns.  &  H.  266  (1860);  Furley 

4Loring    v.    Woodward,    41    N.    H.  v.  Hyder,  42  L.  J.    (Ch.)    626   (1873). 

391    (1860),   holding   also  that   parol  6  Webster  v.   Hale,   8   Ves.   Jr.   410 

evidence  cannot  show  a  contrary  in-  (1803). 

tent  of  the  testator.    Where  by  a  will  7  Drinkwater  v.  Falconer,  2  Ves.  Sr. 

certain  specified  insurance  stocks  are  622  (1755). 

bequeathed  as  a  trust  for  subsequent  8  Gordon    v.    Duff,     28    Beav.     519 

distribution    among   certain   legatees,  (1860);  Ashton  v.  Ashton,  3  P.  Wms. 

the  legacy  is  specific  and  the  trustee  384  (1735). 

is  entitled  to  dividends  declared  after  9  Evans  v.  Tripp,  6  Mad.  91  (1821). 

the  testator's  death.    Connecticut,  etc.  io  Perry  v.  Maxwell,  2  Dev.  Eq.  (N. 

Co.  v.  Hollister,  74  Conn.  228   (1901).  C.)   488   (1834). 

5  De  Gendre  v.  Kent,  L.   R.   4  Eq. 

821 


302.J 


LEGACIES   AND   GIFTS   OF   STOCK. 


[CH.   XVIII. 


courts;  and,  if  there  is  doubt  as  to  whether  a  legacy  be  specific  or 
general,  it  will  be  construed  to  be  of  the  latter  kind.1 

Where,  however,  the  intent  of  the  testator  clearly  was  to  give 
particular  stock  owned  by  him,  the  court  will  declare  the  legacy 
to  be  a  specific  one.2  Thus,  where  the  testator  gives  the  legacy  of 
stock  by  describing  it  as  "my"  stock,  the  legacy  is  a  specific  one.3 
So  also  where  the  phase  "standing  in  my  name" 4  is  used,  or 
"which  I  hold ;"  5  or  a  direction  is  given  to  make  up  the  specified 
amount  from  the  general  fund  if  the  testator  does  not  hold  enough ;  6 
or  the  testator  describes  the  stock  as  "now  lying  in  the  three  per 
cents ; 7    or  uses   the  word   "such ;" 8    or  makes   a  legacy  of   stock 


i  Davies  v.  Fowler,  L.  R.  16  Eq. 
308  (1873);  Tifft  v.  Porter,  8  N.  Y. 
516,  520  (1853);  Eckfeldt's  Estate,  7 
W.  N.  Cas.  (Pa.)  19  (1879). 

2  A  bequest  of  specific  stock  is  a  spe- 
cific bequest,  and  debts  of  the  estate 


(1860);  Kampf  v.  Jones,  2  Keen,  756 
(1837).  Where,  however,  other  parts 
of  the  will  indicate  that  the  legacy- 
was  general,  it  was  held  to  be  general. 
See  Auther  v.  Auther,  13  Sim.  422 
(1843),  holding  also  that  though,  by 


must  be  paid  from  other  property  if  the  delay   of   the   executor   beyond   a 

possible.    In  re  Noon's  Estate,  88  Pac.  year  in  purchasing  the  stock,  it  rises, 

Rep.  673  (Ore.  1907).  the    legatee    is    entitled   to   the   same 

3  Walton   v.   Walton,   7   Johns.    Ch.  amount  as  if  it  had  been  bought  at 

258   (1823);   Loring  v.  Woodward,  41  the  right  time.    Fidelity,  etc.  Co.'s  Ap- 

N.    H.    391    (1860);    Shuttleworth    v.  peal,  108  Pa.  St.  492  (1885). 


Greaves,  4  Myl.  &  Cr.  35  (1838);  Mil- 
ler v.  Little,  2  Beav.  259  (1840); 
Hayes  v.  Hayes,  1  Keen,  97  (1836); 
Brainerd  v.  Cowdrey,  16  Conn.  1 
(1843).     The   omission    of   the   word 


5  Blackstone  v.  Blackstone,  3  Watts 
(Pa.)   335   (1834). 

6  Townsend  v.  Martin,  7  Hare,  471 
(1849),  holding  that  such  a  legacy 
is  specific  and  not  demonstrative.  Mc- 


"my"  does  not  necessarily  make  the  Guire  v.  Evans,   5  Ired.  Eq.    (N.  C.) 

legacy  a  general  one.    Avelyn  v.  Ward,  269  (1848),  however,  holds  that  a  leg- 

1    Ves.    Sr.    420    (1749).      The    word  acy   of  stock,   to   take   effect   in   case 

"my"    does    not,    however,    have    the  other    legacies    do    not    absorb    that 

same   significance    in    its    application  stock,  is  demonstrative;    also  that  in 

to  a  legacy  of  an  annuity  as  it  has  case  of  legacies  of  the  same  stock  to 

to  a  legacy  of  stock.    Kirby  v.  Potter,  two   different   persons,    each   takes   a 


4  Ves.  Jr.  748  (1799).  In  the  case 
of  Parrott  v.  Worsfold,  1  Jac.  &  W. 
574  (1820),  a  legacy  of  "all  my  stock 
that  I  may  be  possessed  of  at  my  de- 
cease" was  held  to  be  general,  since 
there  was  no  "individual  thing  given." 


moiety.  The  cases  of  Mullins  v. 
Smith,  1  Dr.  &  Sm.  204  (1860);  Fon- 
taine v.  Tyler,  9  Price,  Exch.  94 
(1821);  and  Queen's  College  v.  Sut- 
ton, 12  Sim.  521  (1842),  hold  that 
such  a  legacy  is  specific  if  the  testator 


Bequests  in  different  sums  to  different  leaves  stock  enough,  but  is  general  if 

legatees  of  "my"  stocks  and  bonds  at  he  does  not  leave  enough, 

their  par  value,  not  describing  them  7  Morley    v.    Bird,    3    Ves.    Jr.    628 

particularly,     are     general     legacies.  (1798),   holding  that  if  the  executor 

They  are  not  void  for  uncertainty.  Re  has  sold  the  stock  the  legatees  may 

Hadden's    Will,    9    N.    Y.    Supp.    453  hold  him  liable  for  its  value  one  year 

(1888).  after  the  testator's  death. 

4  Ludlam's    Estate,    13    Pa.    St.    188  8  Davies    v.    Fowler,    L.    R.    16    Eq. 

(1850);  Gordon  v.  Duff,  28  Beav.  519  308    (1873),  the  court  saying  that  a 

822 


CH.   XVIII.] 


LEGACIES  AND  GIFTS  OE  STOCK. 


[§   302. 


out  of  a  quantity  of  stock ;  1  or  in  another  part  of  the  will  speaks 
of  the  stock  as  that  of  which  the  testatrix  may  be  possessed ;  2  or 
where,  after  several  legacies,  all  apparently  general,  the  testator 
bequeaths  the  remaining  stock  "standing  in  my  name," — the  effect 
of  all  these  is  that  the  legacies  are  specific.3  A  legacy  of  all  the 
dividends,  interest,  and  proceeds  from  stock  is  a  specific  legacy, 
oven  though  the  testator  did  not  own  such  stock  at  the  time  he 
made  the  will.4  There  has  been  some  difference  of  opinion  as  to 
whether  the  fact  that  the  testator,  at  the  time  of  making  the  will, 
possessed  an.  equal  or  greater  amount  of  stock  than  that  bequeathed, 
and  of  the  same  kind,  is  to  be  taken  as  evidencing  an  intent  to 
make  the  legacy  specific.  The  weight  of  authority  holds  that  such 
a  fact  is  not  to  be  taken  into  consideration,  and  that  if  the  words 
of  the  legacy  make  it  general,  it  cannot  be  construed  to  be  specific 
simply  because  by  an  examination  of  the  testator's  effects  he  is 
found  to  have  possessed  stock  similar  to  that  described  in  the  will.5 


legacy  is  specific  when  a  meting  out 
or  dividing  is  evidently  intended. 

i  Hosking  r.  Nicholls,  1  Y.  &  C.  Ch. 
478  (1842).  And  if  the  administrator 
has  paid  the  dividends  to  another,  he 
is  personally  liable.  A  legacy  of  "ten 
shares  of  the  stock  of  the  W.  &  N.  R. 
Co."  is  a  specific  legacy,  where  a  sub- 
sequent clause  bequeaths,  "the  balance 
of  my  stock  as  per  my  stock  book." 
Harvard  Unitarian  Soc.  v.  Tufts,  151 
Mass.  76  (1890). 

2  Measure  v.  Carleton,  30  Beav.  538 
(1862).  This  case  also  holds  that,  if 
an  exact  partition  of  the  stock  is  im- 
possible, enough  will  be  sold  to  render 
it  possible. 

3  Sleech  v.  Thorington,  2  Ves.  Sr. 
560  (1754).  A  legacy  of  all  of  sev- 
eral articles  is  specific.  Tomlinson  v. 
Bury,  145  Mass.  346   (1887). 

4  Stephenson  v.  Dowson,  3  Beav.  342 
(1840).  See  also  Fidelity  Trust  Co.'s 
Appeal,  108  Pa.  St.  492  (1885). 

5  Robinson  v.  Addison,  2  Beav.  515 
(1840),  the  court  holding  that  the  leg- 
acy was  general,  and  saying  the  tes- 
tator "in  effect  -gave  such  an  indefi- 
nite sum  of  money  as  would  suffice  to 
purchase  so  many  shares  as  he  had 
given;"  Davis  v.  Cain,  1  Ired.  Eq. 
(N.    C.)     304     (1840);     Bronsdon     r. 


Winter,  Ambl.  56  (1738);  Simmons  v. 
Vallance,  4  Bro.  Ch.  346  (1793);  Bish- 
op of  Peterborough  v.  Mortlock,  1  Bro. 
Ch.  565    (1784);    Boys  v.  Williams,  2 
Russ.  &  M.  689    (1831);   Partridge  v. 
Partridge,   Cas.   t.   Talb.    226    (1736); 
Tifft   v.   Porter,    8   N.   Y.   516    (1853), 
where  the  court  said:    "The  mere  pos- 
session by  the  testator,  at  the  date  of 
his  will,  cf  stock  of  equal  or  larger 
amount  than  the  legacy,  will  not  of 
itself  make  the  bequest  specific;"  Os- 
borne v.   McAlpine,    4   Redf.    (N.   Y.) 
1   (1878);   Eckfeldfs  Estate,  7  W.  N. 
Cas.     (Pa.)     19     (1879);     Sponsler's 
Appeal,  107  Pa.  St.  95   (1884),  where 
the  court  also  held  that  a  codicil  re- 
peating a  general  legacy  of  stock  will 
entitle  the  legatee  to  both  legacies.  In 
Massachusetts  a  doctrine  contrary  to 
that  stated  in  the  text  prevails.     See 
White    v.    Winchester,    23    Mass.    48 
(1827);    Metcalf  v.  First  Parish,   128 
Mass.    370    (1880).      To    same    effect, 
Cuthbert  v.  Cuthbert,  3  Yeates   (Pa.) 
486  (1803) ;  Jeffreys  v.  Jeffreys,  3  Atk. 
120  (1744).  Where  the  will  bequeaths 
a  specified  amount  of  stock  but  pro- 
vides that  if  the  testator  did  not  have 
that  amount  on  his  death,  the  amount 
shall  not  be  made  up,  this  is  a  general 
and     not     a     specific     legacy.  Fence, 


823 


§  303.] 


LEGACIES  AND   GIFTS  OP   STOCK. 


[CII.   XVIII. 


§  303.  The  most  common  form  of  a  general  bequest  of  stock  is 
where  the  testator  merely  bequeaths  a  specified  number  of  shares 
of  a  specified  kind  to  the  legatees,  without  any  further  words  in- 
dicating that  he  then  held  or  expected  to  hold  the  stock  be- 
queathed.1 A  direction  to  the  executors  to  invest  a  certain  sum  in 
specified  stock  for  the  benefit  of  the  legatee  is  a  general  legacy.2 
So,  also,  where  the  executors  are  directed  to  transfer-  to  the  legatee 
certain  stock.3  A  legacy  of  the  residue  of  the  testator's  stock  has 
been  held  to  be  a  general  legacy.4  A  legacy  to  be  paid  "out  of 
the  four  per  cents"  is  general.5  A  provision  in  a  will  that  certain 
stock  shall  be  sold  and  the  proceeds  divided  between  specified  leg- 
atees is  not  a  specific  bequest  of  the  stock,  and  hence  does  not  carry 
the  dividends  declared  before  the  sale  of  the  stock.0  A  legacy  of  the 
entire  contents  of  a  box  to  several  persons  is  general  and  not  specific, 
where  the  securities  therein  cannot  be  divided   among  them.7      A 

where  the  will  contains  a  further  pro-    but   £5,000    of   stock,    the   court   held 
vision  that  the  legatee  shall  take  only    that  the  general  estate  must  purchase 


such  stock  as  the  testator  might 
leave,  and  he  has  sold  a  part  of  the 
stock  and  invested  the  money  in  other 
stocks,  the  amount  will  be  made  up 
out  of  these  latter  stocks.  Blair  v. 
Scribner,  67  N.  J.  Eq.  583  (1905); 
rev'g  65  N.  J.  Eq.  498.  A  legacy  of 
stock  is  general,  no  particular  certifi- 
cates being  specified,  even  though  the 
testator  has  that  amount  of  that  par- 
ticular stock  in  his  possession  at  the 
time  of  his  death.  Matter  of  King, 
122  N.  Y.  App.  Div.  354  (1907). 

l  Wilson  v.  Brownsmith,  9  Ves.  Jr. 
180  (1803),  holding  also  that,  if  there 
is  not  enough  of  such  stock  among 
the  testator's  assets,  the  deficiency 
must  be  purchased  for  the  legatee. 
Pearce  v.  Billings,  10  R.  I.  102  (1871), 
the  court  saying  that  the  evident  in- 
tent of  the  testator  was  "to  have  the 
stock  mentioned  purchased  for  the  leg- 
atees by  his  executor,  or  to  have  the 
legatees  furnished  with  the  means  to 
purchase  the  stock  for  themselves." 
The  value  of  the  stocks  one  year  after 
the  testator's  death  is  the  amount  to 
be  paid  to  the  legatees.  In  the  case 
of  Purse  v.  Snaplin,  1  Atk.  414  (1737), 
where  two  legacies  of  stock  of  £5,000 
each  were  given,  and  the  testator  had 

824 


£5,000  of  the  same  stock. 

2  Raymond  v.  Brodbelt,  5  Ves.  Jr. 
199    (1800). 

3  Lambert  v.  Lambert,  11  Ves.  Jr. 
607  (1806) ;  Sibley  r.  Perry,  7  Ves.  Jr. 
522  (1802),  the  court  saying  a  legacy 
is  not  specific  "without  something 
marking  the  specific  thing — the  very 
corpus;  without  describing  it  as 
standing  in  his  name,  or  by  the  ex- 
pression of  'my  stock,'  etc." 

4  Parrott  v.  Worsfold,  1  Jac.  &  W. 
574  (1820).  Contra,  Bethune  v.  Ken- 
nedy, 1  Myl.  &  C.  114  (1835).  A  be- 
quest of  all  the  stock  which  the  testa- 
tor owns  at  the  time  of  his  death  is  a 
general  legacy  and  if  there  are  debts 
the  stock  must  be  sold  to  pay  the 
debts  before  the  real  estate  is  sold  for 
that  purpose.  The  court  will  not  or- 
der a  sale,  however,  if  there  is  a  great 
depreciation  in  the  market  in  the 
value  of  securities.  Matter  of  Bergen, 
56  N.   Y.  Misc.  Rep.   92    (1907). 

5  Deane  v.  Test,  9  Ves.  Jr.  146 
(1803). 

c  Missouri,  etc.  v.  McCune,  112  Mo. 
App.    332    (1905). 

7  Matter  of  Fisher,  93  N.  Y.  App. 
Div.,  186   (1904). 


CH.   XVIII.] 


LEGACIES   AND   GIFTS   OF   STOCK. 


[§§  304,  305. 


codicil  which,  is  general  in  form  is  held  to  be  such,  although  it  is  but 
an  increase  of  a  previous  legacy  which  is  specific,  and  which  is 
revoked  by  the  codicil.1 

§  304.  Amount  of  stock  conveyed  by  certain  legacies.  — A  legacy 
of  "one  hundred  pounds,  long  annuities,"  has  been  held  to  mean, 
not  that  the  legatee  is  entitled  to  an  annual  income  from  the  estate 
of  one  hundred  pounds,  but  that  he  was  entitled  to  have  that  amount 
invested  for  him.2  A  will  reciting  the  amount  of  stock  held  by 
the  testatrix,  and  bequeathing  it,  or  so  much  as  should  be  stand- 
ing in  her  name  at  her  death,  does  not  give  to  the  legatee  stock 
acquired  after  the  making  of  the  will  and  before  the  death  of  the 
testatrix.3  A  bequest  of  stock  "that  I  possess"  is  held  to  mean 
stock  possessed  by  the  testator  at  the  time  of  making  the  will.4 

§  305.  There  has  been  some  controversy  and  doubt  as  to  whether 
a  legacy  of  the  testator's  "money"  would  give  to  the  legatee  the 
testator's  stock  in  a  corporation.  The  weight  of  authority  holds 
that  it  does  not.5     Nor  will  shares  of  stock  belong  to  a  legatee  to 


i  Johnson  v.  Johnson,  14  Sim.  313 
(1844). 

2  Att'y  Gen.  r.  Grote,  2  Russ.  &  M. 
699  (1827);  Fonnereau  v.  Poyntz,  1 
Bro.  Ch.  472  (1785).  See  Pearce  v. 
Billings,  10  R.  I.  102  (1871).  Contra, 
Stafford  v.  Horton,  1  Bro.  Ch.  482 
(1785).     See  also  §  560,  infra. 

3  Hotham  v.  Sutton,  15  Ves.  Jr.  319 
(1808).  So,  also,  of  a  legacy  of  "the 
whole  of  my  stock  in  the  Housatonic 
Bank,  amounting  to  $6,000."  The  leg- 
atee does  not  take  stock  subsequently 
acquired.  Foote's  Appeal,  39  Mass. 
299  (1839);  Douglas  v.  Douglas,  Kay, 
404 -(1854).  The  case  of  Fidelity 
Trust  Co.'s  Appeal,  108  Pa.  St.  492 
(1885),  states  that  at  common  law  a 
specific  legacy  of  stock  spoke  from 
the  death  of  the  testator,  and  that 
the  English  wills  act  of  1838,  and  the 
Pennsylvania  act  of  1879  were  but 
declaratory  in  that  respect.  If  the  tes- 
tator, in  making  a  specified  bequest 
of  stock,  speaks  of  the  stock  as  "now 
standing  in  my  name/'  the  statute 
does  not  apply,  and  the  bequest  speaks 
from  the  date  of  the  will.  In  Miller 
v.  Little,  2  Beav.  259  (1840),  the  tes- 
tator gave  one  share  to  each  child  him 
surviving.     He  then  had  eight  shares 


and  seven  children.  At  his  death  he 
had  ten  shares  and  eleven  children. 
Only  the  eight  shares  were  held  to 
pass. 

4Cockran  v.  Cockran,  14  Sim.  248 
(1844).  This  rule  is  sometimes 
changed  by  statute.  See,  in  England, 
§24,  Wills  Act  (1  Vict.,  c.  26),  ap- 
plied in  Trinder  v.  Trinder,  L.  R.  1  Eq. 
695  (1866),  and  Goodlad  v.  Burnett,  1 
K.  &  J.  341  (1855)  ;  Hepburn  v.  Skirv- 
ing,  4  Jur.  (N.  S.)  651  (1858);  Wag- 
staff  v.  Wagstaff,  L.  R.  8  Eq.  229 
(1869);  Bothamley  v.  Sherson,  L.  R. 
20  Eq.  304  (1875),  and  preceding  note. 
A  legacy  of  bank  stock  conveys  all 
stock  deposited  in  bank,  there  being 
no  shares  of  bank  stock  owned  by 
the  testator.  Tomlinson  v.  Bury,  145 
Mass.  346  (1887).  A  will  may  be- 
queath not  only  the  stock  standing 
in  the  name  of  the  testatrix,  but  also 
certificates  of  stock  owned  by  her  but 
standing  in  the  name  of  others.  An- 
gell  v.  Springfield  Home,  157  Mass. 
241    (1892). 

5  Mullins  v.  Smith,  1  Dr.  &  Sm.  204 
(1860) ;  Hotham  v.  Sutton,  15  Ves.  Jr. 
319  (1808);  Lowe  v.  Thomas,  Kay, 
369  (1854),  affirming  5  De  G.,  M.  & 
G.  315   (1854);   Gosden  v.  Dotterill,  1 


825 


§  305.] 


LEGACIES  AND   GIFTS   OP   STOCK. 


[CII.    XVIII. 


whom  the  testator  has  given,  by  a  last  will  and  testament,  his  "fur- 
niture .  .  .  with  all  claims  or  demands  of  whatever  nature,"  1 
or  "every  other  article,"2  or  "goods,"3  or  "money  and  effects;"4 
but  they  will  pass  under  a  bequest  of  the  "personal  estate,"  5  or 
"residue  of  money,"  6  or  "chattels."  7  A  bequest  of  "all  securities 
for  money  standing  invested  in  my  name"  carries  stocks  and  bonds.8 
"Gas  stock  to  the  extent  of  six  thousand  dollars"  means  six  thousand 
dollars  at  par.9  A  bequest  of  stock  does  not  carry  debentures, 
even  though  the  debentures  after  a  period  were  to  be  convertible  into 
stock.10  If  the  testator,  in  describing  the  stock  bequeathed,  has 
very  clearly  made  a  mistake  in  the  description,  the  legacy  will  be 
held  to  apply  to  the  stock  intended  to  be  bequeathed.  Thus,  where 
the  testator  has  "City  Bank"  stock,  but  bequeaths  "Mechanics'  Bank" 
stock,  and  the  intent  was  to  bequeath  the  former,  the  court  will 
render  a  decree  to  that  effect.11     Where,  subsequently  to  the  making 


Myl.  &  K.  56  (1832);  Hudleston  v. 
Gouldsbury,  10  Beav.  547  (1847); 
Douglas  v.  Congreve,  1  Keen,  410,  424 
(1836);  Willis  v.  Plaskett,  4  Beav. 
208  (1841) ;  Ogle  v.  Knipe,  L.  R.  8  Eq. 
434  (1869);  Ommanney  v.  Butcher,  1 
Turn.  &  R.  260,  272  (1823),  holding 
also  that  a  bequest  of  stock  for  an 
indefinite  charity  fails;  Beck  v.  Mc- 
Gillis,  9  Barb.  35,  59  (1850).  Contra, 
Waite  v.  Combes,  5  De  G.  &  S.  676 
(1852);  Chapman  v.  Reynolds,  28 
Beav.  221  (1860),  where  the  testator 
had  no  property  but  stock;  Bescoby  v. 
Pack,  1  Sim.  &  Stu.  500  (1823),  hold- 
ing that  the  words  "securities  for 
money"  will  pass  the  "funds,"  but  not 
deciding  as  to  stock  in  private  corpo- 
rations; Newman  v.  Newman,  26  Beav. 
218  (1858),  where  the  legacy  was  of 
"surplus  money;"  Jenkins  v.  Fowler, 
63  N.  H.  244  (1884).  "All  my  money" 
may  include  stock.  Re  Buller,  74  L. 
T.  Rep.  406    (1896). 

i  Delamater's  Estate,  1  Whart. 
(Pa.)  362  (1836). 

2  Collier  v.  Squire,  3  Russ.  467 
(1827). 

3  Cowling  v.  Cowling,  26  Beav.  449 
(1859).  Contra,  Kendall  v.  Kendall, 
4  Russ.  Ch.  360  (1828).  Stock  passes 
under  a  legacy  of  "my  property  at 
R.'s    bank,"     the     certificates     b<ung 


there.    Re  Prater,  L.  R.  37  Ch.  D.  481 
(1888). 

4  Borton  v.  Dunbar,  30  L.  J.  (Ch.) 
8  (1860).  "Ready  money"  covers  un- 
collected dividends.  May  v.  Grave, 
3  De  G.  &  Sm.  462  (1849). 

5  Kermode  v.  Macdonald,  L.  R.  3  Ch. 
App.  584  (1868) ;  aff'g  L.  R.  1  Eq.  457. 

o  Dowson  v.  Gaskoin,  2  Keen,  14 
(1837);  Fulkeron  v.  Chitty,  4  Jones, 
Eq.   (N.  C.)   244   (1858). 

i  Kendall  v.  Kendall,  4  Russ.  Ch.  360 
(1828). 

s  Re  Johnson,  89  L.  T.  Rep.  84 
(1903);  aff'd,  89  L.  T.  Rep.  520.  Cf. 
Turner  v.  Turner,  21  L.  J.  (Ch.)  843 
(1852).  See  also  Bescoby  v.  Pack, 
1  Sim.  &  Stu.  500  (1823).  Re 
Maitland,  74  L.  T.  Rep.  274  (1896). 
Where  power  is  given  by  a  will  to 
trustees  to  invest  money  in  "securi- 
ties" they  may  invest  in  shares  of 
stock  in  railway  companies.  Re  Ray- 
ner,  [1904]  1  Ch.  176. 

o  Re  Johnson's  Estate,  170  Pa.  St. 
177  (1895).  Bank  stock  is  to  be  es- 
timated at  its  par  value  in  a  legacy 
of  "$500  of  bank  stock"  and  "$500 
in  bank  stock."  Partner  v.  Citizens', 
etc.  Co.,  163  Ind.  303  (1904). 

io  Connecticut,  etc.  Co.,  v.  Chase, 
75  Conn.  683  (1903). 

H  Roman,  etc.  Asylum  v.  Emmons, 
•26 


CH.   XVIII.] 


LEGACIES   AND   GIFTS   OF   STOCK. 


B  305. 


of  the  will,  and  before  the  death  of  the  testator,  the  stock  bequeathed 
is  changed  in  its  character  by  operation  of  law,  the  legatee  will 
nevertheless  be  entitled  to  the  stock  in  its  new  form.1 

In  England,  where  "shares"  corresponds  to  the  American  "stock," 
but  "stock"  is  a  term  applicable  to  a  paid-up  interest,  which,  like 
a  bank  deposit,  may  be  used  in  large  or  small  quantities,  a  bequest 
of  "shares"  does  not  pass  "stock"  if  there  be  any  "shares"  to  which 
tlio  legacy  may  apply.2  A  will  giving  all  personal  property  in  the 
United  Kingdom  to  one  party  and  all  personal  property  in  South 
Africa  to  another  party,  gives  to  the  former  legatee  shares  of  stock 
in  a  South  African  corporation,  where  such  corporation  has  a  transfer 
office  in  London  as  well  as  in  South  Africa,  and  the  certificates  them- 
selves are  on  deposit  in  London.  But  it  was  held  that  bonds  issued  by 
a  South  African  company  will  not  pass  to  the  London  legatee,  even 
though  such  bonds  are  on  deposit  in  London.3  The  words  "funds"  or 
"public  funds"  will  include  long  annuities ;  4  and  "foreign  funds" 
means  securities  guaranteed  by  foreign  governments ;  5  but  "funds" 


3  Bradf.  (N.  Y.)  144  (1855).  A  be- 
quest to  "Georgetown  University"  will 
go  to  "Georgetown  College,"  a  corpo- 
ration, if  there  is  no  corporation  of 
the  former  name.  Speer  v.  Colbert, 
200  U.  S.  130  (1906).  Where  a  will 
bequeaths  all  the  testator's  "Carthage 
National  Bank  stock"  and  then  be- 
queaths twenty  shares  in  addition,  it 
may  be  shown  that  the  testator  really 
intended  twenty  shares  of  Central  Na- 
tional Bank  stock  which  he  held.  Wa- 
ters v.  Hatch,  181  Mo.  262  (1904). 
Door  v.  Geary,  1  Ves.  Sr.  255  (1749), 
holding  that  a  bequest  of  "East  India 
stock"  will  apply  to  bank  stock,  when 
the  testator  had  the  latter  but  none 
of  the  former.  See  also  Trinder  v. 
Trinder,  L.  R.  1  Eq.  695  (1S66),  where 
a  legacy  of  "Great  Western  Railway" 
stock  was  held  to  apply  to  the  stock 
of  a  road  absorbed  by  the  Great  West- 
ern Railway;  Oakes  v.  Oakes,  9  Hare, 
666  (1852),  where  a  bequest  of 
"shares"  was  held  to  apply  to  "stock;" 
Gallini  v.  Noble,  3  Mer.  Ch.  691 
(1810) ;  Penticost  v.  Ley,  2  Jac.  &  W. 
207  (1820);  Clark  v.  Atkins,  90  N. 
C.  629  (1884),  where  "bank  stock" 
was  held  to  pass  bonds.  A  palpable 
mistake  of  the  testator  in  describing 


a  legacy  of  bonds  will  be  corrected  by 
the  court.  Holt  v.  Jex,  48  Hun,  528 
(1888).  A  legacy  of  "12  shares  in  the 
steam  barge  J."  may  be  shown  to  be 
twelve  shares  in  the  corporation  own- 
ing the  steam  barge  J.,  and  may  be 
shown  to  intend  shares  worth  $1,000 
each,  even  though  the  par  value  of 
the  shares  is  only  $50  each,  but  the 
testator  considered  them  as  of  $1,000 
par  value  each.  Oades  v.  Marsh,  111 
Mich.  168  (1896).  A  legacy  of  "£400 
invested  in  the  B.  Company"  means 
400  shares  in  that  company,  the  testa- 
tor having  five  hundred  shares  of  £1 
each  and  the  shares  being  worth  £1 
10s.  each.  Re  Buller,  74  L.  T.  Rep. 
406  (1896).  See  98  L.  T.  Rep.  745. 
i  See  p.  830,  note  7,  infra. 

2  Oakes  v.  Oakes,  9  Hare,  666 
(1852). 

3  Re  Clark,  [1904]  1  Ch.  294. 

4  Howard  v.  Kay,  27  L.  J.  (Ch.) 
448  (1858). 

5  Ellis  v.  Eden,  23  Beav.  543 
(1857);  Cadett  v.  Earle,  L.  R.  5  Ch. 
D.  710  (1S77),  properly  holding  that 
New  York  and  Ohio  are  foreign  gov- 
ernments. Cf.  Langdale's  Trusts,  L. 
R.  10  Eq.  39  (1870),  relative  to  French 
railway  securities. 


827 


305.] 


LEGACIES   AND   GIFTS   OF   STOCK. 


[CH.    XVIII. 


will  not  include  bank  stock,1  nor  East  India  stock.2  An  uncondi- 
tional bequest  of  the  dividends  of  stock  is  a  bequest  of  the  stock  it- 
self.3 But  a  bequest  of  a  specific  sum  to  be  paid  from  stock  does  not 
bequeath  the  stock  itself,  although  amounting  to  a  charge  upon  it.4 
A  bequest  of  stock  to  a  legatee  "to  draw  the  income  arising  there- 
from during  her  life-time,  and  at  her  death  to  dispose  of  the  same 
as  she  shall  see  fit,"  vests  the  title  to  the  stock  when  it  is  set  apart, 
in  the  legatee,  even  though  the  executors  are  directed  to  collect  and 
pay  to  her  the  dividends.5  A  bequest  of  the  "rest  and  residue  after 
deducting"  certain  specific  legacies  of  stock  includes  those  legacies, 
if  they  have  lapsed  by  reason  of  the  death  of  the  legatees.6'  A  gen- 
eral bequest  of  stock  applies  to  partly-paid  as  well  as  to  full-paid 
stock.7  Legacies  may  be  made  of  stock  over  which  the  testator  has 
the  power  of  appointment,8  and  a  will  may  provide  for  an  annuity 
to  be  derived  from  stock.9  In  all  these  cases  the  intention  of  the 
testator  is  the  "pole  star"  of  the  courts. 

i  Slingsby  r.  Granger,  7  H.  L.  Cas. 
273   (1859). 

2  Brown  v.   Brown,   4   K.   &  J.   704 


(1858). 

3  A  bequest  of  dividends  and  income 
to  an  institution  as  a  permanent  fund 
is  an  absolute  gift  of  the  stock.  An- 
gell  v.  Springfield  Home,  157  Mass. 
241  (1892);  Collier  v.  Collier,  3  Ohio 
St.  369  (1854);  Haig  v.  Swainey,  1 
Sim.  &  Stu.  487  (1823) ;  Page  v.  Leap- 
ingwell,  18  Ves.  Jr.  463  (1812);  Fox 
v.  Carr,  16  Hun,  566  (1879),  involv- 
ing a  similar  question.  Cf.  Blann  v. 
Bell,  2  De  G.,  M.  &  G.  775  (1852), 
holding  that  this  rule  applies  only  to 
the  "funds,"  but  not  to  stock  in  pri- 
vate corporations.  A  legacy  of  stock 
to  A.,  "the  dividends  derived  from 
the  same  to  be  paid  to  her  by  B., 
whom  I  name  as  trustee  for  said 
stocks  and  bonds,  as  said  dividends 
may  accrue  from  time  to  time,"  passes 
complete  title  to  the  legatee.  No  trust 
exists.  Arnold's  Appeal,  6  Atl.  Rep. 
751    (Pa.    1886). 

■i  Quoted  and  approved  in  Missouri, 
etc.  v.  McCune,  112  Mo.  App.  332 
(1905).  Wilson  v.  Maddison,  2  Y. 
&  C.  Ch.  372    (1843). 

s  Onondaga  Trust,  etc.  Co.  v.  Price, 
87  N.  Y.  542  (1882). 

c  Carter    v.    Taggart,    16    Sim.    423 


(1848);  Shuttleworth  v.  Greaves,  4 
Myl.  &  Cr.  35  (1838),  holding  that  a 
legacy  of  stock  lapses  as  to  those  dy- 
ing before  the  testator,  though  it  is 
given  to  them,  "their  executors,  ad- 
ministrators, and  assigns." 

7  Emery  v.  Wason,  107  Mass.  507 
(1871).  This  case  holds  also  that, 
where  a  call  on  the  stock  becomes 
due  the  day  after  the  testator  died, 
it  was  the  duty  of  the  executor  to 
pay  it  from  the  general  fund.  Where 
a  will  bequeaths  one  hundred  and 
forty  shares  of  a  certain  stock  and  the 
testatrix  dies  leaving  two  hundred 
and  eighty  shares  of  that  stock,  forty 
of  which  are  paid  up  and  two  hun- 
dred and  forty  not  paid,  the  one  hun- 
dred and  forty  must  be  taken  from 
the  two  hundred  and  forty.  Re 
Cheadle,  [1900]  2  Ch.  620. 

s  See  Re  David's  Trusts,  1  Johns. 
495  (1859);  Innis  r.  Sayer,  3  Mac.  & 
G.  606  (1851);  Lownds  v.  Lownds, 
1  You.  &  Jer.  445  (1827);  Nannock  v. 
Horton,  7  Ves.  Jr.  391  (1802);  Re 
Gratwick's  Trusts,  L.  R.  1  Eq.  177 
(1865);  Warren  v.  Postlethwaite,  2 
Coll.  Ch.  116  (1845) ;  Walker  v.  Mack- 
ie,  4  Russ.  Ch.  76  (1827),  disapproved 
in  Hughes  v.  Turner,  3  Myl.  &  K.  666, 
697  (1835). 

o  As  to  the  construction  of  different 


S2S 


CH.    XVIII.] 


LEGACIES   AND    GIFTS   OF   STOCK. 


[§  306. 


§  306.  Ademption  or  revocation  of  a  legacy  of  stock,  and  abate- 
ment.— The  ademption  of  a  legacy  is  a  revocation  of  that  legacy 
in  part  or  wholly,  not  by  an  express  revocation  in  the  will,  but  by 
the  acts  of  the  testator.  Consequently,  an  ademption  applies  only 
to  specific  legacies.1  An  ademption  of  a  specific  legacy  of  stock 
generally  arises  by  a  sale  of  the  stock  by  the  testator.  If  the  spe- 
cific stock  bequeathed  is  not  owned  by  the  testator  at  the  time  of 
his  death,  the  legal  conclusion  is  that  the  specific  legacy  is  adeemed, 
and  the  legatee  takes  nothing.2  A  sale  of  the  stock  by  the  testator 
after  the  will  is  made  revokes  or  adeems  the  legacy,  and  it  is  as  if 
never  made.3  A  codicil  giving  all  the  "personal  estate"  to  another 
is  a  revocation  of  a  bequest  of  stock  in  the  original  will.4  Where  the 
testator  specifies  the  amount  of  his  stock,  the  specific  legatees  of 
it  abate  proportionately  with  the  residuary  legatee,  if  upon  his 
death  it  is  insufficient.5      The  rule  is  otherwise  if  no  mention  is 


provisions  in  wills,  where  an  annuity    Rep.  718   (1891).     A  legacy  of  stocks 

aggregating  two  thousand  two  hun- 
dred shares  "now  owned  by  me  and 
standing  in  my  name  on  the  books 
of"  the  company  is  not  specific,  so  as 
to  be  subject  to  ademption,  although 
in  the  meantime  the  testator  has  sold 
three  thousand  and  fifty-seven  shares 
out  of  three  thousand  two  hundred 
and  fifty-seven.  Mahoney  v.  Holt,  19 
R.  I.  660  (1896). 

2  Ford  v.  Ford,  23  N.  H.  212  (1851), 
although  not  a  stock  case,  says  in  re- 
gard to  this  branch  of  the  law:  "It  is 
now  established  in  England  that  the 
only  question  is  whether  the  specific 
thing  remains  at  the  death  of  the  tes- 
tator, and  that  the  intention  to  adeem 
will  not  be  considered  beyond  the  ex- 
pressions in  the  will.  .  .  .  The 
weight  of  American  authority  is  in 
favor  of  the  English  rule." 

3  Ashburner  v.  Macguire,  2  Bro.  Ch. 
108  (1786);  White  v.  Winchester,  23 
Mass.  48  (1827);  Humphreys  v.  Hum- 
phreys, 2  Cox,  Ch.  184  (1789); 
Hayes  v.  Hayes,  1  Keen,  97  (1836); 
Blackstone  v.  Blackstone,  3  Watts 
(Pa.),  335    (1834). 

4  Kermode  v.  Macdonald,  L.  R.  1 
Eq.  457  (1866);  affirmed,  L.  R.  3  Ch. 
App.  584  (1868). 

5  Elwes    v.    Causton,    30    Beav.    554 


on  stock  is  created,  see  Innes  v. 
Mitchell,  9  Ves.  Jr.  212  (1803);  Kerr 
v.  Middlesex  Hospital,  2  De  G.,  M.  & 
G.  576  (1852);  Ross  v.  Borer,  2  John. 
&  H.  469  (1862);  Yates  v.  Maddan,  3 
Mac.  &  G.  532  (1857) ;  Blewitt  v.  Rob- 
erts, Craig  &  P.  274  (1S41);  Potter 
v.  Baker,  13  Beav.  273  (1851);  Robin- 
son v.  Hunt,  4  Beav.  450  (1841); 
Hedges  v.  Harpur,  3  De  G.  &  J.  129 
(1858);  Evans  v.  Jones,  2  Coll.  Ch. 
516  (1846);  Mansergh  v.  Campbell,  3 
De  G.  &  J.  232  (1858). 

i  Where  the  will  bequeaths  a  speci- 
fied amount  of  stock  but  provides 
that  if  the  testator  did  not  have  that 
amount  on  his  death,  the  amount  shall 
not  be  made  up,  this  is  a  general  and 
not  a  specific  legacy.  Hence,  where 
the  will  contains  a  further  provision 
that  the  legatee  shall  take  only  such 
stock  as  the  testator  might  leave,  and 
he  has  sold  a  part  of  the  stock  and 
invested  the  money  in  other  stocks, 
the  amount  will  be  made  up  out  of 
these  latter  stocks.  Blair  v.  Scribner, 
67  N.  J.  Eq.  583  (1905) ;  rev'g  65  N.  J. 
Eq.  498.  A  bequest  of  $2,000  of  cer- 
tain bonds  is  demonstrative  and  not 
specific  and  not  adeemed  where  the 
testator  had  $10,000  of  such  bonds  and 
sold   them.     Ives   v.   Canby,   48   Fed. 


829 


306.] 


LEGACIES   AND   GIFTS   OF   STOCK. 


[CU.   XVIII. 


made  of  what  amount  of  stock  he  owns.1  Where  the  testator  by 
his  will  gives  two  hundred  shares  of  stock  to  a  legatee,  but  has 
only  one  hundred  shares  when  he  dies,  the  legatee  takes  such  one 
hundred  shares  and  no  more.2  Where  the  testator  in  his  will  give- 
away thirty-six  shares  of  stock,  but  he  only  had  thirty-one  shares, 
and  at  the  time  of  his  death  he  only  had  twenty-five  shares,  the 
executor  is  bound  to  purchase  eleven  shares,  the  legacy  being  a  gen- 
eral one  of  so  many  shares  of  stock.3  If  the  general  property  of  the 
testator  is  exhausted  in  the  payment  of  the  debts  of  the  estate, 
specific  legacies  of  stock  abate  proportionately,  with  other  specific 
legacies.4  A  specific  legacy  of  stock  is  not  adeemed  by  a  change 
in  the  stock  produced  by  an  act  of  the  government.  Thus,  where 
the  government  buys  the  stock,  a  specific  legatee  takes  the  compen- 
sation if  it  has  not  yet  been  collected  by  the  testator,5  but  not  if  it 
has  been  collected  and  used  by  the  latter.6  A  change  by  law  of  the 
funds  into  funds  bearing  a  lower  rate  of  interest  does  not  adeem 
a  specific  legacy  of  it,7  even  though  the  testator  sells  the  former 
and  buys  the  latter  kind  of  funds.8  Even  though  the  testator  has 
deposited  stock  in  exchange  for  bonds,  yet  the  stock  is  not  thereby 


(1862),    following    Page    r.    Leaping- 
well,  18  Ves.  463  (1812). 

i  Petre  v.  Petre,  14  Beav.  197 
(1851);  De  Lisle  v.  Hodges,  L.  R.  17 
Eq.  440  (1874);  Vivian  v.  Mortlock, 
21  Beav.  252  (1855).  The  debts  of 
the  estate  may  be  directed  to  be  paid 
from  the  residue  of  the  stock.  Choat 
v.  Yeates,  1  Jac.  &  W.  102  (1819). 

2  New  Albany,  etc.  Co.  r.  Powell. 
29  Ind.  App.  494  (1902).  Where 
the  testatrix  owns  twenty  shares  of 
stock  and  by  her  will  gives  ten  shares 
each  to  two  persons,  and  then  sells 
ten  shares,  they  take  but  five  shares 
each.  Drake  v.  True,  72  N.  H.  322 
(1903). 

3  Slade  v.  Talbot,  182  Mass.  256 
(1902). 

4  Sparks  v.  Weedon,  21  Md.  156 
(1864).  When  general  legacies  of 
stock  abate  proportionately  with  other 
general  legacies,  the  stock  is  esti- 
mated at  its  value  twelve  months  af- 
ter the  testator's  death.  Blackshaw 
v.  Rogers  (1780),  cited  in  4  Bro.  Ch. 
349. 

5  Walton    v.   Walton,    7    Johns.    Ch. 


258  (1823).  Where  after  a  bequest  is 
made  and  before  the  testator's  death, 
stock  bequeathed  by  it  passes  out  of 
existence  by  reason  of  the  municipal- 
ity taking  over  the  property  of  the 
corporation,  the  bequest  fails.  Re 
Slater,  97  L.  T.  Rep.  74   (1907). 

6  Ludlam's  Estate,  13  Pa.  St.  1S8 
(1850). 

7  Brown  v.  McGuire,  1  Beatty,  Ir. 
Ch.  358  (1829).  But  a  legacy  of 
stock  in  an  incorporated  unlimited 
company  which,  after  the  making  of 
the  will,  is  incorporated  as  a  limited 
company,  and  the  value  of  the  stock 
changed,  which  change  the  testator 
accepts,  fails,  whether  considered  as  a 
specific  legacy  adeemed  or  a  general 
legacy  impossible  of  fulfillment.  Re 
Gray,  L.  R.  36  Ch.  D.  205  (1887). 

8  Partridge  v.  Partridge,  Cas.  t. 
Talb.  226  (1736).  Roper,  Legacies, 
p.  331,  2d  ed.  (1848),  is  inclined  to 
the  opinion  that  a  specific  legacy  of 
stock  is  not  revived  by  a  purchase  of 
similar  stock  after  a  sale  of  the  stock 
bequeathed. 


50 


CH.   XVIII.  ]  LEGACIES   AND   GIFTS   OF  STOCK.  [§   307. 

adeemed,  if  lie  dies  before  tlie  exchange  is  made.1  But  where  the 
will  gave  seventy-five  shares  of  stock  in  a  company,  which,  has  been 
merged  into  another  company,  and  after  the  merger  twenty-five 
shares  were  sold  by  the  testatrix,  the  remaining  fifty  shares  will 
pass,  and  the  balance  will  not  be  made  up  out  of  the  assets,  even 
though  the  intent  was  to  substitute  the  new  stock  for  the  old.2  Even 
though  a  corporation  is  consolidated  with  another  corporation  and 
new  stock  is  taken  in  exchange,  yet  this  is  not  an  ademption.3  Yet 
where  a  will  makes  a  bequest  to  a  church  corporation,  and  after  its 
execution  and  before  the  death  of  the  testator  the  corporation  is  con- 
solidated with  another  one  having  broader  purposes,  the  bequest 
fails.4  A  specific  legacy  of  stock  by  a  feme  covert,  who  had  the 
power  to  bequeath  it,  is  not  adeemed  by  the  fact  that  she  had  the 
stock  transferred  into  her  own  name  after  the  death  of  her  husband.5 
A  specific  legacy  which  has  been  adeemed  is  not  revived  by  a  repub- 
lication of  the  will  after  the  ademption.6 

§  307.  Duty  of  executor  or  administrator  as  regards  a  specific  or 
general  legacy  of  stock. — Where  a  legacy  of  stock  is  made,  it  is  the 
duty  of  the  executor  or  administrator  to  carry  into  effect  the  wishes 
of  the  testator  by  turning  over  to  the  legatee  the  stock  bequeathed, 
if  the  legacy  be  specific;  or,  if  the  legacy  be  general,  by  either  set- 
ting aside  for  the  legatee  the  required  amount  of  stock  from  the 
testator's  effects,  or  purchasing  the  same  for  the  legatee.  The  spe- 
cific legacy  of  stock  vests  in  the  legatee  as  soon  as  the  executor  is 
satisfied  that  the  general  fund  will  pay  the  debts  of  the  estate  and 
consents  to  such  vesting.  When  once  given  the  consent  of  the 
executor  is  irrevocable,  and  only  a  court  of  chancery  can  reach  the 
stock  and  subject  it  to  the  testator's  debts.7      The  liability  of  the 

1  In  re  Frahni's  Estate,  120  Iowa,  85  the  will  assent;  and  in  equity,  if  both 
(1903).  the  corporation   and  such   parties   do 

2  Gardner  v.  Gardner,  72  N.  H.  257  not  assent.  A  decree  of  a  probate 
(1903).  court  that  the  legacy  of  stock  shall 

3/n  re  Peirce,  25  R.  I.  34  (1903).  be  turned  over  to  the  legatee  cannot 

4  Gladding  v.  St.  Matthew's  Church,  be  required  by  the  corporation.  Un- 
25  R.  I.  628  (1904).  der  the  Vermont  statute  it  is  the  duty 

5  Dingwell  v.  Askew,  1  Cox,  Ch.  of  the  executor  to  transfer  stock  to 
427  (1788).  the     residuary     legatee.     Witters     v. 

6  Harvard  Unitarian  Soc.  v.  Tufts,  Sowles,  25  Fed.  Rep.  168  (1885).  As 
151  Mass.  76  (1890).  regards  sales  of  stock  by  an  executor, 

7  Onondaga  Trust,  etc.  Co.  v.  Price,  see  §  329,  infra.  If  stock  specifically 
87  N.  Y.  542  (1882)  ;  Hill  v.  Rocking-  bequeathed  is  not  given  to  the  legatee, 
ham  Bank,  44  N.  H.  567  (1863),  hold-  but  is  used  for  other  purposes,  the 
ing  that  the  legatee  should  sue  the  other  legatees  must  make  good  its 
corporation  at  law  for  refusing  trans-  value.  Tomlinson  v.  Bury,  145  Mass. 
fer,   where  the  parties   interested    in  346   (1887).     Executors  in  New  York 

831 


§  308.] 


LEGACIES  AND  GIFTS  OF  STOCK. 


[en.  XVIII. 


legatee  to  pay  calls  on  the  stock  is  discussed  elsewhere.1  Where 
stock  in  a  Maryland  bank  is  owned  by  a  citizen  of  Delaware,  the 
law  of  Delaware  governs  a  legacy  of  such  stock.2 

§  308.  Gifts  of  stock.  —Shares  of  stock  in  a  corporation  may  be 
the  subject  of  a  gift.  No  formal  method  of  completing  the  gift  is 
necessary.  A  formal  instrument  of  transfer,  duly  delivered  to  an 
agent  with  directions  to  deliver  to  the  donee,  vests  title  in  the 
donee,  though  no  certificates  are  transferred.3  A  gift  of  stock, 
vested  by  a  due  transfer  into  the  name  of  the  donee,  cannot  be  re- 
voked by  the  donor.4  In  order  to  constitute  a  gift  a  perfectly  clear 
intent  so  to  do  must  be  proved.5     A  gift  of  stock  may  be  made  by 


are  not  entitled  to  commissions  on 
transfers  of  stock  specifically  be- 
queathed. Schenck  v.  Dart,  22  N.  Y. 
420  (1860).  A  legacy  may  be  paid  by 
the  stock  of  the  decedent  at  a  valua- 
tion agreed  upon.  Chase  v.  Burritt, 
14  Atl.  Rep.  212  (Conn.  1888). 
i  See  §  560,  infra. 

2  Lowndes  v.  Cooch,  87  Md.  478 
(1898).  Where  a  citizen  of  Tennessee 
is  a  stockholder  in  a  Mississippi  cor- 
poration and  he  dies  and  his  will  is 
probated  in  Tennessee  and  he  gives 
his  stock  to  a  certain  person,  that 
person  can  compel  the  Mississippi  cor- 
poration to  transfer  it,  even  though 
the  will  would  not  be  good  in  Missis- 
sippi. Delta,  etc.  Co.  v.  Pearce,  45  S. 
Rep.  981  (Miss.  1908).  See  also  §  330, 
infra,  and  §  12  supra. 

3  De  Caumont  v.  Bogert,  36  Hun, 
382  (1885),  treating  also  a  gift  as  an 
advancement.  See  s.  c,  Re  Morgan, 
104  N.  Y.  74  (1887).  In  England, 
under  the  statutes,  it  is  held  that  a 
gift  of  stock  does  not  vest  in  the  do- 
nee until  registry  on  the  corporate 
books.  Nanney  v.  Morgan,  L.  R.  35 
Ch.  D.  598  (1887).  Where  a  person 
buys  stock  through  a  broker  on  the 
stock  exchange,  and  the  day  before 
his  death  gives  to  the  broker  his 
wife's  name  as  transferee,  the  gift  to 
her  is  complete,  although  he  died  be- 
fore the  transfers  were  executed.  Bull 
v.    Smith,   84   L.   T.   Rep.   835    (1901). 

4  Standing    v.    Bowring,    L.    R.    27 
Ch.  D.  341    (1884),  where  the  donor 

8 


transferred  into  the  joint  names  of 
donor  and  donee,  and  afterwards  at- 
tempted to  dispose  of  the  whole  stock. 
A  gift  of  stock  fully  made  and  ac- 
cepted cannot  be  retracted.  Walker  v. 
Joseph,  etc.  Co.,  47  N.  J.  Eq.  342 
(1890).  A  father  who  takes  stock  in 
the  name  of  a  son  in  order  to  qual- 
ify him  as  a  director,  and  takes  back 
the  certificates,  does  not  thereby  make 
a  gift  of  the  stock.  Re  Gooch,  62  L. 
T.  Rep.  384  (1890).  A  person  trans- 
ferring stock  in  trust,  the  dividends  to 
be  paid  to  him  during  life,  and  also 
such  part  of  the  principal  as  the 
trustee  deems  best,  and  the  stock  to 
go  to  his  heirs  upon  his  death,  the 
trustee  to  have  power  to  sell  and  re- 
invest the  fund,  cannot  be  revoked  by 
the  person  creating  the  trust.  Sands 
v.  Old  Colony,  etc.  Co.,  81  N.  E.  Rep. 
300   (Mass.  1907). 

5  Where,  however,  the  stock  is  pur- 
chased by  one  in  the  name  of  another, 
it  may  be  shown,  as  against  the  cred- 
itors of  the  former,  that  he  intended 
the  stock  as  a  gift  to  the  latter.  Rider 
v.  Kidder,  10  Ves.  Jr.  360  (1805).  A 
gift  of  stock  to  take  effect  only  upon 
the  death  of  the  donor  is  not  absolute, 
and  is  subject  to  the  payment  of  his 
debts  existing  at  the  time  of  his 
death.  Sterling  v.  Wilkinson,  83  Va. 
791  (1887).  A  gift  of  stock  whereby 
the  owner  makes  himself  a  trustee  of 
it  for  his  donee  is  complete,  and  a 
recognition  of  the  trust  in  his  will 
does  not  render  the  stock  a  part  of 
32 


CII.    XVIII.] 


LEGACIES    AND    GIFTS    OF   STOCK. 


[§  308. 


delivering  to  the  donee  the  certificates  indorsed  in  blank  on  the  back 
thereof.1  A  gift  of  stock  completed  by  the  delivery  thereof  is  not 
revoked  by  the  fact  that  the  donee  hands  it  back  to  the  donor  to 
pledge  for  the  benefit  of  the  company.2  Where  the  gift  is  made 
in  gratitude  for  care  to  be  bestowed  on  another,  the  gift  will  fail 
upon  the  death  of  the  donee,  if  it  is  proved  that  the  stock  had  not 
been  fully  and  finally  delivered.3  A  gift  of  the  dividends  on  stock 
is  a  gift  of  the  stock  itself.4  A  gift  of  stock  by  one  legatee  to  an- 
other, in  the  belief  that  the  testator  so  intended  the  stock  to  be  dis- 
posed of,  cannot  be  revoked  after  an  instrument  of  transfer  is  signed 


his  estate,  subject  to  the  dower  right    fills  in  the  name  of  a  person  and  after 


of  his  wife.  Dickerson's  Appeal,  115 
Pa.  St.  198  (1887);  Stone  v.  Hackett, 
78  Mass.  227  (1858).  Although  a  per- 
son buys  stock  as  trustee,  and  charges 
the  price  on  his  books  against  his 
daughters  and  credits  them  with  divi- 
dends, yet  if  he  sold  the  stock  and 
used  the  money  the  stock  was  not  an 
advancement  to  them.  Herkimer  v. 
McGregor,  126  Ind.  247  (1S90).  Where 
a  stockholder  transfers  the  certificate 
on  the  back  to  a  person  and  leaves 
it  in  his  own  safe-deposit  box,  and 
writes  a  letter  to  such  person,  direct- 
ing him  to  distribute  it  among  a  list 
of  charitable  corporations,  but  no  list 
is  attached,  the  latter  takes  no  title, 
and  the  executors  may  compel  him  to 
transfer  the  certificate  to  them.  Bliss 
v.  Fosdick,  76  Hun,  508   (1894). 

i  Coffey  v.  Coffey,  179  111.  283 
(189$).  In  Maryland  it  is  held  that 
a  mere  transfer  of  the  certificates  of 
stock,  without  a  registry  on  the  corpo- 
rate book,  is  incomplete  as  a  gift,  and 
cannot  be  enforced  against  the  per- 
sonal representatives  of  the  deceased 
donor.  Baltimore  Retort,  etc.  Co.  v. 
Mali,  65  Md.  93  (1886).  The  delivery 
of  a  certificate  of  stock  by  a  husband 
to  his  wife  with  intent  to  give  the 
stock  to  her  may  constitute  a  com- 
plete gift,  even  though  the  stock  is 
not  transferred  by  him  on  the  back 
for  several  years  thereafter.  First 
Nat.  Bank  v.  Holland,  99  Va.  495 
(1901).  Where  the  owner  of  stock 
signs   the  transfer   on   the   back  and 


wards  dies,  and  the  person  to  whom  it 
is  transferred  is  in  possesoion  of  the 
certificate  and  claims  that  the  stock 
was  given  to  her,  such  possession  is 
prima  facie   evidence   of   a   gift   and 
delivery.    Liscomb  v.  Manchester,  etc. 
R.  R.,   70   N.   H.   312    (1900).     Under 
the  New  York  statute,  prohibiting  tes- 
timony by  an  interested  party  as  to 
conversations  with  a  deceased  party,  a 
person  claiming  stock  by  gift  cannot 
so  prove  delivery  by  the  deceased  per- 
son.   Richardson  v.  Emmett,  170  N.  Y. 
412     (1902).     Where     a     stockholder 
holds  the  note  of  an  employee,  secured 
by  stock,  which  the  former  had  sold 
to    the   latter,   and   the   former   gave 
up   the   certificate   and   tears   up   the 
note  and  states  that  the  transaction  is 
a  gift,   it   is  a  gift  inter  vivos.     De- 
nunzio's  Receiver  v.  Scholtz,  117  Ky. 
182  (1903). 

2  Goodwin  v.  Hampton,  etc.  Co.,  133 
Mich.  229    (1903). 

3  Jackson  v.  Twenty-third  St.  Ry., 
88  N.  Y.  520  (1882).  When  a  gift  of 
stock  is  made  in  accordance  with  an 
agreement  to  compensate  the  doaee 
for  taking  care  of  the  donor,  a  deliv- 
ery of  the  certificate  without  any 
transfer  suffices.  Reed  v.  Cope- 
land,  50  Conn.  472  (1883).  But  the 
contract  to  make  the  gift  must  not  be 
in  opposition  to  public  policy,  nor  in 
fraud  of  the  rights  of  other  stockhold- 
ers. Nickerson  v.  English,  142  Mass. 
267  (1886). 

4  See  §  305,  supra. 


(53) 


833 


§  308.] 


LEGACIES    AND    GIFTS    OF    STOCK. 


[CII.    XVIII. 


and  actual  transfer  made,  even  though  it  is  afterwards  found  that 
the  testator  had  no  such  intent.1  A  stockholder  who  has  transferred 
his  stock  into  the  joint  names  of  himself  and  his  Avife  cannot  dispose 
of  his  interest  by  a  last  will  and  testament.  It  passes  to  the  wife  as 
the  survivor.2  A  gift  of  stock  causa  mortis  may  he  made  by  a  mere 
delivery  of  the  certificate  to  the  donee.3     The  delivery  and  accept- 


1  Delamater's  Estate,  1  Whart. 
(Pa.)   362   (1836). 

2  Dummer  v.  Pitcher,  5  Sim.  35 
(1831);  aff'd,  2  M.  &  K.  262  (1833). 
A  gift  of  stock  direct  from  the  hus- 
band to  the  wife  is  legal.  She  there- 
upon takes  a  sole  and  separate  estate 
therein.  Deming  v.  Williams,  26 
Conn.  226  (1857).  The  case  of  Fran- 
cis v.  New  York,  etc.  R.  R.,  17  Abb. 
N.  Cas.  1  (N.  Y.  1885),  aff'd,  108  N. 
Y.  93,  holds  that,  when  a  gift  of  stock 
is  made  to  a  minor,  it  is  complete 
and  irrevocable,  so  far  as  the  donor 
is  concerned;  but  the  minor  may, 
upon  attaining  majority,  either  accept 
or  refuse  it. 

3  Grymes    v.    Hone,    49    N.    Y.     17 
(1872)  ;  Walsh  v.  Sexton,  55  Barb.  251 
(1869);    Allerton   v.   Lang,    10    Bosw. 
362   (1863).     The  last  two  cases  hold 
that  the  certificates  need  not  even  be 
indorsed   or   transferred,   but   that   a 
mere  delivery  without  any  writing  is 
sufficient.     Cf.    §§  375,   465,   infra.     A 
delivery  of  a  certificate  of  stock  with- 
out written  assignment  is  not  a  good 
gift  inter  vivos.     Matthews  v.  Hoag- 
land,  48  N.  J.  Eq.  455   (1891).     No  de- 
livery  of   stock   to  a  wife  as   a  gift 
exists     where,     after    the     husband's 
death,  the  stock  is  found  among  his 
papers  in  her  possession  and  not  in- 
dorsed.    Morse  v.  Meston,   152  Mass. 
5    (1890).      Although    no    transfer    is 
made   of   the   certificate,   yet   if  it   is 
found  among  the  papers  of  a  deceased 
person  it  will  be  presumed  to  be  his, 
though   standing  in  the  name  of  his 
sister,   who    also    is   dead,    the    stock 
having  been  considered  of  little  value 
by  them.    Re  Mapes's  Estate,  12  N.  Y. 
Supp.  9  (1890).    A  donatio  causa  mor- 


tis of  stock  is  revoked  by  the  recov- 
ery of  the  donor,  even  though  it   is 
registered.     Staniland    v.    Willott,     3 
Macn.  &  G.  664    (1850).     In  England 
railway  stock  is  not  the  subject  of  a 
donatio  causa  mortis  by  a  delivery  of 
the  certificate,  since  the  transfer  can 
be  by  deed  only.     Moore  v.  Moore,  43 
L.   J.    (Ch.)    617    (1874).     A  delivery 
of  certificates  of  stock  is  not  a  good 
donatio    mortis    causa.      Re    Weston, 
[1902]   1  Ch.  680.     Delivery  of  an  in- 
vestment certificate  is  not  a  valid  do- 
natio mortis  causa  of  the  stock  itself. 
Re    Andrews,    [1902]    2    Ch.    394.      A 
gift  causa  mortis  of  stock  in  a  bank 
by  mere  manual  delivery  of  the  certifi- 
cate,   without    any    signature    to    the 
transfer  thereof,  is  good  where  there 
is   clear   proof   of   the   intent    of   the 
donor  to   make   the   gift.     Leyson   v. 
Davis,    17    Mont.    220    (1895).     A   de- 
cision of  a  state  court  that  a  donatio 
causa  mortis  of  bank  stock  was  effec- 
tive,  although   the   donor  merely   de- 
livered the  certificates  of  stock  with- 
out transferring  the  same  on  the  back 
thereof,  does  not  raise  a  federal  ques- 
tion, even  though  the  stock  was  na- 
tional-bank  stock.     Leyson  v.   Davis, 
170  U.  S.  36    (1898).     A  common-law 
donation  causa  mortis  differs  from  a 
civil-law    donation    mortis    causa    in 
that   the   former   was    a    gift    during 
life,  but  in  expectation  of  death,  and 
not  to  take  effect  until  death,  while 
the    latter,    although    in    prospect    of 
death,  to  take  effect  upon  death,  is  rev- 
ocable and  under  the  Louisiana  code 
cannot  be  made   except  by   last   will 
and  testament.     Hence  a  delivery  of 
certificates   of   stock   not   indorsed   is 
not  a  good  donation  mortis  causa.    A 
834 


CH.    XVIII.]  LEGACIES    AND    GIFTS   OF    STOCK.  [§   308. 

ance  of  a  gift  of  stock  is  held  to  be  effectual,  where  the  donor  had 
the  stock  transferred  into  the  name  of  the  donee  and  took  out  certifi- 
cates in  the  donee's  name,  even  though  the  donor  died  before  the 
donee  knew  of  the  gift.1  Where  a  father  assigns  stock  to  his  son 
and  such  stock  is  recognized  and  treated  as  the  son's  property  for 
several  years,  the  gift  is  a  completed  gift  inter  vivos.2  If  a 
person  transfers  stock  on  the  corporate  books  to  another  person  and 
the  latter  collects  the  dividends,  and  the  former  states  to  others  that 
he  had  given  such  stock  to  the  latter,  such  gift  may  be  effective,  even 
though  the  new  certificates  were  not  delivered  to  the  donee.3  Where 
the  owner  of  a  certificate  of  stock  indorses  it  to  a  specified  person, 
the  indorsement  containing  also  the  words,  "reserving  to  myself  the 
dividends  declared  upon  the  same  during  my  life,"  and  the  certificate 
of  stock  is  then  placed  in  an  envelope  which  is  sealed  and  delivered 
to  the  donee  with  instructions  not  to  open  it  until  the  death  of  the 
donor,  this  is  an  executed  gift,  except  as  to  the  dividends  during  the 
life  of  the  donee.4  A  gift  of  bonds  inter  vivos  is  not  good  unless 
there  is  actual  delivery.  Even  though  the  donor  gives  the  donee 
a  key  to  the  box  in  which  the  bonds  are  placed,  and  even  though 
he  had  declared  that  he  had  given  the  bonds  to  the  donee,  yet  this 
is  not  sufficient  if  there  was  no  actual  delivery.  A  gift  inter  vivos 
is  the  same  as  a  gift  causa  mortis  in  this  respect.5     A  gift  of  stock, 

common-law  donation  causa  mortis  is  v.   Biddeford,   etc.   Bank,  94  Me.   452 

not  valid  in  Louisiana.    Succession  of  (1900). 

Sinnott  v.  Hibernia  Nat.  Bank,  105  4  Calkins  v.  Equitable,  etc.  Assoc, 
La.  705  (1901).  A  gift  of  stock  is  126  Cal.  531  (1899).  In  the  case  State 
one  inter  vivos,  even  though  it  was  v.  Probate  Court,  etc.  County,  113 
made  just  before  death,  such  gift  N.  W.  Rep.  888  (Minn.  1907),  a  stock- 
being  to  complete  what  the  donor  holder  transferred  title  to  his  children 
believed  had  been  an  insufficient  and  the  children  then  leased  to  him 
delivery  of  such  stock  at  a  prior  the  use  of  the  stock  during  his  life 
time.  Coffey  v.  Coffey,  179  111.  283  and  the  transaction  was  upheld  by 
(1899).  the  court. 

i  Roberts's   Appeal,    85    Pa.    St.    84  5  Chambers   v.   M'Creery,    106    Fed. 

(1877).  Rep.  364    (1901).     In  the  case  of  Gil- 

2  Jennings  v.  Neville,  180  111.  270  kinson  v.  Third,  etc.  R.  R.,  47  N.  Y. 
(1899).  App.  Div.  472   (1900),  where  a  stock- 

3  Richardson  v.  Emmett,  61  N.  Y.  holder  during  his  life  took  the  donee 
App.  Div.  205  (1901);  rev'd  on  an-  to  a  deposit  company  and  rented  a 
other  point  in  170  N.  Y.  412.  Even  deposit  box  in  both  of  their  names 
though  a  husband  buys  stock  in  his  and  placed  therein  stock  certificates 
own  name  and  causes  the  certificates  running  to  him  and  gave  the  donee 
to  be  made  out  in  the  name  of  his  one  key,  he  retaining  the  other,  and 
wife,  yet,  if  he  does  not  deliver  them  stated  that  he  gave  the  donee  the 
to  her  or  declare  a  trust  in  her  favor,  stock,  it  was  held  that  this  amounted 
the  title  does  not  vest  in  her.  Getchell  to  a  gift  inter  vivos.     Where  a  hus- 

835 


§  308.]  LEGACIES   AND   GIFTS   OF   STOCK.  [CII.    XVIII. 

bonds,  etc.,  may  be  by  a  separate  bill  of  sale  or  assignment^  but  if 
the  donee  immediately  gives  back  a  power  of  attorney  authorizing  the 
donor  to  keep  the  property  and  take  the  income  and  sell  it  if  he 
wishes,  the  gift  is  not  complete,  and  temporary  possession  by  the 
donee  subsequently  of  the  key  to  the  safe  in  which  the  property  is 
deposited  is  immaterial.1     Where  a  man  buys  stock  and  has  it  issued 
in  the  name  of  his  infant  daughter  and  states  that  it  is  a  gift  to 
her  and  places  it  in  his  safe-deposit  box  with  other  articles  belonging 
to  his  family,  this  is  a  sufficient  delivery.2     A  delivery  of  a  transfer 
of  stock  does  not  complete  the  gift,  where  the  donor  retains  the  cer- 
tificate of  stock,  especially  where  thereafter  he  votes  the  stock  and 
receives  the  dividends,  and  hence  such  a  delivery  by  a  man  to  his 
wife  while  he  is  solvent  is  not  good  after  he  becomes  insolvent.3 
;Where  a  husband  gives  stock  to  his  wife,  but  afterwards,  with  her 
consent,   sells  it,   she  cannot  after  his  death  claim  that  it  was   a 
completed  gift.4      Even   though  the   wife,    after  the   death  of   the 
husband,  is  in  possession  of  certificates  of  stock  made  out  in  his  name 
but  enclosed  in  an  envelope  on  which  he  had  written  the  words  "the 
property  of  Electa  C.  Bean,"  yet  if  the  certificates  were  not  endorsed 
and  delivery  of  the  gift  cannot  be  proved  except  by  her  testimony, 
the  gift  is  not  valid  as  a  gift  inter  vivos  or  causa  mortis.5     Under 
the  California  statute  requiring  a  verbal  gift  to  be  completed  by 
an  actual  or  symbolic  delivery,  a  gift  whereby  the  donor  assigns  the 
certificates  to  the  donees  and  delivers  them  to  the  secretary  to  be 
delivered  to  the  donees  on  his  death  is  not  a  valid  gift.     Neither  is 
it  a  gift  donatio  mortis  causa.6     To  make  a  gift  of  stock  inter  vivos, 
absolute  delivery  is  necessary,  although  after  delivery  the  donee  may 
leave  the  certificates  with  the  donor.     Clear  proof  in  such  a  case 

band  who  is  about  to  use  his  wife's  donor,  may  have  the  dividends,  is  not 

bonds  without   her  consent  executes,  a  valid  gift.    Re  Shield,  53  L.  T.  Rep. 

in  the  presence  of  a  witness,  an  as-  5  (1885).  Even  though  a  certificate  of 

signment  to  her  of  certain  stocks  of  stock  is  found  in  the  deposit  box  of 

his  own,  the  certificates  of  the  same  the  deceased  person,  yet  there  may  be 

being  attached  thereto,  to  secure  her  a  question  as  to  whether  it  had  been 

from  loss  by  reason  of  his  use  of  her  given  to  her.    Hastings  v.  Tousey,  123 

securities,  and  his  paper  is  found  at  N.  Y.  App.  Div.  480   (1908). 

his    death    in   his   tin   box   with    the  i  Brown  v.  Crafts,  98  Me.  40  (1903). 

stocks,  it  amounts  to  a  declaration  of  2  Crouse  v.  Judson,  41  N.  Y.  Misc. 

trust  and  is  legal,  even  though  there-  Rep.  338   (1903). 

after  he  amended  it  by  substituting  3  Allen,    etc.    Co.    v.   Grumbles,    129 

other  securities.    Collins  v.  Steuart,  58  Fed.  Rep.  287  (1904). 

N    J    Eq    392   (1899).     But  a  written  4  Bauernschmidt  v.  Bauernschmidt, 

memorandum  left  by  a  decedent  to  the  97  Md.  35  (1903). 

effect  that   he   thereby   gives   certain  5  Bean  v.  Bean,  71  N.  H.  538  (1902). 

stock   to    a   person,   but   retains    the  6  Noble    v.    Garden,    146    Cal.    225 

same  during  life  in  order  that  he,  the  (1905). 

836 


CH.   XVIII.]  LEGACIES   AND   GIFTS   OF   STOCK.  [§   308. 

is  required,  and  hence  where  a  person  purchases  stock  and  puts  it 
in  the  name  of  an  agent  and  then  deposits  the  stock  in  the  former's 
safe-deposit  box,  the  agent  may  be  compelled  to  execute  a  transfer, 
even  though  he  claims  that  the  stock  had  been  given  to  him.1  A 
person  may  make  a  gift  of  stock  by  executing  and  delivering  the  cer- 
tificates to  a  third  person  with  a  writing  attached  thereto  stating 
that  the  donor  held  the  stock  in  trust  for  the  donee  to  be  delivered 
to  her  upon  his  death,  he  retaining  the  right  to  the  dividends  during 
his  lifetime.2  Where  a  woman  takes  her  securities  from  a  box  and 
transfers  them  in  blank  and  hands  them  to  her  nephew  and  states 
in  his  presence  and  in  the  presence  of  an  officer  of  the  safe-deposit 
company  that  she  is  thereby  giving  the  securities  to  the  nephew,  and 
then  she  surrenders  her  box  and  her  nephew  takes  out  a  box  in  his 
own  name  and  deposits  the  securities  therein,  this  is  a  complete 
gift,  even  though  the  nephew  gave  her  access  to  the  box  and  she 
thereafter  sold  some  of  the  securities  and  collected  dividends  and 
interest  from  others  and  used  the  money.3 

A  stockholder  who  assigns  certificates  of  stock  to  his  wife  and 
places  them  in  a  box  in  his  possession  in  which  he  keeps  her  papers, 
is  not  guilty  of  a  fraud  as  against  his  subsequent  creditors,  even 
though  he  did  not  actually  deliver  the  certificates  to  her  and  she 
did  not  know  of  the  assignment.4 

Even  though  a  man  writes  to  his  son  that  he  had  acquired  certain 
stock  from  the  deceased  mother,  and  that  he  had  transferred  a  por- 
tion of  it  to  his  son,  yet  if  he  keeps  the  stock  and  afterwards  denies 
that  it  belongs  to  the  son,  the  son  is  not  entitled  to  it.5 

Even  though  the  owner  of  the  stock  transfers  it  to  another  person 
and  delivers  it  to  the  latter,  yet  if  the  latter  a  year  afterwards  re- 
turns it  to  the  former  and  the  former  puts  it  in  her  deposit  box 
where  it  is  found  at  the  time  of  her  death,  this  is  not  a  valid  gift 
inter  vivos,  there  being  proof  that  the  owner  intended  title  to  pass 
only  after  her  death.6 

But  where  the  owner  of  bonds,  who  holds  the  certificate  of  the 

1  Bowron  v.  De  Selding,  105  N.  Y.  and  does  in  fact  modify  the  certifi- 
App.  Div.  500  (1905).  cates  before  her  death,  the  gift  is  not 

2  Matter  of  King,  115  N.  Y.  Apn.  completed  by  delivery  after  her  death. 
Div.  751   (1906);  aff'd,  188  N.  Y.  626.  Noble  v.  Learned,  94  Pac.  Rep.  1047 

3  Reese  v.  Philadelphia,  etc.  Co.,  67  (Cal.  1908). 

Atl.  Rep.  124  (Pa.  1907).  Even  though  4  In  re   Hedley,   156   Fed.   Rep.   314 

a   stockholder   endorses   his   stock   to  (1907). 

various  persons  and  delivers  it  to   a  5  Paine  v.   Paine,   67   Atl.   Rep.   127 

third   person  to  be  delivered  to  such  (R.  I.  1907). 

persons  after  her  death,  yet  if  she  re-  6  Bone    v.    Holmes,    81    N.    E     Rep. 

serves  the  right  to  change  her  mind  290   (Mass.  1907). 

837 


§   308.]  LEGACIES   AND   GIFTS   OF   STOCK.  [CH.   XVIII. 

depository   therefor,   indorses  such  certificate  to  a  person  and  de- 
livers it,  this  is  a  gift  inter  vivos.1    The  owner  of  bonds  may  deposit 
them  in  trust  with  a  trustee,  with  directions  in  writing  to  deliver 
them  to  certain  persons  upon  the  donor's  death.     Such  persons  are 
then   entitled    to   them,    although    the   donor   collected   the   coupons 
during  his  life.2     Stock  may  be  given  away  in  trust,  with  the  donor 
himself  as  a  trustee,   although  no  transfer  is  made  on  the  corpo- 
rate books.3      A  stockholder  in  a  national  bank  many   donate  his 
stock  to  his  children  by  putting  it  in  trust  for  them,  and  he  is  not 
then  liable  on  the  stock  where  it  is  clear  that  his  acts  were  not  for 
the  purpose  of  avoiding  liability.4     Certificates  of  stock  transferred 
to  a  trustee  to  pay  the  income  to  the  donor  during  life  and  upon  his 
death  to  be  delivered  in  a  certain  way  to  another  party,  is  a  com- 
pleted gift  inter  vivos  and  is  not  revoked  by  the  trustee  delivering 
his  stock  back  to  the  donor.5     A  gift  of  stock  on  condition  that  the 
dividends  should  all  go  to  the  owner  and  that  he  should  vote  it  is 
a  gift  of  a  remainder  with  a  life  interest  in  the  donor.6     Where  a 
person  indorses  certificates  of  stock  and  delivers  them  to  donees,  it 
is  a  complete  gift,  even  though  he  thereafter  takes  the  dividends  and 
continues  to  be  president.7     A  gift  of  stock,  the  donee  to  have  the 
possession  and  management  of  the  same,  but  the  donor  to  have  the 
income  during  his  life,  makes  the  donee  trustee,  until  the  death  of 
the   donor,   and  hence  such  gift  is   taxable  under   the  New   York 
statutes  as  a  transfer  to  take  effect  on  his  death.8     Where  a  person, 
who  is  under  contract  to  deliver  certain  stock,  gives  the  stock  to  a 
relative  for  nothing,  the  party  entitled  to  the  stock  by  contract  may 
compel  such  relative  to  give  up  the  stock.9 

i  McGavic  v.  Cossum,  72  N.  Y.  App.  7  Matter  of  Bullard,  76  N.  Y.  App. 

Div.  35    (1902).  Div.  207   (1902). 

2  Green  v.  Tulane,  52  N.  J.  Eq.  169  8  Matter  of  Cornell,   170  N.   Y.   423 
(1893).  (1902).    A  sale  of  stock  in  considera- 

3  Locke  v.  Farmers'  L.  &  T.  Co.,  140  tion  of  an  annuity  is  not  subject  to 
N.  Y.  135  (1893).  the  New  York  inheritance  tax.     Mat- 

4  Fowler  v.  Gowing,   152  Fed.  Rep.  ter  of  Edgerton,  35  N.  Y.  App.  Div. 
801  (1907).  125  (1898);  aff'd,  158  N.  Y.  671. 

5  Larimer   v.    Beardsley,    130    Iowa,  o  Graham    v.    O'Connor,    73    L.    T. 
706    (1906).  Rep.   712    (1896). 

6  Matter    of    Brandreth,    169    N.    Y. 
437    (1902). 

838 


CHAPTER   XIX. 
WHO  MAY  BUY  AND  SELL  STOCK. 


§§  309,  310.  Competency  of  a  corpora- 
tion to   purchase   shares   of 
its  own  capital  stock. 
311,  312.  Rule  in  the  United  States. 

313.  The  stock  is  not  merged,  and  it 

may  be  sold  by  the  corpora- 
tion. 

314.  Purchase   by    a   corporation    of 

stock  in  another  corporation 
— Purchase  by  railroad. 

315.  Purchases    of    stock    by    banks, 

and  pledges  to  banks. 

316.  Purchases    of    stock    by    insur- 

ance, manufacturing,  and 
other  corporations. 

317.  Stockholding  co  r  p  o  r  a  t  i  o  n  s, 

known  as  "holding  corpora- 
tions"— Mortgages  by  stock- 
holding   corporations. 

318.  Infants  as  purchasers  of  stock. 

319.  Married  women  as  purchasers, 

owners,  or  vendors  of  stock. 


§  320.  Competency     of     miscellaneous 
parties — Joint  operation. 

Sales,  purchases,  and  transfers 
by  agents. 

Purchase  of  stock  by  guardians, 
executors,  and  trustees. 
323,  324.     Sale  or  pledge  of  stock  by 
trustee  legally  or  in  breach 
of  his  trust. 

326.  Transferee  of  stock  from 
trustee  is  protected,  when. 

Rights  and  liability  of  the  cor- 
poration allowing  a  transfer 
by  a  trustee  in  breach  of  his 
trust. 

Sales  of  stock  by  a  guardian. 

Sales  by  executor  or  adminis- 
trator. 

Duty  and  liability  of  the  corpo- 
ration in  sales  by  an  execu- 
tor or  administrator. 


321. 
322. 


325, 


327. 


328. 
329. 

330. 


§  309.  Competency  of  a  corporation  to  purchase  shares  of  its  own 
capital  stock.  —In  England  a  long  line  of  decisions  lias  established 
the  rule  that,  at  common  law,  a  corporation  cannot  purchase  shares 
of  its  own  capital  stock.1  This  rule  is  clear  and  decisive  in  that 
country  and  is  closely  adhered  to.2     The  corporation  may  be  given 

l  Trevor  v.  Whitworth,  L.  R.  12  App.  rector  buys  merchandise  of  his  corpo- 

Cas.  409  (H.  L.  1887),  reviewing  many  ration,  and  pays  for  it  in  stock  of  the 

cases;  Re  Marseilles  Extension  Ry.,  L.  corporation,    and    the    transaction    is 

R    7  Ch.  App.  161    (1871);   Evans  v.  ratified  in  general  meeting,  the  direc- 

Coventry,    25    L.    J.     (Ch.)     489,    501  tor,   on    a   winding   up,    is   not   liable 

(1856);   Cross's  Case,  38  L.  J.   (Ch.)  for    the    value    of    the    merchandise. 

583  (1869);  Morgan's  Case,  1  De  G.  &  Weekes's    Case,    17    L.    R.    (Ir.)    239 

Sm.  750   (1849);   Ex  parte  Morgan,  1  (18S5).    A  purchase  by  a  corporation 

Macn.  &  G.  225   (1849);   Eyre's  Case,  of  its  own  stock  and  payment  by  de- 

31  Beav.  177   (1862).     See  also  3  Ry.  bentures  is  void,  and  a  resale  of  the 

&    Corp'   L     J.    169.      Cf.    Taylor,    v.  stock  at  a  discount  is  void.    Re  Lon- 

Hughes,'  2  Jones  &  Lat.    (Ir.  Ch.)    24  don     Celluloid    Co.,    39    Ch.     D.     190 

(1844),  holding  that  a  banking  com-  (1888). 

pany  at  common  law  may  buy  its  own        2  Zulueta's  Claim,  L.  R.  5  Ch.  App. 

stock    the    same   as    a   copartnership  444  (1870) ;  Hope  v.  International  Fin. 

may  buy  out  a  partner.    Where  a  di-  Soc,  L.  R.  4  Ch.  D.  327  (1876),  hold- 

839 


309.] 


WHO   MAY   BUY   AND    SELL    STOCK. 


[CH.   XIX. 


an  express  power  for  this  purpose,  but,  unless  so  given,  the  purchase 
is  held  to  be  beyond  the  legal  powers  of  the  directors  and  stock- 
holders.1 The  object  of  the  rule  is  to  preserve  the  rights  of  the  cor- 
porate creditors,  and  also  to  confine  the  corporation  within  the  ex- 
press powers  given  it,  and  the  implied  powers  necessary  to  its  trans- 
action of  business.2  If  the  sale  is  completed,  and  the  corporation 
afterwards  becomes  insolvent,  the  stockholder  who  sold  the  stock 
to  the  corporation  is  liable,  on  the  winding  up,  as  though  he  never 
had  made  such  a  sale.3  If,  however,  the  stockholder  sells  to  a  per- 
son, not  knowing  that  the  latter  is  purchasing  as  a  trustee  for  the 
corporation,  the  vendor  is  not  liable  on  such  stock.4     The  directors 

ing  also  that  a  stockholder  may  enjoin  limited  liability  may,  under  the  Eng- 
the    purchase;     distinguishing    Teas-  lish   statute,    provide    for   the   retire- 
dale's    Case,    L.    R.    9    Ch.    App.    54  ment  of  stock  by  the  company  and  the 
Qgyg-v  repayment    of   the    money    paid.      Re 

x  Zulueta's  Claim,  L,  R.  5  Ch.  App.  Borough,  etc.   Soc,   [1893]   2  Ch.  242. 
444  (1870) ;  Hope  v.  International  Fi-  2  Compare  with  the  cases  in  the  pre- 
nancial    Soc,    L.    R.    4    Ch.    D.    327  vious    note,    Re    Dronfield    Silkstone 
(1S76).     See' also  Lindley,  Partn.,  p.  Coal  Co.,  L.  R.  17  Ch.  D.  76   (1880), 
739    (ed.    1881).      Under    an    express  where  the   court  said:     "If  the   corn- 
power  to  the  directors  to  enter  into  pany   could   not   question    it,   neither 
any    contract    and    engagement    that  can    a    creditor;    for    he    can    obtain 
seemed  best  for  the  company,  such  a  nothing  but  what  the  company  can  get 
purchase  was  upheld.     Singer's  Case,  from  the  shareholders." 
4  W.  N.  206  (1869);  Cockburn's  Case,  3  Walters's  Second  Case,  3  De  G.  & 
4    De    G    &    Sm.    177    (1850),   where  Sm.  244    (1850);   Richmond's  Case,  3 
power  was  given  by  the  deed  of  settle-  De  G.  &  Sm.  96  (1849) ;  Munt's  Case, 
ment       See,    however,    Re    Dronfield  22  Beav.  55   (1856),  where  the  stock- 
Silkstone  Coal  Co.,  L.  R.   17  Ch.  D.  holders  disagreed,  and  the  corporation 
76  (1880)    where  an  express  power  to  bought    out    one    faction;     Daniell's 
purchase  'its  own  stock  was  held  not  Case,   22  Beav.  43    (1856);    Bennett's 
to    authorize    a    trafficking    in    that  Case,   5   De  G.,  M.  &  G.  284    (1854), 
stock— the  buying  and  selling  for  pur-  where  the  stockholders  disagreed  con- 
poses  of  gain.    Where  a  company  has  cerning  the  validity  of   a  lease,   and 
power  to  purchase  its  own  stock  and  the  corporation  bought  out  part.     If, 
does   purchase    stock   which   has   not  however,  the  corporation,  six  years  af- 
been   paid   up,   the   liability    on   that  ter   the   transfer,    discovers   that   the 
stock  cannot  be  included  as  among  the  transfer  was  invalid,  and  summarily 
debts  of  the  company.    Re  Sovereign,  retransfers  to  the  vendor,  the  latter 
etc.   Co.,    [1892]    3   Ch.    279.     Having  may  apply  to  a  court  of  equity  to  corn- 
purchased  its  own  stock  from  profits,  pel  the  corporation  to  keep  the  stock. 
a    company    may    reduce    its    capital  Gardiner  v.  Victoria   Estates   Co.,   12 
stock  to  that  extent.     Re  York  Glass  Ct.  of  Sess.  (Sc.  4th  ser.)  1356  (1885). 
Co.,   60  L.   T.  Rep.  744    (1889).     The  See  also  §251,  supra. 
corporation    may    purchase    its    own  4  Nicol's    Case,    3    De   G.   &   J.    387 
stock  from  a  part  of  the  stockholders  (1859);   Grady's  Case,  1  De  G.,  J.  & 
as   a   means    of   reducing   its    capital  S.  488   (1863),  where  the  vendee  was 
stock.     British,   etc.  Corp.  v.  Couper,  managing   agent   of    the    corporation, 

[1894]  A   C   399.    Companies  with  un-  and  the  sale  of  the  stock  was  to  stop 

840 


CH.   XIX.]  WHO   MAY   BUY  AND   SELL   STOCK.  [§   310. 

authorizing  or  directing  a  purchase  for  the  corporation  of  shares 
of  its  own  capital  stock  are  liable  personally  to  the  same  extent 
that  the  selling  stockholder  would  have  been  had  the  sale  not  taken 
place.1  Generally  the  transfer  is  made,  not  to  the  corporation  di- 
rectly, but  to  a  trustee  on  behalf  of  or  for  the  benefit  of  the  corpo- 
ration. This  practice  is  not  at  all  necessary,2  and  has  no  effect 
other  than  a  transfer  direct  to  the  corporation  itself,  unless  it  be 
that  the  vendor  of  the  stock  may  not  know  that  his  vendee  pur- 
chases for  the  corporation,  and  hence  may  thereby  escape  liability  on 
the  winding  up.  If  the  contract  is  executory,  the  corporation  may 
repudiate  it  and  refuse  to  pay  the  purchase  price  of  the  stock.3  If, 
however,  the  sale  is  completed,  the  stock  belongs  to  the  corpora- 
tion, and  does  not  pass  to  the  vendor's  assignee  in  bankruptcy.4 

§  310.  Where  the  transfer  of  stock  to  the  corporation  is  made  by 
one  of  the  original  subscribers  for  stock,  it  frequently  becomes  a 
difficult  question  to  decide  whether  the  transaction  was  a  cancel- 
lation of  the  subscription  contract  or  was  a  sale  of  the  stock  to  the 
corporation.  Each  case  turns  largely  on  its  own  peculiar  facts  and 
circumstances.  If  the  transaction  is  a  cancellation,  it  may  be  legal. 
A  cancellation  or  surrender  of  a  stock  subscription,  however,  is 
legal  only  when  a  forfeiture  of  the  same  would  be  legal,  and  is  the 
same  as  a  purchase  by  the  company  of  its  own  stock,  and  hence  is 
illegal,  and  the  subscriber  still  remains  liable.5  In  England,  if  it  is 
a  sale,  it  is  illegal.  The  courts  seem  to  favor  a  construction 
whereby  the  transaction  is  held  to  be  a  sale,  and  the  stockholder 
made  liable  on  the  winding  up.6     A  donation  of  partially  paid-up 

litigation.     Richmond's  Case,  3  De  G.  held  liable  to  the  corporation.     Ash- 
&  Sm.  96  (1849),  holds,  however,  that  hurst    v.    Mason,    L.    R.    20    Eq.    225 
if  the  vendor's  selling  agent,  his  so-  (1875). 
licitor,   knew   that   the   sale   was   for  2  See  §  46,  supra. 
the    benefit    of    the    corporation,    the  3  The  corporation  may  even  refuse 
stockholder  himself  is  chargeable  with  to  pay  the  price  to  the  brokers  em- 
knowledge.     See  Re  Orpen,   32  L.  J.  ployed    by    its    directors    to    buy    its 
(Ch.)     633     (1863),    holding    that    it  stock.     Zulueta's  Claim,   L.  R.    5   Ch. 
is   a   question   for   the   jury   whether  App.  444  (1870).    This,  of  course,  does 
the  vendee  purchased  for  the  corpora-  not  authorize  the  corporation  to  retain 
tion  or  for  himself.     See  also  §  251,  the  stock  so  purchased. 
supra.  4  Great  Eastern   Ry.   v.   Turner,   42 

l  Evans  v.  Coventry,  25  L.  J.  (Ch.)  L.  J.  (Ch.)  83   (1872). 

489,   501    (1856);    Marzetti's  Case,  42  5  Bellerby    v.     Rowland,     etc.     Co., 

L.  T.  Rep.  206  (1880).  Cf.  Land  Credit  [1902]   2  Ch.  14.     See  §§167-170,  su- 

Co.  v.  Fermay,  L.  R.  5  Ch.  App.  763  pra. 

(1870);  rev'g  L.  R.  8  Eq.  7.     The  di-  c  Re    United    Service    Co.,    L.    R.    5 

rectors  may  have  contributions  from  Ch.   App.    707    (1S70),    distinguishing 

each    other    for    sums    paid    out    by  Snell's    Case,    L.    R.    5    Ch.    App.    22 

their    authority    for    such    purchases,  (1869).     See  also  Thomas's  Case,   L. 

and  for  which  one  or  more  has  been  R.  13  Eq.  437  (1872);  Teasdale's  Case, 

841 


311.] 


WHO   MAY   BUY   AND    SELL    STOCK. 


[cn.  XIX. 


stock  may  be  illegal  and  may  be  repudiated  by  tlie  donor.1 
§  311.  Rule  in  the  United  States. — In  this  country  there  has 
been  a  difference  of  opinion  as  to  whether  a  corporation  may  pur- 
chase shares  of  its  own  stock.  In  Illinois,  Massachusetts,  and  other 
states  such  a  purchase  is  legal  and  allowable.2     And,  indeed,  if  there 


L.  R.  9  Ch.  App.  54  (1873);  Duke's 
Case,  L.  R.  1  Ch.  D.  620  (1876).  See 
also  §§  167-170,  supra. 

1  Where,  in  consequence  of  losses 
by  the  company,  some  of  the  directors 
make  a  gift  of  a  portion  of  their  par- 
tially paid-up  stock  to  the  company, 
they  may,  seven  years  thereafter,  have 
the  stock  delivered  back  to  them,  the 
company  having  become  prosperous, 
inasmuch  as  by  the  surrender  they 
were  relieved  from  further  liability 
on  the  stock.  It  amounted  to  a  pur- 
chase by  the  company  of  its  own 
stock,  and  that  being  illegal  the  direc- 
tors could  reclaim  the  stock,  although 
seven  years  had  elapsed.  A  surren- 
der of  stock  is  similar  to  a  purchase 
of  its  own  stock  by  a  company.  Bel- 
lerby  v.  Rowland,  etc.  Co.,  [1902]  2 
Ch.  14. 

2  First  Nat.  Bank  v.  Salem,  etc.  Co., 
39  Fed.  Rep.  89  (1889).  At  common 
law  a  corporation  may  buy  and  retire 
or  sell  shares  of  its  own  stock.  Burnes 
v.  Burnes,  137  Fed.  Rep.  781  (1905). 
Where  all  the  stockholders  assent 
thereto  and  creditors  are  not  affected, 
a  corporation  may  purchase  shares 
of  its  own  stock  and  agree  to  pay  an 
annuity  therefor,  the  corporation  be- 
ing entirely  solvent,  and  especially 
will  a  transaction  be  upheld  when  it 
has  been  carried  out  for  several  years. 
Burnes  v.  Burnes,  132  Fed.  Rep.  485 
(1904);  aff'd,  137  Fed.  Rep.  781.  A 
contract  by  which  a  corporation  pur- 
chases the  stock  of  some  of  the  stock- 
holders with  the  unanimous  consent 
of  all  the  stockholders,  in  order  to 
dispose  of  dissentions  and  litigation, 
the  vendors  agreeing  not  to  engage  in 
a  competing  business  for  three  years, 
is  prima  facie  valid  under  New  York 
law,  and  will  be  sustained,  although 
the    corporation    becomes    bankrupt, 


there  being  no  proof  that  it  was  in- 
solvent at  the  time  of  the  transaction, 
even  though  the  purchase  was  from 
officers   and  directors.     In  re  Castle, 
etc.    Co.,    145    Fed.    Rep.    224    (1906). 
A    going    corporation    may    purchase 
stock  owned  by  its  president  in  order 
to  terminate  his  contract  of  employ- 
ment  and    obtain   his    resignation    as 
president,  where  the  contract  is  a  fair 
one  and  another  party  had  agreed  to 
purchase  such  stock  from  the  corpora- 
tion at  once  and  subscribe  for  further 
capital  stock.     Joseph  v.  Raff,  82   N. 
Y.  App.  Div.  47  (1903);  aff'd,  176  N.  Y. 
611.     A  corporation  may  purchase  its 
own   stock,   but   if  it  purchases  such 
stock  from  a  director  the  sale  may  be 
valid,  but  the  price  is  not  binding  and 
the  director  will  be  allowed  only  what 
the  stock  is  reasonably  worth.    Even 
though  the  stockholders  for  two  years, 
with  full  knowledge  of  the  facts,  do 
not   object,   the   corporation   may   de- 
fend   against    the    agreed    price,    but 
may  be  obliged  to  pay  what  the  stock 
was   worth.     Oliver   v.   Rahway,    etc. 
Co.,  64  N.  J.  Eq.  596  (1903).    Where  a 
New  Jersey  corporation  having  power 
to  purchase  its  own  stock  and  issue 
its    bonds    in    payment    therefor    has 
made  such  an  issue,  the  bonds  may  be 
enforced    in    dona    fide    hands,    even 
though   the   stock   so   purchased   was 
worthless.      Hoskins   v.    Seaside,    etc. 
Co.,   68   N.   J.   Eq.,   476    (1905).     "The 
power   of   a   corporation   to   purchase 
shares  in  its  own  capital  stock  is  set- 
tled,   as   also   is    its   power   to   agree 
with   a    stockholder   that    his    shares 
shall  be  transferred  to  the  corporation 
under  certain   circumstances."     Lind- 
say v.  Arlington,  etc.  Assoc,  186  Mass. 
371    (1904).     A   street   railway   com- 
pany which  has  purchased  shares  of 
its  own  stock  is  liable  for  the  price, 


842 


CIT.    XIX.] 


WHO   MAY   BUY  AND   SELL   STOCK. 


[§  311. 


is  no  statutory  liability  on  stock,  and  if  stockholders  do  not  object, 
even  though  the  stock  turned  out  to 


be  worthless.     Stock  so  purchased  by 
the  company  may  be  reissued  and  does 
not  amount  to  a  reduction  of  the  capi- 
tal stock.    A  statute  prohibiting  street 
railways  from  owning  stock  relates  to 
stock  in  other  companies.    Leonard  v. 
Draper,  187  Mass.  536    (1905).     A  by- 
law authorizing  a  corporation  to  buy 
the  stock  of  a  member  who  wishes  to 
sell  is  a  contract  binding  on  a  stock- 
holder who  wishes  to  sell,  the  corpo- 
ration having  been  organized  to  pur- 
chase household  supplies  for  the  mem- 
bers and  interest  being  paid  instead 
of  dividends.    Such  a  purchase  by  the 
corporation    is   legal,   even   though   it 
has  no  profits,  it  being  practically  not 
a  purchase  but  a  repayment.    Lindsay 
t?.    Arlington,    etc.    Assoc,    186    Mass. 
371    (1904).     A  corporation  may  pur- 
chase its  own  stock  if  the  stockholders 
assent  and  the  creditors  are  not  in- 
jured.   Rogers  v.  Ogden,  etc.,  30  Utah 
188     (1905).      A    solvent    corporation 
may  purchase  its  own  stock  and  keep 
it  alive  and  treat  it  as  an  asset.  Pabst 
v.  Goodrich,  113  N.  W.  Rep.  398  (Wis. 
1907).     A  mining  company  may  pur- 
chase its  own  stock  held  by  a  super- 
intendent,  the   purpose   being  to   get 
rid    of    him    on    account    of    his    bad 
management,     the     officers     believing 
that,  the    company    is    solvent.      Cop- 
per, etc.  Co.  v.  Costello,  95  Pac.  Rep. 
94  (Ariz.  1908).    "A  corporation  may, 
if  it  acts  in  good  faith,  buy  and  sell 
shares   of   its   own  stock."     Republic 
L.    Ins.    Co.    v.    Swigert,    135    111.    150 
(1890);    First,    etc.    Bank    v.    Peoria 
Watch   Co.,    191    111.    128    (1901).      In 
Chicago,  etc.  R.  R.,  v.  Marseilles,  84 
111.  145    (1876),  the  court  said:    "We 
entertain    no    doubt    that    a    railroad 
company  may,  for  legitimate  purposes, 
purchase  shares  of  stock  which  have 
been   issued   to   individuals.     Such   is 
believed  to  have  been  the  general  cus- 
tom   of    such   bodies;     nor   have    we 
known  the  power  to  have  been  ques- 
tioned."    A  contract  whereby  the  cor 


poration  agreed  to  take  back  the  stock 
unless  certain  things  were  done  with- 
in a  certain  time  was  sustained.  Chi- 
cago, etc.  R.  R.  v.  Marseilles,  84  111. 
643  (1877),  where  the  court  says,  "the 
power  of  the  directors  of  a  company, 
when  not  prohibited  by  their  charter 
to  purchase  shares  of  stock  of  their 
company,"  is  well  recognized;    Clapp 
v.  Peterson,  104  111.  26    (1882);   Chet- 
lain  v.  Republic  L.  Ins.  Co.  86  111.  220 
(1877);   Havemeyer  v.  Bordeaux  Co., 
8    Nat.    Corp.    Rep.    127     (111.    C.    C. 
1894) ;    Fraser  r.  Ritchie,  8  111.  App. 
554   (1881),  where  a  perfectly  solvent 
concern    sold    certain    property    and 
took  its  own  stock  in  payment.  Under 
the  decisions  of  Iowa  a  private  corpo- 
ration   may    purchase    shares    of    its 
own  capital   stock.     West  v.   Averill, 
etc.  Co.,  109  Iowa,  488   (1899). 

A  by-law  allowing  a  stockholder  to 
return  his  stock  to  the  corporation  at 
a  fixed  value  is  illegal.    Vercoutere  v. 
Golden  State  Land  Co.,  116  Cal.  410 
(1897).     See   §  170,  supra.     Although 
a  corporation  has  purchased  its  own 
stock,  it  cannot  rescind  the  purchase 
and  recover  back  the  price  unless  it 
tenders  back  the  stock.     Bank  of  San 
Luis   Obispo,   etc.  v.  Wickersham,   99 
Cal.  655   (1893).    Where  the  majority 
stockholders    cause    the    directors    to 
purchase  stock  of  them  for  the  cor- 
poration at  a  price   higher  than   the 
market  price,  the  minority  may  cause 
the  transaction  to  be  set  aside.    Wood- 
roof  v.  Howes,  88  Cal.  184  (1891).     A 
corporation  which  has  agreed  to  pay 
a  person  a  certain  sum  for  his  stock 
in  the  corporation,  if  he  will  trans- 
fer it  to  a  corporate  creditor  in  pay- 
ment of  the  corporate  debt,  is  liable 
for    that    sum     to    the    stockholder. 
Snyder  v.  Tunitas  Petrol.  Co.,  72  Cal. 
194   (1887). 

In  Georgia,  in  the  case  of  Hartridge 
v.  Rockwell,  R.  M.  Charlt.  260  (1828), 
the  court  said:  "If  from  the  course  of 
business  or  the  state  of  things  the 
capital   of   the   bank   cannot   be   use- 


S43 


§   311.]  WHO   MAY    BUY   AND   SELJL    STOCK.  [CH.    XIX. 

there  is  no  reason  why  the  net  profits  of  a  corporation  should  not 


fully  employed  in  loans,  there  can, 
I  think,,  be  no  objection  against  the 
purchase  of  its  own  stock."  The  legis- 
lature, however,  thought  differently, 
and  by  the  Penal  Code  of  1833  made 
such  purchases  a  penal  offense.  In 
Robison  v.  Beall,  26  Ga.  17  (185S),  the 
purchase  was  held  to  be  authorized 
under  a  power  to  purchase  goods,  etc. 

The  directors  are  personally  liable 
where  they  advance  corporate  funds 
to  the  vendee  of  stock  of  the  company 
in  order  to  enable  him  to  purchase 
the  stock.  Green  v.  Hedenberg,  159 
111.  489   (1896). 

Where  all  the  stockholders  and  all 
the  directors  cause  the  corporation  to 
sign  a  note  which  is  given  to  one  of 
the  stockholders  in  consideration  of 
the  sale  of  his  stock  to  another  stock- 
holder, the  corporation  is  bound.  Sol- 
omon Co.  v.  Barber,  58  Kan.  419 
(1897).  The  directors  are  not  liable 
to  the  vendor  of  the  stock  for  the 
failure  of  the  corporation  to  complete 
their  purchase  for  it  of  its  own  stock. 
Abeles  v.  Cochran,  22  Kan.  405  (1879). 

Where,  according  to  contract,  stock 
sold  to  the  corporation  is  appraised 
by  the  corporation,  and  the  appraised 
price  is  actually  paid  to  and  received 
by  the  stockholder,  he  cannot  main- 
tain a  bill  to  obtain  a  larger  price, 
but  must  either  rescind  or  sue  at  law. 
Tuttle  v.  Batchelder,  etc.  Co.,  170 
Mass.  315  (1898).  A  corporation,  un- 
less prohibited  by  statute,  may  pur- 
chase its  own  stock.  New  Eng.  Trust 
Co.,  v.  Abbott,  162  Mass.  148  (1894). 
In  Dupee  v.  Boston  Water-Power  Co., 
114  Mass.  37  (1873),  it  was  held  that 
a  stockholder  could  not  enjoin  the 
purchase,  the  court  saying:  "In  the 
absence  of  legislative  provision  to  the 
contrary,  a  corporation  may  hold  and 
sell  its  own  stock,  and  may  receive 
it  in  pledge  or  in  payment  in  the  law- 
ful exercise  of  its  corporate  powers." 
See  also  Leland  v.  Hayden,  102  Mass. 
542    (1869);    Crease    v.    Babcock,    51 


Mass.  525,  557  (1846),  holding  that 
the  stockholders  are  not  liable  for  the 
deficiency  caused  by  part  of  the  stock 
being  owned  by  the  corporation. 
Where,  in  order  "to  enable  the  com- 
pany to  keep  its  stock  in  the  owner- 
ship of  stockholders  of  its  own  choos- 
ing," each  stockholder  enters  into  an 
agreement  with  the  corporation  that 
in  case  he  wishes  to  sell  his  stock  it 
shall  first  be  appraised  and  then  of- 
fered to  the  corporation  before  it  is 
offered  to  any  one  else,  the  refusal  of 
the  board  of  directors  to  make  an  ap- 
praisal, in  accordance  with  the  agree- 
ment, does  not  render  the  corpora- 
tion liable  in  damages,  inasmuch  as  it 
is  clear  that,  even  though  the  stock 
were  appraised,  the  corporation  would 
not  buy  it.  Whiton  v.  Batchelder, 
etc.  Corp.,  179  Mass.  169   (1901). 

Instead  of  subscribing  for  stock, 
a  party  may  make  a  contract  with  a 
corporation  to  take  the  stock  with  the 
right  to  return  it  and  receive  back  the 
purchase  price  within  a  certain  time. 
Such  a  contract  is  legal,  and  the  stock 
may  be  returned  and  the  money  re- 
covered if  corporate  creditors'  rights 
do  not  intervene.  Vent  v.  Duluth,  etc. 
Co.,  64  Minn.  307  (1S96).  Where  a 
corporation  issues  stock  in  payment 
for  a  patent-right,  and  agrees  to  take 
back  the  stock  and  pay  the  par  value 
thereof  at  the  end  of  five  years  if  the 
purchaser  so  wishes,  the  purchaser 
may  enforce  the  agreement.  Browne 
v.  St.  Paul  Plow  Works,  62  Minn.  90 
(1895).  See  also  §  339,  infra.  Cf.  §  170, 
supra.  Quo  warranto  does  not  lie 
against  a  corporation  for  purchasing 
its  own  stock.  State  v.  Minnesota,  etc. 
Co.,  40  Minn.  213  (1889).  In  the  case 
of  Costello  v.  Portsmouth,  etc.  Co.,  69 
N.  H.  405  (1899),  the  court  upheld  a 
by-law  of  a  brewing  company  which 
gave  the  corporation  a  lien  on  the 
stock  of  its  stockholders  for  any  debts 
due  from  them  to  the  corporation,  and 
also  gave  the  corporation  a  right  to 


844 


CH.    XIX.]  WHO   MAY   BUY   AND   SELL   STOCK.  [§    3H. 

De  applied  to  purchasing  its  stock,  instead  of  being  used  for  a  divi- 

appropriate  such  stock  at  its  par  value  the  title  of  the  assignor  so  far  as  to 
in  liquidation  of  such  debts  when 
overdue  three  months.  The  corpora- 
tion actually  did  so  appropriate  the 
stock  of  one  of  its  stockholders  in 
that  manner  and  afterwards  sold  the 
stock  to  a  third  party,  and  the  court 
upheld  the  transaction. 

An  agreement  of  a  corporation  to 
accept  its  own  stock  in  payment  for 
land  sold  by  it  is  not  per  se  an  ultra 
vires  contract.  Thompson  v.  Moxey, 
47  N.  J.  Eq.  538  (1890).  A  contract 
between  a  corporation  and  an  em- 
ployee that  he  should  purchase  eighty 
shares  of  stock  in  the  former,  and  in 
case  of  his  discharge  the  corporation 
would  buy  said  stock  from  the  em- 
ployee, is  enforceable  against  the  cor- 
poration. Chapman  v.  Iron,  etc.  Co., 
62  N.  J.  L.  497  (1898).  A  corpora- 
tion may  purchase  shares  of  its  own 
stock,  subject  to  the  right  of  creditors 
to  object  thereto  if  the  capital  stock 
is  impaired  thereby.  Blalock  v.  Ker- 
nersville  Mfg.  Co.,  110  N.  C,  99 
(1892). 

In  Ohio  the  early  case  of  Taylor  v. 
Miami  Exporting  Co.,  6  Ohio,  176 
(1883),  held  that  a  bank  may  re- 
ceive from  the  stockholders  transfers 
of  stock  in  payment  of  debts  pre- 
viously contracted  by  them.  See  also 
State  v.  Franklin  Bank,  10  Ohio,  91, 
97  (1840).  But  in  Coppin  v.  Green- 
lees,  etc.  Co.,  38  Ohio  St.  275  (1882), 
the  court  refused  to  enforce  an  ex- 
ecutory contract  for  the  sale  to  the 
corporation  of  its  own  stock.  The 
proposed  purchase  was  held  to  be  in- 
valid under  the  constitutional  pro- 
vision imposing  a  personal  liability 
on  all  stockholders.  But  see  Morgan 
v.  Lewis,  46  Ohio  St.  1  (1888). 

In  Pennsylvania,  in  Eby  v.  Guest,  94 
Pa.  St.  160  (1880),  and  Early  &  Lane's 
Appeal,  89  Pa.  St.  411  (1879),  it  was 
held  that  "the  assignment  of  the 
stock  of  a  corporation  to  itself,  as 
collateral  security  for  a  loan,  divests 


prevent  a  sale  of  it  under  a  fi.  fa. 
against  the  assignor."  But  in  Cole- 
man v.  Columbia  Oil  Co.,  51  Pa.  St. 
74  (1865),  where  a  stockholder  had 
accepted  the  benefit  of  the  purchase 
and  then  objected  to  its  legality,  the 
court  said:  "The  employment  of  cor- 
porate funds  to  speculate  in  the  stock 
of  the  company  to  which  the  funds 
belong  is  not  a  practice  to  be  en- 
couraged; but  the  present  plaintiff  is 
not  in  position  to  censure  the  prac- 
tice." He  "should  have  sought  an  in- 
junction against  the  company  to  re- 
strain the  purchase,  or  to  cancel  it 
if  done  before  he  had  knowledge  of  it; 
cr  if  he  would  bring  an  action  at  law, 
he  should  have  declared  for  his  share 
of  the  funds  which  he  complains  were 
misapplied  in  buying  the  shares."  A 
by-law  of  a  corporation,  organized  by 
farmers  to  deal  in  grain  and  merchan- 
dise, may  provide  that  on  the  decease 
of  any  stockholder  the  corporation 
shall  buy  his  stock,  and  such  pro- 
vision may  be  enforced  where  the 
corporation  has  undivided  profits  suffi- 
cient to  purchase  the  stock  of  a  de- 
ceased stockholder.  Howe,  etc.  Co.  v. 
Jones,  21  Tex.  Civ.  App.  198  (1899). 
Where  by  unanimous  consent  a  cor- 
poration buys  shares  of  its  own  stock 
and  issues  notes  therefor,  such  notes 
may  be  enforced  after  all  other  credi- 
tors have  been  paid.  Van  Brocklin  v. 
Queen,  etc.  Co.,  19  Wash.  552  (1898). 
A  person  who  buys  out  and  assumes 
the  liabilities  of  a  corporation  cannot 
repudiate  its  note  in  payment  for 
some  of  its  own  stock,  he  knowing  of 
the  transaction  when  he  assumed  the 
debts.  Miller  v.  Washington  Southern 
Ry.,  11  Wash.  414  (1895).  Stock- 
holders cannot  defeat  their  liability 
on  stock  by  setting  up  that  they  sub- 
scribed in  behalf  of  the  corporation 
itself  and  on  the  secret  agreement 
that  they  should  not  be  held  liable. 
Barto  v.  Nix,  15  Wash.  563  (1896).    A 


845 


311.] 


WHO   MAY    BUY   AND    SELL    STOCK. 


[CH.    XIX. 


dend.1  The  federal  court  has  said:  "It  is  a  mooted  question  in  this 
country  as  to  whether  a  corporation  may  purchase  shares  of  its  own 
stock.  Many  states  forbid  it.  In  the  absence  of  a  charter  prohibi- 
tion or  a  statute  forbidding  it,  there  is  no  reason  why  the  stock 
should  not  be  purchased,  at  least  with  the  profits  derived  from  the 
business  of  the  corporation,  where  all  the  stockholders  assent 
thereto."  2  The  cases  which  appear  to  uphold  a  contrary  rule  are 
found,  upon  close  examination,  to  come  within  the  exceptions  given 
above.3      Under  the  reserved  right  to  amend  charters,   the  legisla- 


corporation  may  issue  stock  to  an  em- 
ployee on  an  agreement  to  buy  it  back 
in  case  he  is  discharged.  Yeaton  v. 
Eagle,  etc.  Co.,  4  Wash.  St.  183  (1892). 
Where  a  corporation  has  power  to 
reduce  its  capital  stock,  it  may  pur- 
chase from  one  of  its  stockholders  his 
stock  and  give  him  in  payment  there- 
for his  pro  rata  share  of  the  assets 
of  the  corporation,  the  corporation  be- 
ing solvent.  This  amounts  to  a  reduc- 
tion of  the  capital  stock,  and  a  sub- 
sequent creditor  of  the  corporation 
cannot  complain.  Shoemaker  v.  Wash- 
burn, etc.  Co.,  97  Wis.  585  (1897).  A 
manufacturing  corporation  has  power 
to  buy  its  own  stock,  but  its  business 
manager  has  no  inherent  authority 
to  make  such  purchase.  Calteaux  v. 
Mueller,  102  Wis.  525  (1899).  Where, 
by  reason  of  dissensions,  a  solvent 
corporation  buys  the  stock  which  a 
director  holds  in  the  company  and  for 
two  years  continues  the  business  and 
then  becomes  insolvent,  the  trustee 
in  bankruptcy  cannot  attack  the  trans- 
action, all  creditors  at  the  time  of 
the  transaction  having  been  paid.  The 
property  of  the  corporation  is  not 
a  trust  fund  for  creditors  except  for 
those  who  are  interested  at  the  time 
of  the  transaction.  Marvin  v.  Ander- 
son, 111  Wis.  387  (1901).  See  also, 
as  supporting  the  doctrine,  Farmers', 
etc.  Bank  v.  Champlain  Transp.  Co., 
18  Vt.  131,  139  (1846);  Iowa  Lumber 
Co.  v.  Foster,  49  Iowa,  25  (1878), 
under  a  power  to  purchase  "prop- 
erty that  may  be  deemed  desirable  in 
the  transaction   of   its  business."     A 


purchaser  of  stock  which  has  assented 
to  the  corporation  purchasing  its  own 
stock  cannot  complain.  Where  by 
statute  the  preferred  stock  shall  not 
exceed  two-thirds  of  the  capital  stock 
paid  in  for  cash  or  property,  a  pre- 
ferred stockholder  cannot  question 
the  value  of  property  received  in  pay- 
ment for  the  preferred  stock  in  a  suit 
instituted  by  him  to  enjoin  the  cor- 
poration purchasing  its  own  stock,  as 
allowed  by  statute,  where  the  assets, 
less  the  debts,  equal  the  preferred 
stock  outstanding.  Hodge  v.  United 
States  Steel  Corp.,  53  Atl.  Rep.  601 
(N.  J.  1902).  This  decision  was  re- 
versed on  other  points  in  64  N.  J.  Eq. 
807  (1903). 

i  Quoted  and  approved  in  Dacovich 
v.  Canizas,  44  S.  Rep.  473  (Ala.  1907). 
In  the  preceding  case  after  the  cor- 
poration had  purchased  shares  of  the 
stock,  the  directors  transferred  it  to 
themselves  for  a  consideration,  but 
the  court  at  the  instance  of  other 
stockholders  set  aside  the  latter  trans- 
fers and  enjoined  the  voting  of  the 
stock. 

2  The  court,  however,  enjoined  the 
company  from  transferring  nearly  all 
of  its  property  to  a  few  stockholders 
in  purchase  of  their  stock,  but  re- 
fused to  appoint  a  receiver.  Lowe  v. 
lioneer  Threshing  Co.,  70  Fed.  Rep. 
64b    (1895). 

3  Thus,  in  German  Sav.  Bank  v. 
Wulfekuhler,  19  Kan.  60  (1877),  the 
bank  was  insolvent  when  the  stock 
was  purchased  by  it.  The  purchase 
was  declared  illegal.    In  Bent  v.  Hart, 


816 


CH.    XIX.] 


WHO    MAY    BUY   AND    SELL    STOCK. 


[§    311. 


ture  may  authorize  a  corporation  to  reduce  its  capital  stock  and 
issue  bonds  in  exchange  for  such  part  of  the  capital  stock  as  is  re- 
tired, especially  where  the  original  charter  authorized  the  corpora- 
tion to  decrease  its  capital  stock  by  purchasing  its  own  stock.1  All 
of  the  American  courts  coincide  in  the  view  that  a  corporation 
may  take  shares  of  its  own  stock  in  payment  of  or  security  for 


10  Mo.  App.  143  (1881),  the  corpora- 
tion did  not  purchase  its  own  stock. 
The  stock  was  purchased  by  another 
corporation,  and  the  transaction  was 
sustained.  In  St.  Louis,  etc.  Co.  v. 
Hilbert,  24  Mo.  App.  338  (1887),  the 
stock  purchased  by  the  corporation 
was  not  paid-up  stock.  In  State  v. 
Oberlin  Building  Assoc,  35  Ohio  St. 
25S  (1SS0),  the  peculiar  purposes  and 
articles  of  association  of  a  building 
association  governed  the  decision.  In 
Barton  v.  Port  Jackson,  etc.  Co.,  17 
Barb.  397  (1854),  the  company  mort- 
gaged its  road  in  order  to  raise  money 
to  buy  the  stock.  Where  a  corpora- 
tion buys  shares  of  its  own  stock 
from  one  of  its  stockholders,  it  may 
repudiate  the  transaction  and  defend 
a  suit  by  the  stockholder  on  a  note 
given  for  the  stock.  The  court  said 
that  such  a  purchase  should  not  be 
to  the  advantage  of  a  few  favored 
stockholders,  to  the  injury  of  the 
great  body  of  them.  Price  v.  Pine 
Mountain,  etc.  Co.,  32  S.  W.  Rep.  267 
(Ky.  1895).  In  Crandall  v.  Lincoln, 
52  Conn.  73,  99,  100  (1884),  where 
stock  was  bought  for  the  corporation 
by  a  corporate  agent,  the  latter  was 
held  liable  to  the  receiver  of  the 
corporation  for  the  money  so  expend- 
ed. The  court  said:  "The  statute  for- 
bidding the  company  to  make  divi- 
dends payable  from  the  stock,  and  to 
loan  money  upon  a  pledge  of  its 
stock,  by  necessary  implication  for- 
bids the  company  from  purchasing  its 
stock.  ...  As  a  rule,  to  which 
there  are  few,  if  any,  exceptions,  when 
a  stockholder  conveys  his  stock  to  the 
company  and  receives  in  return  a  por- 
tion of  the  capital,  he  holds  the 
money  so  received  subject  to  the  su- 


perior equities  of  creditors."  A  party 
who  loans  money  to  a  corporation 
knowing  that  the  money  is  to  be  used 
by  the  company  to  buy  shares  of  its 
own  capital  stock  cannot  collect  his 
debt,  the  act  being  ultra  vires.  Adams, 
etc.  Co.  v.  Deyette,  8  S.  D.  119  (1895). 
A  by-law  that  a  land  company  will 
accept  its  stock  in  payment  for  land 
will  not  sustain  a  suit  for  specific  per- 
formance brought  by  a  purchaser  of 
land  who  wishes  to  pay  in  stock,  the 
by-law  having  been  practically  disre- 
garded. Kelley  v.  York,  etc.  Co.,  94 
Me.  374  (1900).  A  corporation  has  no 
power  to  traffic  in  its  own  stock.  Her- 
ring v.  Ruskin,  etc.  Assoc,  52  S.  W. 
Rep.  327  (Tenn.  1899).  Even  though 
the  company's  name  is  signed  to  a 
contract  by  which  the  owners  of  the 
stock  sell  the  stock,  yet  the  company 
is  not  liable  for  a  breach  of  the  con- 
tract on  the  part  of  either  party,  or 
for  fraudulent  representations  made 
in  connection  with  it.  Home,  etc.  Co. 
v.  Collins,  31  Ind.  App.  493    (1903). 

i  Venner  Co.  v.  United  States,  etc. 
Corp.,  116  Fed.  Rep.  1012  (1902).  By 
its  certificate  of  incorporation  a  New 
Jersey  corporation  may  have  power  to 
purchase  and  retire  part  or  all  of  its 
preferred  stock,  and  to  issue  in  pay- 
ment therefor  its  bonds  or  to  sell  its 
bonds  and  use  the  proceeds  to  retire 
such  preferred  stock,  or  it  may  pur- 
chase and  hold  such  stock  for  re-issue. 
The  offer  to  purchase  must  be  made 
pro  rata  to  all  the  preferred  stock- 
holders. Under  the  reserved  rights  to 
amend,  alter,  or  repeal  charters,  the 
rights  of  stockholders  among  them- 
selves cannot  be  impaired,  except  as 
required  by  public  interests;  but, 
while  it  is  true  that  the  charter  con- 


847 


§  311.] 


WHO    MAY    BUY    AND    SELL    STOCK. 


[CH.    XIX. 


antecedent  debts  due  to  the  corporation.1     A  corporation  may  take, 
its  own  stock  by  way  of  gift  2  or  bequest.3     Inasmuch  as  a  corpora- 


stitutes  a  contract  between  the  stock- 
holders, yet  under  this  reserved  pow- 
er the  legislature  may  authorize  exist- 
ing corporations  to  purchase  and  re- 
tire preferred  stock  and  issue  in  lieu 
thereof  mortgage  bonds,  such  amend- 
ment being  construed  to  be  in  behalf 
of  the  public  interest.  Where  a  cor- 
poration has  charter  authority  to  re- 
tire its  preferred  stock  and  issue 
mortgage  bonds  in  lieu  thereof,  on  a 
vote  of  the  directors  and  stockholders, 
a  minority  stockholder  cannot  enjoin 
such  action  on  the  ground  that  it 
would  be  disastrous  in  its  effect  on 
the  corporation.  Berger  v.  United 
States  Steel  Corp.,  63  N.  J.  Eq.  809 
(1902). 

i  The  leading  case  is  City  Bank  v. 
Bruce,  17  N.  Y.  507   (1858),  where  a 
corporation    received    $133,000    of    its 
own  stock  in  payment  of  debts  due  the 
corporation,    the    court    saying    it    is 
"not  aware  of  any  common-law  prin- 
ciple which  forbids  it."    See  also  Ver- 
planck  v.  Mercantile  Ins.  Co.,  1  Edw. 
Ch.  84   (1831);   Chillicothe,  etc.  Bank 
v.  Fox,  3  Blatchf.  431   (1856);  s.  c,  5 
Fed.   Cas.   632,   where   the  stock   was 
taken  in  payment  of  a  debt  due  the 
corporation.     A  solvent  bank  may  as 
against  its  creditors  receive  its   own 
stock  in  payment  of  a  debt  due  to  it. 
Draper  v.  Blackwell,  etc.  138  Ala.  182 
(1903.)     In  Williams  v.  Savage  Mfg. 
Co.,    3   Md.   Ch.    418,   451    (1851),   the 
debtor  who  had  given  stock  to  a  cor- 
poration  in   payment   of   a   debt   was 
allowed   to   deny   the   amount  of   the 
debt  and  to  take  back  the  stock  upon 
payment  of  the  amount  actually  due. 
A  company  may  receive  its  own  stock 
in  satisfaction  of  a  debt  where  it  is 
necessary  in  order  to  protect  the  cor- 
poration from  loss.     Barto  v.  Nix,  15 
Wash.  563  (1896).    Where  a  bank  de- 
sires to  take  its  own  stock  from  one 
of  its  debtors  in  payment  of  the  debt, 
and  in  order  to  do  so  one  of  its  di- 


rectors takes  the  stock  and  gives  his 
note  to  the  bank  on  the  understand- 
ing that  he  is  not  to  be  liable  there- 
on, a  receiver  of  the  bank  may  enforce 
the  note.  Atwater  v.  Smith,  73  Minn. 
507  (1898).  A  college  corporation 
may,  while  solvent,  receive  its  own 
stock  in  payment  of  a  debt.  Roach  v. 
Burgess,  62  S.  W.  Rep.  803  (Tex. 
1901). 

2  Lake  Superior  Iron  Co.  v.  Drexel, 
90  N.  Y.  87   (1882),  where  its  legality 
was   assumed.     Where   a   corporation 
purchases   its   own   stock   such   stock 
cannot  be  taxed.     City  of  Worcester 
v.    Board    of   Appeal,    184    Mass.    460 
(1904).     A  tax  on  stock  "issued  and 
outstanding"      applies      to      treasury 
stock.       Knickerbocker,     etc.     Co.     v. 
State  Board,  etc.,  65  Atl.  Rep.  913   (N. 
J.  1907).     The  court  in  the  preceding 
case  intimated  that  the  treasury  stock 
was  illegally  acquired  by  the  corpora- 
tion as   a  gift   because   it  was   origi- 
nally illegally  issued,  there  being  no 
proof  that  it  was  issued  for  full  value, 
but  the  reasoning  of  the  opinion  in 
that     respect     can     hardly     be     com- 
mended.    Stock  purchased  by  the  cor- 
poration itself  and  then  re-issued  is 
entitled  to  all  dividends  subsequently 
declared    and    this    result    cannot    be 
avoided    by    the    dividend    being    de- 
clared as  payable  to  stockholders  at 
a  preceding  date.     Hartley  v.  Pioneer 
Iron    Works,    181    N.    Y.    73     (1905). 
Stock  purchased  by  a  corporation  and 
then  sold  is  issued  stock.     Hartley  v. 
Pioneer    Iron    Works,    181    N.    Y.    73 
(1905).     A   corporation   which    holds 
stock    in    another    corporation    may 
agree    to    surrender    a    part    of    such 
stock   in   order   to    enable   the   latter 
company  to  proceed  with  its  business, 
and  such  surrender  is  not  ultra  vires. 
Thomson   v.    Trustees,    [1895]    2    Ch. 
454.     See  also  §  46,  ch.  Ill,  supra. 

3  Rivanna   Nav.   Co.   v.   Dawsons,   3 
Gratt.  (Va.)  19   (1846). 


848 


CH.   XIX.] 


WHO   MAY   BUY   AND   SELL   STOCK. 


[§   311. 


tion  has  power  to  buy  its  own  stock,  it  may  take  a  subscription  for 
stock  at  par,  and  agree  to  repurchase  the  stock,  no  creditors  or 
stockholders  objecting  thereto.1 

The  objection  usually  made  to  allowing  a  corporation  to  purchase 
its  own  stock  is  that  thereby  the  corporate  funds  are  expended  and 
no  property  is  received  by  the  corporation,  except  the  right  to 
resell.  This  objection  is  merely  a  limit  to  the  power  of  the  corpora- 
tion to  purchase.  In  Illinois,  the  state  where  the  right  of  the 
corporation  to  make  such  purchases  is  most  clearly  and  decisively 
established,  the  collateral  principle  that  such  purchases  are  to  be 
declared  illegal  and  voidable  at  the  instance  of  corporate  creditors 
who  arc  injured  thereby  is  distinctly  stated  and  rigidly  applied.2 
If  the  corporation  is  insolvent  at  the  time  of  the  purchase,  it  is 
clearly  an  invalid  transaction,   and  will  be  set  aside.3       The  rule 


i  Freemont  Carriage,  etc.  Co.  v. 
Thomsen,  65  Neb.  370  (1902).  A  cor- 
poration in  selling  its  stock  may 
agree  to  repurchase  it  at  a  specified 
time  if  the  vendee  so  desires  and  if 


Plymouth,    etc.     Co.,     29     Mont.     347 
(1904).   Cf.   §§167-170,  supra. 

2  Clapp  v.  Peterson,  104  111.  26 
(1882);  Peterson  v.  Illinois  Land,  etc. 
Co.,  6  111.  App.  257  (1880).  Where  a 
the  president  also  makes  such  agree-  corporation  is  insolvent  and  a  stock- 
ment  he  also  may  be  held  liable,  holder  knows  that  fact,  he  cannot  sell 
Ophir,  etc.  Co.  v.  Brynteson,  143  Fed.  his  stock  to  the  corporation  in  ex- 
Rep.  829  (1906).  The  agreement  of  a  change  for  corporate  property,  and  he 
corporation  to  take  back  its  stock  at  will  be  compelled  by  the  court,  in  be- 
cost  at  the  expiration  of  two  years  half  of  then  existing  creditors,  to  re- 
if  the  purchaser  wishes,  becomes  void  turn  the  property.  Commercial  Nat. 
if  the  corporation  is  insolvent  at  that  Bank  v.  Burch,  141  111.  519  (1892); 
time.    Mclntyre  v.  Bement's  Sons,  146     Butler,    etc.    Co.   v.    Robbins,    151    111. 

588  (1894).  But  the  selling  stock- 
holder, not  knowing  that  his  vendee 
buys  for  the  corporation,  is  not  liable. 
Johnson  v.  Laflin,  5  Dill.  65  (1878); 
s.  c,  13  Fed.  Cas.  758;  aff'd  103  U.  S. 
800. 

3  Currier  v.  Lebanon  Slate  Co.,  56  N. 
H.  262  (1875);  Alexander  v.  Relfe,  74 


Mich.  74   (1906).     A  corporation  may 
agree  with  a  subscriber  to  its  stock 
that  it  will  repurchase  the  same   in 
case   it   sells   its   franchises,   the   cor- 
poration    being    solvent.      Wisconsin 
Lumber   Co.    v.    Greene,   etc.   Co.,    127 
Iowa  350   (1904).     A  corporation  may 
issue  its  stock  in  payment  for  proper- 
ty and  agree  to  buy  the  stock  back    Mo.  495   (1881).    Where  a  trust  com- 
within  four  months  at  its  par  value,    pany,   in  order   to  carry  through   its 
United  States,  etc.  Co.  v.  Camden,  etc.,    consolidation  with  another  trust  com- 
106  Va.   663    (1907).     A   private   cor-    pany,  causes  a  national  bank  to  pur- 
poration  may  purchase  its  own  stock    chase  in  its  behalf  some  of  its  stock, 
if  the  purchase  is  fair  and  free  from    the  money  being  advanced  by  the  bank 
fraud,  if  the  corporation  is  not  insolv-    and  the  obligations  of  trust  company 
ent  or  being  dissolved  and  creditors    employees    guaranteed    by    the    trust 
are  not  affected.     Under  such  power    company    being    taken    therefor,    and 
the  corporation  may  issue  stock  and    the    trust    company    fails,    the    bank 
agree  to  take  it  back  in  six  months,     cannot  recover  back  the  money  from 
if  the  purchaser  so  desires.    Porter  r.     the  assets  of  the  trust  company.     It 
(54)  849 


§  311.] 


WHO  MAY   BUY   AND   SELL   STOCK. 


[CH.    XIX. 


goes  still  further,  and  declares  that  if  a  corporation,  by  a  purchase 
of  shares  of  its  own  capital  stock,  thereby  reduces  its  actual  assets 
below  its  capital  stock  and  debts,  or  if  the  actual  assets  at  that  time 
are  less  than  the  capital  stock  and  debts,  such  purchase  may  be  set 
aside,  and  the  guilty  corporate  officers,  as  well  as  the  vendor  of 
the  stock,  may  be  rendered  liable  thereon  at  the  instance  of  a  cor- 
porate creditor.1  A  stockholder  in  a  bank  however,  who  sells  his 
stock  to  the  cashier  of  the  bank  in  the  usual  course  of  trade,  and 


was  an  illegal  purchase  by  the  trust 
company  of  its  own  stock,  there  be- 
ing no  express  statutory  authority  to 
make  such  purchases.  The  bank  be- 
ing equally  guilty  cannot  recover 
back  its  money.  Maryland  Trust  Co. 
v.  National  Mechanics'  Bank,  102  Md. 
608  (1906).  Notes  given  by  an  in- 
solvent corporation  in  purchase  of  its 
own  stock  are  invalid  and  cannot  be 
enforced.  In  re  Smith  Lumber  Co., 
132  Fed.  Rep.  618  (1904);  aff'd  140 
Fed.  Rep.  988.  A  purchase  by  an  in- 
solvent bank  of  shares  of  its  own 
stock  .from  one  who  had  just  resigned 
as  vice-president  is  illegal,  and  he 
cannot  collect  a  certificate  of  indebted- 
ness given  him  therefor.  Re  Colum- 
bian Bank,  147  Pa.  St.  422  (1892).  So 
also  of  a  sale  by  the  president  even 
though  he  held  the  stock  as  executor 
of  an  estate.  Re  Columbian  Bank,  147 
Pa.  St.  422  (1892).  Where  a  manu- 
facturing company,  four  months  be- 
fore it  is  adjudged  insolvent  and  a 
receiver  appointed,  purchases  shares 
of  its  own  stock  and  gives  its  note  in 
payment,  such  note  cannot  be  en- 
forced against  the  corporation,  there 
being  no  proof  that  there  were  any 
net  profits  at  the  time  of  the  trans- 
action. Hamor  v.  Taylor,  etc.  Co.,  84 
Fed.  Rep.  392  (1897);  Roan  v.  Winn, 
93  Mo.  503  (1887).  Where  a  corpora- 
tion which  has  no  profits  on  hand 
issues  its  bonds  in  payment  for  its 
stocK,  the  party  so  receiving  the 
bonds  cannot  enforce  them,  but  on  the 
contrary  remains  liable  for  the  unpaid 
subscription  price  of  the  stock,  it  not 
having  been  properly  issued  as  paid- 


up  stock,  and  he  not  being  a  bona  fide 
holder.  Hebberd  v.  Southwestern,  etc. 
Co.,  55  N.  J.  Eq.  18  (1896).  Where  a 
corporation  uses  its  assets  to  buy  its 
own  stock,  corporate  creditors  may 
follow  such  assets.  Henderson  v.  Hall, 
134  Ala.  455  (1900).  An  insolvent 
corporation  cannot  purchase  shares  of 
its  own  stock.  Adams,  etc.  Co.  v.  Dey- 
ette,  5  S.  D.  418  (1894) ;  s.  c,  8  S.  D. 
119.  Where  a  corporation  is  in  proc- 
ess of  dissolution  the  directors  have 
no  power  to  use  the  corporate  funds 
to  purchase  shares  of  its  stock.  Augs- 
burg Land,  etc.  Co.  v.  Pepper,  95  Va. 
92  (1897). 

i  A  stockholder  who  sells  his  stock 
to  the  corporation  itself,  the  latter  be- 
ing insolvent,  may  be  compelled  to 
restore  the  consideration  received  by 
him.  Buck  v.  Ross,  68  Conn.  29 
(1896),  quoting  and  approving  the 
text  herein.  Where  a  cashier  sells  his 
holdings  of  stock  in  the  bank  to  the 
bank  itself,  and  takes  out  the  money, 
he  may  be  compelled  to  repay  the 
money.  Central  Bank,  etc.  v.  Thayer, 
184  Mo.  61  (1904).  An  insolvent  cor- 
poration cannot  turn  over  its  prop- 
erty to  one  of  its  stockholders  for 
his  interest  in  the  company.  Howell 
v.  Crawford,  77  Ark.  12  (1905).  A 
judgment  creditor  of  a  corporation 
may  object  to  a  previous  purchase  by 
the  corporation  of  its  own  stock,  and 
may  hold  the  person  selling  the  stock 
liable  for  the  amount  received  there- 
for, and  the  suit  may  be  in  equity. 
Hall  &  Farley  v.  Alabama,  etc.  Co. 
143  Ala.  464  (1905).  Even  though  a 
corporation   purchases    shares   of   its 


850 


CH.   XIX.] 


WHO   MAY   BUY  AND   SELL   STOCK. 


[§   311. 


has  no  reason  to  suppose  that  the  cashier  used  bank  funds  to  pay  for 
the  stock,  is  not  liable  to  the  bank  for  the  money,  even  though  it  be- 


own   stock,   which   are    but   partially    charge,  yet  a  judgment  creditor  may 
paid,  this  does  not  render  the  remain-    file  a  bill  to  compel  a  stockholder  to 


ing   stockholders   liable   for   the   bal- 
ance due  on   such   unpaid   shares   so 
purchased.      Crawford    v.    Roney,    126 
Ga.  763  (1906).  A  sale  by  a  stockhold- 
er of  his  stock  to  the  corporation  may 
be  set  aside  at  the  instance  of  a  re- 
ceiver,   even   though   the   corporation 
was  not  insolvent  at  the  time  of  the 
sale,  but  the  price  was  paid  from  the 
capital  stock  in  violation  of  a  statute. 
Tait  v.  Pigott,  32  Wash.  344  (1903).  A 
receiver  in  behalf  of  corporate  cred- 
itors can  recover  back  money  paid  by 
the    corporation    out    of    its    capital 
stock   in   purchase  of   its  own  stock. 
Tait  v.   Pigott,   38   Wash.   59    (1905). 
Where    a    corporation    purchases    its 
own    capital    stock,    the    subscription 
price  of  which  has  not  been  paid  in 
full,  and  the  other  stockholders  take 
it  from  the  corporation,  they  are  lia- 
ble for  the  unpaid  subscription  price. 
Crawford  v.  Roney,  61  S.  E.  Rep.  117 
(Ga.  1908).     Where  all  the  stockhold- 
ers consent  to  some  of  them  selling 
their   stock    to   the   corporation    they 
cannot  afterwards  object,  and  if  part 
of  it  is  resold  by  the  corporation,  the 
corporate  creditors  cannot  object  ex- 
cept to  the  extent  that  the  price  re- 
ceived  on   the   resale  does  not  equal 
the  price  paid  for  all  the  stock  so  pur- 
chased.    Clark  v.  Clark,  etc.  Co.,  115 
N.  W.  Rep.  416   (Mich.  1908).     A  re- 
ceiver of  an  insolvent  bank  may  file 
a  bill  in  equity  to  compel  its   presi- 
dent and  another  bank  to   pay  back 
the    price   of   stock    in    the    insolvent 
bank     which     the     insolvent     bank, 
through    the    instrumentality    of    its 
president,    who    was    also    cashier    of 
the    other    bank,    had    purchased    of 
the  other  bank  on  the  eve  of  the  in- 
solvency of  the  former.     Bridgens  v. 
Dollar    Sav.    Bank,    66    Fed.    Rep.    9 
(1895).    Even  though  a  receiver  is  in 


pay  back  an  illegal  dividend  and  also 
to  account  for  property  transferred  to 
him  by  the  corporation  for  a  portion 
of  his  stock,  the  receiver  being  made 
a  party   defendant.     Bowker   v.   Hill, 
115  Fed.  Rep.  528   (1879).    A  corpora- 
tion having  no  surplus  profits  cannot 
purchase  shares  of  its  own  stock,  and 
where  a  director  sells  his  stock  osten- 
sibly to  the  president,  but  really  to 
the    corporation    itself,     a    judgment 
creditor  of  the  corporation  may  com- 
pel   him    to    refund    the    price,    even 
though  the  director  took  in  payment 
the  notes  of  the  president,  which  notes 
were  afterwards   paid  by  the  checks 
of  the  corporation,  the  books  of  the 
company   showing  that   the  purchase 
as   originally   made   was    in   fact   for 
the  corporation.     Hall  v.   Henderson, 
126  Ala.  449    (1900).     Where  a  bank 
illegally  holds  its  own  stock  and  in- 
duces a   person   to   take   it   and   give 
his  own  note  therefor,  on  the  under- 
standing that  such  note  is  merely  for 
the  accommodation  of  the  bank  and  is 
not  to  be  collected,  a  receiver  of  the 
bank  cannot  enforce  the  note,  unless 
it  is  shown  that  the  bank  is  insolvent 
or  that  debts  exist.    Shuey  v.  Holmes, 
20  Wash.  13    (1898);    s.  c,   22  Wash. 
193.     Where   the   treasurer   uses   the 
funds   of  the  corporation  to  pay  for 
stock  in  the  corporation  itself,  which 
he  and  other  stockholders  have  pur- 
chased,  he   may   be   compelled,   upon 
corporate    insolvency,    to    refund    the 
money,  even  though  he  took  the  funds 
from   the  treasury   with   the  consent 
of  all  the  stockholders.    Re  Brockway 
Mfg.  Co.,  89  Me.  121    (1896).     Fraser 
v.    Ritchie,    8    111.    App.    554     (1881), 
holds  that  the  right  of  the  corporation 
to  purchase  its  own  stock  is  subject 
to  certain  restrictions,  "one  of  which 
is  that  it  shall  not  be  done  at  such 


851 


§  311.] 


WHO   MAY    BUY    AND    SELL    STOCK. 


[cn.  XIX. 


comes  insolvent.1  Where  bonds  are  issued  to  the  stockholders  for 
their  stock,  such  bonds  will  be  paid  only  after  other  creditors  have 
been  paid.2  Subject  to  the  above  conditions,  not  even  a  dissenting 
stockholder  can  complain  of  the  purchase  by  a  corporation  of  shares 
of  its  own  stock.3  Although  a  company  buys  its  own  stock  from 
a  stockholder,  subsequent  creditors  cannot  complain.4 


time  and  in  such  manner  as  to  take 
away  the  security  upon  which  the 
creditors  of  the  corporation  have  the 
right  to  rely  for  the  payment  of  their 
claims;  or,  in  other  words,  so  as  not 
to  diminish  the  fund  created  for  their 
benefit.  Each  case  must  therefore  de- 
pend upon  and  be  determined  by  its 
own  facts  and  circumstances."  See 
also  Gillet  v.  Moody,  3  N.  Y.  479 
(1850).  Where  directors  and  stock- 
holders desire  to  sell  the  enterprise, 
and  do  so  by  paying  for  their  stock  out 
of  the  corporate  funds,  and  then  re- 
insuring all  risks  in  another  company, 
and  turning  over  everything  to  the 
latter,  a  receiver  of  the  company  so 
sold  out  may  hold  a  director  liable  for 
moneys  so  paid  out.  Guild  v.  Parker, 
43  N.  J.  L.  430  (1881).  A  receiver  of 
a  corporation  seeking  to  set  aside  a 
purchase  of  stock  by  the  corporation 
itself  must  tender  back  the  stock  be- 
fore suing  to  recover  the  money. 
Pierson  v.  McCurdy,  33  Hun,  520 
(1884);  aff'd  100  N.  Y.  608.  In  Re 
Republic  Insurance  Co.,  3  Biss.  452 
(1873);  s.  c,  20  Fed.  Cas.  544,  where 
the  insolvent  corporation  had,  some 
three  years  previously,  when  the  cor- 
poration was  solvent,  purchased  stock 
of  various  stockholders  and  still  held 
it,  the  court  held  that  these  old  stock- 
holders were  not  liable  for  the  un- 
paid subscription  price  thereof.  In 
Farnsworth  v.  Robbins,  36  Minn.  369 
(1887),  the  receiver  of  an  insolvent 
company  recovered  from  a  stockhold- 
er whose  stock  the  company  had  pur- 
chased. A  scheme  whereby  the  cor- 
poration takes  back  the  stock  and  is- 
sues certificates  of  indebtedness  for  it 
is  invalid  as  against  creditors.  The 
latter   are   entitled   to   the   assets    in 

8 


preference  to  the  former.  Heggie  v. 
People's,  etc.  Assoc,  107  N.  C.  581 
(1890).  Although  a  company  buys  its 
own  stock  from  a  stockholder,  sub- 
sequent creditors  cannot  complain. 
Rollins  v.  Shaver,  etc.  Co.,  80  Iowa, 
380  (1890).  Where  a  corporation  uses 
its  profits  to  buy  its  own  stock,  the 
remaining  stockholders  are  not  liable 
on  the  statutory  liability  attaching  to 
the  stock  so  purchased  by  the  corpora- 
tion. Moon,  etc.  Co.  v.  Waxahachie, 
etc.  Co.,  13  Tex.  Civ.  App.  103  (1896); 
aff'd  89  Tex.  511  (1896).  Even  though 
the  directors  have  sold  preferred 
stocK  held  by  them  to  the  corporation 
and  taken  its  notes  therefor  when  the 
corporation  was  insolvent,  yet  a  re- 
ceiver should  not  be  appointed  at  the 
instance  of  a  stockholder.  The  remedy 
is  an  injunction  and  accounting.  Em- 
pire Hotel  Co.  v.  Main,  98  Ga.  176 
(1896).  A  judgment  creditor's  bill 
is  multifarious  where  it  asks  to  hold 
the  defendant  liable  on  a  subscription 
for  stock,  and  as  an  officer  for  causing 
the  corporation  to  buy  its  own  stock, 
and  as  an  outsider  for  obtaining  real 
estate  of  the  company  without  con- 
sideration, and  as  an  outsider  mis- 
representing the  condition  of  the  com- 
pany. First  Nat.  Bank  v.  Peavey,  75 
Fed.  Rep.  154   (1896). 

1  Corn  v.  Skillern,  75  Ark.  148 
(1905). 

2  In  re  Estate,  etc.,  202  Pa.  St.  589 
(1902). 

3  Dupee  v.  Boston  Water-Power  Co., 
114  Mass.  37  (1873).  See  §  282  as  to 
the  power  of  a  corporation  to  pur- 
chase stock  in  order  to  reduce  its  cap- 
ital stock. 

4  Rollins  v.  Shaver,  etc.  Co.,  80  Iowa, 
380  (1890).    Where  the  incorporators 

52 


CH.   XIX.] 


WHO   Mx\Y   BUY  AND   SELL   STOCK:. 


[§   312. 


§  312.  Frequently  statutes  are  passed  expressly  prohibiting  a  cor- 
poration from  purchasing  shares  of  its  own  stock.  The  national 
banks  in  this  country  are  prohibited  from  so  doing  by  the  statutes 
of  the  federal  government.1     In  New  York,  by  statute,  certain  cor- 


organize  before  the  minimum  capital 
is  subscribed,  they  are  liable  to  cor- 
porate creditors  under  the  Georgia 
statute  up  to  the  amount  of  such  min- 
imum capital,  and  it  is  no  defense 
that  before  debts  were  incurred  they 
sold  their  stock  back  to  the  corpora- 
tion. Walters  v.  Porter,  59  S.  E.  Rep. 
452  (Ga.  1907).  A  scheme  by  which  a 
corporation  purchases  its  own  stock 
from  the  subscribers  therefor  may 
upon  corporate  insolvency  be  attacked 
by  existing  creditors  or  subsequent 
creditors  who  had  no  knowledge  of 
the  scheme.  Alabama,  etc.  Co.  v. 
Hall,  44  S.  Rep.  592  (Ala.  1907).  Cf. 
§  46  and  §§  167-170,  supra. 

i  U.  S.  Rev.  Stat.,  §  5201.  See  John- 
son v.  Laflin,  5  Dill.  65  (1878);  s.  c, 
13  Fed.  Cas.  758;  aff'd  103  U.  S.  800, 
holding  that,  if  a  stockholder  in  good 
faith  and  without  notice  that  the  pur- 
chase is  for  the  bank  sells  his  stock 
to  one  who  purchases  for  the  bank, 
the  sale  is  valid  so  far  as  he  is  con- 
cerned, and  he  is  not  liable  thereon. 
See  also  Bank  v.  Lanier,  11  Wall.  369 
(1870),  holding  that  the  bank  cannot 
take  its  own  stock  in  pledge.  A  na- 
tional bank  has  no  power  to  pur- 
chase its  own  stock  except  to  prevent 
a  loss  on  an  existing  debt.  The  bank 
may  by  a  suit  at  law  recover  back 
the  money  paid  for  the  stock  without 
tendering  the  stock.  Burrows  v.  Nib- 
lack,  84  Fed.  Rep.  Ill  (1898). 

When  the  president  of  a  bank  buys 
its  stock  for  the  bank  itself,  taking 
title  in  his  own  name,  he  is  liable  as  a 
stockholder.  The  purchase  for  the 
bank,  however,  is  void.  Bundy  v. 
Jackson,  24  Fed.  Rep.  628  (1885). 
Although  a  national  bank  must  sell 
its  stock  taken  in  payment  of  a  debt 
within  six  months,  it  may  sell  on 
credit,  taking  a  note  in  payment  and 
the   stock   as   collateral.     Union   Nat. 


Bank  v.  Hunt,  76  Mo.  439  (1882).  The 
question  whether  a  note  given  by  a 
bank  was  in  payment  of  its  own  stock 
is  not  a  question  giving  jurisdiction. 
to  the  federal  courts.  Chemical  Bank* 
v.  City  Bank,  160  U.  S.  646  (1896). 
Where  a  national  bank  receives  its 
own  stock  in  pledge  at  the  time  of 
making  the  loan,  and  sells  the  stock 
as  collateral,  on  failure  of  the  debtor 
to  pay,  the  latter  cannot  complain 
that  the  statute  has  been  violated. 
National  Bank  of  Xenia  v.  Stewart, 
107  U.  S.  676  (1S82).  See  also  Gold 
Min.  Co.  v.  National  Bank,  96  U.  S. 
640  (1877);  Shoemaker  v.  National 
Mech.  Bank,  31  Md.  396  (1869); 
O'Hare  v.  Second  Nat.  Bank,  77  Pa. 
St.  96  (1874);  Stewart  v.  National 
Union  Bank,  2  Abb.  (U.  S.)  424 
(1869);  s.  c,  23  Fed.  Cas.  68.  Al- 
though a  national  bank  is  prohibited 
from  taking  its  own  stock  as  security, 
yet  if  it  does  so,  the  stock  being  taken 
in  the  name  of  the  cashier,  it  may  en- 
force the  security.  Only  the  govern- 
ment can  object  after  the  transaction 
has  been  completed.  It  is  immaterial 
that  the  stock  was  transferred  to  the 
cashier  individually  and  not  "as 
cashier."  Walden  Nat.  Bank  v.  Birch, 
130  N.  Y.  221  (1891).  A  transfer  of 
the  stock  of  a  national  bank  to  the 
bank  in  payment  of  a  debt  will  not 
be  set  aside  at  the  instance  of  the 
vendor  as  being  in  violation  of  the 
statute.  Chapin  v.  Merchants'  Nat. 
Bank,  14  N.  Y.  St.  Rep.  272  (1888). 
A  person  who  allows  stock  to  stand  in 
his  name  on  the  books  of  a  national 
bank  is  liable  on  the  statutory  liabil- 
ity therefor,  even  though  he  held  the 
stock  as  trustee  for  the  bank  itself. 
Lewis  v.  Switz,  74  Fed.  Rep.  381 
(1896).  A  national  bank  president 
and  directors  are  not  liable  criminally 
for  purchasing  the  stock  of  the  bank 


853 


§  313.] 


WHO   MAY   BUY  AND   SELL   STOCK. 


fcH.    -XIX. 


porations  are  prohibited  from  purchasing  shares  of  their  own  cap- 
ital stock.1 

§  313.  The  stock  is  not  merged,  and  it  may  be  sold  by  the  corpora- 
tion,— When  a  corporation  buys  shares  of  its  own  capital  stock,  the 
capital  stock  is  not  reduced  by  that  amount,  nor  is  the  stock  merged.2 
So  long,  however,  as  the  corporation  retains  the  ownership,  the 
stock  is  lifeless,  without  rights  or  powers.  It  cannot  be  voted  nor 
can  it  draw  dividends,  even  though  it  is  held  in  the  name  of  a 


for  the  bank  itself.     United  States  v.        2  State  v.  Smith,  48  Vt.  266  (1876); 
Britton,  107  U.  S.  655  (1882) ;  United    Williams  v.  Savage  Mfg.  Co.,  3  Md.  Ch 


States  v.  Britton,  108  U.  S.  192  (1883). 
A  stockholder  in  an  insolvent  national 
bank  cannot  avoid  the  statutory  lia- 
bility on  the  ground  that  he  pur- 
chased the  stock  from  the  bank  and 


418,  451  (1851);  City  Bank  v.  Bruce, 
17  N.  Y.  507  (1858);  Chillicothe,  etc. 
Bank  v.  Fox,  3  Blatchf.  431  (1856); 
s.  c,  5  Fed.  Cas.  632,  the  court  saying: 
"The  stock  was   not  extinguished  or 


that  the  bank  prior  to  that  time  had    destroyed  by  the  purchase  thereof  by 


purchased  it,  ultra  vires.  Lantry  v 
Wallace,  182  U.  S.  536  (1901); 
Wallace  v.  Hood,  89  Fed.  Rep.  11 
(1898);  aff'd,  182  U.  S.  555. 

1  "The  evident  intention  was  to  pro- 
hibit a  division  of  the  capital,  or  any 
portion  of  it,  among  the  stockholders, 
by  whatever  instrumentality  the  pow- 
ers of  the  corporation  in  doing  the 
act  might  be  exerted."  Gillet  v. 
Moody,  3  N.  Y.  479,  487  (1850).  See 
also  United  States  Trust  Co.  v.  United 
States  F.  Ins.  Co.,  18  N.  Y.  199,  226 
(1858);  Tracy  v.  Talmage,  14  N.  Y. 
162    (1856).     But  purchasers  of  stock 


the  corporation;"  Vail  v.  Hamilton,  85 
N.  Y.  453  (1881) ;  American  Ry.  Frog 
Co.  v.  Haven,  101  Mass.  398  (1869)  ; 
Commonwealth  v.  Boston,  etc.  R.  R., 
142  Mass.  146  (1886);  Ex  parte 
Holmes,  5  Cow.  426  (1826).  A  solv- 
ent corporation  may  purchase  its 
own  stock  and  keep  it  alive  and  treat 
it  as  an  asset.  Pabst  v.  Goodrich,  113 
N.  W.  Rep.  398  (Wis.  1907).  The 
fact  that  a  corporation  buys  its  own 
stock  does  not  necessarily  reduce  the 
capital  stock,  inasmuch  as  the  stock 
so  purchased  may  be  re-issued.  Rals- 
ton  v.   Bank   of   California,   112    Cal. 


from  a  banking  corporation  that  had  208  (1896);  Bank  of  San  Luis  Obispo 
purchased  it  in  violation  of  the  stat-  v.  Wickersham,  99  Cal.  655  (1893). 
ute  cannot  complain.  They  cannot  A  sale  by  a  corporation  of  all  its  prop- 
impeach  their  own  title.  Re  Reciproc-  erty  does  not  entitle  the  vendee  to 
ity  Bank,  22  N.  Y.  9,  17  (1860).  Nor  stock  in  the  corporation  which  the 
can  the  vendor  of  the  stock  to  the  corporation  itself  has  purchased  on  a 
bank  claim  that  the  sale  was  invalid,  sale  for  a  delinquent  assessment  and 


He  is  estopped.  United  States  Trust 
Co.  v.  Harris,  2  Bosw.  75,  91  (1857). 
See,  in  general,  Barton  v.  Port  Jack- 
son, etc.  Co.,  17  Barb.  397  (1854).    A 


not    re-issued.      Tulare,    etc.    Dist.    v. 
Kaweah,   etc.    Co.,   44    Pac.   Rep.    662 
(Cal.  1896). 
An  unincorporated  association  may 


statute  giving  a  bank  a  lien   on  its  purchase  its  own  stock,  and  a  question 

stock  for  debts  due  to  the  bank  from  of  whether  a  reduction  of  the  capital 

the  stockholder  is  not  nullified  by  an-  stock  is  thereby  effected  is  a  question 

other  statutory  provision  prohibiting  of  intention.     Booth  v.  Dodge,  60  N. 

the  bank  from  loaning  money  on  its  Y.    App.    Div.    23     (1901).      See    also 

stock.      Battey    v.    Eureka    Bank,    62  §§  251,  282,  supra. 
Kan.  384    (1901). 

854 


CH.   XIX.] 


WHO  MAY   BUY  AND   SELL   STOCK. 


[§  314. 


trustee  for  the  benefit  of  the  corporation.1  But  at  any  time  the 
corporation  may  resuscitate  it  by  selling  it  and  transferring  it  to 
the  purchaser.  Such  sale  may  be  made  upon  the  authority  of  the 
board  of  directors.2  It  may  be  sold  at  its  market  value,  and  need 
not  be  held  for  its  par  value,  as  is  necessary  in  an  original  issue  of 
stock.3  The  question  whether  a  director  may  buy  the  stock  from 
the  corporation  is  considered  elsewhere.4 

§314.  Purchase  by  a  corporation  of  stock  in  another  corpora- 
tion—  Purchase  by  a  railroad. — It  may  be  stated  as  a  general 
rule  that  a  corporation  has  no  implied  power  to  purchase  shares  of 
the  capital  stock  of  another  corporation.  This  rule  has  often  been 
applied  to  railroad  corporations.  It  has  been  firmly  settled  by 
well-considered  cases  that  a  railroad  company,  unless  expressly  au- 
thorized so  to  do,  cannot  purchase  shares  of  stock  in  another  railroad 
company.5     If  the  rule  were  otherwise  a  railroad  might  practically 


i  Quoted  and  approved  in  O'Connor  a  rival  and  competing  railroad.  The 
v.  International,  etc.  Co.,  68  N.  J.  Eq.  court  declared  the  purchase  to  be  be- 
67  (1904);  aff'd,  68  N.  J.  Eq.  680.  yond  the  corporate  powers  and  con- 
See  §  613,  infra.  trary  to  public  policy,  and  says,   "it 

2  Chillicothe  Bank  v.  Fox,  3  Blatehf.  is  a  general  principle  that  a  railroad 
431  (1856);  s.  c,  5  Fed.  Cas.  632;  company,  without  express  authority 
State  v.  Smith,  48  Vt.  266  (1876).  See  given  by  the  legislature  to  make  the 
also  §  282,  supra.  Stockholders  can-  purchase,  cannot  purchase  stock  in 
not  enjoin  the  corporate  officers  from  another  railroad  company."  See  also 
selling  shares  of  its  own  stock  which  Angell  &  Ames,  Corp.,  §  392.  To  same 
it  has  purchased.  Jefferson  v.  Bur-  effect,  Hazlehurst  v.  Savannah,  etc. 
ford,  17  S.   W.  Rep.  855    (Ky.   1891).  R.  R.,  43  Ga.  13,  57  (1871),  the  court 

3  See  §  46,  ch.  Ill,  supra.  It  may  be  saying:  "If  one  railroad  may,  at  its 
issued  by  way  of  a  stock  dividend,  option,  buy  the  stock  of  another,  it 
See  ch.  XXXII,  infra.  In  Louisiana  practically  undertakes  a  new  enter- 
the  purchase  by  a  corporation  of  its  prise  not  contemplated  by  its  charter, 
own  stock  cancels  the  stock  until  re-  This  it  cannot  do  by  any  implication, 
issued.  If,  however,  in  the  re-issue  The  power  so  to  do  must  be  clear." 
the  corporation  gives  away  the  stock,  Eleven  years'  delay  is  fatal  to  a  com- 
the  parties  receiving  it  are  liable  to  plaint  that  another  corporation  has 
subsequent  corporate  creditors.  No  purchased  a  majority  of  the  stock  of 
formal  contract  of  subscription  is  the  corporation  in  which  the  com- 
necessary,  but  the  mere  taking  of  the  plainant  stockholder  holds  stock,  and 
stock  is  sufficient  to  render  them  lia-  that  such  purchaser  is  diverting  the 
ble.     Belknap  v.  Adams,  49  La.  Ann.  traffic  to  its  own  line  and  is  wreck- 


1350   (1897). 

4  See  §  70,  supra. 

5  See  §  64,  supra.    The  most  impor- 
tant case  is  Central  R.  R.  v.  Collins, 


ing  the  corporation  which  it  controls. 
Alexander  v.  Searcy,  81  Ga.  536 
(1889).  In  Elkins  v.  Camden,  etc.  R. 
R.,  36  N.  J.  Eq.  5    (1882),  a  similar 


40  Ga.  582,  636  (1869),  where  a  stock-  injunction  was  granted.  The  court 
holder  in  one  railroad  obtained  an  said  (pp.  12,  14):  "The  purchase  of 
injunction  against  its  purchase,  for  a  rival  railroad  is  (not  to  speak  of 
purposes  of  consolidation,  of  stock  in    public  policy)    foreign  to  the  objects 

855 


§  314.] 


WHO  MAY  BUY   AND   SELL   STOCK. 


[cn.  XIX. 


extend  its  road  beyond  its  chartered  limits  by  controlling  another 
railroad  corporation.     The  supreme  court  of  the  United  States  has 


for  which  the  defendant  was  incor- 
porated. ...  As  a  purchase  with 
a  view  to  extinguishing  competition, 
the  transaction  is  clearly  ultra  vires." 
To  same  effect,  Salomons  v.  Laing,  12 
Beav.  339,  353,  377  (1850);  Great 
Northern  Ry.  v.  Eastern  Counties  Ry., 
9  Hare  306  (1851),  where  the  object 
was  to  control  the  corporation.  The 
court  said  it  was  an  "attempt  to  carry 
into  effect,  without  the  intervention  of 
parliament,  what  cannot  lawfully  be 
done  except  by  parliament  in  the  exer- 
cise of  its  discretion  with  reference  to 
the  interest  of  the  public."  See  also 
Maunsell  v.  Midland,  etc.  Ry.,  1  Hem. 
&  M.  130  (1863),  relative  to  the  power 
of  a  railroad  company  to  subscribe  for 
the  stock  of  another  railroad.  In  Cen- 
tral R.  R.  v.  Pennsylvania  R.  R.,  31 
N.  J.  Eq.  475,  494  (1879),  the  defend- 
ant was  enjoined  from  building  an- 
other railroad  by  means  of  an  inde- 
pendent corporation  operated  by 
"dummies."  The  court  said:  "A  cor- 
poration cannot  in  its  own  name  sub- 
scribe for  stock  or  be  a  corporator 
under  the  general  railroad  law,  nor 
can  it  do  so  by  a  simulated  compli- 
ance with  the  provisions  of  the  law 
through  its  agents  as  pretended  cor- 
porators and  subscribers  of  stock." 
Pearson  v.  Concord  R.  R.,  62  N.  H. 
537  (1883),  was  a  case  where  a  rail- 
road had  purchased  the  controlling  in- 
terest in  the  stock  of  a  connecting 
railroad  and  was  managing  it  in  the 
interest  of  the  former  road.  A  suit 
by  a  stockholder  of  the  defrauded 
road  to  enjoin  such  act  was  sustained. 
A  foreign  corporation  cannot  buy  rail- 
road stocks  for  the  purpose  of  uniting 
competing  lines,  where  domestic  cor- 
porations are  prohibited  from  so  do- 
ing. Clarke  v.  Central  R.  R.,  50  Fed. 
Rep.  338  (1892).  In  this  case,  how- 
ever, on  the  final  hearing  the  bill  was 
dismissed.  62  Fed.  Rep.  328  (1894). 
Where  a  railroad  president  uses  its 


funds  to  purchase  the  stock  of  a  con- 
struction company  that  has  the  stocks 
and  bonds  of  a  contemplated  compet- 
ing line  which  the  construction  com- 
pany has  agreed  to  build,  the  sale  of 
the  stock  to  such  president  may  be  at- 
tacked by  parties  who  were  defrauded 
by  the  party  who  sold  the  stock  of  the 
construction  company.  Langdon  v. 
Branch,  37  Fed.  Rep.  449  (1888).  A 
railroad  corporation  which  is  advanc- 
ing money  to  another  corporation  may 
take  the  bonds  and  stock  of  the  latter 
as  security.  The  West  Virginia  stat- 
utes do  not  prevent  such  act.  Taylor 
County  Court  v.  Baltimore,  etc.  R.  R., 
35  Fed.  Rep.  161  (1888).  Where  the 
state  has  brought  suit  to  forfeit  the 
charter  of  a  railroad  company  on  the 
ground  that  a  majority  of  its  stock  is 
held  contrary  to  the  statutes  and  con- 
stitution of  the  state  by  another  rail- 
road company,  the  case  may  be  re- 
moved to  the  federal  court  if  the 
latter  company  is  an  instrument  of  in- 
terstate commerce  and  purchased  the 
stock  for  interstate-commerce  pur- 
poses. It  is  also  removable  where  the 
latter  company  claims  that  its  charter 
existed  before  such  constitution  and 
statutes,  and  gives  it  a  right  to  own 
such  stock.  State  v.  Port  Royal,  etc. 
Ry.,  56  Fed.  Rep.  333  (1893). 

A  railroad  has  no  power  to  buy  the 
stock  of  another  railroad.  Hamilton 
v.  Savannah,  etc.  Ry.,  49  Fed.  Rep. 
412  (1892);  Mackintosh  v.  Flint,  etc. 
R.  R.,  34  Fed.  Rep.  582  (1888).  See 
also  Green's  Brice's  Ultra  Vires,  91 
(2d  ed.).  Where  a  railroad  company, 
in  the  name  of  one  of  its  leased  lines, 
contracted  to  purchase  a  majority  of 
the  stock  of  still  another  line,  the 
vendor  representing  that  the  last  line 
was  unincumbered,  the  first-men- 
tioned company  may  avoid  the  con- 
tract by  proving  that  an  incumbrance 
rested  on  the  road  to  be  sold.  South- 
western R.   R.   v.   Papot,   67   Ga.   675 


856 


CH.   XIX.  I 


WHO   MAY   BUY  AND   SELL   STOCK. 


[§  314. 


said  that  "not  only  is  the  purchase  of  stock  in  another  company 
beyond  the  power  of  a  railroad  corporation,  in  the  absence  of  an 
express  stipulation  in  the  charter,  but  the  purchase  of  such  stock 
in  a  rival  and  competing  line  is  held  to  be  contrary  to  public  pol- 
icy and  void."1  Where  one  railroad  company  illegally  buys  from 
an  individual  the  stock  of  another  railroad  company,  and  pays 
partly  in  cash  and  partly  by  note,  and  the  note  is  paid  by  a 
sale  of  the  stock  at  pledgee's  sale,  the  former  company  can- 
not hold  the  individual  liable  for  the  money  so  paid.  Both 
parties  are  guilty  of  the  illegality,  and  the  contract  being  executed 
will  not  be  disturbed.2  The  directors  may  be  liable  for  causing  the 
railroad  company  to  purchase  the  stock  of  another  railroad  com- 
pany, but  the  six  years'  statute  of  limitations  is  a  bar  to  a  stock- 


(1881).  A  bondholder  cannot  object. 
Matthews  v.  Murchison,  15  Fed.  Rep. 
691  (18S3).  A  suit  by  a  state  to  en- 
join the  defendant  railroad  company 
from  being  managed  by  directors 
elected  by  the  votes  of  stock  of  the 
company  owned  by  a  foreign  railroad 
corporation  ultra  vires,  and  also  to 
declare  such  votes  and  elections  void, 
and  also  for  a  receiver,  or,  in  lieu  of 
all  this,  for  a  forfeiture  of  the  charter, 
is  not  demurrable.  State  v.  Port 
Royal,  etc.  Ry.,  45  S.  C.  470  (1895). 
One  railroad  corporation  has  no  power 
to  acquire  the  bonds  of  another  rail- 
road corporation  in  order  to  control 
the  elections  of  the  latter,  such  bonds 
having  a  voting  power.  State  v.  Mc- 
Daniel,  22  Ohio  St.  354,  368  (1872). 
A  controlling  stockholder  in  one  rail- 
road corporation  may  become  the  con- 
trolling stockholder  in  another  rail- 
road corporation.  Havemeyer  v.  Have- 
meyer,  43  Super.  Ct.  (N.  Y.)  506 
(1878);  45  Super.  Ct.  (N.  Y.)  464; 
aff'd  86  N.  Y.  618.  Even  though  a 
railroad  which  owns  stock  in  another 
railroad  sells  such  stock  to  a  copart- 
nership in  which  one  of  the  directors 
is  a  partner,  yet  the  court  will  not 
enjoin  the  sale  if  it  is  a  fair  one.  Ryan 
v.  Williams,  100  Fed.  Rep.  172  (1900). 
Even  though  one  railroad  company 
owns  the  majority  of  the  stock  of  an- 
other railroad  company  and  purchases 


the  property  of  the  latter  at  a  fore- 
closure sale  thereof,  yet,  if  there  was 
no  actual  fraud,  the  minority  stock- 
holders of  the  insolvent  company  can- 
not complain,  especially  where  they 
waited  seventeen  months  and  allowed 
large  expenditures  to  be  made  in  re- 
liance on  the  sale.  Rothchild  v.  Mem- 
phis, etc.  R.  R.,  113  Fed.  Rep.  476 
(1902).  Stock  held  by  one  corpora- 
tion in  another  cannot  be  voted  where 
its  charter  has  been  forfeited  and  a 
proxy  given  by  its  directors  had  been 
revoked  by  a  part  of  them  leaving  the 
remainder  in  minority  and  the  stock 
held  by  it  had  been  returned  to  the 
corporation  and  canceled.  In  re 
Delaware  River,  etc.  R.  R.,  68  Atl. 
Rep.  1104   (N.  J.  1908). 

i  Louisville,  etc.  R.  R.  v.  Kentucky, 
161  U.  S.  677,  698  (1896),  citing  the 
above  text.  See  also  note  5,  p.  876, 
infra.  Where  one  corporation  pur- 
chases a  majority  of  the  stock  of  an- 
other corporation,  thereby  creating  a 
tendency  to  restrain  competition,  the 
purchase  is  illegal,  even  though  a  com- 
plete monopoly  would  not  result.  Mi- 
nority stockholders  of  the  purchasing 
corporation  may  enjoin  the  purchase. 
Dunbar  v.  American,  etc.  Co.,  224  111. 
9   (1906). 

2  Cincinnati,  etc  R.  R.  v.  McKeen, 
64  Fed.  Rep.  36  (1894). 


857 


314.] 


WHO    .MAY    EUY    AND    SELL    STOCK. 


[cn.  XIX. 


holder's  suit  to  hold  them  liable,  no  fraud  being  alleged.1  In  some 
instances,  particular  corporations,  by  their  charters,  arc  given  the 
power  to  purchase  other  railroad  stocks,  and  in  other  instances 
general  statutes  to  that  effect  prevail.2  In  Pennsylvania  by  stat- 
ute one  railroad  may  purchase  stock  in  another  railroad,  if  the  two 
are  not  parallel  or  competing.3  Under  a  statute  authorizing  the  stock- 
holders by  an  amended  certificate  to  change  the  objects  of  the  cor- 
poration, the  certificate  may  bo  amended  so  as  to  give  a  corporation 
power  to  purchase  stock  in  other  corporations.4  In  some  of  the  states, 
prohibitions  against  such  purchases  are  placed  in  the  constitution  of 
the  state.5     Even  though  a  railroad  purchases  the  stock  of  another 


1  Whitwam  v.  Watkin,  78  L.  T.  Rep. 
188    (1898). 

2  See  Baltimore  v.  Baltimore,  etc. 
R.  R.,  21  Md.  50  (1863);  Columbus, 
etc.  Ry.  v.  Burke,  19  Week.  L.  Bull. 
27  (Ohio,  1S87);  Zabriskie  v.  Cleve- 
land, etc.  R.  R.,  23  How.  381  (1859), 
as  to  the  Ohio  statute.  In  White  v. 
Syracuse,  etc.  R.  R.,  14  Barb.  559 
(1853),  a  general  law  allowing  any 
New  York  railroad  to  subscribe  to  the 
stock  of  the  Great  Western  Railroad, 
Canada  West,  was  held  constitutional 
and  valid.  See  also  Matthews  v. 
Murchison,  17  Fed.  Rep.  760  (1883), 
on  the  North  Carolina  act.  As  to  the 
Kansas  act  allowing  such  purchases, 
see  Atchison,  etc.  R.  R.  v.  Fletcher, 
85  Kan.  236  (1886);  Atchison,  etc.  R. 
R.  v.  Cochran,  43  Kan.  225  (1890). 
In  the  case  of  Ryan  v.  Leavenworth, 
etc.  Ry.  Co.,  21  Kan.  365  (1879),  the 
court  held  that  a  railroad  company 
having  the  power  "of  acquiring  by 
purchase  and  otherwise  and  of  hold- 
ing or  conveying  real  and  personal 
estate  which  may  be  needful  to  carry 
into  effect  fully  the  purposes  and  ob- 
jects of  this  act,"  might  buy  the  stock 
of  a  connecting  railroad  company. 
This  was  approved  by  the  circuit 
court  of  the  United  States  in  Venner 
v.  Atchison,  etc.  R.  R.  Co.,  28  Fed. 
Rep.  584  (1886).  In  Kimball  v.  Atch- 
ison, etc.  R.  R.,  46  Fed.  Rep.  888 
(1891),  the  court  held  that  the  Atchi- 


son, Topeka,  &  Santa  Fe  Railroad 
Company  had  power  under  its  char- 
ter to  buy  a  majority  of  the  stock  of 
the  St.  Louis  &  San  Francisco  Rail- 
way, a  partially  competing  line.  Un- 
der the  statutes  of  Pennsylvania  it 
is  legal  for  a  railroad  company  to  own 
all  the  stock  of  a  mining  company 
which  owns  land,  and  "such  land  does 
not  escheat.  Commonwealth  v.  New 
York,  etc.  R.  R.,  132  Pa.  St.  591;  139 
Pa.  St.  457  (1891).  In  New  York,  by 
statute,  a  railroad  company  may  pur- 
chase shares  of  stock  in  another  rail- 
road company.  Oelbermann  v.  New 
York  &  Northern  R.  R.,  77  Hun,  332 
(1894).  Under  the  statutes  of  New 
Jersey  a  steam  railroad  company  may 
acquire  the  stock  and  bonds  of  a  street 
railway  company.  State  v.  Atlantic 
City,  etc.  R.  R.,  69  Atl.  Rep.  468  (N. 
J.  1908). 

3  Northern,  etc.  R.  R.  v.  Walworth, 
193  Pa.  St.  207   (1899). 

4  Meredith  v.  New  Jersey,  etc.  Co., 
59  N.  J.  Eq.  257  (1899) ;  aff'd,  60  N.  J. 
Eq.  445. 

5  By  the  constitution  of  Pennsyl- 
vania any  railroad  corporation  is  for- 
bidden to  control  any  other  railroad 
corporation  owning  or  having  under 
its  control  a  parallel  or  competing 
line.  Under  this  provision  the  Penn- 
sylvania Railroad  Company  was  en- 
joined from  purchasing  a  majority  of 
the  stock  of  the  South  Pennsylvania 


858 


CH.   XIX.] 


WHO  MAY   BUY  AND   SELL   STOCK. 


[§  314. 


railroad  in  violation  of  the  charter  of  the  former,  yet,  if  subsequently 
the  legislature  passes  a  law  authorizing  any  corporation  to  purchase 
and  own  the  stock  of  other  corporations,  the  illegality  of  the  above- 
mentioned  purchase  is  cured  and  the  disability  to  hold  such  stock  is 
removed,  there  being  no  longer  any  statute,  rule  of  law,  or  principle 
of  public  policy  forbidding  such  purchase.1 

Where  a  railroad  company  has  power  to  purchase,  lease  or  con- 
solidate with  another  railroad  company,  it  may  buy  the  stock  of  the 
latter  company  with  a  view  to  such  consolidation,  lease  or  sale.2 


Railroad  Company.   In  this  noted  case 
(Pennsylvania     R.     R.     v.    Common- 
wealth,  7   Atl.   Rep.   368  —  1886),   the 
court   said   that   the   ownership   of   a 
majority  of  the  stock  gave  "control" 
in  the  sense  of  that  word  as  used  in 
the  constitution.     Cf.  Pullman  Palace 
Car  Co.  v.  Missouri  Pac.  R.  R.,  11  Fed. 
Rep.  634    (1882);   affirmed,  115  U.  S. 
587  (1885),  construing  the  word  "con- 
trol" differently  in  a  contract  where- 
by the  defendant  was  to  use  the  plain- 
tiff's cars  over   roads   under   the   de- 
fendant's control.    The  supreme  court 
of  Pennsylvania,   in  Pennsylvania  R. 
R.  v.  Commonwealth,  7  Atl.  Rep.  368 
(Pa.     1886),    also    sustained    an    in- 
junction   enjoining    a   corporation,    a 
majority  of  whose  stock  was  owned 
by   the   Pennsylvania   Railroad    Com- 
pany from  purchasing  a  majority  of 
the  stock  of  a  road   competing  with 
the  Pennsylvania  Railroad  Company. 
The  'constitution    of   Georgia   forbids 
and  prevents  one  railroad  from  buy- 
ing the  stock  and  control  of  a  com- 
peting railroad  scheme,  even  though 
the  railroad  of  the  latter  is  not  even 
commenced  and  there  is  no  intention 
of  building  it.    Hamilton  r.  Savannah, 
etc.  Ry.,  49  Fed.  Rep.  412  (1892).  This 
constitutional   provision   applies  only 
to     roads    competing    in    the     state. 
Clarke  v.  Richmond,  etc.  Co.,  62  Fed. 
Rep.  328    (1894).     The  constitutional 
provision  in  Georgia  against  the  con- 
solidation of  competing  lines  of  rail- 
road does  not  necessarily  apply  to  a 
consolidation,    even    though    the    two 
roads  compete  at  certain  points.   Each 
case  is  decided  on  its  own  facts,  and 


if  on  the  whole  the  public  is  benefited 
rather  than  injured  by  the  consolida- 
tion, it  is  not  illegal  under  this  con- 
stitutional provision.   State  v.  Central, 
etc.  Ry.,   109   Ga.   716    (1900).     Even 
though     a     railroad    company     owns 
stock  in  a  coal  company  contrary  to 
the  statute,  yet  a  person  contracting 
with  a  coal  company  cannot  raise  that 
question.     Hill  v.  Rich  Hill,  etc.  Co., 
119  Mo.  9   (1893).     Under  the  Massa- 
chusetts statute  prohibiting  railroads 
from  holding  directly  or  indirectly  the 
stock    of    any    other    corporation,    a 
steam  railroad  cannot  indirectly  hold 
the  stock  of  a  street  railroad  by  hav- 
ing a  holding,  company  as  an  inter- 
mediary.     Attorney-General    v.    New 
York,   etc.   R.  R.,   84   N.  E.   Rep.   737 
(Mass.  1908). 

i  In  re  Buffalo,  etc.  R.  R.,  37  N.  Y. 
Supp.  1048  (1896),  involving  the 
same  transaction  as  was  involved  in 
Milbank  v.  N.  Y.  etc.  R.  R.,  64  How. 
Pr.  20.  See  also  Joseph  Bancroft,  etc. 
Co.  v.  Bloede,  106  Fed.  Rep.  396  (1901). 

2  Where  a  railroad  corporation  has 
power  to  consolidate  with  another,  it 
may  purchase  the  stock  of  that  other 
in  contemplation  of  the  consolidation. 
Hill  v.  Nisbet,  100  Ind.  341  (1884). 
In  the  case  Toledo,  etc.  R.  R.  v.  Con- 
tinental Trust  Co.,  95  Fed.  Rep.  497, 
510  (1899),  where  one  Indiana  rail- 
road purchased  the  stock  of  another, 
as  a  preliminary  to  consolidation,  the 
court  considered  the  two  roads  as  be- 
ing consolidated,  even  though  the 
technical  consolidation  had  not  been 
carried  out,  on  account  of  the  possi- 
ble effect  upon  certain  municipal  sub- 


859 


§  314.] 


WHO  MAY   BUT  AND   SELL   STOCK. 


[cu.  XIX. 


Even  though  the  purchase  by  one  corporation  of  the  stock  of  another 
corporation  is  ultra  vires  of  the  former,  yet  a  stockholder  of  the 
latter  corporation  cannot  ordinarily  object.1  Where  a  street  railway 
company  employs  a  person  as  its  agent  to  purchase  a  majority  of  the 
stock  of  another  street  railway  company,  and  he  does  so,  and  the 
former  pays  him  for  the  stock  and  for  his  services,  he  cannot  refuse 
to  deliver  the  stock  on  the  ground  that  the  company  had  no  power 
to  purchase.2  A  person  who  sells  his  stock  in  a  ferry  company  to 
a  trust  company  cannot  repudiate  the  sale  on  the  ground  that  the 
trust  company  purchased  it  for  a  foreign  railroad  company,  which 
was  not  entitled  to  do  business  in  the  state,  the  stockholder  not  know- 
ing that  the  purchase  was  for  the  railroad  company.3 

A  railroad  company  owning  all  the  stock  and  bonds  of  another 
company  does  not  own  the  property  of  the  latter.  It  cannot  sue 
on  a  cause  of  action  belonging  to  the  latter.4 


scriptions.  A  railroad  corporation 
may  purchase  the  stock  of  another 
railroad  with  a  view  to  buying  the 
railroad  itself,  where  the  sale  of  the 
railroad  is  authorized.  Dewey  v.  To- 
ledo, etc.  Ry.,  91  Mich.  351  (1892). 
"Where  a  railroad  company  has  power 
to   lease   another   company's  road,   it 


interest  in  the  stock  of  a  competing 
railroad,  it  and  its  officers  and  dum- 
mies will  be  enjoined  from  voting 
such  stock  at  the  instance  of  minor- 
ity stockholders,  it  being  clear  that 
if  allowed  to  control  the  latter  cor- 
poration the  former  corporation  can 
enhance  its  profits  at  the  expense  of 


may  buy  all  the  stock  of  the  latter  in-  the  latter  corporation,  by  diversion  of 
stead  of  taking  a  lease.  Atchison,  etc. 
R.  R.  v.  Fletcher,  35  Kan.  236,  247 
(1886).  A  railroad  corporation  hav- 
ing the  power  to  buy  or  consolidate 
with  other  railroads  may  buy  a  con- 
trolling interest  in  the  stock  of  an- 
other railroad.  Wehrhane  v.  Nash- 
ville, etc.  R.  R.,  4  N.  Y.  St.  Rep.  541 
(1886).  But  where  one  company  buys 
the  stock  of  another  with  no  declara- 
tion of  purpose  of  leasing  the  road, 
although  the  power  to  lease  exists,  a 
stockholder  may  enjoin  the  purchase 
of  stock.  Elkins  v.  Camden,  etc.  R. 
R.,  36  N.  J.  Eq.  5  (1882).  See  also 
§  316,  infra. 

l  Oelbermann  v.  N.  Y.  etc.  Ry.,  77 
Hun,  332  (1894);  Milbank  r.  N.  Y. 
etc.  R.  R.,  64  How.  Pr.  20,  27  (1882); 
excepting,  of  course,  where  the  former 
corporation  thereby  controls  the  latter 
corporation  and  is  misusing  such  con- 
trol. Great  Western  Ry.  v.  Metro- 
politan Ry.,  32  L.  J.  (Ch.)  382  (1863). 
Where  a  railroad  buys  a  controlling 


traffic.     Memphis,  etc.  R.  R.  v.  Woods, 
88  Ala.  630   (1889). 

The  New  Jersey  chancery  court  will 
at  the  instance  of  a  stockholder  en- 
join a  New  Jersey  corporation  from 
owning  and  voting  stock  in  a  Wash- 
ington corporation,  inasmuch  as  the 
Washington  courts  hold  that  a  Wash- 
ington corporation  has  no  power  to 
own  stock  in  another  Washington 
corporation,  and  may  be  enjoined 
from  voting  such  stock.  Coler  v.  Ta- 
coma,  etc.  Co.,  65  N.  J.  Eq.  347;  rev'g 
64  N.  J.  Eq.  117  (1903).  Cf.  §§615, 
662,  infra. 

2  Nor  on  the  ground  that  it  had 
passed  no  resolutions  authorizing  him 
to  purchase,  and  the  former  may  re- 
cover the  stock  from  a  transferee  with 
notice  from  the  agent.  Manchester 
St.  Ry.  v.  Williams,  71  N.  H.  312 
(1902). 

3  Newman  v.  Mercantile  T.  Co.,  189 
Mo.  423    (1905). 

4  Fitzgerald   v.   Missouri    Pac.   Ry., 


860 


CH.    XIX.] 


WHO    MAY   BUY   AND    SELL   STOCK. 


[§   314. 


Notwithstanding  the  above  rules  the  savings,  profits  and  advan- 
tages flowing  from  consolidation  of  railroad  companies  have  been  such 
as  to  lead  to  other  devices  for  bringing  about  the  same  result.  The 
laws  of  trade  eliminating  wasteful  competition  have  been  stronger 
than  the  laws  of  men.1 

In  England,  for  more  than  thirty  years,  parliament  legislated 
against  the  consolidation  of  railroads.  This  legislation  proved  to  be 
utterly  ineffective,  and  in  1872  a  parliamentary  committee  made  an 
elaborate  and  exhaustive  report  on  the  subject,  and  said,  among  other 
things,  that  consolidation  "had  not  brought  with  it  the  evils  that 
were  anticipated,  but  that  in  any  event,  long  and  varied  experience 
had  fully  demonstrated  the  fact  that,  while  parliament  might  hinder 
and  thwart  it,  it  could  not  prevent  it."  In  the  United  States  the 
holding  company  has  been  resorted  to.2  Some  of  the  states  have  done 
the  same  as  was  done  in  England,  namely,  recognized  the  inevitable 
tendency  and  have  regulated  rather  than  prohibited.  In  Connecti- 
cut the  legislature  has  gone  so  far  as  to  even  authorize  the  great 
railroad  company,  which  own-  practically  all  the  railroads  in  that 


45  Fed.  Rep.  812  (1891).  Although 
one  railroad  company  owns  a  major- 
ity of  the  stock  of  another  railroad 
company,  yet  the  identity  of  the  two 
is  separate  as  regards  being  parties 
to  suits.  Jessup  v.  Illinois  Cent.  R. 
R.,  36  Fed.  Rep.  735  (1888).  A  cor- 
poration which  owns  a  majority  of 
the  stock  of  another  corporation,  and 
buys  goods  of  it,  is  not  bound  to  see 
that  the  latter  turns  the  funds  over  to 
a  party  who  owned  the  goods  and 
consigned  them  for  sale.  "Wheeler  v. 
New  Haven  Wire  Co.,  16  Atl.  Rep.  393 
(Conn.  1889).  See  on  this  subject 
§  6,  supra,  and  §§  663,  664,  709,  infra. 
i  In  1908  a  special  commission  on 
commerce  and  industry  in  Massachu- 
setts made  a  report  on  the  question 
of  allowing  the  New  York,  New  Haven 
&  Hartford  R.  R.  Co.  to  own  a  ma- 
jority of  the  stock  of  the  Boston  & 
Maine  R.  R.  Co.,  and  the  following 
summary  of  its  report  is  taken  from 
the  Railroad  Gazette  of  March  27, 
1908: 

"The  proposals  for  safeguarding  the 
merger  of  the  two  large  railroad  systems, 
which  combined,  create  a  unique  and  firm 


railroad  monopoly  in  the  six  New  Eng- 
land states,  are  naturally  the  real  nucleus 
of  this  important  report  They  can  be 
summarized  almost  in  a  single  sentence. 
They  allow  well-nigh  free  control  and 
operation  by  the  New  Haven  of  the  Bos- 
ton &  Maine — the  localization  features  not 
being  important — but  subject  to  some  pret- 
ty radical  restrictions  based  on  new  and 
contingent  conditions.  Those  restrictions 
are  twofold:  (1)  The  right  of  the  state, 
If  the  merger  in  a  public  sense  after  five 
years  is  unsatisfactory,  to  buy  in  the  New 
Haven's  Boston  &  Maine  shares,  and  (2) 
suspensive  repeal  of  the  voting  power  on 
Boston  &  Maine  shares  if  control  of  the 
New  Haven  itself  passes  to  an  outside 
interest.  On  their  face  these  provisions 
look  severe ;  striking  at  a  principle  of 
ownership  and  opening  a  vista  of  future 
legislative  interference.  ...  To  the 
twofold  conditions  named  of  Boston  & 
Maine  control,  should  be  added  a  third  one 
suggested  by  the  commission  for  control 
by  the  New  Haven  of  its  Massachusetts 
trolley  system  by  a  Massachusetts  cor- 
poration in  which  the  state  shall  be  rep- 
resented on  the  board  of  directors  with 
provision  for  sale  of  control  if  the  plan 
after  ten  years  works  out  badly  for  the 
public.  This  applies  to  the  trolleys  sub- 
stantially the  same  policy  as  that  out- 
lined for  the  steam  railroad  merger  and 
with  the   same   arguments   in   its   favor." 

2  See  §  317,  infra. 


861 


315.] 


WHO   MAY   BUY   AND    :  ELL   STOCK. 


[cu.  XIX. 


state  to  condemn  the  stock  held  by  minority  stockholders  in  another 
railroad  corporation,  the  majority  of  the  stock  of  which  was  held  by 
the  main  railroad  company,  and  the  Supreme  Court  of  the  United 
States  has  upheld  this  statute.1 

§  315.  Purchases  of  stock  by  banks,  and  pledges  to  banks. — A 
banking  corporation  has  at  common  law  no  power  to  purchase  or 
invest  in  the  stock  of  another  corporation,  whether  that  other  cor- 
poration bo  itself  a  bank  or  of  a  different  business.2     A  bank  is 


1  A  state  may  enact  a  statute  au- 
thorizing a  railroad  corporation  to 
condemn  a  minority  of  the  stock  in 
another  company,  the  former  company 
being  already  the  owner  of  the  ma- 
jority of  the  stock,  it  being  shown 
that  the  public  interest  so  demands 
and  the  improvement  of  the  railroad 
itself  being  of  sufficient  public  inter- 
est. Offield  v.  N.  Y.,  etc.  R.  R.,  203 
U.  S.  372   (1906). 

2  Cited  and  approved  in  California 
Bank  v.  Kennedy,  167  U.  S.  362,  369 
(1897) ;  Talmage  v.  Pell,  7  N.  Y.  328, 
347  (1852);  Nassau  Bank  v.  Jones,  95 
N.  Y.  115,  120  (1884);  First  Nat. 
Bank  v.  National  Exch.  Bank,  92  U. 
S.  122,  128  (1875),  where,  in  reference 
to  national  banks,  the  court  said: 
"Dealing  in  stocks  is  not  expressly 
prohibited,  but  such  a  prohibition  is 
implied  from  the  failure  to  grant  the 
power."  Tracy  v.  Talmage,  14  N.  Y. 
162  (1856);  Royal  Bank  of  India's 
Case,  L.  R.  4  Ch.  App.  252  (1869); 
Franklin  Co.  v.  Lewiston  Sav.  Inst., 
68  Me.  43  (1877).  Where  a  bank  de- 
sires to  subscribe  to  the  stock  of  a 
trust  company,  but  cannot  legally  do 
so,  and  its  directors  give  their  note 
in  payment,  they  are  liable  on  the 
note  to  the  receiver  of  the  trust  com- 
pany. Adams  v.  Kennedy,  34  Atl.  Rep. 
659  (Pa.  1896).  A  bank  has  no  power 
to  buy  stock  in  an  insurance  company, 
and  the  cashier  of  the  bank  has  no 
authority  to  take  stock  in  payment  of 
a  debt.  Bank  of  Commerce  v.  Hart, 
37  Neb.  197  (1893).  A  state  bank 
has  no  power  to  purchase  stock  in  a 
national  bank  as  an  investment,  and 
hence  is  not  liable  on  such  stock  in 


case  the  national  bank  becomes  insol- 
vent. Schofield  v.  Goodrich,  etc.  Co., 
98  Fed.  Rep.  271  (1899).  Contra,  Cit- 
izens' State  Bank  v.  Hawkins,  71  Fed. 
Rep.  369  (1896);  qualified  in  92  Fed. 
Rep.  744.  A  bank  may  buy  the  stock 
of  another  bank  under  the  express 
power  of  the  former  to  discount  se- 
curities, and  as  a  stockholder  is  liable 
on  the  stock.  Latimer  v.  Citizens' 
State  Bank,  102  Iowa  162  (1897). 
Where  the  cashier  uses  the  bank's 
funds  to  buy  stock  in  another  bank, 
the  court  will  hold  that  such  stock  be- 
longs to  the  first-mentioned  bank  ex- 
cept as  against  bona  fide  purchasers 
of  such  stock.  Tecumseh,  etc.  Bank 
v.  Russell,  50  Neb.  277  (1897).  Where 
a  bank  buys  wall  paper  at  a  sheriff's 
sale  and  organizes  a  corporation  to 
sell  the  paper,  all  the  stock  of  the 
corporation  being  owned  by  the  bank, 
and  guarantees  debts  thereafter  in- 
curred by  such  corporation,  the  bank 
is  liable  on  such  debts.  American 
Nat.  Bank  v.  National  Wall  Paper 
Co.,  77  Fed.  Rep.  85  (1896).  Even 
though  a  bank,  in  order  to  handle 
real  estate  which  it  acquires  on  fore- 
closure, organizes  a  corporation  and 
owns  all  the  stock  and  is  the  sole 
creditor  of  such  corporation,  yet  it 
cannot  ignore  the  corporate  existence 
and  convey,  encumber  or  deal  with 
the  property  as  its  own.  Watson  v. 
Bonfils,  116  Fed.  Rep.  157  (1902). 
Under  a  charter  power  to  receive,  in 
payment  for  stock,  property  "for  the 
■advancement  of  the  purposes  for 
which"  the  corporation  was  organ- 
ized, a  trust  company  may  receive 
stock  in  a  savings  association,   and 


862 


CH.   XIX.] 


WHO   MAY   BUY  AND   SELL   STOCK. 


[§   315. 


organized  for  the  purpose  of  receiving  deposits  and  loaning  money, 
not  for  the  purpose  of  dealing  in  stocks.  Any  attempt  to  engage 
in  such  transaction  is  a  violation  of  its  charter  rights  and  of  its 
duty  towards  the  stockholders  and  the  public.  Thus,  where  a  national 
bank  invests  its  money  in  the  stock  of  a  savings  bank,  the  investment 
is  ultra  vires,  even  though  the  savings  bank  becomes  insolvent.  The 
national  bank  is  not  liable  on  the  statutory  liability  attached  to 
such  savings  bank  stock,  even  though  the  national  bank  received 
dividends  on  the  stock.1  So  also  where  a  national  bank  invests  its 
money  in  the  stock  of  another  national  bank  the  investment  is  ultra 
vires,  and  the  former  bank  is  not  liable  on  such  stock,  even  though 
the  latter  bank  becomes  insolvent.2  A  national  bank  cannot  be  com- 
pelled to  carry  out  a  contract  in  respect  to  stock  in  a  rubber  corn- 


even  though  by  statute  the  payment 
of  stock  by  property  must  first  be 
authorized  by  the  stockholders,  yet  if 
the  corporation  receives  the  stock  and 
pledges  it  and  receives  a  dividend 
thereon  and  retains  it  two  years  un- 
til it  depreciates  in  value,  it  cannot 
then  repudiate  the  transaction.  South- 
ern Trust,  etc.  Co.  v.  Yeatman,  130 
Fed.  Rep.  798  (1904);  aff'd,  134  Fed. 
Rep.   810. 

l  California  Bank  v.   Kennedy,   167 
U.    S.   362    (1897),    rev'g  Kennedy   v. 
California    Sav.    Bank,    101    Cal.   495. 
It  is   illegal  for   a  national   bank   to 
prrchase    stock    in    a   savings    bank, 
and  hence  a  national  bank  is  not  lia- 
ble by  reason  of  the  statutory  liabil- 
ity   attached    to    such    stock    in    the 
savings  bank.    Chemical  Nat.  Bank  v. 
Havermale,     120     Cal.     601      (1898). 
"Where  a  trust  company,  in  order  to 
carry  through  its  consolidation  with 
another  trust  company,  causes  a  na- 
tional bank  to  purchase  in  its  behalf 
some  of  its  stock,  the  money  being  ad- 
vanced by  the  bank  and  the  obliga- 
tions   of    trust    company    employees 
guaranteed  by  the  trust  company  be- 
ing taken  therefor,  and  the  trust  com- 
pany fails,   the   bank  cannot  recover 
back   the   money   from  the   assets   of 
the  trust  company.     It  was  an  illegal 
purchase  by  the  trust  company  of  its 
own    stock,    there    being    no    express 
statutory  authority  to  make  such  pur- 


chases. The  bank  being  equally  guilty 
cannot  recover  back  its  money.  Mary- 
land Trust  Co.  v.  National  Mechan- 
ics' Bank,  102  Md.  608  (1906). 

2  Concord    First    National    Bank    v. 
Hawkins,  174  U.  S.  364   (1899),  rev'g 
First  Nat.  Bank  v.  Hawkins,  79  Fed. 
Rep.  51;  and  82  Fed.  Rep.  301.    Even 
though  a  national  bank,  as  pledgee  of 
national  bank  stock  which  stands  on 
the  books  of  the  latter  bank  in  the 
name  of  the  pledgor,  sells  the  stock  on 
notice  and  buys  it  in  at  a  nominal  fig- 
ure, yet  if  the  pledgee  does  not  have 
the   stock  transferred  to  himself   on 
the  books  of  the  bank  he  cannot  be 
held  liable  thereon,  the  pledgee  hav- 
ing  soon    after   the   sale    waived    its 
rights   as   a   purchaser  at  such   sale. 
Robinson  v.  Southern,  etc.  Bank,  180 
U.   S.   295    (1901).     A  national  bank 
has   no    power   to   invest   its   surplus 
funds  in  the  stock  of  another  national 
bank,  and  hence  cannot  be  taxed  as  a 
stockholder.     Shaw   v.   National,   etc. 
Bank,  132  Fed.  Rep.  658  (1904) ;  aff'd, 
199  U.  S.  603.  A  stockholder  in  a  na- 
tional bank  who  is  sued  on  the  statu- 
tory liability   cannot  set  up   the   de- 
fense that  the  money  is  to  be  used  to 
pay   a   liability   of    such   bank,    as   a 
stockholder  in  another  insolvent  na- 
tional  bank.     Martin  v.   Wilson,   120 
Fed.  Rep.  202    (1903).     One  national 
bank  has  no  power  to  purchase  stock 
in  another  national  bank,  and  if  such 


863 


§  315.] 


WHO   MAY   BUY   AND   SELL   STOCK. 


[CII.    XIX. 


pany.1  But  it  lias  been  held  in  Pennsylvania  that  a  national  bank 
may  be  liable  for  losses  on  purchases  and  sales  of  stock  by  its  cashier 
made  with  its  consent  and  for  its  benefit,  where  it  has  received  large 
profits  therefrom.2 

A  pledge  of  stock  to  a  bank  as  collateral  security  for  a  loan  made 
by  the  bank  at  the  time  is  of  course  legal.  Such  a  pledge  of  stock 
is  valid  and  may  be  enforced.3  So  also  as  regards  a  pledge  of  stock 
to  a  bank  to  secure  a  debt  previously  contracted  and  as  regards  the 
sale  of  stock  to  a  bank  in  payment  of  a  doubtful  debt.  Such  trans- 
actions are  of  constant  occurrence  and  are  legal.4     But  a  national 


purchase  is  made  in  the  name  of  a 
person  who  gets  the  money  from  the 
first-named  bank  in  order  to  pay  for 
the  stock  and  gives  his  note  to  such 
bank  for  the  money,  he  is  liable  to 
the  receiver  of  the  first-named  bank 
on  such  note.  Tillinghast  v.  Carr, 
82  Fed.  Rep.  298  (1897).  See  §252, 
supra. 

i  Metropolitan,  etc.  v.  Lyndonville 
Nat.  Bank,  76  Vt.  303  (1904).  In  this 
case  the  court  stated  that  Wiley  v. 
National  Bank  of  Brattleboro,  47  Vt. 
546,  and  Whitney  v.  National  Bank 
of  Brattleboro,  50  Vt.  389,  had  been 
disapproved  by  the  supreme  court  of 
the  United  States. 

2  National  Bank,  etc.  v.  Fridenberg, 
206  Pa.   St.  243    (1903). 

3  Royal  Bank  of  India's  Case,  L.  R. 
4  Ch.  App.  252   (1869).     "Making  ad- 
vances   upon    shares    in    public    com- 
panies is  within  the  ordinary  course 
of  the  dealing  of  bankers."    The  stock 
pledged   was   stock  in  another  bank. 
To  same  effect,  Re  Barned's  Banking 
Co.,   L.   R.    3    Ch.    App.    105    (1867); 
Shoemaker  v.  National  Mech.  Bank,  1 
Hughes,    101    (1869);    s.    c,    21    Fed. 
Cas.    1331,   as   applicable   to   national 
banks;    also   National   Bank  v.   Case, 
99  U.  S.  628    (1878).     Such  a  pledge 
to  a  national  bank  is  not  prohibited 
by   the   statutory    provision   that  the 
bank  shall  not  take  a  real-estate  mort- 
gage as  security,  although  the  prop- 
erty of  the   corporation  whose   stock 
was    pledged    consisted    only    of    real 
estate.     Baldwin  v.  Canfield,  26  Minn. 
43    (1879).     See  also  Sistare  v.  Best, 


88  N.  Y.  527    (1882).     Contra,  Frank- 
lin Bank  v.  Commercial  Bank,  36  Ohio 
St.  350    (1881),  where  the  legality  of 
the  pledge  was  denied,  and  the  right 
of  the  pledgee  to  have  the  stock  reg- 
istered in  its  name  not  granted.     On 
a  reorganization  it  is  legal  for  a  bank 
owning  some  of  the  bonds  to  take  part 
in  such-  organization  and  accept  stock 
in  the  new  company.    Deposit  Bank  v. 
Barrett,  13  S.  W.  Rep.  337  (Ky.  1890). 
4  A  national  bank  may  accept  rail- 
road and  other  stocks  in  satisfaction 
of  a  doubtful   debt  and  may  also   in 
compromising  a  contested  claim  pay 
additional  money  in  order  to  acquire 
such  stocks,   if  the  transaction   is  in 
good  faith,  and  with  a  view  to  avoid 
loss,  and  with  a  view  also  to  a  subse- 
quent sale  of  such  stocks.     First  Na- 
tional   Bank    v.    National    Exchange 
Bank,  92  U.  S.  122    (1875).     "No  ex- 
press power  to   acquire  the  stock  of 
another  corporation  is  conf-erred  upon 
a  national  bank,  but  it  has  been  held 
that,   as   incidental   to   the   power   to 
loan   money    on   personal   security,    a 
bank  may  in  the  usual  course  of  do- 
ing such  business  accept  stock  of  an- 
other   corporation    as   collateral,    and 
by  the  enforcement   of  its  rights   as 
pledgee  it  may  become  the  owner  of 
the  collateral   and   be   subject  to  lia- 
bility  as   other   stockholders."      Cali- 
fornia  Bank   v.   Kennedy,    167   U.    S. 
362,    366     (1897).      A    national    bank 
holding  stock  as  security  may  acquire 
title  thereto  by  a  sale.     Westminster, 
etc.  Bank  v.  New  England,  etc.  Works, 
73    N.    H.     465     (1906).    A    savings 


864 


CH.    XIX. J  WHO    MAY    BUY   AND    SELL   STOCK.  [§    316. 

bank  which  has  taken  as  security  for  a  debt  and  then  acquired  shares 
of  stock  in  an  unincorporated  association,  formed  for  speculative 
purposes,  is  not  liable  on  said  stock,  its  acquisition  having  been  ultra 
vires.1  A  national  bank,  which  is  a  creditor  of  an  insolvent  manu- 
facturing company,  has  no  power  to  join  in  a  reorganization  plan  by 
which  it  turns  over  its  claim  to  a  new  corporation  and  takes  stock  of 
the  new  corporation  in  payment  therefor,  and  hence  if  the  new  cor- 
poration fails  the  bank  is  not  liable  as  a  stockholder  on  a  statutory 
double  liability  attaching  to  such  stock.2  Where  a  bank  holds  stock 
as  collateral,  and  on  sale  purchases  the  same,  the  stock  being  in  a 
coal  company,  it  should  sell  the  stock  within  a  reasonable  time.  If 
it  continues  to  hold  it  and  a  large  loss  results,  the  president  is  per- 
sonally liable.3 

Under  a  charter  power  to  receive,  in  payment  for  stock,  property 
"for  the  advancement  of  the  purposes  for  which"  the  corporation  was 
organized,  a  trust  company  may  receive  stock  in  a  savings  associa- 
tion.4 

§  3 1 G.  Purchases  of  stock  by  insurance,  manufacturing,  and  other 
companies. — The  surplus  of  a  company  may  be  invested  in  such  se- 
curities as  the  board  of  directors  may  deem  best,  and  the  board  is 
not  confined  to  securities  in  which  a  trustee  may  invest.5  In  Penn- 
sylvania by  statute  corporations  may  invest  their  surplus  in  "good 
stocks  or  securities."  6  But  "unless  express  permission  be  given  to  do 
so,  it  is  not  within  the  general  powers  of  a  corporation  to  purchase 
the  stock  of  other  corporations  for  the  purpose  of  controlling  their 
management."     Such  is  the  language  of  the  supreme  court  of  the 

bank  may  accept  stock  in  another  cor-  4  And   even  though  by  statute   the 

poration  in  settlement  of  a  debt  and  payment  of   stock   by   property   must 

may    be    held    liable    on   such    stock,  first  be  authorized  by  the  stockhold- 

Hill  v.  Shilling,  69  Neb.  152    (1903).  ers,  yet  if  the  corporation  receives  the 

A  national  bank  may  receive  mining  stock  and  pledges   it  and  receives  a 

stock  in  payment  of  a  bad  debt.    Mor-  dividend   thereon   and  retains  it  two 

gan  v.  King,  27  Colo.  539  (1900).     In  years  until  it  depreciates  in  value,  it 

the  case  of  Tourtelot  v.  Whithed,  84  cannot  then  repudiate  the  transaction. 

N.  W.  Rep.  8    (Dak.  1900),  where  a  Southern  Trust,  etc.  Co.  v.  Yeatman, 

national  bank  canceled  a  debt  of  an  130  Fed.  Rep.  798    (1904);    aff'd,  134 

embarrassed  milling  company  in  con-  Fed.  Rep.  810. 

sideration   of   preferred   stock   of  the  5  Burland,  etc.  v.  Earle,  etc.,  [1902] 

latter,  the  court  upheld  the  transac-  A.  C.  83.    In  this  case  the  surplus  was 

tion.  invested   in    bank    shares   and    mort- 

i  Merchants'      National      Bank     v.  gages,  and  such  investment  was  made 

Wehrmann,  202  U.  S.  295  (1906).  in  the  name  of  a  director.    The  court 

2  First  National  Bank  v.  Converse,  further  stated  that  such  investments 
200  U.  S.  425   (1906).  should  not  be  in  speculative  securities. 

3  Stone  v.  Rottman,  183  Mo.  552  6  Act  of  March  31,  1868.  P.  L.  50, 
(1904).  §1- 

(55)  865 


316] 


WHO    MAY    BUY    AND    SELL    STOCK. 


[cn.   XIX. 


United  States.1  An  insurance  company  lias  no  power  or  legal  right 
to  subscribe  for  stock  in  a  savings  bank  and  building  association,2  nor 
to  purchase  stock  in  another  insurance  company.3  It  is  difficult  to 
state  any  general  rule  as  regards  the  right  of  a  manufacturing  or 

1  De  La  Vergne,  etc.  Co.  v.  German,    tors  represented  their  own  stock;  and 


etc.  Inst.,  175  U.  S.  40,  55  (1899).  In 
this  case  a  contract  was  made  by 
which  the  president  of  an  Illinois 
manufacturing  corporation  sold  all 
its  assets  to  a  rival  New  York  cor 


the  court  pointed  out  that  the  "Vot- 
ing Trust  Cases"  in  New  Jersey  had 
established  the  principle  of  law  that 
agreements  which  sever  the  owner- 
ship of  stock  from  the  voting  power 


poration  and  all  the  shares  of  stock  are,  in  many  instances,  a  violation  of 

in  the  Illinois  corporation  were  also  another  principle  of  law,  that  "every 

delivered   to   the  New  York   corpora-  stockholder   is    entitled   to   the   bene- 

tion.     The  court  held  the  transaction  fit   of   the   judgment    of   every    other 

to  be  illegal  on  the  ground  that  the  stockholder  in  the  management  of  the 

president  was  not  authorized   to   sell  affairs  of  the  corporation."    Robotham 

the  assets,  and  on  the  further  ground  v.   Prudential   Ins.   Co.,   G4   N.   J.   Eq. 


that  the  New   York  corporation  was 
prohibited   by   its   charter   from   pur- 
chasing stock  in  other  corporations. 
2  Mechanics',  etc.  Assoc,  v.  Meriden 


673  (1903). 

Although  the  statute  exempts  capi- 
tal "invested  in  property  which  is  oth- 
erwise taxed  as  property,"  yet  an  in- 


Agency  Co.,  24  Conn.  159  (1855),  hold-  surance    company   cannot    claim    any 
ing  the  insurance  company  not  liable  exemption  because  it  owns  stock  in  a 
on  the  stock.     An  insurance  company  bank,  inasmuch  as  it  had  no  power  to 
cannot  invest  in  the  stock  of  a  bank,  subscribe  for  such  stock.    Commercial 
State  r.  Butler,  86  Tenn.  614    (1888).  F.   Ins.   Co.  v.  Board  of  Revenue,   99 
An  insurance  company  holding  stock  Ala.  1  (1892).     Where  in  order  to  in- 
in  a  national  bank  is  liable  thereon,  crease  its  apparent  reserve  directors 
Cooper  Ins.  Co.  v.  Hawkins,  71  Fed.  of  an  insurance  company  borrow  mon- 
Rep.  372   (1896).     An  insurance  com-  ey  and   purchase   worthless   stock   of 
pany  may  receive  bank  stock  as  the  another  corporation,  they  are  person- 
purchase   price   of   a   claim   which   it  ally  liable  therefor  to  a  receiver  of  the 
holds   against    an    insolvent   corpora-  former,  even  though  the  stockholders 
tion,  even  though  the  statute  prohib-  ratified  the  transaction,  it  appearing 
ited'  the  investment  of  the  funds  in  that  the  directors  controlled  the  stock- 
stock.  Moreover  the  transaction  could  holders'    meeting.      Bowers    v.    Male, 
not   be    rescinded    without    returning  111  N.  Y.  App.  Div.  209  (1906);  affd, 
the   stock.     Fidelity  Ins.   Co.  v.  Ger-  186  N.  Y.  28.     A  statute  prohibiting 
man  Sav.  Bank,  127  Iowa,  591  (1905).  insurance   companies   from    investing 
An  able  New  Jersey  court  has  re-  in  stocks   of  other  corporations  does 
cently   held   that   a   scheme   whereby  not  prevent  it  voting  stock  which  it 
an    insurance   company    purchased    a  already  holds  in  favor  of  a  consolida- 
majority  of  the  stock  of  a  trust  com-  tion,  which  will  give  it  stock  in  a  con- 
pany     and    the    trust    company    pur-  solidated  company  in  exchange  for  the 
chased  a  majority  of  the  stock  of  the  stock  which  it  already  holds   and  is 
insurance  company,   was  illegal,  and  voting.     Morse  v.  Equitable,  etc.  Soc., 
would  be  set  aside  at  the  instance  of  a  124  N.  Y.  App.  Div.  235  (1908). 
dissenting  stockholder,  inasmuch  as  it  3  Ex  parte  British  Nation,  etc.  As- 
resulted    in    self-perpetuating    boards  soc,  L.  R.   8  Ch.   D.  679    (1878),  the 
of   directors,  without  the  responsibil-  court  refusing  to  hold  the  former  li- 
ity  which  would  exist  if  those  direc-  able  on  a  winding  up;  Berry  v.  Yates, 

866 


CH.    XIX.] 


WHO   MAY   BUY   AND    SELL    STOCK. 


[§   316. 


trading  corporation  to  purchase  shares  of  the  capital  stock  of  another 
corporation.  It  has  been  held  that  neither  a  note-selling  company  1 
nor  a  lumber  company  2  has  power  to  invest  in  the  shares  of  a  bank, 
nor  a  steamship  company  to  subscribe  for  stock  in  a  dry-dock  com- 
pany.3 But  a  manufacturing  company  which  buys  bank  stock  and 
for  several  years  receives  dividends  thereon  with  the  knowledge  of 
all  its  stockholders,  is  liable  on  a  statutory  liability  attached  to  such 
stock.4  On  the  other  hand,  it  has  been  held  that  a  steamboat  com- 
pany may  purchase  stock  in  another  rival  line.5  It  is  clearly  legal  for 
a  manufacturing  corporation  to  take  the  stock  of  another  in  payment 
of  a  debt.6  A  manufacturing  corporation  has  no  implied  power 
to  buy  the  stock  of  another  manufacturing  corporation  for  the  pur- 


24  Barb.  199  (1857)  ;  Pierson  v.  Mc- 
Curdy,  33  Hun,  520  (1884);  aff'd  on 
another  point,  100  N.  Y.  608. 

i  Joint-stock  Discount  Co.  v.  Brown, 
L.  R.  8  Eq.  381  (1869). 

2  Sumner  v.  Marcy,  3  Woodb.  &  M. 
105  (1847);  s.  c,  23  Fed.  Cas.  384. 

3  New  Orleans,  etc.  Co.  v.  Ocean 
Dry-dock  Co.,  28  La.  Ann.  173  (1876). 
Although  a  corporation  purchases 
stock  in  another  corporation  contrary 
to  statute,  yet  a  bona  fide  holder  of 
a  note  given  in  payment  therefor  may 
collect  the  note.  Wright  v.  Pipe  Line 
Co.,  101  Pa.  St.  204   (1882). 

4  Hunt  v.  Hauser,  etc.  Co.,  90  Minn. 
282   (1903). 

5  Booth  v.  Robinson,  55  Md.  419 
(1880).  This  decision  goes  to  the  ex- 
treme length  in  allowing  one  corpora- 
tion to  invest  in  the  stock  of  another. 
A  manufacturing  corporation  is  not 
presumed  to  be  incapable  of  purchas- 
ing stock  in  another  corporation. 
Evans  v.  Bailey,  66  Cal.  112  (1884). 

6  Howe  v.  Boston  Carpet  Co.,  82 
Mass.  493  (1860).  Where  an  iron  com- 
pany sells  iron  to  a  railway  company, 
to  be  paid  for  in  stock  of  the  latter, 
the  contract  is  void,  and  the  iron  com- 
pany cannot,  it  seems,  even  recover 
the  value  of  the  goods  delivered.  Val- 
ley Ry.  v.  Lake  Erie  Iron  Co.,  46 
Ohio  St.  44  (1888).  Where  one  tele- 
graph corporation  holds  the  bonds  of 
another  and  exchanges  the  bonds  for 


the  stock  of  the  latter  corporation,  a 
subsequent  mortgagee  of  the  first  cor- 
poration cannot  attack  the  validity  of 
the  bonds  and  mortgage  on  the  prop- 
erty of  the  second  corporation.  Bos- 
ton, etc.  Co.  v.  Bankers',  etc.  Co.,  36 
Fed.  Rep.  288  (1888).  This  case  was 
affirmed  sub  nom.  United  Lines  Tel. 
Co.  v.  Boston,  etc.  Co.,  147  U.  S.  431. 
The  court  said,  in  regard  to  this  meth- 
od of  issuing  the  stocks  and  bonds, 
"it  violated  no  principle  of  law,  and 
no  rule  of  good  morals."  In  this  case 
the  usual  and  simple  process  of  one 
company  selling  all  its  property  to 
the  other  company  and  taking  pur- 
chase-money mortgage  bonds  in  pay- 
ment, and  then  distributing  the  bonds 
among  its  stockholders,  was  not 
adopted,  but  the  mortgage  was  given 
by  the  vendor  company,  the  object  be- 
ing not  to  have  the  mortgage  cover 
existing  property  of  the  vendee  com- 
pany. The  vendee  company  at  the 
same  time  agreed  to  construct  new 
lines  and  place  them  under  the  mort- 
gage. Th9  whole  scheme  was  awk- 
ward, and  was  sustained  by  the  courts 
only  after  prolonged  litigation.  A 
corporation  dealing  in  jewelry  may 
sell  its  goods  and  take  in  payment 
stock  in  a  park  company.  White  v. 
Marquardt,  70  N.  W.  Rep.  193  (Iowa, 
1897);  s.  c,  105  Iowa,  145  (1898). 
A  corporation  having  power  to  buy 
and   hold   securities  may   take  stock 


867 


316.] 


WHO   MAY    BUY    AND    SELL    STOCK. 


[CH.    XIX. 


pose  of  holding  the  stock  permanently.1  A  company  chartered  to 
manufacture  cars  has  no  power  to  purchase  stock  of  other  corpora- 
tions. The  state  may  file  quo  warranto  proceedings  to  forfeit  the 
charter.2  A  construction  company  is  not  presumed  to  have  power  to 
hold  stock  in  a  railroad  company.3 

A  land  and  lumber  company  having  power  to  consolidate  with 
a  railroad  company  may  own  the  stock  and  guarantee  the  bonds 
and  preferred  stock  of  such  railroad  company,  the  railroad  of  which 
is  beneficial  to  the  land  company  in  its  mining,  manufacturing,  and 
lumbering  business.4      One   building   association   has   no   power   to 

in  another  company  as  collateral  se-  purchase  stock   in   other  oil   refining 

curity      Calumet  Paper  Co.  v.  Stotts  companies.     Patterson  v.  Tide  Water 

Inv.  Co.,  96  Iowa,  147  (1895).  Pipe  Co.,  12  Weekly  Notes  Cases,  452 

i  Byrne    r.    Schuyler,    etc.    Co.,    65  (1882).     A  smelting  company  has  no 

Conn.   336    (1895).     Where  the  direc-  inherent  power  to  purchase  stock  in 

tors  of  a  failing  linen  manufacturing  another  smelting  company  and  hence 

corporation   sell   a  part  of  the  plant  may  be  enjoined  by  a  stockholder  of 

for  stock  of  a  knit-goods  manufactur-  the  latter  company  from  voting  such 


ing  corporation,  a  stockholder  who 
does  not  complain  for  two  years  can- 
not hold  the  directors  liable  for  his 
share  of  the  property  so  exchanged 
for  stock.  Pinkus  v.  Minneapolis 
Linen  Mills,  65  Minn.  40  (1896).  A 
member  of  a  mercantile  firm  cannot 
bind  the  firm  by  a  subscription  to  the 
capital  stock  of  a  milling  corporation. 
Patty  v.  Hillsboro,  etc.  Co.,  4  Tex. 
Civ.  App.  224  (1893).  A  furniture 
manufacturing  company  is  not  liable 
on  a  statutory  liability  on  stock  which 
it  has  subscribed  and  paid  for  in  a 
hotel  company.  Knowles  v.  Sander- 
cock,  107  Cal.  629  (1895).  A  lien  of  a 
corporation  on  stock  for  debts  due  it 
from  its  stockholders  does  not  attach 
to  stock  purchased  by  another  corpo- 


stock.    Parsons  v.  Tacoma,  etc.  Co.,  25 
Wash.  492   (1901). 

2  People  v.  Pullman's  Palace  Car 
Co.,  175  111.  125   (1898). 

3  In  a  suit  by  the  receiver  of  an  in- 
solvent street  railway  company  to 
hold  a  construction  company  liable  on 
stock  which,  together  with  bonds,  was 
issued  for  the  construction  of  a  street 
railway,  the  claim  being  that  there 
was  no  consideration  received  for  the 
stock,  the  bill  in  equity  must  allege 
that  the  construction  company  had 
power  to  acquire  such  stock.  Doak  v. 
Stahlman,  58  S.  W.  Rep.  741  (Tenn. 
1899).     Cf.  §  64,  supra. 

4  Marbury  v.  Kentucky,  etc.  Co.,  62 
Fed.  Rep.  335  (1894),  holding  also 
that  it  is  not  necessary  that  an  ac- 


ration    the  latter  having  no  power  to  tual  consolidation  be  made   (aff  g,  on 

purchase.    Lanier  Lumber  Co.  v.  Rees,  this  point,  Tod  v.  Kentucky,  etc.  Co., 

103  Ala.  622    (1894).     A  company  or-  57  Fed.  Rep.  47).     If  the  guaranty  is 

ganized'  to  manufacture,  bleach,  and  within  the  power  of  the  company,  and 

dye   cottons   has   power  to  issue   its  no  stockholder  objects,  it  is  not  neces- 

stock   in   exchange   for   and   payment  sary  to  show  that  it  was  beneficial  to 

of  stock  in  a  dyeing  corporation  which  the  stockholders,  nor  to  show  any  spe- 

had  been  organized  by  the  consulting  cial     consideration,     other    than    the 

chemist   of   the   former  company   for  money  paid  for  the  securities  having 

the  purpose  of  exchanging  the  stock  the  guaranty.     Marbury  v.  Kentucky, 

as  above  set  forth.     Joseph  Bancroft,  etc.  Co.,  62  Fed.  Rep.  335   (1894).     A 

etc    Co    v.  Bloede,  106  Fed.  Rep.  396  land  company  may  purchase  the  stock 

(1901)     An  oil  refining  company  may  of  a  railroad  company  when  the  power 

868 


CH.    XIX.]  WHO   MAY   BUY   AND   SELL   STOCK.  [§   316. 

accept  stock  of  another  building  association  in  payment  for  stock 
of  the  former.1  A  corporation  formed  to  manufacture  and  sell  gas 
has  no  power  to  buy  shares  of  stock  in  other  gas  companies,2  but  of 
course  the  statutes  may  expressly  allow  it.3  Where  the  statutes 
authorize  mining  corporations  to  consolidate  or  to  sell  their  property 
one  to  the  other  for  stock  of  the  other,  a  mining  corporation  may 
purchase  stock  in  another  mining  corporation.4 

A  steel  spring  company  may  use  its  surplus  earnings  to  purchase 
shares  of  stock  in  an  iron  and  steel  company  for  the  purpose  of 
purchasing  steel  cheaply  from  the  latter  company,  especially  where 
there  is  a  combination  which  has  put  up  the  price  of  steel.5  A  trust 
company  may  have  power  to  hold  as  trustee  and  vote  the  majority 
of  the  stock  of  a  railroad  system.6  An  investment  trust  company 
has  no  power  to  purchase  all  the  capital  stock  of  another  trust  com- 
pany unless  expressly  authorized  so  to  do,  and  a  statute  authoriz- 
ing it  to  purchase  all  kinds  of  stocks  and  other  investment  securi- 

to  do  so  is  expressly  stated  in  a  spe-  that  amount.  The  certificates  were 
cial  charter  of  the  former  company,  accordingly  issued;  but  after  the  con- 
Tod  v.  Kentucky,  etc.  Co.,  57  Fed.  solidation,  upon  a  bill  filed  for  that 
Rep.  47  (1893).  A  corporation  or-  purpose,  the  scrip  was  declared  void, 
ganized  to  buy,  improve,  and  sell  a  Bailey  v.  Citizens'  Gas  Light  Co.,  27 
certain  piece  of  land  has  no  power  to  N.  J.  Eq.  196  (1876). 
subscribe  for  stock  in  a  manufactur-  3  In  the  case  Attorney-General  v. 
ing  corporation.  Pauly  v.  Coronado  Consolidated  Gas.  Co.,  124  N.  Y.  App. 
Beach  Co.,  56  Fed.  Rep.  428  (1893).  Div.  421(1908),  it  is  held  that  the  pur- 
Payment  for  stock  in  a  lumber  com-  chase  by  one  gas  company  of  the  stock 
pany  cannot  be  made  by  turning  in  of  other  gas  companies  to  prevent 
the  stock  of  another  lumber  company,  competition  is  legal,  if  it  does  not  re- 
and  where  the  stock  of  the  latter  was  suit  in  limiting  the  supply  and  in- 
issued  for  property  at  a  palpable  creasing  the  cost  of  gas,  inasmuch  as 
overvaluation  the  subscriber  to  the  a  new  competing  company  might  be 
former  is  entitled  only  to  credit  for  organized,  and  the  court  held  that 
the  actual  value  of  the  latter  stock,  combinations  controlling  commercial 
Lester,  etc.  v.  Bemis,  etc.  Co.,  71  Ark.  commodities  are  different,  inasmuch 
379   (1903).  as  a  new  competitor  could   not  com- 

1  German-American,    etc.    Assoc,    v.  pete. 

Droge,  14  Ind.  App.  691  (1895).  4  MacGinniss  v.  Boston,  etc.  Co.,  29 

2  People  v.  Chicago  Gas  T.  Co.,  130  Mont.  428  (1904).  Vendors  of  all  the 
111.  268  (1889).  While  negotiations  stock  of  a  mining  company  to  an  in- 
were  pending  between  two  gas  com-  dividual  cannot  attack  the  sale  on  the 
panies  for  their  consolidation  by  one  ground  that  the  purchaser  represented 
company  buying  the  stock  of  the  oth-  a  corporation  that  had  no  power  to 
er,  upon  a  certain  basis  of  capital  and  purchase  such  stock.  O'Brien  v.  Dunn, 
indebtedness,    one    of    them,    without  etc.  Co.,  141  Mich.  616   (1905). 

the  knowledge  of  the  other,  passed  a        5  Layng  v.  A.  French  Spring  Co.,  149 
resolution  declaring  a  scrip  dividend    Pa.  St.  308  (1892). 
of  ten  per  cent,  on  its  capital  stock,        6  Clarke  v.  Richmond,   etc.   Co.,   62 
thus    increasing   its    indebtedness    by    Fed.  Rep.  328  (1894),  dismissing  the 

869 


§  316.] 


WHO    MAY    BUY   AND    SELL    STOCK. 


[CII.    XIX. 


ties  does  not  sustain  such  a  purchase.1  Even  though  a  statute 
prohibits  a  corporation  from  buying  the  stock  of  another  corporation, 
yet  if  the  purchase  is  made  and  partly  paid  for  and  a  note  given  for 
the  balance  the  corporation  is  liable  on  the  note.2 

It  is  not  every  one  who  may  complain.  A  stockholder  who  par- 
ticipated cannot.3  Neither  may  the  purchasing  corporation  itself 
in  most  instances.4  Where  a  corporation  owns  stock  in  another 
corporation  and  sells  it  and  takes  a  note  in  payment,  it  is  no  de- 
fense to  a  suit  on  the  note  to  set  up  the  ultra  vires  of  the  above  act.5 


bill  involved  in  Clarke  v.  Central 
R.  R.,  etc.  Co.,  50  Fed.  Rep.  338 
(1892). 

i  Anglo-American,  etc.  Co.  v.  Lom- 
bard, 132  Fed.  Rep.  721  (1904),  hold- 
ing also  that  where  an  insolvent  Kan- 
sas corporation  transfers  all  its  assets 
to  a  Missouri  corporation,  and  at  the 
same  time  all  the  stock  of  the  former 
is  transferred  to  the  latter,  the  trans- 
action is  ultra  vires  and  fraudulent, 
and  the  statutory  liability  of  the 
stockholders  in  the  Kansas  corpora- 
tion continues. 

2  Watts  Mercantile  Co.  r.  Buchanan, 
46  S.  Rep.  66  (Miss.  1908). 

3  Where  the  owner  of  all  the  stock 
of    two    mining    corporations   assigns 
the   stock  of  the  first  to  the  second 
and  then  has  the  second  corporation 
turn  over  the  stock  of  the  first  corpo- 
ration to  a  partnership  in  which  he 
is    interested,    he    cannot    afterwards 
attack  the  transaction  on  the  ground 
that   the   second   corporation   had   no 
power  to  take  the   stock  of  the  first 
corporation.    Whalen  v.  Stephens,  193 
111.  121  (1901).     Where  an  iron  man- 
ufacturing concern  owns  an  iron  man- 
ufacturing plant  and  stocks  in  an  ore 
company  and  a  railway  company  and 
a  steamboat  company  and  other  cor- 
porations,  and  also   a  farm,   and   by 
consent  of  all  the  partners  the  firm  is 
transformed  into  a  corporation  which 
takes  all  the  property,  including  the 
stocks  and  the  farm,  one  of  the  par- 
ticipants cannot  afterwards  complain 
that    it   was   illegal    for   the   corpora- 
tion to   acquire  such  stocks  and   the 


farm.     Burden  v.  Burden,  159  N.   Y. 
Rep.  287    (1899). 

4  See  §  681,  infra.   Although  a  hard- 
ware corporation  has  no  power  to  be- 
come a  stockholder  in  and   borrower 
from  a  building  association,  yet  if  it 
does   so   it  cannot   repudiate   a  mort- 
gage which  it  gave  in  connection  with 
the  transaction.     Bowman  v.   Foster, 
etc.  Co.,  94  Fed.  Rep.  592  (1899).     An 
opera  house  company  which  has  taken 
stock    in    a    building    association,    in 
order  to  obtain  a  loan,  cannot  repudi- 
ate the  loan  on  the  ground  that  it  was 
not   authorized    to    take    such    stock. 
Blue,  etc.  Co.  v.  Mercantile,  etc.  Assoc, 
53  Pac.  Rep.  761  (Kan.  1898).    A  com- 
pany organized  to  deal  in  jewelry  and 
which  takes  stock  of  another  company 
in  exchange  for  its  merchandise  and 
then  sells  the  stock  cannot  avoid  lia- 
bility on   such   stock  by  the  plea  of 
ultra   vires.     White   v.   Marquardt   & 
Sons,   105    Iowa,   145    (1898).     Where 
by    statute    one    corporation    cannot 
purchase  stock  in  another  corporation, 
except  by  unanimous  consent  of  the 
stockholders,  a  note  given  by  the  cor- 
poration   in    payment   for    stock    pur- 
chased  without  such  consent   cannot 
be  enforced.    Midland,  etc.  Co.  v.  Citi- 
zens',   etc.    Bank,    26    Ind.    App.    71 
(1901).     A   corporation   may    defend 
against    an    ultra   vires   purchase    of 
stock   by    it    and    may    recover    back 
money  paid  therefor.     Guarantee,  etc. 
Co.  v.  Moore,  35  N.  Y.  App.  Div.  421 
(1898). 

5  Holmes,    etc.   Co.    v.   Holmes,   etc. 
Co.,    53    Hun,    52    (1889);    aff'd,    127 


870 


en.  xix.] 


WHO   MAY   BUY   AND    SELL    STOCK. 


[§   316. 


In  a  suit  by  a  bridge  company  against  a  street  railway  for  tolls, 
in  accordance  with  a  contract,  the  street  railway  cannot  set  up  that 
all  the  stock  of  the  bridge  company  has  been  purchased  by  the  city 
and  that  the  purchase  was  ultima  vires.1  A  water-works  company's 
charter  will  not  be  forfeited  because  another  company  has  pur- 
chased a  majority  of  its  stock  and  illegally  placed  a  mortgage  upon 
its  property.2  Where  one  corporation  subscribes  for  stock  in  another 
corporation  and  pays  for  such  stock,  and  dividends  are  declared, 
the  latter  cannot  refuse  to  pay  the  dividends  to  the  former  on  the 
ground  that  the  former  had  no  power  to  subscribe  for  the  stock.3 

If  the  statutes  do  not  prohibit  one  corporation  buying  the  stock 
of  another,  and  such  a  purchase  is  made  by  a  corporation  and  sub- 
sequently the  statutes  expressly  allow  such  purchase,  the  purchase 
will  not  be  held  void  as  against  public  policy,  and  may  be  held  to 
have  been  legalized,  even  though  of  doubtful  validity  at  the  time 
of  purchase.4  In  a  few  extreme  instances  it  has  been  held  that  one 
company  may  be  enjoined  from  voting  stock  in  a  rival  corporation 


N.  Y.  252.  See  also  §  312,  supra.  Even 
though  a  corporation  has  no  power  to 
purchase  stocks,  yet  if  stocks  are  sold 
to  it  in  payment  for  its  own  stock, 
the  purchase  is  legal  as  against  ev- 
erybody excepting  the  state,  and  espe- 
cially as  against  parties  who  partici- 
pated in  the  act.  Burden  v.  Burden, 
8  N.  Y.  App.  Div.  160  (1896);  affd, 
159  N.  Y.  287  (1S99).  Even  though  it 
be  illegal  for  an  irrigation  company 
to  subscribe  for  the  stock  of  a  land 
company,  yet  where  it  does  so  sub- 
scribe and  turns  in  property  in  pay- 
ment, and  the  stock  is  taken  in  the 
name  of  its  secretary  individually  and 
not  as  secretary,  the  company  may 
compel  him  to  turn  over  the  stock, 
even  though  he  has  pledged  it  for  his 
personal  debt,  the  pledgee,  however, 
having  taken  with  knowledge  of  all 
the  facts.  Bear  River,  etc.  Co.  v. 
Hanley,  15  Utah,  506  (1897).  Where 
a  gas  company  buys  the  stock  of  an 
electric  light  company  and  gives  a 
mortgage  upon  its  property  as  secur- 
ity for  the  payment  of  the  purchase 
nrice,  and  this  mortgage  passes  into 
the  hands  of  another  person,  such 
last-named  person  cannot  rescind  the 


transaction  on  the  ground  that  it  was 
ultra  vires.  Woodcock  v.  First  Nat. 
Bank,  113  Mich.  236  (1897).  Nine 
years'  delay  on  the  part  of  a  minority 
stockholder  in  complaining  of  the  act 
of  the  directors  in  causing  the  cor- 
poration to  purchase  stock  upon 
which  they  received  a  secret  profit  is 
fatal  to  the  suit.  Cullen  v.  Coal 
Creek,  etc.  Co.,  42  S.  W.  Rep.  693 
(Tenn.  1897). 

1  Monongahela,  etc.  Co.  v.  Pitts- 
burgh, etc.  Co.,  196  Pa.  St.  25  (1900). 

2  Commonwealth  v.  Punxsutawney, 
etc.  Co.,  197  Pa.  St.  569   (1901). 

3  Bigbee,  etc.  Co.  v.  Moore,  121  Ala. 
379  (1899).  In  Louisiana  it  is  held 
that  where  one  corporation  acquires 
stock  in  another  corporation  without 
authority  so  to  do,  the  former  may 
collect  the  dividends  on  such  stock 
and  may  sell  it,  but  cannot  vote  it, 
and  hence  that  directors  elected  by 
such  vote  may  be  ousted  by  quo  war- 
ranto proceedings.  State  v.  Newman, 
51  La.  Ann.  833  (1899).  As  to  voting, 
see  §  615,  infra. 

4  Joseph  Bancroft,  etc.  Co.  v.  Bloede, 
106  Fed.  Rep.  396  (1901).  See  also 
§  315,  supra,  on  this  point. 


871 


§  316.] 


WHO   MAY    BUY    AND    SELL    STOCK. 


[CH.    XIX. 


where  such  ownership   of  stock  is   illegal  and  controls   the  second 
corporation,  and  such  control  will  be  inequitably  used.1 

Where  the  statutes  of  a  state  authorize  incorporation  for  any 
legal  purpose,  incorporation  may  be  had  for  buying  and  selling 
shares  of  stock  in  other  corporations.2     Under  a  statute  authoriz- 


i  See  §  315,  supra;  also  §  615,  infra. 
Where  a  consolidation  is  effected  by 
one  company  buying  all  the  stock  of 
another  company,  and  just  before  the 
transaction  is  completed  the  company 
whose  stock  is  thus  sold  issues  a  divi- 
dend of  interest-bearing  securities  in 
order  to  defraud  the  purchasing  com- 
pany, the  latter  may,  by  a  bill  in  eq- 
uity, have  such  securities  canceled. 
Bailey  v.  Citizens'  Gas,  etc.  Co.,  27  N. 
J.  Eq.  196   (1876). 

2  Quoted  and  approved  in  Edmunds 
v.  Illinois  Central  R.  R.,  36  Natl. 
Corp.  Rep.  (Chicago)  50  (1908).  A 
stockholder  in  the  corporation  cannot 
enjoin  it  from  purchasing  stock  in  ac- 
cordance with  its  articles  of  incorpo- 
ration. Willoughby  v.  Chicago,  etc. 
Co.,  50  N.  J.  Eq.  656  (1892).  A 
minority  stockholder  cannot  enjoin 
the  company  from  issuing  its  stock  in 
payment  for  the  stock  of  other  similar 
companies  on  the  ground  that  the 
price  to  be  paid  is  excessive  and  that 
three  of  the  directors  are  interested 
as  stockholders  in  the  other  com- 
panies, where  he  does  not  prove  that 
the  price  is  excessive,  and  it  appears 
that  the  stockholders  will  have  to 
approve  the  transaction  before  the  di- 
rectors can  issue  the  stock,  and  it  ap- 
pears also  that  the  plaintiff  owns  but 
a  very  small  amount  of  the  stock. 
Geer  v.  Amalgamated,  etc.  Co.,  61  N. 
J.  Eq.  364  (1901).  A  corporation  or- 
ganized to  deal  in  the  stock  of  a 
stock-yard  corporation  and  hold  per- 
sonal and  real  estate  may  buy  compet- 
ing stock  yards;  also  buy  the  stock 
of  a  contemplated  competing  com- 
pany; also  buy,  guaranty,  and  sell  the 
bonds  of  such  competing  company; 
also  pay  money  to  settle  suits  against 
the  first-named  stock-yard  company, 
and   to   bind   stock-yard   men  not   to 


erect  competing  yards  for  a  specified 
term  of  years,  within  a  certain  terri- 
tory; and  may  sell  any  or  all  of  the 
above  property  and  right  to  the  first- 
named  company.  Ellerman  v.  Chi- 
cago, etc.  Co.,  49  N.  J.  Eq.  217  (1891). 
It  is  not  for  a  creditor  of  the  vendor 
of  stock  to  raise  the  question  whether 
the  vendee — a  corporation — had  power 
to  purchase  the  stock.  Kern  v.  Day, 
45  La.  Ann.  71  (1S93).  The  provision 
in  the  constitution  of  Georgia  against 
the  legislature  authorizing  any  corpo- 
ration to  purchase  the  stock  of  anoth- 
er corporation  does  not  apply  except 
in  cases  where  such  purchase  lessens 
competition,  and  hence  does  not  pre- 
vent a  trust  company  being  given  the 
power  to  purchase  the  stock  of  street 
railway  companies,  and  hence  such 
purchase  cannot  be  enjoined  at  the  in- 
stance of  the  state.  Trust  Co.,  etc.  v. 
State,  109  Ga.  736  (1900).  The  stat- 
ute of  New  York  prohibiting  the  issue 
of  stock  at  less  than  par,  and  of  bonds 
at  less  than  their  fair  market  value, 
does  not  prohibit  the  issue  of  stock 
and  bonds  by  a  gas  company  in  pay- 
ment for  the  stock  and  bonds  of  a 
competing  gas  company,  even  though 
a  high  value  is  placed  upon  the  fran- 
chise of  such  competing  company  as  a 
part  of  the  purchase  price.  Such  a 
transaction  is  not  illegal  on  the 
ground  of  creating  a  monopoly,  nor  is 
it  ultra  vires,  provided  the  charter  of 
the  first  company  allowed  it  to  pur- 
chase stock  and  bonds,  as  provided 
in  the  New  York  statutes.  Rafferty 
v.  Buffalo,  etc.  Co.,  37  N.  Y.  App.  Div. 
61S  (1899).  A  stockholder  cannot 
maintain  a  suit  against  the  corpora- 
tion to  enjoin  other  stockholders  from 
selling  their  stock  to  a  second  corpo- 
ration, such  second  corporation  and 
the  other  stockholders  not  being  par- 


872 


CH.    KIX.] 


WHO  MAY  BUT  AND   SELL   STOCK. 


[§  316. 


ing  the  stockholders  by  an  amended  certificate  to  change  the  objects 
of  the  corporation,  the  certificate  may  be  amended  so  as  to  give  a 
corporation  power  to  purchase  stock  in  other  corporations.1  A  cor- 
poration having  the  charter  power  to  purchase  the  stock  of  another 
corporation  has  power  to  guarantee  dividends  on  such  stock  in  selling 
it.2 

Where  a  statute  authorizes  one  corporation  to  "invest"  in  the 
stock  of  another  corporation,  this,  by  implication,  prevents  the  for- 
mer from  purchasing  the  stock  of  the  latter  for  the  purpose  of  con- 
trol, such  purpose  not  being  to  "invest."  3 

Religious  and  charitable  and  other  corporations,  not  for  profit, 
have,  it  seems,  implied  power  to  invest  their  funds  in  stock  of  other 
corporations.4 


ties  to  the  suit.  Ingraham  v.  National 
Salt  Co.,  36  N.  Y.  Misc.  Rep.  646 
(1902);  afl'd,  72  N.  Y.  App.  Div.  582; 
appeal  dismissed,  172  N.  Y.  644.  As  to 
corporations  organized  to  deal  in  the 
stock  of  other  corporations,  see  §  317, 
infra. 

i  Meredith  v.  New  Jersey,  etc.  Co., 
59  N.  J.  Eq.  257  (1S99);  aff'd,  60  N. 
J.  Eq.  445.  A  New  Jersey  corpora- 
tion, having  corporate  power  so  to  do, 
may  purchase  stock  in  another  cor- 
poration in  a  similar  business,  and 
as  a  part  of  the  purchase  price  may 
guarantee  and  agree  to  pay  dividends 
on  certain  outstanding  preferred  stock 
of  the  latter  company.  Such  a  con- 
tract is  not  illegal,  immoral  or  against 
public  policy.  Windmuller  v.  Stand- 
ard, etc.  Co.,  106  N.  Y.  App.  Div.  246 
(1905).  Where  by  its  charter  a  cor- 
poration may  sell  all  its  property  and 
deal  in  stocks,  it  may  sell  all  its  prop- 
erty for  stock.  Traer  v.  Lucas,  etc. 
Co.,  124  Iowa,  107  (1904).  Where  by 
its  charter  a  corporation  has  a  right 
to  purchase  stock  in  other  corpora- 
tions the  corporation  may  subscribe 
for  stock  in  another  corporation  to 
be  formed  to  carry  on  a  similar  busi- 
ness, and  the  court  will  not,  at  the 
instance  of  a  stockholder,  review  the 
discretion  of  the  directors  in  making 
such  investment.  Rubino  r.  Pressed, 
etc.  Co.,  53  Atl.  Rep.  1050  (N.  J.  1903). 
It   being    illegal    in    Washington    for 


one  corporation  to  own  stock  in  an- 
other corporation,  a  New  Jersey  cor- 
poration cannot  legally  own  stock  in 
a  Washington  street  railway  company. 
Coler  v.  Tacoma  Ry.  etc.  65  N.  J.  Eq. 
347  (1903).  Under  the  Mississippi 
statutes  a  corporation  cannot  be  or- 
ganized to  deal  'in  the  stock  of  other 
corporations.  Woodbury  v.  McClurg, 
78  Miss.  831    (1901).    See  §317,  infra. 

2  Mason  v.  Standard,  etc.  Co.,  85 
N.  Y.  App.  Div.  520  (1903). 

3  Robotham  v.  Prudential  Ins.  Co., 
64  N.  J.  Eq.  673  (1903),  holding, 
also,  that  where  an  insurance  com- 
pany has  power  to  invest  in  the  stock 
of  another  company  which  has  paid 
dividends  for  five  years,  the  fact  that 
the  latter  company  increases  its  stock 
does  not  extend  the  time  for  five  years 
more. 

4  Pearson  v.  Concord  R.  R.,  62  N.  H. 
537  (1883).  In  this  case  the  court 
said  (p.  549):  "Certain  classes  of  cor- 
porations, such  as  religious  and  char- 
itable corporations,  and  corporations 
for  literary  purposes,  may  rightfully 
invest  their  moneys  in  the  stock  of 
other  corporations.  The  power,  if  not 
expressly  mentioned  in  their  charters, 
is  necessarily  implied,  for  the  preser- 
vation of  the  funds  with  which  such 
institutions  are  endowed,  and  to  ren- 
der their  funds  productive."  To  same 
effect,  Hodges  v.  New  England  Screw 
Co.,  1  R.  I.  312  (1850). 


873 


§  316.] 


WHO   MAY   BUY   AND    SELL    STOCK. 


[cn.  XIX. 


There  lias  been  some  controversy  whether  one  corporation  could 
sell  all  its  property  to  another  corporation,  taking  pay  in  stock  of 
the  latter,  and  dividing  such  stock  among  the  stockholders  of  the 
selling  corporation.  The  weight  of  authority  holds  that  such  a  trans- 
action is  legal  if  all  the  stockholders  assent,  but  may  be  prevented 
by  any  stockholder  of  the  former  corporation.1  Where  a  corporation 
owns  stock  in  the  name  of  a  trustee  for  the  corporation  it  is  obliged 
to  indemnify  such  trustee  for  calls  paid  by  him.2  The  stock  owned 
by  a  corporation  may  be  sold  by  its  general  business  agent  and 
financial  manager  and  representative,  he  having  apparent  power  to 
sell,  and  the  governing  body  not  objecting.3  The  plan  of  having  one 
"parent"  company  own  a  majority  of  the  stock  of  many  subsidiary 
companies  is  legal  where  the  parent  company  has  power  to  own 
stocks  such  as  those  of  the  subsidiary  companies.4     Where  one  cor- 


i  See  §  671,  infra.  Although  a  cor- 
poration is  authorized  by  its  charter 
"to  take  stock"  in  other  corporations, 
this  does  not  authorize  it  to  sell  all 
its  property  to  another  corporation 
in  payment  for  stock  of  that  corpora- 
tion to  be  distributed  among  the 
stockholders  of  the  vendor  corpora- 
tion. Elyton  Land  Co.  v.  Dowdell,  113 
Ala.  177  (1896).  In  M'Cutcheon  v. 
Merz  Capsule  Co.,  71  Fed.  Rep.  787 
(1896),  several  corporations  agreed 
to  turn  over  their  property  to  one 
corporation  and  to  take  stock  and 
bonds  in  payment,  the  price  to  be 
thereafter  fixed  by  appraisers.  After 
the  stock  was  issued  one  of  the  com- 
panies withdrew,  and  the  court  held 
that  the  company  withdrawing  could 
file  a  bill  to  cancel  the  agreement  on 
the  ground  that  the  company  had  no 
power  to  hold  stock  in  other  corpora- 
tions and  that  the  agreement  was 
not  yet  executed.  A  Michigan  capsule 
company  has  no  right  or  power  to  sell 
all  its  property  to  a  New  Jersey  cap- 
sule company — a  combination  com- 
pany— in  exchange  for  or  payment  of 
stock  of  such  New  Jersey  company. 
The  agreement  so  to  do  cannot  be 
enforced,  even  though  every  stock- 
holder assented  to  it.  Merz  Capsule 
Co.  v.  U.  S.  Capsule  Co.,  67  Fed.  Rep. 
414  (1895). 

2Goodson's    Claim,    28    W.    R.    760 


(1880).  Where  one  company  takes 
shares  of  stock  in  another  company 
and  puts  such  stock  in  the  name  of  its 
treasurer  and  president  as  "trustees 
for  the  stockholders  of  the  A.  Co.," 
and  the  treasurer  afterwards  sells  the 
stock  and  converts  the  money  to  his 
own  use,  he  may  be  compelled  to  ac- 
count for  the  same.  Murray  v.  Aiken, 
etc.  Co.,  37  S.  C.  468    (1892). 

3  Walker  v.  Detroit  Transit  Ry.,  47 
Mich.  388  (1882).  See  also  Sistare 
v.  Best,  88  N.  Y.  527  (1882).  That  the 
corporate  treasurer  may  sell  the  stock, 
see  Holden  v.  Metropolitan  Nat.  Bank, 
138  Mass.  48  (1884);  s.  c,  151  Mass. 
112.  Where  an  agent  of  a  corpora- 
tion purchases,  without  authority, 
stock  in  another  company  and  sells 
one  of  the  shares  to  a  person  in 
order  to  enable  the  latter  to  qualify 
as  a  director  in  such  company,  the 
person  receiving  the  one  share  is  pro- 
tected in  his  title,  and  the  first-named 
corporation  cannot  compel  him  to  give 
it  up,  even  though  the  agent  had  no 
power  to  sell,  the  purchaser  having 
purchased  in  good  faith.  Hence  his 
acts  as  a  director  are  valid.  Scarlett 
v.  Ward,  52  N.  J.  Eq.  197  (1S93). 

4  For  a  careful  and  clear  statement 
of  the  plan  of  having  a  parent  com- 
pany own  stock  in  subsidiary  com- 
pany, see  People  v.  American  Bell  Tel. 
Co.,  117  N.  Y.  241,  244,  255   (18S9).    A 


874 


CH.    XIX.]  WHO   MAY    BUY   AND    SELL    STOCK.  [§    317. 

poration  owns  all  the  stock  of  another  corporation,  the  court  may 
ignore  the  existence  of  the  latter.1  This  whole  subject  of  the  power 
of  one  corporation  to  buy  the  stock  of  another  corporation  is  much 
the  same  as  the  question  of  the  power  of  one  to  subscribe  to  the  stock 
of  another,  a  subject  fully  considered  elsewhere.2 

§  317.  Stockholding  corporations,  known  as  "holding  corpora- 
tions"— Mortgages  by  stockholding  corporations. — During  the  past 
three  years  there  has  sprung  into  existence  a  new  kind  of  corpora- 
tion, namely,  a  corporation  organized  not  to  do  business  itself,  but 
to  purchase  and  hold  the  stock  of  other  corporations,  in  order  to  se- 
cure harmony  of  control.  Formerly  the  same  result  was  brought 
about  by  an  actual  consolidation  of  the  various  corporations,  or  a  sale 
of  the  property  of  one  to  the  other.  "When,  however,  these  transactions 
became  gigantic  in  their  magnitude,  as  in  the  instance  of  the  United 
States  Steel  Corporation,  involving  one  and  one-half  billion  dollars 
and  a  great  number  of  corporations,  it  became  clear  that  the  old  plan 
of  a  direct  consolidation  or  sale  was  impracticable.  It  was  im- 
practicable because  these  corporations  were  organized  in  different 
states,  and  the  statutes  of  some  of  these  states  did  not  authorize  a 
direct  consolidation  or  sale.  It  was  also  impracticable  because  in 
such  a  vast  body  of  stockholders  there  were  many  minority  stock- 
holders, who,  for  profit  or  principle,  would  institute  injunction  suits 
against  a  consolidation  or  sale.  Accordingly,  the  plan  was  de- 
vised of  organizing  a  corporation  for  the  purpose  of  owning  and 
holding  at  least  a  majority  of  the  stock  of  the  various  corpora- 
tions which  it  was  desirable  to  unite.  The  most  notable  ex- 
amples of  this  kind  of  incorporation  are  the  ^Northern  Securities 
Company  and  the  United  States  Steel  Corporation,  the  former 
being  organized  to  retain  permanently  a  majority,  at  least,  of  the 
stock,  of  the  Northern  Pacific  Railroad  Company  and  the  Great 
Northern  Railroad  Company,  and  the  latter  being  designed  to  ac- 
quire a  majority  at  least  of  the  stock  of  a  large  number  of  iron  and 
steel  and  coal  corporations. 

land   company   has  no  power  to   sell  companies,   he   cannot   recover   it    as 

property  to  a  minor  or  branch  com-  against    a   mortgagee   of   the   branch 

pany  and  take  stock  in  payment,  but  company.    The  rule  is  otherwise  as  to 

in   order   to   set   it   aside   all   parties  necessary     improvements.       Coupons 

interested   must  be   made   parties   to  paid  by  the  receiver  on  bonds  issued 

the  suit.     Marbury  v.  Kentucky,  etc.  by  the  branch  road  rank  next  after 

Co.,  62  Fed.  Rep.  335  (1894).    Where  the  bonds  and  other  coupons  are  paid, 

a  parent  company,  owning  the  stock  Phinizy  v.  Augusta,  etc.  R.  R.,  62  Fed. 

of  branch  companies,  passes  into  a  re-  Rep.  771  (1S94). 

ceiver's  hands,  and  the  latter  expends  l  See    §  6,    supra,    and    §  663,    infra. 

money  in  operating  one  of  the  branch  2  See  §  64,  supra. 

875 


§    317.]  WHO    MAY    BUY   AND    SELL    STOCK.  [cil.    XIX. 

Certain  difficulties,  however,  have  been  met  in  carrying  out  this 
plan  of  a  stockholding  corporation.  The  reason  and  object  of  such 
a  corporation  is  one  thing,  but  its  legality  is  another  thing.  The 
principle  of  law  that  one  corporation  has  no  inherent  power  to 
purchase  the  stock  of  another  corporation1  is  not  applicable,  inas- 
much as  it  is  easy  to  insert  in  a  certificate  of  incorporation  an  ex- 
press power  to  purchase,  hold  and  dispose  of  the  stock  of  other  cor- 
porations;  and  under  the  laws  of  the  state  of  New  Jersey  and 
some  other  states  it  is  permissible  to  organize  a  corporation  for 
that  purpose.2 

There  are  other  legal  difficulties,  however,  which  are  not  so 
easily  disposed  of.  The  law  will  not  always  allow  to  be  done  in- 
directly that  which  the  law  prohibits  directly.  For  instance,  where 
it  is  illegal  for  twTo  competing  railroads  to  consolidate,  the  law  will 
not  allow  one  of  them  to  purchase  the  stock  of  the  other,3  nor 
will  it  allow  one  of  them  to  guaranty  the  bonds  of  the  other  in 
consideration  of  the  stock  of  the  latter  being  held  for  the  benefit 
of  the  stockholders  of  the  former.4  Hence,  when  the  Northern 
Securities  Company  acquired  a  majority  of  the  stock  of  the  Great 
Northern  Railroad  Company  and  of  the  Northern  Pacific  Railroad 
Company  in  1901,  the  United  States  government  attacked  it,  and 
the  court  held  that  under  the  Anti-Trust  Act  of  congress  of  1890 
it  is  illegal  for  a  corporation  to  hold  a  majority  of  the  stock  of  two 
competing  interstate  railroad  corporations.5 

i  See  §§  314-316,  supra.  court  of  equity  affecting  absent  per- 

2  See  §  316,  supra.  sons    materially    interested,    and    no 

3  Penn.  R.  R.  r.  Commonwealth,  7  amendment  would  be  allowed,  inas- 
Atl.  Rep.  368   (Pa.  1886).  much   as  it  would  bring  them   in  as 

4  Pearsall  v.  Great  Northern  Rail-  parties  and  would  destroy  the  juris- 
road,  161  U.  S.  671  (1896).  diction    of    the    court.      In    the    case 

5  Northern  Securities  Co.  v.  United  Washington  v.  Northern  Securities 
States,  193  U.  S.  197  (1904);  aff'g  Co.,  185  U.  S.  254  (1902),  a  bill  was 
United  States  v.  Northern  Securities  filed  in  the  supreme  court  of  the 
Co.,  120  Fed.  Rep.  720  (1903).  Minne-  United  States  by  the  state  of  Wash- 
sota  v.  Northern  Securities  Co.,  184  ington  against  the  Northern  Securi- 
U.  S.  199  (1902),  was  a  suit  to  enjoin  ties  Company,  the  Great  Northern 
the  Northern  Securities  Company  Railway  Company  and  the  Northern 
from  acquiring,  owning  or  voting  a  Pacific  Railway  Company,  to  declare 
majority  of  the  capital  stock  of  the  illegal  the  holding  by  the  first-named 
Great  Northern  Railway  Company  company  of  a  majority  of  the  stock 
and  the  Northern  Pacific  Railway  of  the  two  last-named  companies.  In 
Company,  two  competing  railroad  cor-  the  case  State  of  Minnesota  v.  North- 
porations  of  that  state.  The  court  ern  Securities  Co.,  123  Fed.  Rep.  692 
held  that  it  would  not  entertain  the  (1903)  (rev'd  in  194  U.  S.  48),  the 
suit  for  the  reason  that  the  two  rail-  court  refused  to  follow  the  decision 
way  companies  were  not  made  parties,  of  the  United  States  Circuit  Court  of 
and  no  relief  would  be  granted  by  a  Appeals  in  United  States  v.  Northern 

876 


CH.    XIX.] 


WHO   MAY    BUY   AND    SELL   STOCK. 


[§   317. 


The  same  difficulties  arise  where  a  stockholding  corporation  is 
organized  to  purchase  and  hold  the  stock  of  competing  manufactur- 
ing corporations.  It  was  held  by  the  supreme  court  of  the  United 
States  that  the  American  Sugar  Refining  Company  had  not  vio- 
lated the  anti-trust  act  of  congress  of  July  2,  1890,  even  though  it 
had  purchased  the  stock  of  four  other  sugar  refining  companies, 
and  had  thereby  acquired  almost  the  complete  control  of  the  man- 


Securities  Co.,  120  Fed.  Rep.  721,  aff'd, 

193  U.  S.  197,  and  held  that  a  holding 
corporation  owning  a  majority  of  the 
stock  of  two  competing  railroads  was 
not  illegal  either  at  common  law  or 
under  the  statutes  of  Minnesota  pro- 
hibiting trusts  or  combinations  in  re- 
straint of  trade  or  under  the  statutes 
of  Minnesota  prohibiting  the  consoli- 
dation of  parallel  and  competing  lines 
of  railroad.  A  state  cannot  maintain 
a  bill  in  equity  in  the  United  States 
court  to  enjoin  a  corporation  from 
holding  the  stocks  of  competing  rail- 
roads on  the  theory  that  such  holding 
violates  the  anti-trust  act  of  Congress 
of  July  2,  1890.  Only  the  attorney- 
general  may  institute  such  a  suit. 
Minnesota  v.  Northern  Securities  Co., 

194  U.  S.  48  (1904).  After  the  de- 
cision in  193  U.  S.  197,  supra,  there 
followed  an  acrimonious  litigation 
among  the  defendants  as  to  the  mode 
in  which  the  holding  company's  hold- 
ings of  stock  should  be  distributed. 
The  following  decisions  were  ren- 
dered. The  United  States  government 
having  obtained  a  final  decree  enjoin- 
ing the  Northern  Securities  Company 
from  voting  the  stock  held  by  it  in 
the  Northern  Pacific  Railway  Com- 
pany and  the  Great  Northern  Railway 
Company,  and  enjoining  them  from 
paying  dividends  to  the  Northern  Se- 
curities Company,  the  decree  will  not 
be  modified  with  a  view  to  directing 
the  method  in  which  such  stock  of  the 
two  railway  companies  shall  be  di- 
vided among  the  stockholders  of  the 
Northern  Securities  Company,  that 
question  being  a  subject  for  indepen- 
dent litigation.  A  stockholder's  peti- 
tion   of    intervention    to   modify    the 


decree  will  be  denied.  United  States 
v.  Northern,  etc.  Co.,  128  Fed.  Rep. 
808  (1904).  Where  a  holding  com- 
pany has  illegally  purchased  the  stock 
of  competing  railroads  and  is  com- 
pelled by  decree  of  the  court  to  re- 
turn the  same  to  its  stockholders,  the 
stockholders  are  not  entitled  to  the 
particular  stocks  which  they  turned 
in,  but  are  entitled  to  a  pro  rata  in- 
terest in  all  the  stocks  so  distributed. 
Such  distribution  may  be  in  kind. 
Continental,  etc.  Co.  v.  Northern,  etc. 
Co.,  66  N.  J.  Eq.  274    (1904). 

In  view  of  the  new  questions  in- 
volved in  a  distribution  of  the  as- 
sets of  the  Northern  Securities  Com- 
pany, a  preliminary  injunction 
against  distribution  in  a  certain  way 
was  granted  pendente  lite  in  Harri- 
man  v.  Northern  Securities  Co.,  132 
Fed.  Rep.  464  (1904).  Where  a  hold- 
ing corporation  holding  the  majority 
of  the  stocks  of  two  competing  rail- 
road companies  is  required  by  decree 
of  court  to  sell  or  distribute  among 
its  stockholders  such  stocks,  it  need 
not  return  to  each  stockholder  the 
stocks  he  originally  turned  in,  but 
may  distribute  such  stocks  pro  rata 
among  the  stockholders.  Northern, 
etc.  Co.  v.  Harriman,  134  Fed.  Rep. 
331  (1905) ;  aff'd,  197  U.  S.  244.  Where 
a  holding  corporation  has  been  de- 
clared illegal  and  a  distribution  to  its 
stockholders  ordered,  the  stockhold- 
ers are  not  entitled  to  the  stock  which 
they  turned  in  originally,  but  are  en- 
titled only  to  their  pro  rata  share  of 
the  assets  existing  at  the  time  of  the 
injunction  and  decree  of  distribution, 
the  capital  stock  having  been  reduced 
for  that  purpose.    The  assets  may  be 


877 


§   317.]  WHO    MAY   BUY    AND    SELL    STOCK.  [oil.    XIX. 

ufacture  of  refining  sugar  in  the  United  States  j1  but,  as  pointed 
out  in  another  case,2  the  bill  in  equity  did  not  bring  out  the  fact 
that  the  sugar  so  refined  was  transported  into  different  states,  and 
hence  was  interstate  commerce.  The  decisions  are  clear  that  it  is 
illegal  for  individuals  as  trustees  to  hold  a  majority  of  the  stock  of 
competing  manufacturing  corporations  where  the  purpose  and  re- 
sult is  to  prevent  competition.3  Equally  so,  it  is  quite  likely  that 
the  court  would  hold  it  to  be  illegal  for  a  corporation  to  hold  such 
stock  for  the  same  purpose  and  with  the  same  result.  No  attack 
was  made  on  the  United  States  Steel  Corporation  on  this  ground, 
and  it  is  quite  likely  that  any  such  attack  would  have  failed,  inas- 
much as  that  corporation  did  not  take  in  or  seek  to  take  in  all  the 
competing  plants,  and  its  chief  purpose  seems  to  have  been  to  com- 
bine the  mining  and  transportation  branches  of  the  business  with 
the  manufacturing  branch,  with  a  view  to  an  increased  output  at  a 
lower  cost  and  price. 

It  may  be  said,  therefore,  that  a  stockholding  corporation  is  legal 
and  unobjectionable,4   except  where,   by   its   purchases  of  stock,   it 

distributed   in   kind   pro  rata  among  with    such    certificates    its    preferred 

the  stockholders,  or  may  be  sold  for  stock,    the    dividends    to    be    used    to 

cash,  and  the  company  may  by  vote  pay  the  principal  and  interest  of  such 

adopt  the  former  plan,  thus  avoiding  certificates,  the  preferred   stock  then 

the     disastrous     consequences     of     a  to  belong  to  the  vendors.     Ingraham 

forced    sale.      Harriman    v.   Northern  v.    National    Salt   Co.,    130    Fed.    Rep. 

•Securities  Co.,   197  U.  S.  244    (1905).  676    (1904),  overruling  122  Fed.  Rep. 

i  United  States  v.  E.  C.  Knight  Co.,  40.     A  New  Jersey  corporation,   hav- 

156  U.  S.  1  (1895).  ing   corporate   power   so   to   do,    may 

2  Gibbs  v.  McNeeley,  118  Fed.  Rep.  purchase    stock    in    another    corpora- 

120(1902).     But  see  160  Fed.  Rep.  144.  tion  in  a  similar  business,  and  as  a 

s  People   v.   North   River,    etc.    Co.,  part  of  the  purchase  price  may  guar- 

121  N.  Y.  582  (1890);  State  v.  Stand-  antee  and  agree  to  pay  dividends  on 

ard  Oil  Co.,  49  Ohio  St.  137    (1892);  certain    outstanding    preferred    stock 

also  various  cases  in  ch.  XXIX,  infra,  of  the  latter  company.     Such  a  con- 

4  Where  by  its  charter  a  corpora-  tract  is  not  illegal,  immoral  or  against 
tion  has  a  right  to  purchase  stock  in  public  policy.  Windmuller  v.  Stand- 
other  corporations  the  corporation  ard,  etc.  Co.,  106  N.  Y.  App.  Div. 
may  subscribe  for  stock  in  another  246  (1905);  aff'd,  186  N.  Y.  572.  It 
corporation  to  be  formed  to  carry  on  is  legal  for  a  manufacturing  company 
a  similar  business,  and  the  court  will  to  organize  a  subsidiary  company  to 
not,  at  the  instance  of  a  stockholder,  sell  its  product,  the  entire  capital 
review  the  discretion  of  the  directors  stock  of  the  latter  being  owned  by  the 
in  making  such  investment.  Rubino  former.  Dittman  v.  Distilling  Co.,  64 
v.  Pressed,  etc.  Co.,  53  Atl.  Rep.  1050  N.  J.  Eq.  537  (1903).  A  stockholder's 
(N.  J.  1903).  A  corporation  having  suit  to  set  aside  an  alleged  illegal 
charter  power  to  purchase  the  stock  issue  of  new  stock  must  join  a  holder 
of  other  corporations  may  give  its  of  such  new  stock,  especially  where 
certificates  of  indebtedness  in  pay-  the  holder  is  a  holding  corporation 
ment    therefor,    and    may    also    issue  which  it  is  alleged  has  been  buying 

878 


CH.    XIX.] 


WHO   MAY    BUY   AND    SELL    STOCK. 


[§   317. 


violates  a  statutory  or  common-law  prohibition  against  the  suppres- 
sion of  competition.  In  the  case  of  railroads  this  objection  arises 
where  a  stockholding  corporation  owns  a  majority  of  the  stock  of 
competing  railroads.1     Under  the  Massachusetts  statute  prohibiting 

the    stock    illegally.      Weidenfeld    v.    debtedness    based    on    the    property, 
Northern,  etc.  Ry.,  129  Fed.  Rep.  305     franchises  or  stock  of  the  Massachu- 
(1904).     A  New  Jersey  holding  cor-    setts  corporation,  such  Massachusetts 
poration   whose   entire   assets   consist    corporation  shall  be  dissolved,  unless 
of  stock  in  a  New  York  corporation,    such   issues  were"  authorized   by   the 
and   whose  entire  income  is  derived    laws    of   Massachusetts.     Laws    1894, 
from  such  stock,  is  not  subject  to  a    p.  554,  Ch.  476.     A  corporation  which 
license  or  franchise  tax  in  New  York,     has  sold  its  property  and  distributed 
People  v.  Kelsey,  101  N.  Y.  App.  Div.    most  of   its   assets  among  its   stock- 
205  (1905).    A  statute  relative  to  rail-    holders  cannot  use  its  remaining  cash 
road  fares  applicable  to  any  corpora-    to  buy  stock  in  another  corporation 
tion  controlling  another  refers  to  con-    for  the  purpose  of  distributing  such 
trol  by  lease  or  otherwise,  and  not  to    stock.    Ferry  v.  Latrobe,  etc.  Co.,  155 
control  by  ownership  of  stock.    Senior    Fed.  Rep.  161   (1907).    Where  a  New 
i.  New  York,  etc.  Ry.,  Ill  N.  Y.  App.     Jersey  holding  company  owns  all  the 
Div.  39    (1906);    aff'd,  187  N.  Y.  559.     stock    of    a    Kentucky    railway    corn- 
Where  a  corporation  legally  owns  all    pany  and  nothing  else,  the  New  Jer- 
the   stock   of   another   corporation   it    Bey  stock  is  not  taxable  in  Kentucky, 
may  endorse  the  notes  of  the  latter,    inasmuch  as  all   the  property  of  the 
In  re  New  York,  etc.,  141  Fed.  Rep.     railway    is    taxed,    which    under    the 
430  (1905).    Where  stock  held  by  the    Kentucky  statutes  exempts  the  stock, 
holding    company    is    sold    for    non-    Commonwealth  v.  Ledman,  106  S.  W. 
payment  of  assessment,  and  is  bought    Rep.  247   (Ky.  1907).     See  note  2,  p. 
in  by  the  holding  company,  and  the    872,  supra. 

assessment  was   illegal,    its    damages        i  In   the  case  of  Pearsall  v.  Great 
must    take    that    into    consideration.     Northern   R.   R.,    161   U.    S.   646,    671 
Grand  Valley,  etc.  Co.  v.  Fruita  Imp.     (1896),    the    court    said:    "Doubtless 
Co.,   37   Col.    483    (1906).     A   holding    these  stockholders  could  lawfully  ac- 
company incorporated  in  South  Africa    quire  by  individual  purchases  a  ma- 
does  business  in  London,  within  the    jority,  or  even  the  whole,  of  the  stock 
meaning  of  the  income  tax  law,  where    of  the  reorganized  company,  and  thus 
most   of   its   purchases   and   sales   of    possibly  obtain   its  ultimate  control; 
stocks  are  made  in  London,  and  some    but  the  companies  would  still  remain 
stockholders'  meetings  are  held  there    separate   corporations   with  no   inter- 
and  directors'  meetings  are  held  there,    ests,  as  such,  in  common.  This  though 
Goerz  &  Co.,  Ltd.  v.  Bell,  [1904]  2  K.    possible,  would  not  be  altogether  fea- 
B.   136.     Where   the  stock  of  a  sub-    sible,  and  would  require  considerable 
sidiary  company  is  held  by  the  presi-    time   for    its   accomplishment.      In   a 
dent,   he  may  be   ordered   to  turn    it    few  years  the  two  companies  might  by 
over  to  the  trustee  in  bankruptcy.  In    sales  of  the  stock,  so  acquired,  become 
re  Muncie,  etc.  Co.,  139  Fed.  Rep.  546    completely  dissevered,  and  the  inter- 
(1905).     In  Massachusetts  by  statute    ests  of  the  stockholders  of  each  com- 
if   a   foreign   corporation   acquires   a    pany  thus  become  antagonistic."     In 
majority    of   the    capital    stock   of    a    the    case    of    Pennsylvania    R.    R.    v. 
Massachusetts  street  railway,  gas,  or    Commonwealth,   7  Atl.   Rep.   368,   373 
electric    light    company,    and    issues     (Pa.   1886),  the   court  said:    "During 
stock,  bonds  or  other  evidences  of  in-    the  argument  counsel  invoked  the  aid 

879 


§  317.] 


WHO   MAY    BUY   AND   SELL   STOCK. 


[CH.   XIX. 


railroads  from  holding  directly  or  indirectly  the  stock  of  any  other 
corporation,  a  steam  railroad  cannot  indirectly  hold  the  stock  of  a 
street  railroad  by  having  a  holding  company  as  an  intermediary.1 
Where  a  steam  railroad  is  buying  the  stocks  and  bonds  of  street 
railroads,  the  attorney  general  under  the  Massachusetts  statute  may 
file  an  information  in  equity  to  prevent  the  exercise  of  that  par- 
ticular power,  instead  of  applying  for  a  mandamus  or  an  informa- 
tion at  law  in  the  nature  of  quo  warranto.2  In  the  celebrated  liti- 
gation between  Mr.  Ilarriman  and  Mr.  Fish  for  control  of  the 
Illinois  Central  Railroad  Company,  it  was  held  that  it  was  legal 
for  a  New  Jersey  holding  company  to  own  and  vote  stock  in  an 
Illinois  railroad  company,  the  New  Jersey  company  having  been 
organized  to  buy,  own  and  sell  shares  of  stock  in  other  corpora- 
tions.3 In  some  states  railroad  corporations  are  expressly  au- 
thorized to  buy  the  stock  of  railroad  corporations,  especially  branch 
lines,  and  in  Connecticut  one  railroad  corporation  after  buying  the 
majority  of  the  stock  of  another  may  in  some  cases  condemn  the 
minority  holdings.4 


of  the  undoubted  general  principle 
that  the  ownership  of  shares  of  stock, 
as  of  other  property,  carries  with  it 
the  legal  right  to  sell,  and  contended 
that  the  owners  of  the  shares  of  the 
South  Pennsylvania  Railroad  Com- 
pany could  not  legally  be  restrained 
from  so  doing,  and  that  an  injunction 
against  the  purchaser  would  have 
this  effect.  We  do  not  think  the  prin- 
ciple applies  to  this  case.  We  are  not 
called  upon  to  express  any  opinion  as 
to  the  right  of  individual  sharehold- 
ers to  sell  their  several  shares  bona 
fide  in  the  open  market.  This,  so  far 
as  they  are  concerned,  is  an  intended 
sale  in  combination,  for  the  express 
purpose  of  enabling  them  to  abandon 
the  rights  and  duties  conferred  and 
imposed  upon  them  by  the  act  incor- 
porating the  company,  and  of  putting 
the  control  of  their  corporation  into 
the  hands  of  its  rival.  This  is  an 
act  contrary  to  the  public  policy  of 
the  state,  which  they  have  no  right 
to  do." 

Where  a  New  Jersey  holding  com- 
pany owns  the  majority  of  the  capital 
stock  of  two  competing  street  railway 
and  electric  light  companies  in  Missis- 


sippi, a  state  may  enjoin  its  voting 
such  stock,  inasmuch  as  an  illegal 
trust  is  thereby  created.  Southern, 
etc.  Co.  v.  State,  44  S.  Rep.  785  (Miss. 
1907).  A  stockholder  in  a  New  York 
city  street  railway  company  may  file 
a  bill  in  equity  to  set  aside  a  purchase 
by  a  holding  company  of  the  majority 
of  the  stock  of  his  company,  it  being 
shown  that  the  holding  company  had 
acquired  control  of  all  street  railways, 
elevated  railways  and  subways  in 
New  York  city,  the  basis  of  this  de- 
cision being  that  the  New  York  stat- 
ute prohibiting  monopolies  overrides 
in  such  a  case  the  New  York  statute 
authorizing  holding  companies.  Bur- 
rows i\  Interborough,  etc.  Co.,  156 
Fed.  Rep.  389   (1907). 

i  Attorney  General  v.  New  York,  etc. 
R.  R.,  84  N.  E.  Rep.  737  (Mass.  1908). 

2  Malone  v.  New  York,  etc.  R.  R.,  83 
N.  E.  Rep.  408  (Mass.  1908). 

3  Edmunds  v.  Illinois  Central  R.  R., 
36  Nat'l  Corp.  Rep.  (Chicago)  50 
(1908). 

4  See  §  314,  supra.  By  statute  in 
New  York  the  public  service  commis- 
sion has  jurisdiction  over  street  rail- 
roads, common  carriers  and  gas  and 


880 


CH.   XIX.] 


WHO   MAY    BUY   AND   SELL    STOCK. 


[§    317. 


In  the  case  of  industrial  corporations  this  objection  may  arise 
where  competition  is  thereby  stifled  and  production  limited  and 
prices  increased.1 

It  is  to  be  borne  in  mind  also  that  the  mere  fact  that  a  corpora- 
tion is  a  separate  entity,  and  is  to  be  considered  the  same  as  an  in- 
dividual who  holds  stock  in  two  competing  corporations,  is  not  con- 
clusive on  that  point.      The  courts  have  power  to  ignore  the  cor- 

electric  corporations  and  associations,  tract  of  the  former  by  which  royalties 

and  also  over  companies  "controlling"  were  to  be  paid  to  another  corpora- 

any   property  of  the   same,   but   this  tion.     Brownsville   Glass   Co.    v.   Ap- 

evidently   does   not   apply  to   holding  pert    Glass    Co.,    136    Fed.    Rep.    240 

companies    controlling    such    corpora-  (1905).    A  company  may  be  organized 

tions  themselves.    Ch.  429,  Laws  1897,  under  the  statutes  of  New  Jersey  to 

Art.  1,  Sec.  2.  hold  stock  in  other  corporations,  and 

i  In  the  case  Edwards  v.  Southern  a  stockholder  cannot  raise  the  objec- 
Ry.,  66  S.  C,  277  (1903),  it  was  held  tion  that  the  object  was  to  create  a 
that  a  statutory  penalty  for  owning,  monopoly,  inasmuch  as  such  monop- 
leasing  or  operating  competing  rail-  oly  was  not  necessarily  the  result  of 
road  lines  applied  to  a  railroad  that  the  exercise  of  the  charter  powers, 
purchased  all  the  stock  of  a  competing  Dittman  v.  Distilling  Co.,  64  N.  J.  Eq. 
railroad.  Where  one  corporation  pur-  537  (1903).  In  a  proceeding  by  a 
chases  a  majority  of  the  stock  of  an-  state  against  foreign  corporations  for 
other  corporation,  thereby  creating  a  violating  an  anti-trust  statute,  the 
tendency  to  restrain  competition  the  state  may  compel  the  corporations  to 
purchase  is  illegal,  even  though  a  produce  their  stock  books  in  order 
complete  monopoly  would  not  result,  that  the  state  may  investigate  wheth- 
Minority  stockholders  of  the  purchas-  er  one  company  owns  a  majority  of 
ing  corporation  may  enjoin  the  pur-  the  capital  stock  of  the  competing 
chase.  Dunbar  v.  American,  etc.  Co.,  company.  State  v.  Standard  Oil  Co., 
224  111.  9  (1906).  A  holder  of  notes  194  Mo.  124  (1906).  Even  though  a 
of  the  corporation  may  collect  them  "trust"  has  purchased  stock  in  a  cor- 
even  though  they  were  issued  to  pur-  poration,  yet  another  stockholder  can- 
chase  stock  in  violation  of  an  anti-  not  maintain  a  suit  in  equity  to  have 
trust  statute,  he  having  no  notice  of  such  stock  forfeited  to  the  corporation 
such  purpose,  although  he  knew  of  itself.  His  remedy  is  to  compel  the 
the  purchase  of  the  stock.  National  corporation  to  abandon  any  illegal 
Salt  Co.  v.  Ingraham,  143  Fed.  Rep.  contract  or  connection.  Hence,  the 
805  (1906).  A  corporation  purchasing  mere  fact  that  the  Amalgamated  Cop- 
the  stock  of  another  corporation  can-  per  Co.,  a  New  Jersey  corporation, 
not  repudiate  the  contract  on  the  has  acquired  a  majority  of  the  stock 
ground  that  it  will  enable  the  former  of  a  Montana  Copper  Company,  as 
to  violate  an  anti-trust  statute.  In-  well  as  of  other  companies,  is  not  suf- 
graham  v.  National  Salt  Co.,  130  Fed.  ficient  to  enable  a  minority  stock- 
Rep.  676   (1904).  holder  in  a  Montana  company  to  ob- 

Where    a    manufacturing    company  tain  an  injunction  against  the  voting 

sells  its  patents,  etc.,  to  a  holding  com-  of  such  stock  or  the  paying  of  divi- 

pany  in  consideration  of  stock  of  the  dends  thereon,  or  the  directors  acting 

latter,    under   a   plan   for   controlling  as  such.     MacGinniss  v.  Boston,  etc. 

the  patents  and  business  in  that  line  Co.,   29   Mont.   428    (1904).     See   also 

of  business,    this  is   entering  a   com-  ch.  XXIX,  infra. 

bination  within  the  meaning  of  a  con-  Even  though  the  Michigan  statutes 
(56)                                              881 


§  317.] 


WHO   MAY   BUY   AND   SELL   STOCK. 


[CII.    XIX. 


porate  existence,  when  such  existence  merely  serves  to  conceal  the 
truth.1  Nevertheless,  it  requires  a  strong  case  to  induce  a  court 
of  equity  to  consider  two  corporations  as  one,  on  account  of  one 
owning  all  the  capital  stock  of  the  other.2 


authorize  one  mining  company  to 
purchase  the  stock  of  other  mining 
companies,  yet  where  this  results  in 
establishing  a  practical  monopoly  in 
a  certain  kind  of  copper,  a  minority 
stockholder  may  enjoin  the  voting 
of  such  stock  so  held  by  the  pur- 
chasing company,  and  no  formal  de- 
mand need  first  be  made  by  him  upon 
the  directors  to  institute  the  suit. 
Bigelow  v.  Calumet,  etc.  Co.,  155  Fed. 
Rep.  869  (1907),  rev'd  Oct.,  1908. 

l  See  §  C63,  infra-  A  subsidiary  com- 


at  the  place  where  such  company  was 
incorporated,  the  federal  courts  in 
other  jurisdictions  where  the  subsidi- 
ary corporations  exist  will  appoint 
the  same  receiver,  but  will  not  neces- 
sarily turn  over  the  tangible  property 
to  such  receiver,  even  though  a  sub- 
sidiary corporation  holds  it  on  a  ter- 
minable lease.  Conklin  v.  United 
States,  etc.  Co.,  123  Fed.  Rep.  913 
(1903).    See  85  N.  E.  Rep.  433. 

Even  though  one  corporation  owns 
all  the  stock  of  another,  yet  the  for- 


pany  may  be  liable  to   a  lawyer  for    mer  does  not  thereby  own  the  profits 


services,  even  though  he  has  been 
paid  by  the  parent  company  for  serv- 
ices rendered  to  the  latter.  Trimble 
v.  Texarkana,  etc.  Ry.,  97  S.  W.  Rep. 
164  (Mo.  1906).  Where  a  railroad 
company  owns  all  the  stock  of  certain 
other  railroad  companies  and  all  the 
property  is  operated  as  one  system, 
the  parent  company  may  be  liable  as 
principal  for  the  negligence  of  one 
of  the  subordinate  companies  causing 
injury  to  an  employee  of  the  latter. 
Lehigh,  etc.  R.  R.  V.  Delachesa,  145 
Fed.  Rep.  617  (1906).  Where  one  corpo- 
ration owns  all  the  stock  and  pur- 
chases all  the  property  for  another 
corporation  and  employs  a  person  to 
do  work  for  the  latter,  it  is  liable 
for  his  wages  on  the  ground  that  the 
subordinate  company  was  merely  an 
agency  or  instrumentality  for  carry- 
ing out  the  purposes  of  the  former. 
Kelly  v.  Ning,  etc.  Assoc,  2  Cal.  App. 
460  (1905).  In  a  suit  against  a  sub- 
sidiary company  to  obtain  among  oth- 
er things,  a  transfer  to  the  receiver 


of  the  latter.  American,  etc.  Co.  v. 
Rutan,  123  Fed.  Rep.  979  (1903); 
rev'd  on  another  point  in  128  Fed. 
Rep.  1017.  A  holding  corporation  is 
not  entitled  to  a  surplus  in  a  sale  of 
a  boiler  purchased  by  one  of  the  con- 
stituent companies  on  the  credit  of 
the  holding  company.  Tilford  v.  At- 
lantic Match  Co.,  134  Fed.  Rep.  924 
(1905).  A  brewing  company  is  not 
responsible  for  rebates  given  to  a  re- 
frigerator company  that  handles  the 
former's  product,  even  though  a  mi- 
nority of  the  stock  of  the  brewing 
company  is  owned  by  the  owners  of 
a  majority  of  the  stock  of  the  refrig- 
erator company.  United  States  v.  Mil- 
waukee, etc.  Co.,  145  Fed.  Rep.  1007 
(1906).  A  holding  company  that  re- 
ports and  pays  taxes  on  the  property 
and  franchises  of  companies,  whose 
capital  stock  it  owns,  cannot  be  taxed 
on  such  part  of  its  capital  stock  as 
represents  such  property  and  fran- 
chises. Commonwealth  v.  Chesapeake, 
etc.    Ry.,    91    S.    W.    Rep.    672    (Ky. 


of  a  parent  company  the  stock  which  1906).  A  director  in  a  holding  corn- 
such  parent  company  holds  in  the  pany  who  is  also  a  director  in  one  of 
subsidiary  company,  the  subsidiary  the  sub-companies,  need  not  account 
company  is  a  necessary  party  defend-  to  the  former  for  fees  which  he  re- 
ant.  Conklin  v.  United  States,  etc.  Co.,  ceives  as  director  in  the  latter.  Re 
123  Fed.  Rep.  913  (1903).  Where  a  Dover,  etc.  Ltd.,  98  L.  T.  Rep.  31 
receiver   of  the  parent  company  has  (1907). 

been  appointed  by   the  federal  court  2  Even  though  an   Illinois  railroad 

882 


CH.   XIX.] 


WHO   MAY    BUY   AND    SELL   STOCK. 


[§   317. 


There  is  another  principle  of  law  to  be  noted.  There  are 
decisions  to  the  effect  that  where  one  corporation  is  illegally  hold- 
ing stock  in  another  corporation,  it  may  be  enjoined  from  voting 
such  stock  at  elections.  The  better  rule  is  that  such  an  injunction 
will  not  lie,  unless  an  actual  fraud  or  illegal  act  is  being  perpe- 
trated other  than  the  mere  illegality  of  the  corporation  holding  the 
stock,  but  the  law  on  this  subject  is  not  as  yet  fully  settled,  and 
this  is  one  of  the  dangers  of  these  stockholding  corporations.1 

Finally,  attention  is  called  to  the  principle  of  law  that  the  owner 
of  the  majority  of  the  stock  of  a  corporation  is  under  certain  legal 
obligations  towards  the  minority  stockholders.  This  obligation  may 
not  go  to  the  extent  of  a  trusteeship,  except  under  unusual  circum- 
stances.2 

A  court  of  equity,  however,  will  scrutinize  carefully  any  acts  of 
the  corporation  which  are  for  the  benefit  of  the  majority  stockholders 
to  the  detriment  of  the  minority  stockholders,  and  will  enjoin  or 
set  aside  such  acts  at  the  instance  of  minority  stockholders  where 
actual  fraud  is  involved.3 


corporation  owns  practically  the  en- 
tire capital  stock  of  a  Texas  railroad 
corporation,  yet  the  former  cannot  be 
brought  into  court  in  Texas  by  serv- 
ing officers  of  the  latter.  Peterson  v. 
Chicago,  etc.  Ry.,  205  U.  S.  364  (1907). 
A  stockholder  in  an  English  holding 
corporation,  which  owns  all  the  stock 
of  an  Illinois  corporation,  cannot 
maintain  a  bill  to  have  the  English 
corporation  declared  fraudulent  and 
a  dummy,  and  that  the  property  of 
the  Illinois  corporation  be  declared 
joint  property  of  the  stockholders  in 
the  English  corporation.  Terry  v. 
Chicago  Packing  and  Provision  Co., 
105  111.  App.  Rep.  663  (1903).  Where 
a  director  of  a  holding  company 
serves  as  a  director  in  a  subsidiary 
company,  his  fees  therefor  do  not  be- 
long to  the  holding  company,  even 
though  the  holding  company  provided 
him  with  qualification  shares.  Re 
Dover,  etc.  Ltd.,  96  L.  T.  Rep.  837 
(1907);  aff'd,  98  Id.  31.  Although 
a  holding  company  owns  the  stock 
of  a  street  railway  company  and 
also  of  a  mining  company,  and  sells 
the  former  stock,  the  mining  com- 
pany may  withdraw  privileges  which 
it   has    given    to    the   street    railway 


company.     Coal,  etc.   Ry.   v.  Peabody 
Coal    Co.,    82    N.    E.    Rep.    627     (111. 
1907).    Where  a  railroad  company  ac- 
quires all  the  stock  of  another  rail- 
road company  and  then  files  a  certifi- 
cate with  the  secretary  of  state  under 
the    New    York    statute,    which    pre- 
scribes   that    thereupon    the    former 
succeeds  to  the  property  of  the  latter, 
the    latter     is    practically     dissolved. 
Rochester  Railway  v.  Rochester,  205  U. 
S.    236    (1907),    aff'g    182    N.    Y.    116. 
Even  though  an  English  holding  com- 
pany owns  the  entire  capital  stock  of 
a   German  company  and  controls   its 
entire  business,  yet  the  profits  of  the 
German  company  are  not  considered 
profits  of  the  English  company  under 
the  income  tax  law,  except  so  far  as 
they  are  actually  received  by  the  Eng- 
lish company.     The  German  company 
is    not    a    mere    alias    or    trustee    or 
agent  for  the  English  company.   Gram- 
ophone,   etc.    Ltd.    v.    Stanley,    95    L. 
T.  Rep.  461   (1906). 
i  On  this  subject  see  §  615,  infra. 

2  For  instance,  see  Farmers'  L.  & 
T.  Co.  v.  New  York,  etc.  Ry.,  150  N. 
Y.  410,  434  (1896). 

3  For  instances,  see  §  662,  infra. 
Where   a  holding  company  increases 


883 


§  317.] 


WHO   MAY   BUY   AND   SELL   STOCK. 


[CH.   XIX. 


A  New  Jersey  court  lias  lield  that  a  scheme  whereby  an  insur- 
ance company  purchased  a  majority  of  the  stock  of  a  trust  company, 
and  the  trust  company  purchased  a  majority  of  the  stock  of  an  insur- 
ance company,  was  illegal,  and  would  be  set  aside  at  the  instance  of  a 
dissenting  stockholder,  inasmuch  as  it  resulted  in  self-perpetuating 
boards  of  directors,  without  the  responsibility  which  would  exist  if 


the  capital  stock  of  one  of  its  sub- 
sidiary companies  and  then  causes 
subsidiary  companies  and  then  causes 
it  to  purchase  the  common  stock  of 
the  holding  company,  thereby  creat- 
ing a  conflict  of  interest  between  the 
preferred  stockholders  of  the  holding 
company  and  the  subsidiary  company, 
which  by  the  plan  would  control  the 
holding  company  itself,  minority 
stockholders  may  enjoin  such  a  reor- 
ganization, it  being  a  part  of  the 
plan  that  the  holding  company  shall 
sell  its  various  stocks  to  such  subsidi- 
ary company.  Robinson  v.  Holbrook, 
148  Fed.  Rep.  107  (1906). 

A  stockholder  in  a  holding  corpora- 
tion cannot  maintain  a  suit  in  behalf 
of  the  corporation  on  the  ground  that 
its   promoters    made    large,    unlawful 
and  secret  profits  by  being  interested 
in    the    constituent    company    whose 
stock  was   turned   in   to   the   holding 
company  in  exchange  for  the  stock  of 
the  latter,  it  appearing  that  when  the 
stock  was  so  turned  in  the  promoters 
were   the  only  parties  interested.     If 
any  of  the  original   parties  were  de- 
frauded their  remedy  is  a  suit  at  law 
for  damages  against  the  guilty  parties. 
The  court  said  (p.  241) :  "We  have  here 
nothing     more     than     the     ordinary 
transaction  of  parties  coming  together 
and    agreeing   in   writing   to   form   a 
corporation  that  shall  take  over  from 
them     certain     definitely    understood 
properties  and  cash,  for  which  is  to 
be  issued  its  entire  capital  stock.     It 
is    doubtless    true   that   in   many   in- 
stances there  is  great  overcapitaliza- 
tion,  and   that  the  general  public  is 
frequently      misled      by      the      large 
amounts    of    preferred    and    common 
stock    issued    by    corporations.      The 
rights  of  the  public  are  not  involved 
in  this  litigation.    .    .    .    The  stock- 


holders of  the  constituent  companies 
and    the   individual    defendants   were 
the  organizers  of  the  corporation  and 
became    its    first    stockholders;     they 
dealt   wholly   between   themselves   as 
sellers    and    buyers,    organizers    and 
corporation;     no    other    persons    had 
any    interest   in   this   initial   transac- 
tion;  if  fraud  had  been  practiced  by 
any  one  of  the  organizers  upon  those 
associated  with  him,  the  cause  of  ac- 
tion would  have  vested  in  the  party 
injured."     Blum  v.  Whitney,   185    N. 
Y.  232  (1906).  See  68  Atl.  Rep.  1104. 
It  is  no  defense  to  an  action  by  an 
employee  that  he  was  employed  by  a 
resolution  of  a  dummy  board  of  direc- 
tors who  had  no  real  interest  in  the 
company,  and  that  there  was  a  contest 
in  the  company  and  the  president  had 
informed  the  party  that  the  contract 
was  not  good.    Collier  v.  Consolidated, 
etc.    Co.,    70    N.    J.    Eq.    313     (1904). 
Where  a  telephone  company  agrees  to 
pay  to  another  company  a  certain  per- 
centage of  all  rentals  received  on  tele- 
phones   which    are    leased,    and    the 
former   company   grants   exclusive  li- 
censes in  exchange  for  stock  of  still 
other    companies,    such    stock    is    in 
the  nature  of  a  rental  and  is  to   be 
included  in  the  contract.   Western,  etc. 
Co.   v.   American,    etc.   Co.,    125    Fed. 
Rep.  342  (1903).    A  consolidated  com- 
pany may  maintain  a  suit  against  a 
director  of  one  of  the  constituent  com- 
panies for  fraudulently,   at  the  time 
of  consolidation,  causing  an  issue  of 
a  large  amount  of  stock  to  him  out  of 
the  treasury  stock  for  past  services, 
which  stock  was  thereupon  exchanged 
for  stock  in  the  constituent  company, 
especially  where  such  director  as  trus- 
tee of  the  treasury  stock  of  both  com- 
panies controlled  them  and  voted  such 
stock  for  the  consolidation,  and  also 


884 


es.  xix.] 


WHO   MAY   BUY  AND   SELL   STOCK. 


t§  317. 


those  directors  represented  their  own  stock ;  and  the  court  pointed  out 
that  the  "Voting  Trust  Cases"  in  New  Jersey  had  established  the 
principle  of  law  that  agreements  which  sever  the  ownership  of 
stock  from  the  voting  power  are,  in  many  instances,  a  violation  of 


voted  proxies  obtained  on  a  notice  of 
the  meeting,  which  did  not  state  that 
his  compensation  was  to  be  voted 
upon.  United,  etc.  Co.  v.  Smith,  44 
N.  Y.  Misc  Rep.  567  (1904).  A  suit 
does  not  lie  against  an  individual  to 
enjoin  the  violation  of  a  contract  be- 
tween the  plaintiff  and  a  corporation, 
even  though  it  is  alleged  that  the  in- 
dividual controls  the  corporation,  it 
not  being  alleged  that  he  owns  all  or 
a  majority  of  its  stock.  Aberthaw, 
etc.  Co.  v.  Ransome,  192  Mass.  434 
(1906).  Directors  who  waste  the 
funds  of  the  company  in  purchasing 
the  worthless  stock  of  another  corpo- 
ration are  personally  liable  to  a  re- 
ceiver for  the  amount  so  expended. 
Bowers  v.  Male,  186  N.  Y.  Rep.  28 
(1906). 

A  promoter  who  has  merely  an  op- 
tion to  purchase  stock  which  he  then 
sells  to  a  new  corporation  is  merely 
an  agent  of  the  vendor  and  a  dividend 
declared  on  the  stock  of  the  new  cor- 
poration   before   the    option   is    exer- 
cised  belongs   to   the   vendor.     Rowe 
v.    White,    112    N.    Y.    App.    Div.    688 
(1906);     aff'd,     189     N.    Y.     523.      A 
holding    company    may    legally    loan 
money. to  one  of  its  constituent  com- 
panies  and   may   take   the   bonds    of 
the    latter    as   security   therefor    and 
place   such  bonds   under   a  mortgage 
of   the   holding   company,    the    bonds 
to  be  returned  when  the  loan  is  paid. 
Dittman  v.  Distilling  Co.,  64  N.  J.  Eq. 
537    (1903).     Even  though  the  court 
at  the  instance  of  a  dissenting  stock 


change  for  the  stock  of  the  two  for- 
mer corporations  at  a  price  equiva- 
lent to  the  above  mentioned  valua- 
tion. The  court  has  no  power  to  en-, 
join  such  a  transaction  at  the  in-i 
stance  of  a  dissenting  stockholder. 
The  fact  that  the  holding  company 
may  name  the  directors  of  both  com- 
panies is  not  objectionable  in  itself. 
Pierce  v.  Old  Dominion  etc.  Co.,  67 
N.  J.  Eq.  399  (1904). 

Where  a  holding  company  turns  the 
control  for  a  number  of  years  over  to 
a  person  controlling  competing  com- 
panies,  and  such  person  causes  con- 
tracts to  be  made  between  the  various 
companies    and    then    sells    his    own 
companies  at  a  large  profit,  the  hold- 
ing   company    may    compel    him    to 
divide  the  profit  with  it,  it  appearing 
that  all  the  transactions  were  to  se- 
cure such  profit  and  the  profit  was  due 
to  all  the  companies  being  so  united. 
If  there  is  no  other  basis  of  division, 
the    profits    will    be    divided    half    to 
each.     Bay  State,  etc.  Co.  v.  Rogers, 
147   Fed.  Rep.  557    (1906).     Where  a 
director  dominates  the  board  and  in- 
duces  the   board   to   purchase  worth- 
less securities  of  other  companies  in 
which  he  is  interested,  and  he  there- 
by makes  a  large  individual  profit,  he 
may  be  compelled  by  a  receiver  of  the 
corporation  to  account  for  his  profits, 
and  it  is  immaterial  whether  he  did 
or  did  not  vote  therefor  as  a  director. 
Pepper  v.  Addicks,  153  Fed.  Rep.  383 
(1907).     See  also   Finch  Mfg.  Co.  v. 
Stirling    Co.,    187    Pa.    St.    597.      An 


holder    has    enjoined    a    corporation    American  stockholder  in  an  English 


from  issuing  stock  in  payment  for 
the  property  of  another  corporation 
to  be  purchased  at  a  high  valua- 
tion, this  does  not  prevent  the  major- 
ity   of    the    stockholders    forming    a 


corporation  which  owns  the  entire 
capital  stock  of  an  American  Brewing 
Company  may  bring  suit  against  di- 
rectors of  the  American  Company  to 
account     for      misappropriating     its 


holding  corporation  in  another  state    funds  with  the  connivance  of  the  Eng- 
and  issuing  stock  of  the  latter  in  ex-  lish  corporation,  and  the  latter  may 

885 


317.] 


WHO   MAY   BUY  AND   SELL   STOCK. 


[CH.   XIX. 


another  principle  of  law,  "that  every  stockholder  is  entitled  to  the 
benefit  of  the  judgment  of  every  other  stockholder  in  the  manage- 
ment of  the  affairs  of  the  corporation."  1     It  is  further  held  in  Xew 

be  made  a  party  and  served  by  pub-  rity   for  an   alleged  debt  and   there- 

lication.    Gordon  v.  Sorg,  113  111.  App.  after  causes  the  stock  to  be  sold  for 

Rep.  522   (1904).     While  negotiations  non-payment  of  the  debt  and  buys  it 

were  pending  between  two  gas   com-  in  himself,  the  court  on  a  foreclosure 

panies  for  their  consolidation  by  one  of  the  mortgage  will  subject  the  stock 

company    buying    the    stock    of    the  to  the  mortgage.    Williamson  v.  N.  J. 


other,  upon  a  certain  basis  of  capital 
and  indebtedness,  one  of  them,  with- 
out the  knowledge,  passed  a  resolu- 
tion declaring  a  scrip  dividend  of  ten 
per  cent,  on  its  capital  stock,  thus 
increasing  its  indebtedness  by  that 
amount.  The  certificates  were  ac- 
cordingly  issued;    but  after  the   con- 


Southern  R.  R.,  26  N.  J.  Eq.  398 
(1875);  s.  c,  on  appeal,  29  N.  J.  Eq. 
311. 

A  temporary  receiver  will  not  be  ap- 
pointed for  a  corporation,  whose  only 
assets  consist  of  stock  in  various 
gas  companies,  which  stocks  have 
been  mortgaged  by  the  former   com- 


solidation,  upon  a  bill  filed  for  that    pany,  where  all  charges  of  fraud  and 
purpose,  the  scrip  was  declared  void,    mismanagement  are  denied.    Brady  v. 


Bailey  v.  Citizens'  Gas  Light  Co.,  27 
N.  J.  Eq.  196  (1876). 

Where  a  New  Jersey  holding  corn- 


Bay  State  etc.  Co.,  106  Fed.  Rep.  584 
(1901). 
i  Robotham  v.  Prudential  Insurance 


pany    owns   all   the   stock   of   certain    Co.,    64   N.   J.   Eq.   673    (1903).     The 


Rhode  Island  street  railroad  com- 
panies, and  as  such  stockholder  causes 
them  to  be  leased  to  a  new  corpora- 
tion which  guarantees  5  per  cent,  on 
the  stock  of  the  Rhode  Island  corpo- 


counsel  in  this  case  claimed  that 
the  following  situation  was  legal: 
"One  man  controls  a  company  of  $10,- 
000,000  capital.  He  may  form  a  new 
company  with  a  capital  of  $5,100,000, 


ration,  and  then  causes  another  New  to  hold  a  majority  of  the  stock.  He 
Jersey  holding  company  to  be  or-  may  then  sell  all  but  $2,600,000  of 
ganized  to  issue  one  share  of  its  the  stock  in  company  No.  2,  and  trans- 
stock  for  every  four  shares  of  stock  fer  his  remaining  stock  to  a  new 
in  the  first  holding  company,  and  all  company  with  a  capital  of  $2,600,000. 
the  stockholders  of  the  first  holding  He  may  then  sell  to  company  No.  3 
company  accept  the  offer  excepting  all  but  $1,400,000,  and  transfer  that  to 
one  stockholder,  he  may  maintain  a  new  company.  This  process  may 
a  bill  in  equity  in  the  United  States  go  on  until  the  power  of  the  whole 
court  in  Rhode  Island  against  both  chain  of  corporations  is  vested  in  the 
holding  companies  to  compel  the  pay-  holder  of  a  few  thousand  dollars  of 
ment    to   him    of    an    equitable    com-  stock   in   the   ultimate   company,   and 


pensation  corresponding  to  the  earn- 
ings over  and  above  the  5  per  cent. 
Four  years'  delay  is  no  bar.  Sabre  v. 
United,  etc.  Co.,  156  Fed.  Rep.  79 
(1907).  Where  a  mortgage  covers 
after  acquired  property  and  the  com- 
pany thereafter  acquires  nearly  the 
entire  capital  stock  of  another  com- 
pany,  but   the   president  of    the   for- 


the  same  chain  can  be  used  for  an  un- 
limited number  of  companies."  In 
reply  to  this  the  court  said  that  such 
a  situation,  if  it  should  arise,  might 
lead  to  the  following  questions: 
"First.  Whether  the  holders  of  the 
$4,900,000  of  stock  could  not  disfran- 
chise the  new  irresponsible  adventur- 
ers who  assumed  to  wield  the  voting 


mer    fraudulently    causes   such    stock    power    of   the    $5,100,000    of    stock, — 
to  be  transferred  to  himself  as  secu-    disfranchise  this  stock  until  the  bene- 

886 


CH.   XIX.] 


WHO  MAY  BUY  AND   SELL   STOCK. 


[§  317. 


Jersey  that  an  English  company  holding  a  majority  of  the  stock 
of  a  New  Jersey  corporation,  the  American  stockholders  being  ex- 
cluded, and  the  holding  company  having  the  voting  power  without 
the  legal  title  to  the  stock,  may  be  compelled  to  give  up  the  stock 
to  the  certificate  holders.1 

Mortgages  are  often  given  by  a  stockholding  company,  the  cer- 
tificates of  stock  being  deposited  with  the  trustee  of  the  mortgage, 
in  order  that  the  stock  itself  may  be  covered  by  the  mortgage.  This 
would  seem  to  be  more  of  a  pledge  than  a  mortgage;2  and  of 
course  the  difference  is  important,  where  the  certificates  of  stock 
are  not  actually  transferred  and  delivered  to  the  trustee  of  the 
mortgage.     Where  a  railroad  company  owns  shares  of  stock  in  an 


ficial  owners  of  it  should  take  con- 
trol of  their  own  property  and  use  its 
voting  power.  Second.  Whether  the 
actual,  beneficial  owners  of  the 
$5,100,000  of  stock  could  not  break 
through  the  chain  of  corporate  fictions 
which  separated  them  from  their  prop- 
erty, and  dictate  how  its  voting 
power  should  be  exercised.  Third. 
Whether  it  would  not  be  the  duty  of 
the  attorney-general  of  the  state  to 
take  proceedings  to  dissolve  the  hold- 
ing companies,  as  an  abuse  of  cor- 
porate franchises, — as  a  fraud  upon 
the  extremely  liberal  provisions  of 
our  corporate  act,  which,  however, 
permit  the  incorporation  of  companies 
only  for  a  'lawful  purpose.' "  As  to 
"voting  trusts"  see  §  622,  infra. 
Where  a  corporation  owns  all  the 
stock  of  another  corporation,  the  lat- 
ter cannot  vote,  at  an  election  of  the 
former,  stock  of  the  former  held  by 
the  latter.  O'Connor  v.  International 
etc.  Co.,  68  N.  J.  Eq.  680;  aff'g  s.  c, 
68  N.  J.  Eq.  67  (1904). 

i  Warren  v.  Pirn,  66  N.  J.  Eq.  353 
(1904),  the  court  saying:  "A  holding 
company  is  owner  of  the  stock  itself. 
This  association  is  not.  It  is  only  a 
sham  owner,  vested  with  a  color- 
able and  fictitious  title  for  the  sole 
purpose  of  permanently  voting  upon 
stock  that  it  does  not  own.  The  offi- 
cers of  a  holding  company  are 
responsible  to  the  stockholders  there- 
in; are  subject  to  be  called  to  account 


annually,  and  to  be  refused  re-elec- 
tion if  their  management  of  the  con- 
cerns intrusted  to  them  is  not  sat- 
isfactory to  their  constituents.  But 
under  the  present  voting  trust  there 
is  no  such  responsibility,  no  such  con- 
trol by  the  constituents.  The  con- 
stituents— that  is,  the  owners  of  the 
deposited  shares— have  disabled  them- 
selves from  exercising  by  force  of  ma- 
jorities any  control  of  the  discretion 
of  the  trustees.  The  only  control  that 
is  at  all  reserved  is  either  to  termi- 
nate the  trust  outright,  or  else  to  sim- 
ply oust  one  trustee  and  put  another 
man  in  his  place." 

2  See  §  464,  infra.  Where  stock  is 
"mortgaged"  and  delivered  to  the  trus- 
tee of  the  mortgage,  this  is  a  mort- 
gage and  not  a  pledge.  Toler  v.  East 
Tennessee,  etc.  Ry.,  67  Fed.  Rep. 
168,  178  (1894).  Inasmuch  as  a  mort- 
gage on  shares  of  stock  is  not  a  re- 
cordable instrument  the  record  there- 
of does  not  operate  as  constructive 
notice.  Sinister  v.  Jones,  58  S.  W. 
Rep.  595  (Ky.  1900).  Where  the 
stock  in  several  corporations  is  put 
in  trust  by  a  deed  acknowledged,  de- 
livered and  accepted  by  the  trustees 
in  New  York  where  the  grantor  re- 
sided, the  trust  deed  is  governed  by 
the  law  of  New  York,  without  ref- 
erence to  the  residence  of  the  trus- 
tees or  the  subsequent  residence  of 
the  grantor.  Mercer  v.  Buchanan,  132 
Fed.  Rep.  501   (1904). 


SS7 


§  317. J                             WHO   MAY   BUY  AND   SELL   STOCK.                       [CH.   XIX. 

elevator  company,  sncli  stock  is  not  subject  to  the  general  mortgage 
executed  by  the  railroad  company,  the  stock  never  having  been 
delivered  to  the  trustee,  and  not  being  specifically  mentioned  in  the 

mortgage  itself.1     But  bonds  and  stocks  held  by  a  railroad  company 

at  the  time  when  foreclosure  is  commenced  and  a  receiver  is  put 
in  possession  are  subject  to  the  mortgage.2  Where  a  mortgage 
covers  bonds  to  be  thereafter  delivered,   and   instead   of   such   de- 

i  Humphreys  v.  McKissock,  140  U.  Somewhat  similar  to  this  is  the  prin- 
S.  304  (1891).  Cf.  Williamson  v.  N.  ciple  of  law  that  a  mortgage  on  the 
J.  etc.  R.  R.  25  N.  J.  Eq.  13  (1874);  railroad  and  property  pertaining  to  it, 
s.  c,  26  N.  J.  Eq.  398  (1875);  s.  c,  and  on  the  property,  etc.  of  the  rail- 
on  appeal  29  N.  J.  Eq.  311  (1878).  road,  does  not  cover  unpaid  sub- 
In  Park  v.  New  York,  etc.  R.  R.  64  scriptions.  Dean  v.  Biggs,  25  Hun, 
Fed.  Rep.  190  (1894),  the  court  de-  122  (1881),  aff'd  93  N.  Y.  662.  The 
clined  to  decide  whether  a  general  uncalled  subscriptions  to  stock  are  not 
mortgage  on  all  property,  real,  per-  covered  by  debentures  unless  specific- 
sonal,  and  mixed,  attached  to  stocks  al'y  mentioned.  Re  Russian  Spratts, 
owned  and  held  by  a  mortgagor,  as  Lim.,  [1898]  2  Ch.  149.  A  mortgage 
against  a  subsequent  mortgage,  ex-  on  all  the  land,  property  and  effects 
pressly  covering  the  stocks.  The  of  the  corporation  does  not  include  un- 
court  merely  ordered  the  receivers  called  subscriptions.  Pickering  v.  II- 
to  pay  the  coupons  on  the  latter  fracombe  Ry.,  37  L.  J.  (C.  P.)  118 
mortgage  bonds.  See  §464,  infra.  A  (1868);  Irishman's  Claim,  23  L-.  T. 
general  mortgage  does  not  prevent  Rep.  (N.  S.)  759  (1870);  King  v.  Mar- 
the  corporation  from  receiving  and  shall,  33  Beav.  565  (1864).  Cf.  Re  Ma- 
disposing  of  municipal  bonds  given  rine  Mansions  Co.,  L.  R.  4  Eq.  601 
in  aid  of  the  railroad.  A  mortgage  (1867);  Re  British,  etc.  Soc,  4  De  G., 
on  all  property  now  owned  or  here-  J.  &  S.  407  (1864);  Gardner  v.  Lon- 
after  to  be  acquired,  followed  by  a  don,  etc.  Ry.,  L.  R.  2  Ch.  201,  215 
specification  of  the  various  kinds  of  (1867).  As  to  whether  subscriptions 
property,  does  not  cover  municipal-  may  be  mortgaged,  see  §  111,  supra. 
aid  bonds  when  they  were  not  men-  A  mortgage  drawn  in  the  usual  terms 
tioned  in  such  specifications.  Smith  does  not  cover  a  subscription  for 
v.  McCullough,  104  U.  S.  25  (1881),  It  stock.  General  Elec.  Co.  v.  Wightman, 
does  not  cover  municipal  bonds  given  3  N.  Y.  App.  Div.  118  (1896).  A  de- 
in  payment  of  subscriptions.  Morgan  benture  may  be  made  a  lien  on  un- 
County  v.  Thomas,  76  111.  120  (1875).  called  subscriptions.  Newton  v.  De- 
A  chattel  mortgage  does  not  include  benture-Holders,  [1895]  A.  C.  244.  The 
shares  of  stock,  although  broad  word  "assets"  in  a  mortgage  may  be 
enough  in  its  terms  to  do  so,  where  construed  to  cover  uncalled  subscrip- 
both  parties  testify  that  it  was  not  tions.  Page  v.  International,  etc. 
the  intent  to  include  the  stock  and  the  Trust,  68  L.  T.  Rep.  435  (1893).  A 
mortgagee  allowed  the  mortgagor's  transfer  of  the  "business  and  prop- 
assignee  to  take  away  the  stock,  erty"  of  a  corporation  does  not  carry 
Younkin  v.  Collier,  47  Fed.  Rep.  571  unpaid  subscriptions.  Bank  of  China 
(1891).  Even  though  a  debenture  is  v.  Morse,  44  N.  Y.  App.  Div.  435,  445 
a  floating  charge  on  all  the  property,  (1899);  aff'd,  168  N.  Y.  458. 
yet  the  directors  may  legally  pledge  2  Herring  v.  New  York,  etc.  R.  R. 
stock  which  the  company  owns  in  an-  105  N.  Y.  340  (1887).  See  also  Whit- 
other  corporation.  Re  Standard,  etc.  ney  v.  New  York,  etc.  R.  R.,  32  Hun, 
Co.,  Ltd.,  95  L.   T.  Rep.  S29    (1906).  164  (1884). 

SS8 


CH.   XIX.] 


WHO   MAY   BUY  AND   SELL   STOCK:. 


[§   817. 


livery  the  mortgagor  deposits  the  bonds  as  security  with  the  United 
States  Government  and  then  makes  another  mortgage  covering  such 
bonds,  the  first  mortgage  is  entitled  to  the  bonds  upon  their  being 
released  by  the  United  States  Government,  even  though  such  bonds 
are  delivered  under  the  second  mortgage,  unless  the  bonds  or  the 
notes  secured  by  them  under  the  second  mortgage  have  passed  into 
bona  fide  hands.1  Where  the  mortgage  covers  after-acquired  prop- 
erty and  the  company  does  acquire  such  property,  and  instead  of 
taking  title  causes  the  title  to  be  transferred  to  a  new  corporation, 
all  the  stock  of  which  is  thereby  acquired  by  the  mortgagor,  such 
stock  is  subject  to  the  mortgage  as  against  any  personal  claim  of 
the  trustee  of  the  mortgage,  even  though  the  trustee  of  the  mortgage 
has  loaned  money  to  the  mortgagor  with  the  stock  pledged  as  col- 
lateral.2 

Generally,  however,  the  particular  stocks  and  bonds  which  are 
covered  by  the  mortgage  are  delivered  to  the  trustee  of  the  mort- 
gage.3 


1  Central  T.  Co.  v.  West  India,  etc. 
Co.,  169  N.  Y.  314  (1901).  Where  a 
pledgee  brings  suit  to  obtain  posses- 
sion of  the  pledge,  which  had  been 
wrongfully  diverted,  and  during  the 
suit  the  pledge  becomes  worthless, 
a  supplemental  complaint  may  be 
served  alleging  that  fact  and  demand- 
ing the  value  of  the  pledge  at  the  time 
demand  was  made  therefor.  Central 
T.  Co.  v.  West  India,  etc.  Co.,  109  N. 
Y.  App.  Div.  517  (1905).  A  mort- 
gage purporting  to  cover  municipal 
bonds  not  yet  delivered  by  a  munici- 
pality does  not  sustain  a  suit  by  the 
trustee  against  such  municipality  to 
obtain  such  bonds,  upon  foreclosure 
of  the  mortgage.  Farmers'  L.  &  T. 
Co.  v.  Board  of  Sup'rs,  etc.,  93  Fed. 
Rep.   579    (1899). 

2  Guaranty  T.  Co.  v.  Atlantic,  etc. 
R.  R.,  138  Fed.  Rep.  517  (1905);  rev'g 
on  this  point  132  Fed.  Rep.  68.  See 
also  Central  T.  Co.  v.  Kneeland,  138 
U.  S.  414  (1891).  Where  the  owner 
of  all  the  stock  of  a  waterworks  com- 
pany organizes  another  company  to 
build  a  new  pumping  station  and  a 
new  source  of  supply,  a  mortgage  of 
the  first  company  covering  extensions, 
additions  and  after-acquired  property 


covers  such  new  pumping  station,  it 
appearing  that  a  portion  of  the  mort- 
gage  bonds    were    reserved   for   such 
extension,  and  the  physical  facts,  vis- 
ible to  any  person,  and  the  provision 
to  the  mortgage,  which  were  also  open 
to   public   notice,    making   it   evident 
that  the  mortgage  necessarily  includ- 
ed   the    new    pumping    station    and 
mains.      New    England,    etc.    Co.    v. 
Farmers',  etc.  Co.,  136  Fed.  Rep.  521 
(1905).    See  also  §  857,  infra.    Where 
the  equity  of  redemption  of  a  mort- 
gaged property  is  acquired  by  a  cor- 
poration,   the   after-acquired   property 
clause  of  a  previous  mortgage  applies 
to  the  equity  so  purchased,  but  if  the 
proceeds    of    a    subsequent    mortgage 
given  by  the  corporation  are  used  to 
discharge  such  prior  mortgage  on  the 
property  purchased,  such  second  mort- 
gage must  be  repaid  that  amount,  be- 
fore the  after-acquired  clause  applies, 
it  being  a  condition  of  the  purchase 
that  title  should   not  pass  until   the 
vendor's    lien   was    paid.      The   same 
rule   applies  to  taxes  paid   from   the 
proceeds     of    the    second     mortgage. 
Farmers'  etc.   Co.  v.   Denver,   etc.   R. 
R.,  126  Fed.  Rep.  46    (1903). 
3  See  §  776,  infra;  also  §  464. 


889 


§  317.]  WHO   MAY   BUY   AXD   SELL   STOCK.  fell.    XIX. 

A  mortgage  on  shares  of  stock  does  not  prevent  the  corporation 
controlled  by  such  stock  from  issuing  a  mortgage  on  its  property, 
and  it  is  no  breach  of  trust  for  the  trustee  of  the  first  mortgage  to 
be  the  trustee  of  the  second  mortgage,  where  the  first  mortgage 
does  not  prohibit  such  second  mortgage,  the  stock,  by  the  terms  of 
the  mortgage,  remaining  in  the  name  of  the  mortgagor.1 

In  this  class  of  mortgages  by  stockholding  companies,  complica- 
tion sometimes  arises  as  to  the  rights,  duties  and  obligations  of  the 
trustee  of  the  mortgage.  Tims  whore  stock  is  deposited  with  one 
trust  company  as  additional  security  for  a  mortgage  given  to  an- 
other trust  company,  and  upon  default  the  former  company  refuses 
to  deliver  the  stock,  and  the  latter  trust  company  then  commences  a 
suit  in  equity  to  compel  the  former  trust  company  to  deliver  tin' 
stock,  and  during  that  suit  the  stock  declines  in  value,  a  bondholder 
secured  by  such  mortgage  cannot  hold  liable  the  trust  company 
holding  the  stock  on  account  of  the  decline  in  value,  inasmuch  as 
the  suit  in  equity  determined  all  questions,  including  the  amount 
of  damage.2  Where  a  mortgage  secured  by  slock  as  collateral  ex- 
pressly authorizes  the  trustee  to  release  the  collateral  and  accept 
other  security  in  lieu  thereof  upon  the  consent  of  the  majority  in 
interest  of  the  bondholders,  a  minority  bondholder  cannot  complain 
of  such  substitution  unless  he  proves  that  the  bondholders  as  a  whole 
will  be  injured.3  A  trustee  of  a  pledge  of  stock  for  the  payment, 
of  interest  on  certificates  issued  by  the  corporation  may  on  default 
file  a  bill  in  equity  to  have  the  stock  sold,  even  though  the  trust 
agreement  provides  for  another  remedy.4 

i  Gasquet  v.  Fidelity,  etc.  Co.,  75  relative  to  an  independent  and  out- 
Fed.  Rep.  343  (1S9G);  Central  Trust  side  transaction,  and  in  an  action  by 
Co.  v.  Kneeland,  138  U.  S.  414,  423  the  pledgee  to  realize  on  the  stock 
(1891).  cannot    set    up    that    by    reason    of 

2  Bracken  v.  Atlantic  T.  Co.,  167  N.  the   modified   agreement  between  the 

Y.  510   (1901).     Where  a  corporation  pledgor    and    pledgee    the    depositary 

guarantees  certain  bonds,  and  a  per-  in  its  outside  transaction  has  suffered 

son  holding  stock  of  the  company  in-  damage.     Mercantile  Trust  Co.  v.  At- 

dorses  on  the  guaranty  that  he  holds  lantic  Trust  Co.,  69  Hun,  264   (1893). 

the  stock  to  secure   the  performance  For  subsequent  phases  of  this  litiga- 

cf  the  guaranty,  he  cannot  afterwards  tion,    see    Bracken   v.   Atlantic   Trust 

claim    that   he    has    a   prior   lien    as  Co.,  167  N.  Y.  510    (1901). 

pledgee     of    the     stock.       Mercantile  3  Ikelheimer    v.    Consolidated,    etc. 

Trust   Co.   v.   Atlantic   Trust   Co.,    86  Co.,  59  Atl.  Rep.  363  (N.  J.  1904). 

Hun,   213   (1895).     Where  the  pledge  4  Land,  etc.  Co.  r.  Asphalt  Co.,  121 

is  deposited  with   a  third   party,   the  Fed.  Rep.   192    (1903);  aff'd  127  Fed. 

pledgor  and  pledgee  may  modify  their  Rep.    1.      Where    a    majority    of    the 

agreement  as  to  the  pledge.     The  de-  stockholders    and    also    the    directors 

positary  of  the  pledge  cannot  act  upon  have  ratified   a  sale   by  a  pledgee  of 

a  provision  in  the  original  agreement  property  of  the  corporation  a  minor- 

890 


CH.   XIX.] 


WHO    MAY    BUY   AND   SELL    STOCK. 


[§  317. 


Although  a  trust  company  is  a  pledgee  of  bonds  for  the  benefit 
of  many  notes  of  the  pledgor  in  the  hands  of  many  holders,  and 
the  trust  company,  after  notice  by  mail  to  the  holders  of  the 
notes,  is  authorized  by  the  court  to  sell  the  bonds  at  ten  cents  on 
the  dollar,  yet  a  holder  of  the  notes  may  thereafter  question  the 
good  faith  of  the  trust  company  in  making  such  sale.1 

Where  a  bond  issued  by  a  state  recites  that  it  is  secured  by  an 
equal  amount  of  stock  in  a  railroad  company,  the  holder  of  such 
bond  may  file  a  bill  to  foreclose  on  that  amount  of  stock  and  need 
not  join  other  bondholders  as  parties  defendant.2  Bondholders  can- 
not sustain  a  bill  in  equity  to  remove  a  trustee  who  holds  the  stock 
of  various  gas  companies  as  collateral  security  for  the  payment  of 


ity  stockholder  cannot  cause  the  sale 
to  be  set  aside,  inasmuch  as  the 
pledgor  might  have  originally  con- 
sented to  the  sale.  Macon,  etc.  R.  R. 
v.  Shailer,  141  Fed.  Rep.  585  (1905). 
For  a  case  involving  the  rights  and 
duties  of  a  trustee  holding  mortgages 
as  security  for  debentures,  the  cor- 
poration itself  having  become  insolv- 
ent, see  Girard  Trust  Co.  v.  McKinley, 
etc.  Co.,  135  Fed.  Rep.  180    (1905). 

i  Minneapolis  Trust  Co.  v.  Menage, 
73  Minn.  441  (1898).  Where  a  cor- 
poration owns  all  of  its  bonds,  ex- 
cepting a  few  held  by  one  holder,  such 
bonds  being  secured  by  a  pledge  of 
securities,  and  requests  the  trustee 
holding  the  securities  to  sell  the  same, 
which  the  trustee  does  at  an  insuffi- 
cient price,  the  corporation  itself  be- 
ing the  buyer,  and  the  single  outside 
holder  of  bonds  not  being  notified  in 
time  to  protect  his  interests,  he  may 
either  follow  his  securities  or  may 
hold  the  trustee  liable.  And  even 
though  he  accepted  a  small  sum  in 
settlement  from  the  trustee,  yet  if 
that  settlement  was  caused  by  mis- 
representations as  to  the  value  of  the 
securities,  he  is  not  bound  by  them. 
Other  holders  of  the  bonds  who  have 
turned  them  into  the  corporation  on 
an  agreement  to  take  an  exchange  of 
new  bonds  secured  by  the  same  securi- 
ties will  also  be  allowed  to  partici- 
pate the  same  as  a  bondholder  who 
did  not  turn  in  his  bonds.     Anthony 


v.  Campbell,  112  Fed.  Rep.  212  (1901). 
Where  trustees  hold  stock  as  security 
for  various  debts  of  various  parties, 
the  stock  to  be  sold  if  the  debts  are 
not  paid,  it  is  illegal  for  one  of  the 
trustees  to  resign  and  for  the  remain- 
ing trustee  to  sell  the  stcok  in  a  way 
calculated  not  to  bring  its  full  yalue, 
and  for  the  resigning  trustee  to  pur- 
chase the  same  at  a  very  low  price 
for  the  benefit  of  himself  and  the 
other  trustees.  The  sale  will  be  set 
aside.  Jenkins  v.  Hammerschlag,  38 
N.  Y.  App.  Div.  209  (1899).  Where 
a  prospectus,  offering  for  sale  trus- 
tees' transferable  certificates,  states 
that  such  certificates  represent  stock 
deposited  with  the  trustee,  the  stock 
being  in  an  English  corporation,  the 
trustee  is  personally  liable  if  it  turns 
out  that  the  English  corporation  had 
a  prior  lien  on  the  stock  to  the  full 
extent  of  its  value.  The  trustee  was 
bound  to  take  notice  of  the  lien  cre- 
ated by  the  by-laws  of  the  English  cor- 
poration. The  rule  of  caveat  emptor 
has  been  relaxed  so  as  to  create  an 
implied  warranty  of  title  on  the  part 
of  the  seller.  Even  though  the  trus- 
tee acted  as  agent,  yet,  the  principal 
not  being  disclosed,  the  trustee  is  lia- 
ble. McClure  v.  Central  Trust  Co., 
165  N.  Y.  108  (1900).  See  also  §  763, 
infra. 

2  South  Dakota  v.   North  Carolina, 
192  U.  S.  286   (1904). 


891 


317.] 


WHO   MAY   BUY   AND   SELL   STOCK. 


[cn.  XIX. 


their  bonds,  even  though  such  trustee  has  voted  such  stock  in  favor 
of  directors  who  have  made  improvident  contracts  in  which  such 
directors  were  personally  interested,  it  appearing  that  by  the  terms 
of  the  trust  agreement  the  trustee  was  to  vote  such  stock  as  the 
pledgors  directed,  until  default  of  the  bonds,  and  it  not  being  shown 
that  the  trustee  knew  that  such  default  had  been  made.1  Where 
by  the  terms  of  the  pledge  the  pledgor  reserves  the  right  to  vote 
the  stock,  the  stock  being  transferred  into  the  name  of  the  pledgee, 
the  pledgor  may  by  a  bill  in  equity  compel  the  pledgee  to  give  to 
the  former  a  proxy  to  vote  the  stock  in  favor  of  a  merger  of  the 
corporation  with  another  corporation,  even  though  thereby  the 
pledgee  will  have  to  take  stock  of  the  new  corporation  in  exchange 
for  the  old  stock.2  The  directors  of  a  New  Jersey  holding  corpora- 
tion owning  a  majority  of  the  stock  of  a  New  York  Insurance 
company  cannot  place  the  stock  in  a  voting  trust  for  a  period  of 
years,  because  it  is  the  duty  of  such  directors  to  manage  and  con- 
trol the  property  of  the  corporation  instead  of  delegating  such  con- 
trol to  outside  individuals.3 

Where  a  pledge  of  stock  is  deposited  with  a  third  party,  ac- 
cording to  the  contract  of  pledge,  such  third  party  need  not  be 
joined  in  a  suit  by  the  pledgor  against  the  pledgee  to  redeem.4 


i  Moreover,  such  removal  will  be 
denied  when  the  trust  agreement  it- 
self provides  for  the  removal  of  the 
trustee  by  vote  in  writing  of  one-third 
in  interest  of  the  bondholders  at  a 
meeting  called  for  that  purpose,  and 
no  reason  is  shown  for  disregarding 
this  mode  of  changing  the  trustee. 
Dillaway  v.  Boston,  etc.  Co.,  174  Mass. 
80  (1899).  A  temporary  receiver  will 
not  be  appointed  of  a  corporation, 
whose  only  assets  consist  of  stock 
in  various  gas  companies,  which 
stocks  have  been  mortgaged  by  the 
former  company,  where  all  charges  of 
fraud  and  mismanagement  are  denied. 
Brady  p.  Bay  State,  etc.  Co.,  106  Fed. 
Rep.  584  (1901). 

2  Pennsylvania  R.  R.  v.  Pennsyl- 
vania Co.,  etc.,  205  Pa.  St.  219  (1903). 
"Where  a  holding  company  in  pledg- 
ing its  securities  to  secure  its  bonds 
specified  the  securities  it  is  to  de- 
liver, and  delivers  only  a  part  of 
them,  it  is  not  entitled  to  a  proxy 
from  the  trustee  of  the  mortgage  on 


the  stocks  actually  delivered,  unless 
it  delivers  all  of  the  stocks  called  for 
by  the  trust  instrument.  Moreover, 
any  such  proxy  may  be  limited  in  its 
powers  in  order  that  the  trustee  may 
be  protected  against  the  holding  com- 
pany voting  the  stock  for  purposes 
inconsistent  with  the  trust  agreement. 
Delaware,  etc.  Co.  v.  Metropolitan  T. 
Co.,  146  Fed.  Rep.  600  (1906).  A 
voting  trust  in  which  the  trustee  of  a 
mortgage  held  the  stock  and  voted  it 
was  involved  in  Curtze  v.  Iron,  etc. 
Co.,  46  Or.  601  (1905),  and  it  was 
held  that  such  voting  trust  did  not 
in  itself  extend  the  date  of  the  mort- 
gage. 

3  Knickerbocker,  etc.  Co.  v.  Voor- 
hees,  100  N.  Y.  App.  Div.  414  (1905). 

4  Baeck  v.  Meinken,  33  N.  Y.  Misc. 
Rep  371  (1900).  The  trustee  of  a 
mortgage  who  holds  security  under 
the  mortgage  is  a  proper  party  to  a 
suit  in  equity  to  wind  up  the  insolv- 
ent mortgagor,  and  if  such  trustee 
is  ordered  by  the  court  to  turn  over 


S92 


CH.   XIX.^L  WHO   MAY    BUY   AND    SELL   STOCK.  [§   318. 

A  pledgee  has  power  to  have  the  stock  transferred  on  the  cor- 
porate books,  and  if  it  has  agreed  to  hold  certain  stock  as  security 
for  a  third  person's  note  and  fails  to  obtain  a  proper  transfer,  it  is 
liable  in  some  cases.1 

Instead  of  a  holding  corporation,  an  unincorporated  voluntary 
association  is  sometimes  formed  to  invest  in  the  stocks  of  differnt  cor- 
porations. Such  an  organization  has  some  advantages  over  a  regu- 
larly incorporated  company.  The  Mackay  Companies,  which  owns 
stock  in  over  one  hundred  telegraph,  cable  and  telephone  companies, 
is  an  illustration  of  this  form  of  organization.2 

§318.  Infants  as  purchasers  of  stock. — An  infant  is  incompetent 
to  purchase  shares  of  stock.  Most  cases  of  this  class  arise  upon  a 
winding  up  of  the  corporation,  when  the  infant  is  placed  upon  the 
list  of  contributories,  and,  in  defense,  infancy  is  set  up.3  An  infant's 
purchase  or  sale  of  stock  is  voidable  and  not  void.4  This  seems  to 
be  the  rule  finally  arrived  at  by  the  English  courts,  after  some  hesita- 
tion and  difference  of  opinion.  The  transfer  is  similar  to  a  deed, 
and  passes  an  interest  to  the  infant  even  when  coupled  with  a  liabil- 
ity, if  it  be  for  his  benefit  to  accept  it.5  Consequently  an  infant, 
upon  coming  of  age,  is  bound  to  elect  whether  he  will  affirm  or  dis- 
affirm a  purchase  of  stock  made  by  him  while  yet  an  infant.6     He 

the  securities  to  a  receiver  the  trus-  porated  in  another  state,  is  not  liable 
tee  is  entitled  to  intervene  and  have  for   its   omitting   to   have  such    stock 
its  rights  determined.     Miles  v.  New  in   such  corporation   transferred   into 
etc.    Assoc,    99    Fed.    Rep.    4    (1900).  its  name,  even  though  thereby  an  at- 
Where     a     third     party     holds     the  tachment  takes  precedence  over  such 
pledged    stock    and    agrees    with    the  deposit.      The    trust    company    is    not 
pledgee  that  if  the  pledgee  does  not  bound  to  know  the  law  of  such  other 
pay  any  assessments  the  third  party  state.     New  Jersey  Con.  Co.  v.  Farm- 
may  pay  them  and  obtain  repayment  ers'  L.  &  T.  Co.,  39   N.  Y.  Misc.  Rep. 
out  of  the  dividends,  holding  the  stock  672   (1903) 
as  security,  and  the  third  party  pays  2  See  §  622,  h.  infra. 
the   assessments  without  the  pledgee  3  See  §§  67,  250,  supra. 
being    notified    of    such    assessments,  4  Lumsden's  Case,  L.  R.  4  Ch.  App. 
and  the  third  party  causes  the  iden-  31  (1868);  Smith  r.  Nashville,  etc.  R. 
tity  of  the  stock  to  be  lost,  the  pledgee  R.,  91  Tenn.  221  (1892). 
can  reclaim  the  stock  without  paying  5  Lumsden's  Case,  L.  R.  4  Ch.  App. 
the   assessment   to   such   third    party.  31  (1868). 

Moore   r.   Bank  of  British  Columbia,  c  Where,   however,   the   corporation 

125  Fed.  Rep.  849    (1903).  becomes  insolvent  just  before  or  just 

i  First  Nat.  Bank  r.  Park,  117  Iowa  after  the  infant  comes  of  age,  he  need 

552    (1902).     A  New  York  trust  com-  not  affirm  or  disaffirm,  but  may  await 

pany  that  holds,  as  a  depositary,  the  the    action    of    the    corporation;     but 

certificates  of  stock  of  four  railroad  where  he  is  silent  for  two  years  after 

corporations   which    are    about   to   be  coming  of  age,   and  corporate  insolv- 

consolidated,   one   of  which   is   incor-  ency     then      occurs,     he    is     bound. 

893 


§   319.]  WHO    MAY    BUY    AND    SELL    STOCK.  [CU.    XIX. 

may  disaffirm  while  still  an  infant,  and  is  then  not  liable  on  calls.1 
The  plea  of  infancy  is  a  good  defense,-  but  the  plea  must  allege 
a  disaffirmation  within  a  reasonable  time  after  becoming  of 
age.3  Where  a  stockholder  sells  his  stock  through  a  stock- 
exchange  jobber,  and  the  sale  is  made  to  an  infant,  the  job- 
ber is  Liable  to  the  vendor  for  calls  paid  by  him  in  consequence  of 
such  infancy.4  An  infant's  sale  of  stock,  even  by  a  transfer  of  the 
certificate,  is  not  binding  on  him.5  Where  a  corporation  sells  all 
its  property  to  another  corporation  for  stock  of  the  latter  to  be 
given  to  stockholders  of  the  former,  an  infant  stockholder  in  the 
old  corporation  may  hold  the  latter  liable  for  the  value  of  the  stock 
after  he  becomes  of  age,  even  though  he  consented  to  the  trans- 
action and  took  new  stock,  which  he  afterwards  returned.6 

§  319.  Married  women  as  purchasers,  owners,  or  vendors  of 
stock. — At  common  law  a  married  woman's  rights  as  regards 
shares  of  stock  were  the  same  as  prevailed  with  reference  to  other 
personal  property  purchased  or  owned  by  her.  She  had  no  ma- 
terial rights.  Modern  statutes  have,  however,  completely  changed 
her  rights  of  property  and  of  contract.  These  statutes  are  so  dif- 
ferent in  form  and  effect  that,  for  the  purpose  of  ascertaining  the 
status  of  a  married  woman  as  a  stockholder,  it  is  necessary  to  con- 
sult the  statute  law  in  the  state  of  her  domicile,  and  also  in  the 
state  of  the  corporation  itself.7  In  England  the  severity  of  the 
common  law  has  been  but  partially  modified  by  statute.8 

Mitchell's  Case,  L.  R.  9  Eq.  346  (1870).  2  Birkenhead,  etc.  Ry.  v.  Pilcher,  5 

For  other  cases  of  ratification,  see  ref-  Exch.  24   (1850). 

erences  in  §§  67,  250,  supra.  3  Dublin,  etc.  Ry.  v.  Black,  8  Exch. 

i  Newry,  etc.  Ry.  v.  Coombe,  3  Exch.  181   (1852). 

565,   578    (1849),   where   it   was  said:  4  Nickalls  v.   Merry,  L.   R.   7  H.  L. 

"He  became  a  shareholder  by  contract  530   (1875). 

during   infancy,    and    during   infancy  5  Smith    v.     Baker,     42     Hun,     504 

he  disaffirmed  the  contract;  therefore,  (1886). 

in    my    opinion,    he    ceased    to    be    a  6  White  v.  New  Bedford,  etc.  Corp., 

shareholder    liable    to    be    sued     for  178  Mass.  20  (1901). 

calls."  7  As  to  the  conflict  of  laws  on  this 

8  By  33  &  34  Vict.,  ch.  93,  §  4,  mar-  v.  Carnatic  Ry.,  L.  R.  8  Q.  B.  299 
ried  women  may  purchase  or  take  (1873).  Under  this  act  she  may  trans- 
paid-up  stock,  or  stock  upon  which  fer  her  stock  only  after  it  has  been 
there  can  be  no  liability;  but  if  taken  formally  set  aside  by  statutory  au- 
by  means  of  moneys  of  her  husband  thority  as  her  separate  property, 
without  his  consent,  he  may  apply  to  Howard  v.  Bank  of  England,  L.  R.  19 
the  court  and  have  it  turned  over  to  Eq.  295  (1875).  Where  the  corpora- 
himself.  Previous  to  this  act  the  cor-  tion  has  allowed  a  transfer  by  a  mar- 
poration  might  refuse  to  register  her  risd  woman,  it  cannot  cancel  the 
as  a  stockholder,  but  now  the  corpora-  registry.  Ward  v.  Southeastern  Ry., 
tion  must  accept  her  the  same  as  any  2  El.  &  El.  812  (1860). 
other  applicant  for  registry.     Regina 

894 


en.  xix.] 


WHO  MAY   BUY  AND   SELL   STOCK. 


[§   320. 


§  320.    Competency  of  miscellaneous  parties  —  Joint  operation.  — 
A  sale  of  stock  by  a  person  non  compos  mentis  is  void.     The  corpo- 


subject,  see  §  12,  supra.     A  wife  may 
pledge   her   stock  to   secure  her  hus- 
band's debt.    Just  v.  State  Sav.  Bank, 
132  Mich.   600    (1903).     The  husband 
has  the  right  to  appropriate  to  him- 
self shares  of  stock  owned  by  his  wife, 
and   where   she   signs   the   certificate 
and  delivers  it  to  him  and  he  sells  it, 
this   is   a   reduction   of   the   stock   to 
himself,  even  though  it  is  not  trans- 
ferred on  the  books.  Johnson  v.  Hume, 
138  Ala.  564    (1903).    A  husband  may 
transfer  stock  to  his  wife  by  way  of 
a  gift,  even  under  the  Massachusetts 
statutes,   the   corporation   in    making 
the  transfer  being  considered  a  third 
party  as  an  intermediary.     Tucker  v. 
Curtin,  148  Fed.  Rep.  929  (1906),  rev'g 
In  re  Tucker,  131  Fed.  Rep.  647.     In 
Hill  v.  Pine  River  Bank,  45  N.  H.  300 
(1864),    the    transfer    by    a    married 
woman   was   in   accordance   with   the 
laws  of  the  state  where  she  lived  and 
also  the  state  where  the  corporation 
was  organized.    Dow  v.  Gould,  etc.  Co., 
31  Cal.  629   (1867),  holds  that  in  Cal- 
ifornia a  gift  of  stock  from  husband 
tc  wife  is  valid,  and  that,  after  such 
gift,   he   could   not  sell   and  transfer 
it  as  his  own.    Leitch  v.  Wells,  48  N. 
Y.   585    (1872).     See  also  Vanderhey- 
den  v.  Mallory,   1  N.  Y.   452    (1848); 
Voorhees    v.    Bonesteel,    16    Wall.    16 
(1872).     Where   the   wife   authorizes 
her  husband  to  sell  her  stock  and  use 
the  proceeds  in  his  business,  he  can 


that  he  held  it  in  trust  for  her.    Cum- 
mings   v.    Cummings,    143    Mass.    340 
X1887).      The    case    of    Stanwood    v. 
Stanwood,  17  Mass.  57    (1820),  holds 
that  where  the  husband  does  not  have 
the   stock  transferred   to   himself   on 
the  corporate  books  but  declares  it  to 
be  his  wife's  stock,  there  is  no  reduc- 
tion of  it  to  his  possession.     See  also 
Wall    v.    Tomlinson,    16    Ves.    Jr.    413 
(1810),  to  the  effect  that  a  transfer 
of  the  wife's  stock  to  the  husband  as 
trustee  is  not  a  reduction  to  posses- 
sion;  also,  Arnold  v.  Ruggles,  1  R.  I. 
165    (1837);   Wildman  v.  Wildman,  9 
Ves.   Jr.   174    (1803),   and   Slaymaker 
v.  Bank  of  Gettysburg,  10  Pa.  St.  373 
(1849),  to  the  effect  that  only  a  reg- 
istry will  reduce  the  wife's  stock  to 
the    possession    of   the    husband.      In 
Pennsylvania   it   has   been   held   that 
assent  by  the  husband  to  the  assign- 
ment by  the  wife  of  a  certificate  of 
stock  owned  by  her,  sufficient  to  give 
good  title  to  a  holder  for  value  of  the 
certificate,  is  shown  by  the  fact  that 
not  only  was  her  signature  to  the  as- 
signment, and  the  irrevocable  power 
of    attorney    executed    in    connection 
with  it,  witnessed  by   him,   but  that 
certain   blank    spaces    in   the    instru- 
ment were  filled  out  in  his  handwrit- 
ing.    Souder  v.  Columbia  Nat.  Bank, 
156  Pa.  St.  374  (1893).    The  fact  that 
stock  stands  in  the  name  of  the  wife 
and   is   transferred   by  her   in  blank 


not  sell  the  stock  and  assign  the  pro-    and  is  then  pledged  by  her  husband 


ceeds  to  another  person.  The  latter 
cannot  collect  such  proceeds.  Deni- 
ing  v.  Bailey,  2  Rcb.  (N.  Y.)  1  (1864). 
Possession  by  the  husband,  as  ex- 
ecutor, of  stock  of  his  wife  is  not  a 
reduction  to  possession.  Sowles  v. 
Witters,    39    Fed.    Rep.    403     (1889). 


for  his  individual  debt  does  not  put 
the  pledgee  on  notice  that  the  hus- 
band is  misappropriating  the  wife's 
stock.  McManus  v.  Laughlin,  186  Pa. 
St.  498  (1898).  Where  a  husband 
takes  his  wife's  bonds  and  delivers 
them  to  his  creditor  as  security  and 


Taking 'out  a  certificate  in  his  own  afterwards  sells  them  to  such  creditor 
name  by  the  husband  reduces  his  in  payment  of  debt,  such  creditor  is 
wife's  stock  to  his  possession,  and  it  not  protected  if  he  knew  throughout, 
passes  by  his  will,  even  though  he  the  transaction  that  the  bonds  be- 
made   a    memorandum   to   the   effect    longed    to    the    wife.      Callendar    v. 

895 


§  320.] 


WHO    MAY    BUY    AND    SELL    STOCK. 


[CII.    XIX. 


ration  is  bound  absolutely  to  know  of  the  lunacy  of  a  transferrer, 
even   though   it   allows    a   registry    on   his   ordinary   signature   and 


Kelly,  190  Pa.  St.  455  (1899).  See 
also  Cornell's  Appeal,  114  Pa.  St.  153 
(1886),  and  §§  66,  250,  308,  supra,  and 
§  538,  infra.  The  wife's  stock,  stand- 
ing in  her  name  at  the  time  of  and 
after  marriage,  is  not  subject  to  her 
husband's  debts.  Cockrane  v.  Cham- 
bers, Ambl.  79,  n.  (1825).  In  Connec- 
ticut it  is  held  that  the  wife  is  not 
liable  in  assumpsit  to  her  husband's 
creditors,  to  whom  she  has  pledged 
her  stock,  although  she  subsequently 
pledges  it  to  another.  An  express 
promise  to  pay  on  her  part  is  neces- 
sary. Piatt  v.  Hawkins,  43  Conn.  139 
(1879).  A  married  woman  may  give 
away  or  pledge  her  stock.  Walker  v. 
Joseph,  etc.  Co.,  47  N.  J.  Eq.  342 
(1890).  A  wife  who  allows  stock 
bought  with  her  money  to  stand  for 
several  years  in  her  husband's  name, 
in  order  to  give  him  credit,  is  estopped 
from  asserting  her  ownership  as 
against  his  creditors.  Hamlen  v.  Ben- 
nett, 52  N.  J.  Eq.  70  (1893).  At  com- 
mon law  a  married  woman,  even 
though  she  owns  a  majority  of  the 
stock  of  a  corporation,  cannot  bind 
herself  to  pay  its  debts,  and  even 
under  the  New  Jersey  statute  she  does 
not  obtain  anything  for  the  use  of  her 
s sparable  estate  sufficient  to  sustain 
such  promise.  Allen  v.  Beebe,  63  N. 
J.  L.  377  (1899).  Where  a  husband 
who  is  about  to  use  his  wife's  bonds 
without  her  consent  executes  in  the 
presence  of  a  witness  an  assignment 
to  her  of  certain  stocks  of  his  own, 
the  certificates  of  the  same  being  at- 
tached thereto,  to  secure  her  from 
loss,  by  reason  of  his  use  of  her  se- 
curities, and  this  paper  is  found  on 
his  death  in  his  tin  box  with  the 
stocks,  it  amounts  to  a  declaration  of 
trust  and  is  legal,  even  though  there- 
after he  amended  it  by  substituting 
other  securities.  Collins  v.  Steuart, 
58  N.  J.  Eq.  392  (1899).  Curtis  v. 
Steever,  36  N.  J.  L.  304  (1873),  clearly 


and  properly  holds  that  the  wife's 
stock,  held  by  her  as  her  separate  es- 
tate, is  not  subject  to  her  husband's 
debts.  A  certificate  issued  to  the  hus- 
band as  trustee  of  the  wife  constitutes 
her  separate  estate,  where  he  pays  the 
dividends  to  her.  In  Kentucky  a  resi- 
dent married  woman's  power  of  attor- 
ney to  convey  stock  is  void.  Bank  of 
Louisville  v.  Gray,  84  Ky.  565  (188G). 
Where  a  husband  uses  his  wife's 
money  to  purchase  stock  and  takes 
title  in  his  own  name,  but  considers 
himself  trustee  for  her,  a  creditor  of 
the  husband,  who  at  the  time  of  in- 
curring the  debt  knew  that  the  latter 
held  the  stock  of  his  wife,  cannot  sub- 
ject it  to  the  payment  of  the  debt. 
Porter  v.  Bank  of  Rutland,  19  Vt.  410 
(1847).  Although  a  corporation  errs 
in  allowing  a  wife  to  transfer  her 
stock  to  her  husband,  yet  the  statute 
of  limitations  runs  against  her  right 
of  action  from  the  time  of  the  trans- 
fer. Chase  v.  Hibernia  Nat.  Bank,  44 
La.  Ann.  69  (1891).  In  Kentucky,  by 
statute,  a  wife's  bank  stock  goes  to 
her  heirs,  and  not  to  her  husband,  upon 
her  decease.  Kent  v.  Deposit  Bank, 
91  Ky.  70  (1890).  A  person  taking 
stock  from  a  person  in  whose  name 
it  stands  cannot  hold  the  same  as 
against  the  latter's  wife,  where  the 
stock  belonged  to  her  separate  estate 
and  was  so  known  to  be  by  the  per- 
son taking  it.  Stickney  v.  Adler,  91 
Ala.  198  (1890).  At  common  law  the 
husband  may  appropriate  stock  stand- 
ing in  the  name  of  his  wife  and  may 
sign  her  name  on  the  back  of  the 
certificate  and  pledge  the  same  for  his 
debts.  Birmingham,  etc.  Co.  v.  Hume, 
121  Ala.  168  (1899).  It  appears  in 
this  case  that  the  wife  actually  signed 
her  own  name  on  the  back  of  the 
certificates  and  delivered  the  same  to 
her  husband  to  pledge  for  his  debts. 
A  married  woman  cannot  claim  stock 
as  against  a  bona  fide  pledgee  from 
896 


CII.    XIX.] 


WHO   MAY    BUY   AND    SELL   STOCK. 


[§    320. 


transfer.1  An  assignee  in  bankruptcy  or  for  the  benefit  of  credit- 
ors takes  only  the  interest  and  equitable  rights  of  his  assignor.  A 
previous  unrecorded  transfer  of  the  insolvent's  stock  is  protected.2 
A  partner  may  accept  stock  as  collateral  security  for  a  loan  from 
the  firm,3  and  may  sell  and  transfer  partnership  stock.4     A  tenant 


her  husband  where  the  stock  stood 
in  his  name,  even  though  she  paid 
for  the  stock  and  supposed  it  had 
been  issued  in  her  name.  Anderson  v. 
Waco  State  Bank,  92  Tex.  506  (1899). 
A  hona  fide  pledgee  of  stock  held  by  a 
married  woman  and  transferred  in 
blank  by  her  is  protected  even  though 
she  made  the  transfer  under  duress 
and  coercion  on  the  part  of  her  hus- 
band, especially  where  the  statutes 
authorize  a  woman  to  transfer  her 
stock  without  the  husband  joining  in 
such  transfer.  Bryan  v.  Montandcn, 
6  Idaho  352  (1898).  A  delivery  of  a 
transfer  of  stock  does  not  complete 
the  gift,  where  the  donor  retains  the 
certificate  of  stock,  especially  where 
thereafter  he  votes  the  stock  and  re- 
ceives the  dividends,  and  hence  such 
a  delivery  by  a  man  to  his  wife  while 
he  is  solvent  is  not  good  after  he 
becomes  insolvent.  Allen,  etc.  Co.  v. 
Grumbles,  129  Fed.  Rep.  287  (1904). 
Cf.  §  308.  Where  a  married  woman 
sells  and  transfers  her  stock  to  her 
husband  and  the  corporation  allows 
the  transfer,  it  is  not  liable  to  her, 
even  though  the  transfer  was  not  al- 
lowed by  law,  if  the  corporation  was 
not  aware  of  the  fact  that  she  was 
married.  Bigby  v.  Atlanta,  etc.  Ry., 
119  Ga.  685  (1904).  Where  stock  is 
transferred  to  a  man  by  his  wife,  in 
order  to  qualify  him  to  act  as  a  di- 
rector in  national  bank,  the  agreement 
between  them  that  the  stock  shall  still 
continue  to  be  hers  is  legal.  Citizens' 
Nat.  Bank  v.  Sturgis  Nat.  Bank,  81  S. 
W.  Rep.  550  (Tex.  1904).  Even  though 
by  law  the  husband  is  entitled  to  divi- 
dends on  the  wife's  stock  and  he  be- 
comes bankrupt,  yet  dividends  paid 
after  his  discharge  cannot  be  collected 
by  his  trustees  in  bankruptcy.    Bryan 


v.   Sturgis  Nat.  Bank,   90  S.  W.  Rep. 
704   (Tex.  1905). 

i  Chew  v.  Bank  of  Baltimore,  14  Md. 
299  (1S59).  A  person  who  fraudu- 
lently induces  a  stockholder  of  un- 
sound mind  to  transfer  to  the  former 
the  latter's  stock  is  guilty  of  conver- 
sion. Hagar  v.  Norton,  188  Mass.  47 
(1905).  Where  an  insane  person  has 
been  defrauded  of  stock,  and  the  stock 
is  used  to  levy  an  assessment,  and  the 
corporation  is  about  to  sell  his  stock 
for  non-payment,  an  injunction  will 
be  granted  incident  to  a  suit  to  set 
aside  the  transaction.  Weber  v.  Delia, 
etc.  Co.,  11  Idaho  264  (1905).  A 
guardian  ad  litem  of  a  person  who 
transfers  stock  when  he  is  of  unsound 
mind  may  recover  it  back.  Weber  v. 
Delia,  etc.  Co.,  94  Pac.  Rep.  441 
(Idaho  1908).  A  sale  of  stock  is 
not  easily  set  aside  on  the  ground 
of  mental  incapacity  on  the  part 
of  the  vendor.  Perry  v.  Pearson, 
135  111.  218  (1890).  The  question  of 
whether  the  vendor  of  stock  was  of 
sound  mind  is  largely  a  question  for  a 
jury.  Doheny  v.  Lacy,  168  N.  Y.  213 
(1901).  Fraudulent  representations 
made  to  a  person  of  feeble  mind  were 
held  sufficient  for  a  concellation  in  De 
Frees  v.  Carr,  8  Utah,  488   (1893). 

2  Dickinson  v.  Central  Nat.  Bank, 
129  Mass.  279  (1880);  Purchase  v. 
New  York  Exch.  Bank,  3  Rob.  (N.  Y.) 
164  (1865).  Contra,  Shipman  v.  ^Etna 
Ins.  Co.,  29  Conn.  245  (1860),  where 
the  previous  transferee  delayed  unrea- 
sonably in  claiming  ownership  of  the 
stock. 

3  Weikersheim's  Case,  L.  R.  8  Ch. 
App.  831   (1873). 

4  Quiner  v.  Marblehead  Social  Ins. 
Co.,  10  Mass.  476  (1813).  Cf.  Sargent 
v.    Franklin    Ins.    Co.,     25    Mass.    90 


(57) 


897 


320.] 


WHO   MAY    BUT?  ELL   STOCK. 


|  ('II.    MX. 


for  life,   unless  restrained  by  conditions,   may  sell   his   interest  in 

stock. l 

The  question  of  the  rights  of  a  life  tenant  as  to  the  certificate  of 
stock  itself  is  considered  elsewhere.2 

A  director  of  the  corporation  itself  may  buy  and  sell  its  stock 
like  any  other  individual.  The  information  which  he  has  of  the 
affairs  of  the  corporation,  whereby  he  is  enabled  to  buy  or  sell  at 
an  advantage  over  the  person  with  whom  he  deals,  does  not  affect 
the  validity  of  the  transaction.  He  is  entitle*!  to  the  benefil  of  his 
facilities  for   information.      There   is    no   confidential    relation    be- 

(1829).       Compare  also  Comstock  v.  stock,  and  conceals  all  the  facts  from 

Buchanan,  57  Barb.  127   (1864),  aff'd,  his   partner,    the    latter    may    recover 

57  Barb.  146,  where  the  stock  stood  in  the  value  of  his  share   of  the  stock, 

both  partners'  names.     Stock  may  be-  and  the  measure  of  the  value  is  the 

long  to  a  partnership,  although  stand-  highest  value  between  the  day  of  re- 

ing   in  the   individual   names   of   the  ceiving  the  stock  and  the  day  when 

partners  in  order  to  make  them  stock-  the   plaintiff   received   notice  thereof, 

holders.     Fairfield     v.      Phillips,      83  Morris   v.  Wood,  35   S.  W.  Rep.  1013 

Iowa,  571   (1891).     Where  one  of  sev-  (Tenn.   1896).     Even   though   a  part- 

eral    associates   engaged   in   the   com-  nership  allows  stock  owned  by  it  to 

mon  enterprise  of  building  railroads,  stand  on  the  books  of  the  company  in 

in  many  of  which  he  owned    stocks,  the  name  of  one  of  the  partners,  yet 

bonds,    etc.,    dies,  and    his    executor,  an  attachment  against  him  and  levied 

with   the   assistance   of  experts,   etc.,  on  such   stock  does  not  give  the  at- 

makes  a  settlement  with  the  other  as-  taching    creditor    priority    over    the 

sociates,  such  settlement  is  binding  al-  rights  of  the  partnership.     New  York, 

though  such  other  associates  did  not  etc.  Co.  v.  Francis,  96  Fed.  Rep.   266 

impart  all  the  knowledge  or  informa-  (1899),  modified  in  101  Fed.  Rep.  16. 

tion  they  might  have  given.     The  sub-  A  bill  in  equity  filed  by  a  partner  to 

sequent  rise  in  value  of  some  of  the  hold  his  copartners  and  third  persons 

securities    is    immaterial.      Colton    v.  liable  for  a  misappropriation  of  stock 

Stanford,  82  Cal.  351   (1890).     Where  owned  by  the  firm  cannot  be  sustained 

stock    is    issued    to    two    persons    in  where  it  is  not  alleged  that  the  third 

their  individual  names,  one  of  them  persons  knew   of  such  misappropria- 

cannot    sell     and    transfer    it,     even  tion  at  the  time  of  such  misappropria- 

though  it  was  acquired  in   the  part-  tion.     Wall  v.  Old  Colony,  etc.  Trust 


nership  law  business.  The  law  is 
different  as  to  a  partner  in  a  trad- 
ing copartnership.  Moynahan  v.  Pren- 
tiss     10      Colo.      App.      295      (1897). 


Co.,  174  Mass.  340  (1899). 

i  See  §  560,  infra. 

2  See   §  560,   infra.     In  a  suit  by  a 
remainderman  to  recover  from  a  cor- 


Where  a  firm  contracts  to  sell  stock,  poration   the   value    of    stock    which 

and  then  one  of  the  members  of  the  the  corporation  had  transferred  to  the 

firm    dies,    a    tender    of    certificates  life  tenant  absolutely  and  which  had 

standing  in  the  names  of  the  individ-  been  lost,   the   statute   of  limitations 

ual    members   of  the   firm,    and    not  does  not  begin  to  run  until  the  death 

signed   in  blank,   is  not    a    sufficient  of   the   life   tenant,   even   though   the 

tender.     Nicholls  v.  Reid,  109  Cal.  630  trust  was  created  in  1854  and  the  life 

(1895).     Where  a   person  holds   land  tenant  died  in  1898.     Wooten  v.  Wil- 

for  himself  and  a  partner,  and  trans-  mington,   etc.    R.    R.   128  N.    C.    119 

fers  the  same    to   a  corporation    for  (1901). 

898 


CH.    XIX.] 


WHO    MAY    BUY   AND    SELL    STOCK. 


[§  320. 


tween  him  and  a  stockholder,  so  far  as  a  sale  of  the  stock  between 
them  is  concerned;  and,  so  long  as  he  remains  silent  and  does  not 
actively  mislead  the  person  with  whom  he  deals,  the  transaction 
cannot  be  set  aside  for  fraud.1 


i  Quoted  and  approved  in  Hooker  v. 
Midland,  etc.  Co.,  215   111.  444   (1905). 
An    officer   in   purchasing  stock   need 
not  disclose  facts  which  he  knows  as 
to     the    condition     of    the    company. 
O'Neile  v.  Ternes,  32  Wash.  528  (1903). 
The    secretary   of   a   company  cannot 
sustain   an   action  for  deceit  against 
the   president   and   vice   president   on 
the  ground  of  fraud  inducing  him  to 
sell  them  his  stock,  even  though  they 
misrepresented   the   condition   of  the 
business,  especially  where  he  waited 
five  months  before  selling  and  where 
the    only    damage    was    future    con- 
tingent profits.     Boulden  v.   Stilwell, 
100  Md.  543   (1905).  Where  a  director 
purchases  stock  from  a  stockholder  at 
one  hundred  and  ten,  concealing  the 
fact  that  the  property  is  about  to  be 
sold,    making    the    stock    worth    one 
hundred   and   eighty-five,   it   is   fraud 
on  his  part  and  the  sale  may  be  re- 
scinded.    Oliver  v.  Oliver,  118  Ga.  362 
(1903).    In  Kansas  it  is  held  that  be- 
fore a  director  may  legally  purchase 
the  stock  of  a  stockholder  he  must  in- 
form the  latter  of  the  true  condition 
of    the    affairs    of    the     corporation. 
Stewart  v.  Harris,  69  Kan.  498  (1904). 
The  purchase  by  the  president  of  a 
bank  of  the  stock  of  a  shareholder  at 
$150  a    share  when  it  was  worth  $350 
a  share  was  held  to  be  fraudulent  in 
Stewart  v.  Smith,  72  Kan.  77   (1905). 
Directors  may  purchase    stock    from 
other  stockholders.   In  re  Liquidation, 
etc.,  43  S.  Rep.  270  (La.  1907).     Even 
though  the  president  of  a  company  in 
inducing  the  stockholders  to  sell  their 
stock  to  another  company  conceals  the 
fact  that  he  is  largely  interested  in 
the  latter  company,  this  does  not  con- 
stitute  fraud.     Wann  v.    Scullin,    109 
S.   W.   Rep.    688    (Mo.    1908).     Tippe- 
canoe County  v.  Reynolds,  44  Ind.  509 
(1873);    Carpenter    V.    Danforth,     52 


Barb.  581   (1868).     This  case  was  dis- 
approved    by     the     commentator     to 
Story's  Eq.  Jur.  (12th  ed.)   229b,  note, 
but  the  disapprovel  is  omitted  in  the 
13th  ed.     See  also  Grant  v.  Attrill,  11 
Fed.  Rep.  469    (1882),  where  the  sale 
was  induced  by  threat  of  assessments. 
See  also  Johnson  v.  Laflin,  5  Dill.  65, 
83   (1878);  s.  c,  13  Fed.  Cas.  758,  765; 
aff'd,  103  U.  S.  800  (1880);  Deaderick 
v.     Wilson,     8     Baxt.      (Tenn.)      108 
(1874);    Gilbert's   Case,    L.   R.    5   Ch. 
App.    559    (1870);    Alexander   v.   Rol- 
lins, 14  Mo.  App.  109  (1883);  aff'd,  84 
Mo.  657;    §350,  infra.     In  New  York, 
by   statute,   a  director    is    prohibited 
from     selling     stock     "short."     Laws 
1892,    ch.    692.     Where    the    president 
of  a  company  advises  a  stockholder  to 
sell  his  stock  at  a  certain  price  to  a 
certain  person,  and  the  sale  is  made, 
the  president  is  liable  for  the  differ- 
ence between  that  price  and  the  mar- 
ket price,  where  the  person  purchased 
as  the  secret  agent  of  the  president. 
Fisher  v.  Budlong,  10  R.  I.  525  (1873). 
A    director    may  buy  stock    from    a 
stockholder  at  less  than  its  real  val- 
ue, and  there  is  no  fraud  in  the  fact 
that  the  director  knew  the  real  value 
while  the  stockholder  did  not.     Crow- 
ell    v.     Jackson,     53     N.     J.     L.     656 
(1891);  Haarstick  v.  Fox,  9  Utah,  110 
(1893).     Where    the     president    sells 
stock  for  $120  per  share  after  he  has 
indorsed  a  false  statement  of  the  com- 
pany's affairs,  the  stock  being  really 
worth  but  $70  per  share,  the  vendee 
may  have  the  sale  rescinded.     Prewitt 
v.    Trimble,     92    Ky.    176     (1891).     It 
would   be  "inequitable   to  permit  the 
directors  of  a  corporation  to  so  man- 
age its  business,  or  to  so  deal  with  its 
property,    as   to   lessen   the   value   of 
its  stock  for  the  purpose  of  purchasing 
such   stock  for  themselves   at   a  low 
figure."     But  this  relation    does    not 


899 


320.] 


WHO  MAY   BUY   AND   SELL   STOCK. 


[CII.    XIX. 


It  is  illegal  for  the  directors  to  issue  to  themselves,  in  exclusion 
of  others,  such  part  of  the  original  or  increased  capital  stock  as 
has  not  been  already  issued,  the  issue  being  for  the  purpose  of  con- 
trolling* an  election  and  making  a  profit.1  Where  the  various  stock- 
holders of  a  corporation  join  in  a  contract  for  the  sale  of  their 
stock,  but  secretly  one  of  them  receives  a  bonus  from  the  purchaser, 
the  others  may  compel  him  to  account  therefor  proportionately.2 

exist  between   one   director    and    an-  all  the  stockholders  and  sell  the  same 

other  director.     Perry  v.  Pearson,  135  to    a    new    corporation    at    a    profit. 

111.  218   (1890).     The  vendor  of  stock  Walsh    v.    Goulden,     130     Mich.     531 

to  the  secretary  of  the  company  can-  (1902).     See  126  N.  Y.  App.  Div.  257. 

not  rescind  on  the  ground  of   fraud,  i  See   §  70,   supra. 

the  secretary  having,  at  the  time  of  -  Where  three  persons  own  all  the 

the    sale,    given    all    the    information  stock    of    a    corporation    and    one    of 

which  he  had    concerning    the    com-  them   represents   all   three   in   selling 

pany.     No  confidental  or  fiduciary  re-  the  stock,  but  secretly  takes  an  addi- 

lation    exists    between    such    parties,  tional  price  for  his   sole  benefit,   the 

Krumbhaar  v.  Griffiths,  151  Pa.  St.  223  others  may  hold  him.  liable  for  their 

(1892).     See  also  §350,  infra.     Trus-  portion  thereof  in  an  action  at  law. 

tees  under  a  reorganization  who  are  Graham  v.  Cummings,  208  Pa.  St.  516 

to  hold  a  majority  of  the  stock  and  (1904).    Where  the  general  manager 

vote  the  same  for  five  years,   unless  acts  as  an  intermediary  in  selling  all 

they  decide  to  distribute  the  same  be-  the  stock  of  the  company  and  he  makes 

fore  that  time,  are  not  precluded  from  a  secret  profit,  the  stockholders  may 

selling  stock  owned  by  themselves  in-  compel  him  to  pay  it  over.     Barbar  v. 

dividually,  and  the  fact  that  they  sell  Martin,  67  Neb.  445  (1903).  Where  in 

their    own    stock    is    no    ground    for  a  contract  between  a  number  of  manu- 

compelling   a   distribution   of   the   re-  facturers   and   bankers   as   promoters 

maining  stock.  Haines  v.  Kinderhook,  for  the  organization  of  a  corporation 

etc.  Ry.,  33  N.  Y.  App.  Div.  154  (1898).  to  take  over  the  plants,  the  bankers 

The  president  of  a  corporation  may,  secretly  gave  a  larger  price  to  some 

of   course,   sell  stock  owned  by  him-  of  the  vendors  than  was  specified  in 

self,  even  though  the  corporation  has  the    agreement,    one    of    the    vendors 

been  newly  formed  and  the  stock  is  of  who  did  not  receive  such  secret  price 

doubtful  value.     Matter  of  Rowell,  45  may  file  a  bill  for  an  accounting  of 

N.  Y.  App.  Div.  323   (1899).     If  a  di-  the   secret   profits,   and   may   join   as 

rector  misrepresents  the  financial  con-  parties  defendant  the  corporation,  and 

dition  of   the  company  and  thus   in-  the    parties   taking   the    secret    profit 

duces  a  stockholder  to  sell  his  stock  and  the  promoters.     Shutte  v.  United, 

to  him,  he  is  liable  to  the  vendor  for  etc.  Co.,  67  N.  J.  Eq.  225  (1904).     One 

the  difference  between  the  actual  val-  of  the  vendors  who  was  secretly    to 

ue  of  the  stock  and   the  price   paid,  have  a  higher  price  than  the  others 

Hume  v.   Steele,    59    S.   W.   Rep.    812  may  recover  the  higher    price,    even 

(Tex.  1900).     In  a  sale  of  stock  by  a  though  he  may  possibly  be  under  le- 

director  a  misstatement  made  by  him  gal   obligation  to  divide   it   with  the 

in  good  faith,  as  to  the  property  owned  other  vendors.     Boice  v.  Jones,  106  N. 

by   the   corporation,   does   not   render  Y.     App.     Div.     547      (1905).       Even 

him    liable   in    an   action    for   deceit,  though  three  persons  who  own  all  the 

Boddy  v.  Henry,  113  Iowa,  462  (1901).  stock  of  a  corporation,   enter   into  a 

A  director  may  buy  all  the  stock  of    contract  to  sell   it,   and  one  of  them 

900 


CH.    XIX.] 


WHO  MAY  BUY  AND   SELL   STOCK. 


[f 


320. 


A  joint  owner  of  stock  cannot  transfer  the  interest  of  the  other 
joint  owner  where  the  stock  is  registered  in  the  name  of  hoth.1 
On  the  death  of  one,  the  survivor  takes  title  to  the  whole  stock.2 

Where  stock  is  purchased  by  a  person  in  his  own  name,  but  for 
himself  and  another,  the  latter  is  a  part  owner  and  has  rights  and 
liabilities  as  such.3     The  same  complications  and  principles  of  law 


secretly  receives  a  higher  price  for 
his  holdings  of  the  stock,  yet  the 
other  vendor  cannot  by  an  action  in 
assumpsit  claim  a  part  of  such  extra 
price.  His  remedy,  if  he  has  any,  is 
in  equity  for  an  accounting,  or  an  ac- 
tion for  deceit.  Cummings  v.  Synnott, 
120  Fed.  Rep.  84  (1903);  rev'g  116 
Fed.  Rep.  40.  Even  though  the  seller's 
broker  divides  a  secret  profit  with  the 
purchaser's  broker  without  the  pur- 
chaser knowing  thereof,  yet  the  pur- 
chaser cannot  hold  the  seller's  broker 
liable  for  his  profits.  The  remedy  is 
rescission.  Illingworth  v.  DeMott,  59 
N.  J.  Eq.  8   (1900). 

i  Standing  v.  Browning,  L.  R.  27 
Ch.  D.  341  (1SS4);  Comstock  v.  Bu- 
chanan, 57  Barb.  127  (1864);  aff'd,  57 
Barb.  146.  Where  stock  is  devised 
to  husband  and  wife  jointly,  the 
assignee  of  the  husband's  interest  is 
entitled  only  to  his  share  of  the  divi- 
dends during  life,  and  if  the  wife  sur- 
vives the  husband  the  stock  goes  to 
her.  Phelps  v.  Simons,  159  Mass.  415 
(1893).  But  if  the  other  joint  owner 
dies  first,  the  previous  transfer  of 
the  survivor  is  effective  and  conveys 
the  whole.  Slaymaker  v.  Bank  of 
Gettysburg,  10  Pa.  St.  373  (1849). 
Where  two  persons  own  stock  in  com- 
mon, replevin  will  not  lie  by  one  as 
against  the  other  for  his  part  of  the 
stock  unless  there  was  a  conversion. 
Barrowcliffe  v.  Cummins,  66  Hun,  1 
(1892). 

2Garrick  r.  Taylor,  29  Beav.  79 
(1860);  Hill's  Case,  L.  R.  20  Eq.  585 
(1874).  Under  the  Indiana  statute  the 
survivor  of  joint  owners  of  stock  does 
not  take  the  entire  stock  unless  the 
instrument  creating  the  title  express- 
ly so  provides,  and  hence  if  the  instru- 


ment provides  only  for  dividends,  the 
parties  hold  as  tenants  in  common. 
Thieme  v.  Union  T.  Co.,  32  Ind.  App. 
522    (1904). 

3  Stover  v.  Flack,  41  Barb.  162 
(1862).  A  member  of  a  pool  is  en- 
titled to  his  share  of  the  stock  upon 
its  termination,  even  though  he  was 
a  trustee  of  the  pool  and  was  an  offi- 
cer of  the  company  the  stock  of  which 
had  been  purchased,  and  even  though 
there  had  been  an  over-issue  of  stock. 
Cary  v.  Leszynsky,  184  Mass.  44 
(1903).  Where  two  persons  are  inter- 
ested in  stock  and  it  is  sold  by  one 
of  them  and  the  other  sues  for  his 
part,  it  is  no  defense  that  the  price 
received  was  fraudulently  obtained. 
Doyle  v.  Burns,  123  Iowa,  488  (1904). 
Subscribers  to  stock  may  make  a  con- 
tract by  which  they  divide  their  sub- 
scriptions with  others  and  agree  that 
no  person  should  hold  more  than  a 
certain  amount  of  stock.  Hladovec  v. 
Paul,  222  111.  254  (1906).  A  written 
pool  agreement  for  the  purchase  of 
certain  stock  and  the  appointment  of  a 
manager  to  buy  and  sell  at  his  dis- 
cretion, the  pool  to  continue  for  a 
specified  time,  prevents  any  member 
of  the  pool  selling  his  part  of  the 
stock  in  any  other  way.  Ridgely  v. 
Taylor  &  Co.,  118  N.  Y.  App.  Div.  10 
(1907).     See  69  Atl.  Rep.  899. 

A  person  who  sells  stock  to  a  sup- 
posed pcol  and  brings  suit  to  hold 
them  all  liable  jointly,  cannot  on  ap- 
peal claim  that  he  might  have  held  a 
portion  of  them  liable.  Jones  v. 
Hoadley,  115  N.  Y.  App.  Div.  479 
(1906).  Where  stock  is  purchased  to 
be  resold  on  joint  account,  and  one 
party  refuses  to  live  up  to  the  con- 
tract,  the   other  may  dispose   of   the 


901 


§  320.] 


WHO   MAY    BUY   AND    SELL    STOCK. 


[CH.    XIX. 


are  involved  as  in  the  large  class  of  cases,  involving  promoter's  con- 
tracts among  themselves  for  a  division  of  stock  received  in  connec- 

stock  on  the  best  terms  possible.  Da-  the  profits  should  amount  to  a  certain 
vidor  v.  Bradford,  129  Wis.  524  sum,  is  in  the  nature  of  a  partnership 
(1906).  A  contributor  to  a  fund  to  and  not  of  a  loan,  and  hence  the  stat- 
be  invested  by  syndicate  managers  in  ute  against  usury  does  not  apply  to  it. 
stocks  and  other  property  has  not  Orvis  v.  Curtiss,  157  N.  Y.  657  (1899). 
such  an  interest  in  the  stocks  as  en-  Where  several  parties  buy  and  sell  a 
ables  him  to  maintain  a  suit  in  the  certain  stock  in  the  name  of  one  of 
state  where  the  corporations  are  or-  themselves  and  close  the  deal,  a  sub- 
ganized  as  against  the  non-resident  sequent  purchase  of  the  same  stock  by 
syndicate  managers.  Jones  v.  Gould,  that  one  does  not  inure  to  their  com- 
141  Fed.  Rep.  698  (1905);  aff'd,  149  mon  benefit.  Kennedy  v.  Porter,  109 
Fed.  Rep.  153.  Where  several  persons  N.  Y.  526  (1888).  Although  three 
purchase  stock  for  themselves  propor-  stockholders  do,  by  an  instrument 
tionately,  the  purchases  being  made  similar  to  a  bill  of  sale,  sell  their 
by  one  of  them,  there  is  no  trust  rela-  stock  to  a  fourth  stockholder  "for  and 
aship  or  partnership.  Loetscher  v.  during  the  period  of  six  months,  .  .  . 
Ion,  119  Iowa,  202  (1903).  In  a  joint  in  trust  for  the  use  and  benefit  of 
venture  in  buying  and  selling  stocks  a  the  grantors,"  with  power  to  sell  the 
partnership  may  exist  and  it  is  no  de-  same  on  certain  terms,  yet  this  in- 
tense to  a  suit  by  one  against  the  strument  is  not  a  sale  or  trust  agree- 
other  for  an  accounting  that  a  part  ment,  but  is  merely  a  power  of  attor- 
of  the  profits  were  illegally  acquired,  ney.  It  does  not  prevent  the  fourth 
the  former  not  having  participated  in  stockholder  from  selling  his  own 
any  improper  conduct.  Van  Tine  v.  stock  on  such  terms  as  he  chooses, 
III  ::.l  Fed.  Rep.,  124  (1904).  even  though  he  does  not  sell  the  stock 
Where  in  a  partnership  dissolution  it  of  the  others,  it  not  appearing  that 
is  <1  that  one  of  the  partners  the  sale  of  his  stock  prevented  his 
is  entitled  to  certain  stock,  and  in  the  selling  the  stock  of  the  others.  The 
ent  of  the  others  failing  to  trans-  instrument  conferred  merely  at  most 
fer  it,  he  shall  due,  he  is  en-  "only  a  dry  legal  title  for  the  mere 
titled   to  a  transfer  unless  the  others  purpose  of  sale,  and  with  the  power  of 

it.     Reilly  v.  sale    carefully    circumscribed."     Levi 

9     N.     V.    A.pp.    Div.    4  v.  Evans,  57  Fed.  Rep.  677  (1893).    A 

(18                   ,184   X.   V.  610.     Where  syndicate   operation   was  involved   in 

carrying  stock  for  Hogg    v.    Hoag,    107    Fed.    Rep.    807 

another,    I                     ',    to   take    it    up  (1901),     where     certain     stocks     and 

in    time    to   linn-  at   cost,   any   one  property  were  transferred  to  a  trus- 

th(  in  in    •     lie  him  for  not  30  doing,  tee  who  issued  certificates  therefor  to 

Villard  v.                     I   X.  Y.  A.pp.  Div.  t  lie  members  of  the  syndicate.     Apart 

lut  ween  of   the   subscribers   did   not   pay   and 

which,  on   their  joint  the  vendor  of  the  property  took  the 

:•  of  ;i  particular  one  trustee's  certificates  of  such  non-pay- 

iit    be  ing  subscribers,  and  on  the  death  of 

time  in  amount,  t lie  trustee  a  bill  was  filed  to  have  the 

!    .        eclfled    amount  at  court  substitute  anew  trustee,  and  one 

an                                           them    to    ad-  of  the  subscribers  filed  a  cross-bill  for 

lortions  of  an   accounting.     The  court  decreed  a 

profits    to  winding  up  of  the  syndicate  and  ap- 

divided   equally,  ami    one    of  tin-  pointed    a   receiver.    The  court   held 

Lng  to  tin'  other  that  t'rt    a   partial   payment  made   to  the 

902 


CH.    XIX.] 


WHO   MAY   BUY   AND    SELL    STOCK. 


[§    320. 


tion  with  their  operations.     This  class  of  cases  is  considered  else- 
where.1     A  partnership  or  joint  ownership  of  stocks  between  two 


vendor  of  the  stocks  was  legal,  even 
though  all  the  property  was  not  con- 
veyed to  the  trustee,  as  contemplated, 
and  that  the  vendor's  acceptance  of 
the  certificates  of  non-paying  sub- 
scribers obligated  him  to  pay  there- 
for, although  such  trustee's  certifi- 
cates had  become  worthless,  the  trans- 
action being  in  connection  with  the 
Oregon  Pacific  Railroad  Company. 
The  court  said  that  the  syndicate 
was  in  substance,  though  not  technic- 
ally, a  joint-stock  company.  Where 
a  person  holds  stock  under  an  agree- 
ment with  another  that  after  the 
profits  have  repaid  the  cost  of  the 
stock,  the  further  profits  should  be 
divided  equally  between  them,  such 
agreement  is  binding  upon  a  person 
who  buys  such  stock  with  notice  of 
the  agreement.  Morris  v.  Shepard, 
53  Atl.  Rep.  172  (N.  J.  1902).  Where 
several  parties  agree  to  purchase 
land  in  the  name  of  a  corporation 
in  exchange  for  stock  to  be  taken 
in  the  name  of  one  of  them,  the 
others  may  compel  the  latter  to 
account  for  the  stock.  King  v.  Barnes, 
109  N.  Y.  267  (1S88).  See  also  §  252, 
supra.  Where  several  parties  buy  a 
certificate  of  stock  in  fixed  propor- 
tions, and  the  certificate  is  taken  by 
one  for  the  benefit  cf  all,  he  is  a  bailee 
for  the  others  and  not  a  vendor.  Co- 
quard  v.  Wernse,  100  Mo.  137  (1890). 
In  a  joint  operation  in  stocks  no  bill 
for  an  accounting  will  lie  where  by 
mutual  consent  the  joint  operation 
was  ended,  and  one  sold  his  stock 
while  the  other  held  his.  Keller  v. 
Swartz,  137  Pa.  St.  65  (1890).  Four 
years'  delay  on  the  part  of  the  presi- 
dent to  claim  that  he  was  entitled  to 
a  half  interest  in  certain  stock  which 
a  creditor  of  the  corporation  had  pur- 
chased will  not  sustain  his  claim 
which  was  based  upon  a  general  talk 
to  that  effect.  Mason  v.  Smith,  200 
Pa.  St.  270  (1901).   An  agent  employed 


to  conduct  a  joint  adventure,  who 
has  been  sued  by  his  principals  for 
the  profits,  cannot  file  a  bill  in  equity 
for  an  accounting  and  distribution  of 
the  funds  on  the  ground  that  he  was 
entitled  to  an  interest  in  such  profits. 
Conger  v.  Judson,  69  N.  Y.  App.  Div. 
121  (1902).  A  bill  in  equity  for  an 
accounting  does  not  lie  at  the  in- 
stance of  a  party  who  claims  that  in 
consideration  of  newspaper  work  the 
defendants  agreed  to  carry  five  hun- 
dred shares  of  stock  for  him  in  con- 
nection with  a  pool  which  had  been 
formed.  Black  v.  Vanderbilt,  70  N.  Y. 
App.  Div.  16  (1902).  Where  it  is 
agreed  between  fwo  brothers  that  one 
shall  buy  stock  in  a  corporation  on 
their  joint  account,  and  this  is  done, 
and  the  one  purchasing  charges  his 
brother  with  the  cost  of  his  portion 
of  the  stock,  and  this  account  is  ac- 
cepted, a  suit  in  equity  lies  to  obtain 
the  stock  upon  payment  therefor,  the 
corporation  being  a  close  corporation. 
Rand  v.  Whipple,  71  N.  Y.  App.  Div. 
62  (1902).  Where  a  person  has  a  one- 
third  interest  in  certain  stock  issued 
to  another  person,  and  the  company 
is  reorganized,  and  is  then  reorgan- 
ized a  second  time,  the  former  person 
may  compel  the  latter  person  to  ac- 
count for  the  stock  finally  received,  on 
the  basis  of  a  partnership  in  the 
stock.  Reilly  v.  Freeman,  1  N.  Y. 
App.  Div.  560  (1896).  Where  one  par- 
ty loans  money  to  another  party  to 
buy  stock  in  a  certain  company,  such 
stock  to  be  delivered  to  the  former 
party  in  pledge,  and  the  latter  party 
uses  the  stock  for  another  purpose, 
the  loan  of  the  money  is  not  a  mere 
loan,  but  the  money  is  impressed 
with  a  trust,  and  this  trust  follows 
the  stock  as  against  non-bona  fide 
holders.  Barnard  v.  Hawks,  111  N.  C. 
333    (1892).     See  also  §§321,  622. 

i  See    §§  705,    707,    infra.      A    mere 
statement    by  an    owner    of    mining 


903 


320.] 


WHO   MAY  BUY  AND   SELL   STOCK. 


[cn.  XIX. 


persons  may  be  shown   by  the   acts   and   contracts   of   the   parties, 
and  by  the  fact  that  the  property  clearly  owned  by  them  in  common 


claims  that  he  will  give  to  another 
person  a  half  interest,  does  not  sus- 
tain an  action  for  one-half  of  stock 
issued  for  such  claims,  even  though 
such  other  person  contributed  money 
and  services.  Griffin  r.  Knoblock,  20 
Colo.  App.  153  (1904).  Where  several 
parties  have  turned  in  property  for 
stock  and  divide  the  same,  one  of  them 
cannot,  fourteen  years  thereafter, 
maintain  a  bill  in  equity  to  correct  a 
mistake  in  the  division  where  there 
was  every  opportunity  to  discover 
the  mistake.  In  re  Ridgway's  Account, 
206  Pa.  St.  587  (1903).  Trover  does 
not  lie  in  Pennsylvania  by  one  joint 
speculator  against  the  other  for  stock 
which  the  former  hands  to  the  latter 
to  use  as  collateral  in  their  specula- 
tions, even  though  the  latter  sold  the 
stock  and  lost  the  proceeds  in  specu- 
lations. Martin  v.  Megargee,  212  Pa. 
St.  558  (1905).  A  contract  between  a 
patentee  and  a  person  by  which  the 
latter  puts  money  into  a  corporation 
and  receives  stock  in  payment,  and 
thereafter  the  corporation  is  sold  to 
another  corporation,  each  party  turn- 
ing in  individual  property  in  addition, 
does  not  constitute  a  partnership  en- 
titling one  to  claim  a  part  of  the  price 
received  by  the  other.  Volney  v. 
Nixon,  67  N.  J.  Eq.  457  (1904).  In 
the  case  Leigh  v.  Laughlin,  211  111.  192 
(1904)  the  court  sustained  a  suit  in 
equity  by  a  person  to  compel  his  agent 
to  deliver  certain  certificates  of  stock 
to  the  former,  the  agent  having 
claimed  but  not  proven  that  though 
the  purchase  of  the  stock  was  in  the 
former's  name  it  was  for  the  joint 
benefit  of  both.  Where  a  surviving 
partner  organizes  a  corporation  and 
transfers  to  it  a  large  part  of  the  as- 
sets of  the  old  firm  fraudulently,  but 
outside  persons  become  interested  in 
the  stock  of  the  corporation,  the 
estate  may  bring  suit  to  compel  the 
corporation   to    permit   it  to   become 


a  stockholder,  and  may  join  the 
other  stockholders  as  parties  defend- 
ant, and  may  compel  the  corpora- 
tion to  pay  to  the  estate  such  part  of 
the  profits  as  in  equity  it  is  entitled 
to,  the  corporation  having  acquired 
patent  rights  and  other  property  from 
other  sources.  Rowell  v.  Rowell,  122 
Wis.  1  (1904).  Where  two  parties 
contribute  to  locating  and  developing 
mines  for  their  equal  benefit,  but  not 
to  working  them,  and  one  of  them  in 
whose  name  the  mines  are  taken  sells 
the  mines  for  stock,  the  remedy  of  the 
other  is  at  law  for  conversion  of  the 
bailment,  there  being  neither  a  part- 
nership nor  a  trust.  Doyle  v.  Burns, 
123  Iowa,  488  (1904).  An  agreement 
between  promotors  by  which  one  per- 
son was  to  have  thirty  per  cent,  of 
the  profits,  does  not  make  him  a  part- 
ner or  joint  adventurer.  It  was  mere- 
ly an  agreement  to  pay  a  compensa- 
tion. Boice  v.  Jones,  106  N.  Y.  App. 
Div.  547  (1905),  holding  also  that 
where  one  promotor  sues  another  on 
the  theory  of  partnership,  he  cannot 
on  the  trial  prove  a  joint  adventure, 
instead  of  partnership.  Where  a  per- 
son who  obtains  options  and  pur- 
chases stock  for  another  is  to  have 
an  interest  in  the  profits  on  the  sale 
of  the  same,  it  is  immaterial  whether 
it  is  a  technical  partnership  or  a 
mere  joint  venture,  inasmuch  as  the 
same  legal  rules  apply,  in  a  suit  by 
the  former  for  an  accounting  by  the 
latter.  Spier  v.  Hyde,  92  N.  Y.  App. 
Div.  467  (1904).  Where  several  par- 
ties have  turned  in  property  for  stock 
and  divide  the  same,  one  of  them  can- 
not, fourteen  years  thereafter,  main- 
tain a  bill  in  equity  to  correct  a  mis- 
take in  the  division,  where  there  was 
every  opportunity  to  discover  the  mis- 
take. In  re  Ridgway's  Account,  206 
Pa.  St.  587  (1903).  Representations 
made  by  the  manager  of  the  company 
in  purchasing  the  stock  of  a  stock- 


904 


CH.   XIX.} 


WHO  MAY  BUY  AND   SELL   STOCK. 


[§  321. 


was  used  in  the  acquisition  of  other  property.1  The  statute  of 
frauds  does  not  apply  to  such  an  arrangement.2  A  drunken  person's 
sale  of  stock  may  be  set  aside  if  an  undue  advantage  was  taken.3 
Laches  may  be  a  bar  to  a  suit  brought  by  the  claimant  of  stock 
against  the  corporation  for  allowing  transfers  of  the  same  in  fraud 
of  his  rights.4 

§  321.  Sales,  purchases,  and  transfers  by  agents.  — A  claim  that 
a  person  purchased  stock  as  trustee  or  agent  to  pay  for  and  carry 
the  same  for  the  benefit  of  another  person  is  a  claim  which  can  be 
proved  by  oral  testimony,  but  must  be  clearly  proved,  and  must  be 
founded  on  a  sufficient  consideration.  "Loose,  vague,  and  indefinite 
expressions  are  insufficient  to  create  such  a  trust.  The  intention 
must  be  evinced  with  clearness  and  certainty."5  Stock  may  be 
purchased  through  an  agent,  and  in  making  such  a  purchase  the 
agent  is  not  permitted  to  make  a  secret  profit,  even  though  he  acts 
without  compensation.6      Where  an  agent  conceals  from  his  prin- 


holder  do  not  entitle  the  latter  to  a 
rescission  on  the  ground  of  fraud, 
where  there  were  no  personal  rela- 
tions between  them  and  the  vendor 
did  not  rely  upon  any  statements 
made,  but  on  his  own  judgment,  and 
received  a  price  nearly  equal  to  the 
actual  value  of  the  stock.  Sullivan 
v.  Pierce,  125  Fed.  Rep.  104  (1903). 
Where  the  manager  of  a  pool  has 
not  divided  the  proceeds  fairly  he 
may  be  compelled  to  account.  Brad- 
ley v.  Sweeny,  120  N.  Y.  App.  Div. 
315  (1907).  On  the  sale  of  the  prop- 
erty of  an  insolvent  corporation  the 
agreement  of  some  of  the  stockholders 
with  the  others  to  divide  with  them 
any  profits  which  may  be  made,  does 
not  apply  to  compensation  to  the  for- 
mer for  work  in  connection  with  the 
reorganization.  Poling  v.  Teter,  60 
S.  E.  Rep.  1101  (W.  Va.  1908). 

i  Beardsley  v.  Beardsley,  138  U.  S. 
26   (1891).     See  also  §321,  infra. 

2  See  §  339,  infra. 

3  A  sale  of  stock  by  a  drunken  per- 
son for  an  insufficient  consideration 
will  be  set  aside;  and  if,  without  his 
fault,  he  is  unable  to  restore  the 
amount  received,  it  will  be  provided 
for  in  the  final  decree.  Thackrah  v. 
Haas,  119  U.  S.  499  (1886).    An  older 

90 


brother  who  buys  for  $70,000  stock 
from  his  younger  brother,  which  is 
worth  $95,000,  the  latter  being  a 
drunkard,  may  be  compelled  to  re- 
scind the  transaction.  Shevlin  v. 
Shevlin,  96  Min.  398  (1905). 

4  Ware  v.  Galveston  City  Co.,  140  U. 
S.  102  (1892). 

5  Levi  v.  Evans,  57  Fed.  Rep.  677 
(1893).  An  absolute  transfer  of 
stock  may  be  shown  to  have  been  in 
trust  only,  the  stock  to  be  returned 
upon  the  termination  of  a  lease. 
Town  of  Mt.  Morris  v.  Thomas,  158  N. 
Y.  450  (1899).  See  also  §465,  infra, 
and  §  320,  supra. 

6  Kimber  v.  Barber,  L.  R.  8  Ch.  App. 
56  (1872),  holding  that,  where  a  per- 
son offers  to  buy  for  another,  stock 
at  a  certain  price,  but  buys  it  at  a 
less  price  and  keeps  the  difference, 
he  is  liable  to  the  vendee  for  his 
gains.  Keyes  v.  Bradley,  73  Iowa,  589 
(1887).  An  agent  who  secretly  takes 
a  commission  from  a  party  dealing 
with  his  principal  cannot  enforce  a 
contract  by  which  he  was  to  share  in 
the  stock  purchased  by  the  principal. 
York  v.  Searles,  97  N.  Y.  App.  Div.  331 
(1904).  Where  the  general  manager 
acts  as  an  intermediary  in  selling  all 
the  stock  of  the    company    and    he 


§  321.] 


WHO   MAY    BUY   AND    SELL    STOCK. 


[cn.  XIX. 


cipal  the  amount  of  stock  received  by  the  agent  for  property,  and 
keeps  a  part  of  the  stock,  the  principal  may  hold  him  liable  for  the 
highest  market  value  of  the  stock  reached  between  the  act  and  a 
reasonable  time  after  discovery  of  the  act  by  the  principal.1  Whi  a 
an  agent  lias  an  option  on  stock  and  sells  it  to  his  principal,  who 
thinks  he  is  purchasing  from  an  outsider,  the  principal  may  rescind.2 
A  person  appointed  on  the  sale  of  the  corporate  property  to  sell 
stock  received  in  payment  then  for,  cannot  sell  to  himself,  neither 
can  he  subsequently  purchase  from  one  to  whom  he  has  sold  such 
stock.3  The  real  owner  of  stock  may  compel  the  nominal  owni  r  to 
transfer  the  stock  to  him.4  The  corporation  may  disregard  the  nom- 
inal holder  and  allow  the  real  owner  to  sell  and  transfer  the  stock.5 
An  agent  cannot  keep  stock  on  the  ground  that  his  principal  had  no 
power  to  purchase  it.0     Where  an  owner  of  stock  turns  it  over  to  his 


makes  a  secret  profit,  the  stockholders 
may  compel  him  to  pay  it  over.  Bar- 
bar  v.  Martin,  67  Neb.  445  (1903).  See 
also  §  320,  supra.  Where  an  agent  is 
entitled  to  all  that  land  is  sold  for 
above  $50,000,  and  a  sale  is  made  for 


fraud  if  he  charges  the  "pool"  more 
than  the  stock  cost  him.  Manville  v. 
Lawton,  19  N.  Y.  Supp.  587   (1892). 

2  Montgomery  v.  Hundley,  103  S.  W. 
Rep.  527  (Mo.  1907).  Where  the 
agent  sells  the  principal  the  agent's 


$10,000  cash  and  $44,000  in  stock,  par    stock  instead  of  certain  other  stock  as 
value,  he  must  prove  what  the  stock    the   principal    directed,  the   principal 


was  worth.  He  cannot  assume  that  it 
was  worth  par.  Anderson  v.  Avis,  62 
Fed.  Rep.  227  (1894).  An  agent  may 
of  course  be  held  liable  for  misrepre- 
senting the  price  which  he  received 
on  the  sale  of  stock  and  for  retaining 
the  difference.  Horner  v.  Perry,  112 
Fed.  Rep.  906  (1901).  The  cashier  of 
a  bank  cannot  collect  money  for  his 
services  while  collecting  the  dividends 


must  repudiate  the  transaction  at 
once  if  he  intends  to  do  so.  Trott  r. 
Schmitt,  119  N.  Y.  App.  Div.  474  (1907) . 

3  Wing  v.  Hartupee,  122  Fed.  Rep. 
897   (1903). 

4  Colquhoun  v.  Courtenay,  43  L.  J. 
(Ch.)  338  (1874),  29  L.  T.  Rep.  877. 
Where  a  person  subscribes  for  stock 
in  the  name  of  another  as  trustee,  he 
may  maintain  an  action  to  compel  the 


and  coupons  of  a  depositor  and  stock-    trustee  to  account  for  the  subscription 


holder  in  a  bank,  where  there  was 
no  agreement  to  pay.  Wright  v.  Shel- 
don, 24  R.  I.  336   (1902). 

i  McKinley  v.  Williams,  74  Fed. 
Rep.  94  (1896).  A  settlement  between 
a  principal  and  his  agent  is  no  bar  to 
a  subsequent  suit  by  the  principal 
against  the  agent  for  conversion  of 
stock  where  the  principal  was  not 
aware  of  the  facts  when  he  made  the 
settlement.  Ballard  v.  Beveridge,  171 
N.  Y.  194  (1902).  Where  an  agent  or 
broker  is  employed  to  buy  stock  for 
a  "pool,"   and  agrees  to  do   so  for  a 


and  to  turn  it  over  upon  payment  be- 
ing made.  McComb  v.  Frink,  149  U.  S. 
629  (1893).  A  trustee  holding  stock 
is  entitled  to  have  his  charges  paid 
before  delivering  it  up.  Uehling  v. 
Lyon,  134  Fed.  Rep.  703  (1905). 

5  Sabin  v.  Bank  of  Woodstock,  21 
Vt.  353  (IS  19),  holding  also  that  the 
nominal  holder  is  not  protected,  al- 
though he  subsequently  becomes  the 
real  owner  of  the  stock. 

c  Where  a  street  railway  company 
employs  a  person  as  its  agent  to  pur- 
chase a  majority  of  the  stock  of  an- 


compensation  consisting  of  a  part  of    other  street  railway  company,  and  he 
the  profits,  he  is  liable  in  damages  for    does  so,  and  the  former  pays  him  for 

906 


CH.    XIX.] 


WHO   MAY   BUY   AND    SELL   STOCK. 


[§  321. 


agent  to  look  after  the  stock,  the  stock  itself  being  put  in  the  name  of 
the  agent  as  absolute  owner,  and  the  stock  is  subsequently  attached 
for  a  debt  of  such  agent,  and  sold  thereunder,  the  real  owner  of  the 
stock  may  hold  the  agent  liable  for  the  value  of  the  stock.  Long 
delay  is  not  a  bar  so  long  as  the  agent  does  not  deny  the  agency.1 
Where  a  person  turns  over  stock  and  bonds  to  another  in  order 
that  the  latter  may  act  for  the  former  in  carrying  out  a  reorganiza- 
tion, the  former  may  file  a  bill  against  the  latter  for  an  account 
and  need  not  resort  to  an  action  at  law.2  Even  though  the  wife 
allows  her  stock  to  stand  in  the  name  of  her  husband,  yet,  if  the 
stock  belongs  to  her  and  she  has  the  certificates,  she  may  maintain 
a  bill  in  equity  to  enjoin  his  judgment  creditors  from  selling  the 
stock  and  to  compel  the  corporation  to  allow  a  transfer  of  the 
stock  to  her,  but  she  must  show  that  no  fraud  or  injury  resulted 
to    her   husband's    creditors.3      The   relation   of   an    agent   towards 


the  stock  and  for  his  services,  he  can- 
not refuse  to  deliver  the  stock  on  the 
ground  that  the  company  had  no  pow- 
er to  purchase,  or  on  the  ground  that 
it  had  passed  no  resolutions  authoriz- 
ing him  to  purchase,  and  the  former 
may  recover  the  stock  from  a  trans- 
feree with  notice  from  the  agent. 
Manchester  St.  Ry.  v.  Williams,  71  N. 
H.  312  (1902). 

i  Hovey  v.  Bradbury,  112  Cal.  620 
(1896).  Where  one  of  the  partners 
in  a  firm  organized  to  locate,  develop 
and  operate  mines  does  not  turn  into 
the  firm  a  mine  located  by  him,  hut 
transfers  the  same  to  a  corporation 
for  stock,  and  the  other  partners  de- 
lay for  two  years  after  knowledge 
thereof,  before  filing  a  bill  claiming 
an  interest  in  the  stock,  and  in  the 
meantime  the  corporation  has  expend- 
ed money  and  the  stock  may  have 
passed  into  other  hands,  the  court  will 
refuse  relief  on  the  ground  that  the 
firm  evidently  intended  to  deny  any 
obligation  if  the  mine  turned  out  to 
be  worthless,  but  to  claim  an  interest 
if  it  turned  out  to  be  valuable.  Curtis 
v.  Lakin,  94  Fed.  Rep.  251   (1899). 

2  Benedict  v.  Moore,  76  Fed.  Rep. 
472  (1896).  Where  an  agent  or  trus- 
tee holds  stock  which  belongs  to  an- 
other person,  and  the  corporate  prop- 


erty is  sold,  the  money  going  to  such 
stock  belongs  to  such  other  person 
and  the  fact  that  the  latter  did  not 
pay  an  assessment  does  not  prove 
that  he  abandoned  the  stock.  Loet- 
scher  v.  Dillon,  119  Iowa  202  (1903). 
Where  an  agent  with  whom  stock  is 
deposited  transferred  in  blank  causes 
the  same  to  be  transferred  to  himself 
on  the  books  of  the  company,  and  then 
hypothecates  the  same,  and  afterward 
dies,  the  real  owner  of  the  stock  may 
claim  other  stock  in  the  same  corpo- 
ration which  such  agent  had  at  the 
time  of  his  death.  The  identity  of 
the  certificates  is  immaterial.  Mar- 
shall v.  Marshall,  11  Colo.  App.  505 
(1898).  The  real  owner  of  stock  may 
compel  his  agent  or  trustee  to  account 
for  such  stock.  Love  v.  Wheeler,  S7 
Fed.  Rep.  523    (1898). 

3  Magerstadt  v.  Schaefer,  213  111. 
351  (1904).  The  mere  fact  that  a 
man  purchases  stock  through  his 
brother  as  his  agent,  and  allows  the 
stock  to  stand  in  his  brother's  name 
and  thereby  gives  him  credit,  is  not 
fraud  on  the  part  of  the  former. 
Shields  r.  City  Nat.  Bank,  138  N.  C. 
185  (1905).  Where  a  person  uses  the 
money  of  his  sister  to  purchase  na- 
tional bank  stock  and  continues  to 
hold  it  until  his  death,  he  holds  it  as 


907 


§  321.] 


WHO   31  AY   BUY   AND   SELL   STOCK. 


[CH.    XIX. 


his  principal  in  the  purchase,  sale,  or  holding  of  stock  ex- 
ists where  a  "dummy"  is  used  to  shield  the  real  owner  from  liabil- 
ity on  the  stock.1  A  stockholder  may  of  course  sell  stock  through 
an  agent.2  Bnt  power  to  sell  does  not  give  power  to  pledge.3  An 
agent  employed  to  sell  stock  has  no  inherent  power  to  guarantee 
dividends  thereon.4  Where  an  agent  writes  the  stockholder's  name. 
on  the  back  of  the  certificate  of  stock,  and  disposes  of  it  without 
authority,  he  is  guilty  of  conversion  and  may  be  arrested.5     Where 


trustee  for  her,  even  though  it  is  in 
his  name  and  he  became  director  on 
the  faith  thereof.  In  re  Fisher's 
Estate,  128  Iowa  18  (1905). 

i  See  §  253,  supra.  A  colorable 
transfer  will  not  operate  to  discharge 
the  transferrer  where  shares  were  col- 
lusively  assigned  to  a  servant  for  the 
purpose  of  evading  liability.  Hence, 
when  the  servant,  upon  the  concern 
becoming  solvent,  attempted  to  claim 
the  shares  as  though  the  transfer  had 
been  out  and  out,  the  court  having  pre- 
viously decided  against  the  bona  fides 
of  the  transaction,  it  was  held  that 
the  owner  was  entitled  to  a  declara- 
tion that  the  servant  held  the  shares 
in  trust  for  him.  Colquhoun  v.  Court- 
enay,  29  L.  T.  Rep.  877  (1874)  ;  43  L. 
T.  (Ch.)  338.  Where  a  pledgee  di- 
rects its  agent  to  cause  the  stock  to 
be  transferred  into  the  name  of  the 
pledgee  "as  pledgee,"  but  the  agent 
takes  a  new  certificate  running  to  the 
pledgee  as  absolute  owner,  the  pledgee 
is  not  liable  on  the  stock  to  corporate 
creditors,  it  being  shown  that  the 
pledgee  did  not  know  of  such  issue 
of  the  new  certificate;  and  especially 
in  this  case  where  the  pledgee  is  a 
bank  which  had  authority  to  take 
stock  in  pledge,  but  not  to  purchase 
it  absolutely.  May  v.  Genesee,  etc. 
Bank,  120  Mich.  330  (1899). 

2  See  ch.  XXV,  infra,  on  stock- 
brokers. A  person  may  assign  stock 
to  another  with  discretionary  power 
to  sell  at  any  time  the*  latter  thinks 
best,  and  pay  the  former's  creditors 
therefrom.  Neilson's  Appeal,  13  Atl. 
Rep.  943  (Pa.  1888).  Where  an  agent 
to  sell  stock  is  to  have  any  excess  of 


price  over  a  sum  named  to  him  by  the 
vendor,  and  the  agent  finds  a  custo- 
mer at  an  advanced  price  and  the 
vendor  refuses  to  sell,  the  agent  may 
recover  such  profit  as  he  lost  thereby. 
Mattingly  v.  Roach,  84  Cal.  207 
(1890).  An  agent  authorized  to  sell 
stock  may  sell  part  of  it.  Ulster,  etc. 
Inst.  v.  Fourth  Nat.  Bank,  8  N.  Y. 
Supp.  162  (1889).  See  also  various 
decisions  in  §  375,  infra. 

3  See  §§  326,  351,  infra.  A  stock- 
holder's power  of  attorney  to  his 
agent,  "to  exchange  old  issues  or  cer- 
tificates [of  stock]  and  receive  new 
issues  or  certificates  in  lieu  thereof," 
does  not  authorize  the  agent  to  sell 
or  pledge  the  stock.  The  corporation 
is  liable  for  allowing  a  transfer  to  a 
third  person  on  such  authority.  Quay 
v.  Presidio,  etc.  R.  R.,  82  Cal.  1  (1889). 
Where  a  person  gives  to  another  a 
general  power  of  attorney,  covering 
the  sale  and  transfer  of  all  stocks,  etc, 
the  attorney  cannot,  by  delivering  up 
the  certificate  therefor  to  the  corpora- 
tion, transfer  the  stock  of  his  princi- 
pal into  his  own  name.  The  corpora- 
tion is  bound  to  inquire  further.  Tafft 
v.  Presidio,  etc.  R.  R.,  84  Cal.  131 
(1890),  rev'g  22  Pac.  Rep.  485  (1889). 
Power  of  an  agent  to  sell  does  not 
give  him  power  to  pledge  for  his  own 
use;  and  where  the  corporation  with 
knowledge  of  the  facts  allows  a  trans- 
fer it  is  liable  to  the  owner.  Read  r. 
Cumberland  Tel.  etc.  Co.,  93  Tenn.  482 
(1894). 

4  Smith    v.    Tracey,    36    N.    Y.    78 
(1867). 

5  Reigner  v.  Spang,  5  N.  Y.  App.  Div. 
237    (1896).     Where  a  stockholder  in 


908 


CH.   XIX.] 


WHO   MAY    BUY   AND    SELL    STOCK. 


[§   321. 


an  agent  wrongfully  repledges  the  stock  belonging  to  Lis  principal 

and  then  assigns  for  the  benefit  of  creditors,  and  his  assignee  obtains 

repossession  of  the  stock  realizing  on  other  securities  which  were 

pledged  with  it,  the  original  owner  of  the  stock  may  reclaim  it.1 

An  agent's  written  authority  to  transfer  stock  is  revoked  by  death.2 

But  where  stock  is  transferred  to  a  trustee  to  sell  with  the  stock  of 

other  persons,   the  trustee's  power  of  sale   is  not  revoked  by  the 

death  of  the  transferrer.3    Even  though  an  agent  has  a  half  interest 

in  the  profits  of  the  sale  of  stock,  this  is  not  a  copartnership,  and 

the  owner  may  sell  at  private  sale  and  without  notifying  the  ao-ent.4 

The   principal   and   most   difficult   questions   connected   with   an 

agency  herein  arise  where  the  owner  of  stock  indorses  it  in  blank 

and  places  it  in  the  hands  of  an  agent,  and  the  agent,  in  violation 

of  his  orders,  then  sells  the  stock  to  a  bona  fide  purchaser.     The  law 

is  clear  that  the  bona  fide  purchaser  is  protected  in  his  ownership  of 

the  stock.5     Where  the  owner  of  a  certificate  of  stock  endorsed  in 


an  insolvent  corporation  turns  over 
his  stock  to  another  person  to  de- 
posit under  a  reorganization  agree- 
ment, the  latter  agreeing  to  pay  the 
assessment  on  the  stock  and  to  deliver 
to  the  stockholder  the  new  securities 
upon  repayment  of  such  assessment, 
and  he  refuses  so  to  do  thereafter,  he 
is  guilty  of  a  conversion  and  of  a 
fraud  upon  the  stockholder.  Miller 
v.  Miles,  5S  N.  Y.  App.  Div.  103 
(1901);  aff'd,  171  N.  Y.  675.  Where 
the  owner  of  stock  and  bonds  turns 
them  over  to  a  trust  company  to  sell 
as  it  should  deem  best  and  return  one- 
half  of  the  proceeds,  and  the  trust 
company,  in  violation  of  the  trust, 
pledges  them  for  a  past-due  debt,  the 
remedy  of  the  owner  against  the 
pledgee  is  not  for  conversion  but  for 
an  accounting.  Smith  v.  American 
Nat.  Bank,  89  Fed.  Rep.  832  (1898). 

i  Woodside  v.  Grafflin,  91  Md.  422 
(1900). 

2  Re  Kern's  Estate,  176  Pa.  St.  373 
(1896).  Where  a  certificate  of  stock 
runs  to  a  person  as  attorney  for  an- 
other person  and  the  latter  dies,  the 
attorney  cannot  compel  the  corpora- 
tion to  transfer  the  stock  on  his  signa- 
ture as  attorney,  unless  the  executor 
of  the  estate  also  joins  in  the  transfer. 


909 


Spellissy  v.  Cook,  etc.  Co.,  58  N.  Y. 
App.  Div.  283  (1901).  The  express 
power  of  an  agent  to  sell  securities  is 
revoked  by  the  death  of  the  principal, 
and  if  he  sells  thereafter  he  is  liable 
for  damages  in  conversion.  Matter 
of  Mitchell,  36  N.  Y.  App.  Div.  542 
(1899);  aff'd,  161  N.  Y.  654. 

3  Hiller  v.  Ladd,  80  Fed.  Rep.  794 
(1897). 

4  Hays  v.  Colonial  Trust  Co.,  66  Atl. 
Rep.   143    (Penn.  1907). 

5  See  §  351,  infra.  Where  the  owner 
of  stock  which  is  endorsed  in  blank 
leaves  it  with  his  broker  for  safe 
keeping  and  the  broker  fraudulently 
pledges  it,  the  pledgee,  being  bona 
fide,  is  protected.  Shattuck  v.  Ameri- 
can Cement  Co.,  205  Pa.  St.  197 
(1903).  A  bona  fide  pledgee  from  an 
agent  who  makes  the  pledge  in  breach 
of  trust  is  protected.  Maxwell  v.  Fos- 
ter, 67  S.  C.  377  (1903).  Even  though 
brokers  in  sending  stock  to  a  custo- 
mer endorse  it  in  blank  and  entrust  it 
to  a  messenger,  and  the  messenger 
converts  it  to  his  use  by  having  other 
brokers  sell  it  in  good  faith,  yet  such 
latter  brokers  are  liable  to  the  cus- 
tomer for  the  value  of  the  stock. 
Hall  v.  Wagner,  111  N.  Y.  App.  Div.  70 
(1906).     Even  though  a  person  forges 


§    322.]  WHO    MAY    BUY    AND    SELL    STOCK.  [dl.    XIX. 

blank  puts  it  in  his  safe-deposit  box  and  allows  a  clerk  to  have  a  key 
of  the  box  and  (he  clerk  abstracts  the  certificate  and  sells  it  to  a 
bona  fide  purchaser,  it  is  a  question  for  the  jury  as  to  who  stands 
the  loss.1  But  a  person  buying  stock  from  an  agent,  with  knowl- 
edge that  the  latter  is  acting  as  agent,  is  bound  to  inquire 
into  the  scope  of  his  authority,  and  if  the  agent  is  author- 
ized only  to  sell  for  cash,  his  agree  tnent  to  sell  on  time  cannot  bo 
on  forced  by  the  purchaser.2  In  a  suit  by  a  stockholder  to  hold  a  cor- 
poration liablo  for  his  stock  and  dividends,  by  reason  of  its  allowing 
a  transfer  by  an  unauthorized  agenl  of  the  stockholder,  the  subsequent 
owners  of  the  slock  are  not  necessary  parties.  The  defense  of  pre- 
scription may  prevail.3  A  broker  who  claims  to  be  acting  for  an  un- 
disclosed principal  in  contracting  for  the  purchase  of  bonds,  and  who 
stipulates  that  he  shall  not  be  personally  liable,  cannot  enforce  such 
contract,  if  in  fact  he  was  the  principal  himself.4 

Where  a  person  secretly  speculates  in  stock  in  the  name  of  an- 
other person,  the  latter  having  the  accounts  with  brokers,  in  some 
of  which  accounts  the  former  is  not  interested,  the  former  cannot 
maintain  a  bill  for  accounting  against  the  brokers.5 

A  partner  or  principal  of  a  person  who  signed  a  reorganization 
agreement  under  seal  cannot  sue  the  committee  for  breach  of  the 
contract.  The  instrument  being  under  seal,  only  a  party  to  it  can 
enforce  its  covenants.6 

§  322.  Purchases  of  stock  by  guardians,  executors,  and  trustees. — 
In  England,  at  an  early  day,  the  common-law  rule  was  declared  to 
be  that  guardians,  executors,  and  trustees  had  no  right  to  invest 
the  trust  funds  in  the  stocks  of  private  corporations,  and  that  if 
they  did  so,  they  themselves  were  personally  liable  for  the  moneys 
so  invested.7     The  rigor  of  this  rule  has  been  relaxed  somewhat  in 

the   name    of  a  stockholder    on    the  5  McKay  v.   Hudson,  118  Fed.  Rep. 

back  of  the  latter's  certificate  of  stock  919   (1902). 

and  pledges  it,  yet  if  the  stockholder,  6  Williams  v.  Magee,  76  N.  Y.  App. 

being    informed    of    the    transfer    by  Div.  513  (1902). 

the   secretary,   confirms   it,    and    the  7  Trafford    v.    Boehm,    3    Atk.    440 

stock  is  sold  to  a  bona  fide  purchaser,  (1746),  where  the  investment  was  in 

the  owner  cannot  complain.     Dover  v.  bank  and  South  Sea  stock.     Lewin  on 

Pittsburg  etc.  Co.,  143  Cal.  501  (1904).  Trusts,  281  (7th  ed.,  1879),  says  that, 

i  Aull  v.  Colket,   2  W.  N.  Cas.  322  "unless   specially   given   power,    it   is 

(1875).  settled  in  England  that  a  trustee  may 

2  Norton  v.   Nevills,   174   Mass.    243  not  invest  the  trust  fund  in  the  stock 
(1899).  of  any  private  company,  as  South  Sea 

3  St.  Romes  v.  Levee,  etc.  Co.,  127  U.  stock,  bank  stock,  etc.;  for  the  capi- 
S.  614  (1888).  tal  depends  upon  the  management  of 

4  Paine  v.  Loeb,  96  Fed.  Rep.  164  governors  and  directors,  and  is  sub- 
(1899).  Ject    to   loss." 

910 


CH.   XIX.] 


WHO    MAY    BUY   AND    SELL    STOCK. 


[§    322. 


England,  by  statute  and  by  orders  in  chancery,  so  that  such  invest- 
ments may  be  made  in  the  stock  of  the  banks  of  England  and  of 
Ireland  and  the  East  India  Company.1  A  trustee  authorized  to  in- 
vest in  the  stock  of  any  company  incorporated  by  act  of  parliament 
cannot  invest  in  the  stock  of  a  company  organized  under  the  general 
acts.2  In  this  country,  aside  from  a  few  dicta  and  a  few  decisions  to 
the  contrary,  the  English  rule,  in  its  original  integrity,  is  upheld 
and  followed.  The  weight  of  authority  clearly  holds  that  the  in- 
vestment of  trust  funds  in  the  stock  of  railroad,  insurance,  bank, 
manufacturing,  or  other  corporations  is  made  at  the  peril  of  the 
trustees.3     The  cestui  que  trust  may  hold  the  trustee  liable  for  the 

pany,  although  dividends  had  been  ac- 
cepted  by  the   cestui   que  trust;   and 
this  ruling  was  sustained  on  a  second 
appeal,    23    Pa.    St.    44     (1854).      In 
Rush's  Estate,  12  Pa.  St.  375   (1849), 
however,  under  the  terms  of  the  will, 
stock  in  the  Lehigh  Coal  and  Naviga- 
tion Company  was  approved,  and  this 
case  was  distinguished  from  Worrell's 
Appeal,  9  Pa.  St.  508    (1848),  on  the 
second  appeal  of  that  case,  23  Pa.  St. 
44   (1854).     In  Hemphill's  Appeal,  18 
Pa.    St.    303     (1852),     United     States 
Bank  Stock  was  held    not    good.     In 
Pray's  Appeal,  34  Pa.  St.  100   (1859), 
manufacturing  corporation  stock  was 
disapproved,    the   works   being   unfin- 
ished, and  the  stock  not  paid  up,  and 
the  ruling  in  Barton's  Estate,  1  Pars. 
Sel.  Cas.  24  (1842),  was  doubted.     In 
Ihmsen's     Appeal,     43     Pa.    St.   431 
(1862),   railroad  stock  was  held  not 
good.     In  Pennsylvania    the    probate 
court  may  allow  the  executor  of  an  es- 
tate to  loan  the  funds  of  the  estate 
to    an    unincorporated    association    in 
which  the  estate  is  interested.    In  re 
Mustin's     Estate,    188     Pa.     St.     544 
(1898).     An    administrator   in   Penn- 
sylvania   who    exchanges    bonds    for 
worthless  stock  is  liable  therefor.    In 
re  Locker's  Estate,   67  Atl.  Rep.   954 
(Pa.   1907).     "Stock  in   a  joint-stock 
trading  company  can  never  be  a  suit- 
able  investment   for   an   executor    or 
trustee  to  make,  unless  he  has  been 
invested  with  greater  powers  than  are 
ordinarily    incident    to    such     a   posi- 
tion."   Reed  v.  Reed,  68  Atl.  Rep.  849 


i  Lord  St.  Vincent's  Act,  22  &  23 
Vict.,  ch.  35,  §32;  23  &  24  Vict,  ch. 
38. 

2  Re  Smith,  [1896]  2  Ch.  590. 

3  In  New  York  the  case  of  King  v. 
Talbot,  40  N.  Y.  76  (1869),  affg  50 
Barb.  453,  clearly  sustains  this  rule. 
In  Adair  v.  Brimmer,  74  N.  Y.  539, 
551  (1878),  the  trustees  were  held  lia- 
ble for  selling  coal  lands,  taking  in 
pay  coal  stocks,  although  they  were 
authorized  by  the  will  to  invest  in 
such  securities  as  they  deemed  safe. 
See  also  Mills  v.  Hoffman,  26  Hun,  594 
(1882);  reversed  in  92  N.  Y.  181, 
but  not  on  this  point;  Ackerman  v. 
Emott,  4  Barb.  626  (ISIS).  See  also 
Brown  v.  Campbell,  Hopk.  Ch.  (2d 
ed.)  265  (1S24).  Under  a  statute  in 
New  York  a  trustee  of  real  estate, 
with  power  to  sell  it,  may,  with  the 
consent  of  the  cestui  que  trust  and  the 
court,  sell  it  to  a  corporation,  if  such 
corporation  cannot  invest  in  stock  or 
bends,  which  trust  estates  cannot 
hold.  N.  Y.  Real  Property  Law,  §  94. 
In  Pennsylvania  the  rule  laid  down 
in  the  text  is  the  same.  Nyce's  Es- 
tate, 5  Watts  &  S.  254  (1843),  holding 
the  trustee  liable  for  investment  in 
United  States  Bank  stock,  although 
the  guardian  approved  of  the  trus- 
tee's investment;  Morris  v.  Wallace,  3 
Pa.  St.  319  (1846),  where  the  invest- 
ment was  in  the  stock  of  a  suspend- 
ed bank.  In  Yv'orrell's  Appeal,  9  Pa. 
St.  508  (1848),  a  guardian  was  held 
liable  for  an  investment  in  the  stock 
of.    the    Schuylkill    Navigation    Com- 


911 


322.] 


WHO   MAY    BUY    AND   SELL    STOCK. 


[CH.   XIX. 


amounts  so  invested,  together  with  interest  upon  the  same.  But 
where  the  trustee  is  authorized  to  purchase  stock  he  is  not  liable 
for  the  embezzlements  of  an  agent  whom  with  due  care  he  employs 

(Conn.    1908).      In    New    Jersey    the  Even  though  the  life  tenant  assented 

rule  is  the  same.     Gray  v.  Fox,  1  N.  in    writing    to    regular    accounts    of 

J.  Eq.  2o9    (1831);   Ward  v.  Kitchen,  trustees    which    show    illegal    invest- 

30  N.  J.  Eq.  31  (1878).  Also  in  New  ments  in  stocks,  yet  if  she  knew 
Hampshire.     In    Kimball    v.    Reding,  nothing    of    their    value    or    of    the 

31  N.  H.  352  (1855),  stock  in  a  con-  breach  of  trust  she  is  not  bound 
templated  railroad  was  disapproved,  thereby.  Bennett  v.  Pierce,  188  Mass. 
In  French  v.  Currier,  47  N.  H.  88,  99  1&6  (1905).  A  trustee  has  no  power 
(1S66),  unproductive  stock  was  held  to  invest  in  windmill  manfacturing 
not  good.  In  Massachusetts  the  ten-  company  stock,  especially  where  the 
dency  is  to  favor  a  contrary  rule,  investment  involved  actual  fraud. 
"Trustees  in  this  commonwealth  are  Cropsey  v.  Johnston,  137  Mich.  16 
permitted  to  invest  portions  of  trust  (1904).  An  executor  may  take  part 
funds  in  dividend-paying  stocks  and  in  and  personally  subscribe  for  stock 
interest-bearing  bonds  of  private  busi-  in  a  corporation  formed  to  take  over 
ness  corporations,  when  the  corpora-  an  embarrassed  and  unprofitable  part- 
tions  have  acquired,  by  reason  of  the  i.ership  in  which  the  estate  is  inter- 
amount  of  their  property  and  the  pru-  ested.  Houghteling  v.  Stockbridge,  136 
dent  management  of  their  affairs,  Mich. 544  (1904).  See  85  N.  E.  Rep.  426. 
such  a  reputation  that  cautious  and  In  several  of  the  southern  states  the 
intelligent  persons  commonly  invest  courts  hold  that  trustees,  etc.,  may  in- 
their  own  money  in  such  stocks  and  vest  the  trust  funds  in  stocks.  Boggs 
bonds  as  permanent  investments."  V.  Adger,  4  Rich.  Eq.  (S.  C.)  408 
But  where  the  trustee  invested  over  (1852),  holds  United  States  Bank 
a  fifth  of  the  estate  in  Union  Pacific  stock  good.  Washington  v.  Emery,  4 
Railrod  stock,  and  afterwards  invest-  Jones,  Eq.  (N.  C.)  32  (1858),  ap- 
ed a  further  amount  in  the  same  proves  railroad  stock.  In  Gray  v. 
stock,  he  was  charged  with  the  loss  Lynch,  8  Gill  (Md.),  403  (1849),  and 
due  to  the  second  investment.  Dick-  in  Smyth  v.  Burns,  25  Miss.  422 
inson's  Appeal,  152  Mass.  184  (1890).  (1853),  bank  stock  was  held  good.  In 
In  Harvard  College  v.  Amory,  26  Mass.  Lamar  v.  Micou,  112  U.  S.  452  (1884), 
446  (1830),  express  power  was  given,  and  114  U.  S.  218  (speaking  for  Geor- 
In  Lovell  v.  Minot,  37  Mass.  116  gia  and  Alabama),  bank  and  railroad 
(1838),  the  stock  was  taken  as  securi-  stock  was  held  good,  but  not  Confed- 
ty.  Kinmonth  v.  Brigham,  87  Mass.  erate  bonds.  See  also  on  this  sub- 
270  (1862),  and  Brown  v.  French,  125  ject  generally,  40  Am.  Dec.  515,  notes. 
Mass.  410  (1S78),  were  not  cases  of  An  executor  who  is  interested  in  a 
investments  in  stocks.  Hunt's  Ap-  corporation,  and  gets  a  commission 
peal,  141  Mass.  515  (1886),  is  a  die-  for  selling  its  stock,  is  liable  to  re- 
turn, the  decision  being  that  the  tak-  place  funds  which  he  induces  the 
ing  of  a  national-bank  certificate  of  cestui  que  trust,  a  woman,  to  invest 
deposit  is  legal.  Trustees  holding  in  such  stock.  Potter's  Appeal,  56 
stock  in  an  industrial  corporation  Conn.  1  (1887).  In  Kentucky  the 
(Farr  Alpaca  Co.)  may  use  accumu-  statutes  authorize  the  retention  by  a 
lated  trust  funds  to  subscribe  for  new  guardian  of  an  investment  in  good 
stock  which  is  worth  more  than  par.  bank  stock.  Fidelity,  etc.  Co.  v. 
Hyde  v.  Holmes,  84  N.  E.  Rep.  318  Glover,  90  Ky.  355  (1890).  A  trustee 
(Mass.  1908).  But  see  Smith  v.  cannot  make  an  investment  in  bonds 
Smith  (Mass.  190S),  see  p.  1739,  infra,  in  violation  of  a  statute,  even  though 

912 


CH.   XIX.] 


WHO   MAY    BUY   AND    SELL    STOCK. 


[§  322. 


to  make  the  purchase.1  "Where  the  trustee  is  expressly  authorized  to 
invest  in  bank  stock  he  is  not  liable  to  the  estate  for  losses,  though 
the  investment  is  made  in  his  individual  name.2  Even  though  a 
will  authorizes  trustees  to  make  investments  as  they  deem  best  and 
recites  that  they  shall  have  the  same  power  as  the  testator  had,  yet 
if  the  trustees  do  not  exercise  reasonable  discretion  but  proceed  to 
invest  funds  in  the  bonds  and  stock  of  a  railroad  corporation  after 
they  have  already  invested  a  fifth  of  the  estate  in  such  bonds  and 
stock,  they  are  liable  for  such  further  investment.3    "Where  stock  in 


the  cestui  que  trust  assents  thereto. 
Aydelott  v.  Breeding,  111  Ky.  847 
(1901).  A  trustee  for  an  infant  can- 
not convey  land  to  a  corporation  and 
take  stock  in  payment.  Randolph  v. 
East  Birmingham  Land  Co.,  104  Ala. 
355  (1894).  A  constitutional  pro- 
vision against  any  statute  authoriz- 
ing guardians  or  trustees  to  invest  in 
the  bonds  or  stock  of  a  private  cor- 
poration does  not  prevent  a  guardian, 
who  already  holds  such  stock,  pur- 
chasing more,  in  order  to  control  the 
corporation  and  prevent  the  control 
passing  into  dangerous  hands.  Neither 
does  such  constitutional  provision  pre- 
vent a  guardian  taking  such  stock  as 
collateral  security.  Nagle  v.  Robins, 
9  Wyo.  211  (1900).  Where  the  life 
tenant  refuses  to  pay  for  increased 
capital  stock  which  is  issued  at  fifty 
cents  on  a  dollar,  the  remaining  fifty 
cents  being  a  stock  dividend,  and  the 
trustee*  takes  the  stock  for  himself, 
and  ten  years  have  elapsed  since  the 
life  tenant  claimed  the  stock,  the  stat- 
ute of  limitations  is  a  bar  to  his  suit 
to  compel  the  trustee  to  account  for 
the  stock.  Matter  of  Smith,  66  N.  Y. 
App.  Div.  340  (1901);  aff'd,  178  N.  Y. 
563. 

i  Speight  v.  Gaunt,  L.  R.  9  App.  Cas. 
1  (1883).  The  trustee  is  not  liable  for 
loss  due  to  the  fact  that  the  certifi- 
cates of  stock  purchased  by  him  were 
forgeries,  provided  he  used  due  care. 
Isham  v.  Post,  141  N.  Y.  100    (1894). 

2Pensyl's  Appeal,  15  Atl.  Rep.  719 
(Pa.  1888).  A  trustee  who  is  directed 
by  a  will  to  invest  in  dividend-paying 
securities   is  not  bound   to   sell   divi- 


dend-paying securities  which  he  re- 
ceives as  trustee  and  then  reinvest 
the  proceeds.  Dunklee  v.  Butler,  30 
N.  Y.  Misc.  Rep.  58  (1899).  Even 
though  the  will  of  an  umbrella  manu- 
facturer gives  the  trustees  power  to 
invest  as  the  trustees  may  deem  to  be 
for  the  benefit  of  the  estate,  yet  the 
trustees  cannot  legally  invest  in  de- 
benture stock  of  a  combination  or 
trust  in  the  umbrella  business,  where 
another  part  of  the  will  directed  that 
the  testator's  umbrella  business  be 
closed  within  six  months  after  his 
decease.  Matter  of  Hall,  48  N.  Y.  App. 
Div.  488  (1900).  A  trustee  who  is 
appointed  under  a  will  and  holds 
national  bank  stock,  in  accordance 
with  the  terms  of  the  will  has  no 
right,  upon  the  dissolution  of  the 
bank,  to  take  a  proportionate  interest 
in  a  banking  copartnership  which  suc- 
ceeds to  the  business,  and  is  liable  for 
loss  occurring  thereby.  Penn  v.  Fog- 
ler,  182  111.  76  (1899). 

3  In  re  Day's  estate,  183  Mass.  499 
(1903).  Under  a  power  given  by  the 
will  to  change  investments,  trustees 
may  invest  in  railroad  and  street 
railway  bonds.  Allis  v.  Allis,  123 
Wis.  223  (1904).  Where  a  trustee  is 
authorized  to  invest  in  "any  corpora- 
tion or  company,  municipal,  commer- 
cial or  otherwise,"  he  may  invest  in 
the  stock  of  a  foreign  corporation. 
Re  Stanley;  Tennant  v.  Stanley, 
[1906]  1  Ch.  131.  Where  power  is 
given  by  a  will  /o  trustees  to  invest 
money  in  "securities,"  they  may  in- 
vest in  shares  of  stock  in  railway 
companies.     Re  Rayner,   [1904]  1  Ch. 


(58) 


913 


§  322.] 


\VI1<>    MAY     HIV    AM)    SKLI. 


[CH. 


XIX. 


several  corporations  is  pul  in  trasl  by  a  deed  acknowledged,  de- 
livered and  accepted  by  the  trustees  in  New  York,  where  the  grantor 
resided,  the  trusl  deed  is  governed  by  the  law  of  New  fork,  with- 
out reference  to  the  residence  of  the  tri  or  the  subsequent 
residence  of  the  grantor.1  Where  a  tr  recer  curities 
from  the  testator,  which  a  trustee  is  nol  authorized  to  in. 
in,  it.  is  his  duty  within  a  reasonable  time  to  sell  them  and 
invest  the  funds  in  authorized  securitii  3.a    Tru           if  property  with 


176.  Even  though  trustees  are  au- 
thorized by  the  will  to  Inve  t  in  Bound 
productive  securities  aa  they  might 
deem  hest,  they  may  be  liable  for  in- 
vestments in  stocks  which  depreciate 
and  cause  a  loss  to  the  estate.  Brown 
v.  Brown,  G5  Atl.  Rep.  739  (N.  J.  1907  I. 
(J no  warranto  proceedings  do  not  lie 
to  test  the  right  of  a  private  corpora- 
tion to  act  as  trustee  for  certain 
shares  of  its  own  stock  which  a  stock- 
holder has  placed  in  trust.  State  v. 
Higby  Co.,  130  Iowa  69  (1906).  A 
stockholder  in  a  national  bank  may 
donate  his  stock  to  his  children  by 
putting  it  in  trust  for  them,  and  he 
is  not  then  liable  on  the  stock  where 
it  is  clear  that  his  acts  were  not  for 
the  purpose  of  avoiding  liability. 
Fowler  v.  Gowing,  152  Fed.  Rep.  801 
(1907).  The  statute  of  frauds  does 
not  apply  to  an  express  trust  in 
stock.  In  re  Fisher's  estate,  128 
Iowa  18  (1905).  Under  a  power  to  in- 
vest in  good  dividend-paying  stock  a 
trustee  has  no  power  to  sell  and  re- 
invest, and  a  statute  allowing  such 
reinvestments  does  not  apply  to  a 
pre-existing  trust.  Branch  v.  De- 
Wolf,  68  Atl.  Rep.  543  (R.  I.  1908). 
Even  though  trustees  are  given  a 
wide  discretion  in  investments,  they 
should  not  invest  in  the  stock  of  a 
foreign  corporation.  Pabst  v.  Good- 
rich, 113  N.  W.  Rep.  398   (Wis.  1907). 

i  Mercer  v.  Buchanan,  132  Fed.  Rep. 
501   (1904). 

2  Matter  of  Wottcn,  59  N.  Y.  App. 
Div.  584  (1901);  aff'd,  167  N.  Y.  629. 
In  the  absence  of  instructions  in  a 
will,  an  executor  should  usually  sell 
stocks  and  reinvest  the  proceeds,  but 


special  circumstances  may  govern  par- 
ilar  cases.  Hill  on  Care  of  Es- 
tates, p.  28.  Where  stock  which  the 
trustees  are  expressly  authorized  to 
hold  is  merged  into  stock  which  they 
are  not  authorized  to  hold,  it  is  tin  lr 
duty  to  dispose  of  the  stock  as  soon 
as  they  can  make  an  advantageous 
sale  of  the  same.  Be  Castlehow, 
I L903]  1  (  .    In  N  sey  by 

statute  an  executor  or  trustee  may 
continue  to  hold  securities  which  the 
testator  owned  at  the  time  of  his 
death  and  is  not  liable  for  loss  if  he 
exercised  good  faith  and  reasonable 
discretion.  Brown  v.  Brown,  65  Atl. 
Rep.  739  (X.  J.  1907).  Executors  and 
trustees  may  sustain  the  price  of 
Stock  by  purchasing  the  same  where 
the  results  to  the  estate  would  be  dis- 
astrous un!ess  they  do  so,  as,  for  in- 
stance, where  the  estate  owes  a  large 
amount  of  money  secured  by  such 
stock,  which  loans  would  be  called  if 
the  stock  declined  in  value.  Matter 
of  Corbin,  101  N.  Y.  App.  Div.  25 
(1905).  Executors  and  trustees  have 
no  legal  right  to  pay  the  debts  of  a 
corporation,  even  though  the  estate 
holds  practically  all  of  its  stock  and 
bonds.  Matter  of  Corbin,  101  N.  Y. 
App.  Div.  25  (1905).  In  the  case 
Bertron,  etc.  v.  Polk,  101  Md.  686 
(1905),  the  trustees  were  held  liable 
for  selling  stocks  in  order  to  reinvest 
the  proceeds  in  mortgages,  ground 
rents,  etc.  at  a  less  rate  of  interest. 
It  is  the  duty  of  the  executor,  without 
obtaining  permission  from  the  court, 
to  dispose  of  stocks  and  bonds  which 
the  testator  owned  but  which  the  law 
does  not  allow  him  to  invest  in.  as 


914 


CH.    XIX.] 


WHO   MAY   BUY   AND   SELL   STOCK. 


[§   322. 


j lower  of  sale  may  transfer  the  property  to  a  corporation  in  exchange 
for  all  the  stock  of  the  latter.1  Where  a  deed  of  trust  refers  to  certain 
stock  and  transfers  the  same  to  the  trustee  and  authorizes  him  to 
transfer  the  stock  to  himself  on  the  books,  an  indora  ment  of  the 
certificates  is  unnecessary  to  pass  title  to  the  trustee-  Where  trustees 
invest  in  partly  paid  up  stock  without  authority  and  one  of  them 
•  lies  and  the  other  is  obliged  to  make  good  the  loss,  he  may  have 
contribution  from  the  estate  of  the  deceased  trustee. :: 


soon  as  he  conveniently  can  do  so, 
and  at  such  a  reasonable  time  as  is 
to  the  interest  of  the  estate,  and  to 
use  the  proceeds  in  purchasing  stat- 
utory investments.  Matter  of  New 
York  Life,  etc.  Co.,  86  N.  V.  A  pp.  Div. 
2;7  (1903).  Where  a  trustee  is  au- 
thorized to  retain  investments  owned 
by  the  testator  at  the  time  of  his 
death,  he  may  retain  hazardous  coal 
stocks,  and  the  life  tenant  is  en- 
titled to  the  entire  income.  Re  Bates, 
95  L.  T.  Rep.  753  (1906).  Where 
trustees  legally  hold,  by  the  terms  of 
a  trust  agreement,  stock  in  an  Amer- 
Ican  holding  corporation,  and  the 
American  courts  compel  the  holding 
corporation  to  distribute  its  assets 
among  its  stockholders,  such  assets 
being  railroad  stocks,  the  trustees 
must  sell  such  railroad  stocks  as 
are  so  received  by  them.  Be  Anson's 
Settlement,  97  L.  T.  Rep.  472  (1907). 
In  England  trustees  may,  by  order  of 
the  court,  be  given  leave  to  retain 
stock  which  formed  part  of  the  es- 
tate at  the  time  of  the  testator's 
death.  lie  Piercy,  95  L.  T.  Rep.  868 
(1906).  Where  a  trustee  sells  stock 
by  decree  of  the  court  on  account  of 
the  precarious  nature  of  the  stock,  the 
life  tenant  is  not  entitled  to  anything 
from  the  corpus  of  the  estate  where 
it  is  not  shown  that  the  income  is 
decreased.  Lister  v.  Weeks,  61  N.  J. 
Eq.  623  (1900).  Under  a  statute  in 
Kentucky,  a  trustee  may  sell  stock 
which  he  holds  for  the  estate  and  in- 
vest the  proceeds  in  real  estate.  Bank 
of  Kentucky  v.  Winn,  110  Ky.  140 
(1901).  In  this  case  the  court  held 
also  that  at  common  law  the  trustee 
has  that  power,  and  further,  that  in 


The  guardian 


a  suit  to  authorize  such  transfer 
neither  the  corporation  nor  the  re- 
mainderman is  a  necessary  party.  A 
trustee  of  an  estate  has  implied  power 
to  sell  railroad  stock  belonging  to  the 
estate  in  order  to  reinvest  the  pro- 
ceeds in  securities  which  the  law  al- 
lows him  to  invest  in.  Toronto,  etc. 
Co.  v.  Chicago  etc.  R.  R.,  64  Hun,  1 
(1892);  aff'd,  138  N.  Y.  657.  See  also 
Bennison,  60  L.  T.  Rep.  859 
(1889).  Trustees  should  sell  the 
stock  if  depreciation  is  probable. 
Ward  v.  Kitchen,  30  N.  J.  Eq.  31 
(1S7S).  Where  a  person  transfers  all 
his  property  to  a  trustee  for  various 
purposes  and  a  part  of  the  property 
consists  of  stock,  which  a  trustee 
cannot  legally  hold,  it  is  the  duty  of 
the  trustee  to  sell  the  stock  and  re- 
invest the  proceeds,  and  he  is  liable 
for  a  decline  in  value  if  he  does  not 
sell  within  a  reasonable  time.  Babbitt 
r.  Fidelity  T.  Co.,  66  Atl.  Rep.  1076 
(N.  J.  1907).     See  also  §  323,  infra. 

i  In  re  Sprague,  22  R.  I.  413  (1901). 
A  trustee  holding  property  for  various 
persons  cannot  transfer  it  to  a  cor- 
poration in  exchange  for  stock  of  the 
latter,  even  though  the  trust  agree- 
ment authorizes  a  sale  and  provides 
that  the  proceeds  of  the  sale  shall 
be  divided  among  the  beneficiaries.  In 
a  suit  to  enjoin  such  sale  an  action  to 
hold  members  of  the  executive  com- 
mittee personally  liable  for  conspir- 
acy should  not  be  joined.  Moody  v. 
Flagg,  125  Fed.  Rep.  819  (1903).  See 
also  N.  Y.  Real  Property  Law,  §  94. 

2  Curtis  v.  Crossley,  59  N.  J.  Eq.  358 
(1900). 

3  Jackson    v.    Dickinson,    [1903]    1 

Ch.  947. 


915 


§  32.°>.]  WHO   MAY   BUY    AND   SELL   STOCK.  [cil.    XIX. 

of  an  infant  cannot  purchase  stock  belonging  to  the  estate  of  the 
ward's  ancestor  and  offered  at  administrator's  Bale,  even  though  he 
purchases  as  guardian,  bul  the  courl  or  a  succeeding  guardian  or  the 
beneficiary  on  attaining  majority  may  ratify  the  sale  or  disaffirm  it.1 
A  person  transferring  stock  in  trust,  the  dividends  to  be  paid  to 
him  during  life,  and  also  such  pari  of  the  principal  as  the  trusl 
deems  best,  and  the  .-lock  to  go  to  hia  heirs  upon  his  death,  the  trustee 
to  bave  pow<  r  to  sell  and  reinv<  si  the  fund,  cannot  be  revoked  by  the 
person  cr<  al  ing  tin-  trust.2 

§  323.  Sale  or  pledge  of  stock  by  trustee,  legally  or  in  breach  of 
his  trust. — It  is  the  duty  of  a  trustee  to  keep  and  preserve  the  trust 
property,  and  to  apply  the  income  according  to  the  terms  of  the 
instrument  creating  the  trust.  As  a  general  rule  it  is  not  his  duly 
or  his  right  to  sell  or  change  the  investment.  Unless  the  instrument 
creating  the  trust  authorizes  a  sale  of  the.  trust  property,  it  is  a 
breach  of  trust  for  the  trustee  to  make  a  Bale,8  excepting  of  such 
securities  as  neither  the  trust  instrument  nor  will  nor  the  law 
prescribes  that  lie  may  keep  or  invest  in.  In  this  respeel  the  powers 
of  a  trustee  differ  widely  from  those  of  an  executor  or  administrator. 
Moreover,  Tinder  ordinary  circumstances,  a  trustee  cannot  sell  stock 
held  in  trust,  although  such  sale  be  for  the  purpose  of  investing  the 
proceeds  in  other  property.4  If,  however,  the  estate  has  stocks 
which  the  law  would  not  allow  him  to  invest  in,  it  is,  as  stated  above, 

l  Rogers    v.    Dickey,    117    Ga.    819  does   not   constitute   a   failure   to   de- 

(1903).  liver  in  the  specified  time,  where  the 

i:  Sands  r.  Old  Colony,  etc.  Co.,  195  transferee   accepted   delivery   without 

Mass.  375    (1907).     In  the  case  State  such  order.     German  Sav.  Inst.  v.  De 

v.    Probate    Court,    etc.    County,    113  La  Vergne,  etc.  Co.,  70  Fed.  Rep.  146 

N.  W.  Rep.  8S8  (Minn.  1907),  a  (1895);  s.  c,  on  appeal,  175  U.  S.  40. 
stockholder    transferred    title    to    his        4  A  trustee  who  sells  stock  for  the 

children  and  the  children  then  leased  purpose    of    investing   in    real    estate 

to  him  the  use  of  the  stock   during  may  be  compelled  to  replace  it.     Earl 

his  life  and  the  transaction  was  up-  Powlet    v.    Herbert,    1    Ves.    Jr.    297 

held    by   the   court.      See    also    §308,  (1791).     Cf.  Bohlen's  Estate,   75   Pa. 

supra.  St.  304    (1874) ;   Peckham  r.  Newton, 

3  Bohlen's  Estate,  75  Pa.  St.  304  15  R.  I.  321  (1SS6).  Cf.  note  1,  supra. 
(1874);  Bayard  v.  Farmers',  etc.  The  cestui  que  trust  may  waive  the 
Bank,  52  Pa.  St.  232  (1866);  Jaudon  objection.  Duncan  v.  Jaudon,  15 
v.  National  City  Bank,  8  Blatchf.  430  Wall.  171  (1872).  Under  the  statute 
(1871);  s.  c,  13  Fed.  Cas.  376;  aff'd,  authorizing  trustees  to  invest  money 
Duncan  v.  Jaudon,  15  Wall.  165  in  real  estate,  stocks  may  be  traded 
(1872).  On  the  relations  and  duties  by  them  for  real  estate.  In  re  Derr's 
of  trustees  generally  in  regard  to  Estate,  203  Pa.  St.  96  (1902).  Wash- 
stock,  see  also  Perry  on  Trusts  (3d  ington  v.  Emery,  4  Jones  Eq.  (N.  C.) 
ed.)  §§439,  543-  Where  several  stock-  32  (1858),  holds  that  a  change  in  the 
holders,  including  a  trustee,  sell,  his  investment  is  allowable  if  there  is 
failure  to   obtain  an   order   of  court  good   reason   to  believe   that  the   es- 

916 


en.  xix.] 


WHO   MAY   BUY  AND   SELL   STOCK. 


[§   324. 


the  trustee's  duty  to  sell  them  unless  the  will  directs  otherwise  or  gives 
him  discretionary  power  as  to  investments.1  A  court  of  equity  has  in- 
herent power  to  authorize  a  trustee  to  sell  shares  of  stock  held  in 
trust,  even  though  the  trust  instrument  does  not  give  him  that  power, 
but  the  court  will  not  ordinarily  make  such  an  order  or  decree,  and 
will  only  do  so  when  all  the  persons  interested  in  the  estate  are 
before  the  court.2  One  of  two  or  more  executors  may  legally  sell 
and  transfer  stock  belonging  to  the  estate,3  but  the  rule  is  different 
in  regard  to  trustees,  and  all  must  join  in  any  sale  or  transfer  of*1 
stock.4 

§  324.  Where  a  trustee  improperly  sells  shares  of  stock  belong- 
ing to  the  trust  estate,  the  cestui  que  trust  has  a  right  to  elect  to 
have  the  stock  restored  or  the  amount  received  for  it  paid  over,  to- 
gether with   interest  from  the  time  of  the  sale.5      Were   the   rule 


tate  will  be  benefited.  But  they  are 
not  liable  for  failure  to  sell  if  such 
a  course  is  pursued  in  good  faith  and 
in  the  exercise  of  a  sound  discretion. 
Bowker  v.  Pierce,  130  Mass.  262 
(1881) ;  Parker  r.  Glover,  42  N.  J.  Eq. 
559  (1887);  Stewart's  Appeal,  110  Pa. 
St.  410  (1885),— the  last  case  holding 
also  that  a  sale  by  the  trustee  to  him- 
self, even  at  the  market  price,  was 
voidable  at  the  instance  of  the  inter- 
ested parties.  The  trustee  cannot 
change  the  stock  bequeathed.  Mur- 
ray v.  Feinour,  2  Md.  Ch.  418  (1851). 
Even  though  trustees  hold  stock  in 
trust  and  are  not  authorized  to 
change  the  investment,  yet  if  the  com- 
pany is  reorganized  into  a  larger  com- 
pany, by  exchange  of  stock  for  stock 
and  bonds  of  the  latter,  and  such  re- 
organization is  necessary  from  a  busi- 
ness standpoint,  a  court  of  equity  has 
power  to  authorize  the  trustee  to  ex- 
change the  old  stock  for  the  new 
stock  and  bonds.  Re  New's  Settle- 
ment, [1901J  2  Ch.  534.  A  trustee  is 
not  liable  merely  because  he  did  not 
sell  a  security  in  a  falling  market, 
the  investment  itself  being  legal.  Re 
Chapman,  [1896]  2  Ch.  763.  Unless 
the  will  permits  it,  an  investment  can- 
not be  changed  into  stock.  Re  Warde, 
2  Johns.  &  H.  191  (1861).  Cf.  Waite 
v.  Whorwood,  2  Atk.  159   (1741).     In 


Jones  v.  Atchison,  etc.  R.  R.,  150  Mass. 
304  (1889),  the  court  upheld  a  sale 
of  stock  made  by  the  trustee  for  the 
purpose  of  changing  the  investment. 
i  See  §  322,  supra.  Cf.  the  cases  in 
note,  p.  914,  supra. 

2  Am.  &  Eng.  Ency.  of  Law,  2d  ed., 
vol.  XXVIII,  p.  994.  A  decree  of  a 
South  Carolina  court  allowing  the 
transfer  of  stock  held  in  trust  in  a 
South  Carolina  corporation  is  not 
binding  on  the  remaindermen  if  they 
were  not  parties  to  the  proceedings. 
Putnam  v.  Lincoln,  etc.  Co.,  118  N.  Y. 
App.  Div.  469  (1907).  Where  trus- 
tees hold  stocks  under  a  will  which 
states  that  the  trustees  shall  "stand 
and  be  possessed,"  to  pay  the  income 
to  specified  persons,  they  have  no 
power  to  sell  the  stock  except  by 
order  of  the  court.  Bremer  v.  Hadley, 
81  N.  E.  Rep.  961  (Mass.  1907). 

3  See  §  329,  infra. 

4  Cooper  v.  Illinois,  etc.  R.  R.,  38 
N.  Y.  App.  Div.  22  (1899).  Bohlen's 
Estate,  75  Pa.  St.  304,  312  (1874); 
also  p.  925,  note  4,  infra;  Perry  on 
Trusts,  §  412. 

5  Harrison  v.  Harrison,  2  Atk.  121 
(1740);  Bostock  v.  Blakeney,  2  Bro. 
Ch.  653  (1789);  Pocock  v.  Reddington, 
5  Ves.  Jr.  794  (1801);  Long  v.  Stew- 
art, 5  Ves.  Jr.  800,  n.  (1801);  Hart  v. 
Ten  Eyck,  2  Johns.  Ch.  62, 117  (1816)  ; 


917 


§  324.] 


who  may   81  v   and  BELL 


[oh.  xix. 


otherwise  the  trustee  would  profii  by  his  own  breach  of  trusl  in  i 
there  was  a  decline  in  the  value  of  the  stock.     The  trusl  attaches 
to  any  stock  standing  in  the  name  of  the  trustee,  and  although  the 
Bame  ,.,.,•;  3  are  uo1   retained,  an  equal  amount  of  other  simi- 

lar stock  owned  by  the  trustee  may  be  applied  to  the  trust.1     Where, 
however,  a  trustee  has  pledged  tn  in  breach  of  trust 

and  becomes  insolvent,  his  general  estate  is  uot  bound  to  redeem  the 
pledge.2     Aii-1  in  all  ivhere  the  trustee  has  Bold  stock  belong- 

ing to  the  tn  ate  in  breach  of  his  duti  trustee,  he  may  be 

held  liable  in  damages  by  the  cestui  que  trust  or  his  representative 
for  the  value  of  the  stock.8    Specific  performance  in  regard  to  a  trust 


Re  Massingberd's  Settlement,  Go  L.  T. 
Rep.  620  (1889).  A  trustee  selling 
stock  at  a  high  price  and  thi  n  r<  plac- 
ing it  at  a  lower  figure  is  liable  to 
the  cestui  que  trust  for  the  high  price. 
Snyder  v.  McComb,  39  Fed.  Rep.  292 
(1889).  Where  a  corporation  is  In 
a  precarious  condition,  a  trustee  hold- 
ing stock  in  it  may  sell  the  stock, 
even  though  he  does  not  sell  stock 
held  by  him  personally,  and  even 
though  it  turns  out  subsequently  that 
it  would  have  been  better  not  to 
have  sold.  Owen  v.  Campbell,  100 
Mich.  34  (1894).  A  trustee  who  re- 
ports a  sale  of  stock,  but  makes  the 
sale  subsequently  to  a  relative  at  a 
low  price  is  liable.  Schweitzer  v. 
Bonn,  53  N.  J.  Eq.  107   (1895). 

i  Pinkett   v.    Wright,    2    Hare,    120 
(1842).    A  trustee  is  liable  for  breach 
of  trust  of  his  co-trustee  in  regard  to 
stock  where  the  former  is  negligent 
in  keeping  himself  informed  as  to  the 
transactions  of  the  latter  in  the  trust 
property.    Bullock  v.  Bullock,  55  L.  T. 
Rep.    703     (1886).      Trust    stock    was 
pledged  by  a  trustee  to  secure  his  own 
debt    in    1864,    the    pledgee   knowing 
that  the   stock  was  trust  stock;    the 
stock  was  sold  by  pledgee  in  1867;  the 
cestui    que    trust   learned   thereof    in 
1877  and  commenced  suit  against  the 
executors  of  the  surety  for  the  trus- 
tee;  judgment  was  rendered  in  1882, 
and    executors    commenced    this    suit 
against     the     pledgee     within     three 
years  after  1882.    Held,  that  no  laches 


or  statute  of  limitations  barred  the 
suit.  Blake  v.  Traders'  Nat.  Hank, 
145  Mass.  13  (1SS7).  See  .Marshall 
p.  Marshall  11  Colo.  App.  505   (1898). 

2  Lowe     v.     Jones,     192     Mass.     94 
(1906). 

3  A  trustee  authorized  to  sell  stock, 
but  selling  in  breach  of  trust,  is  lia- 
ble for  the  value  of  the  stock  at  the 
time  of  commencing  suit  against  him, 
and   interest;    also   for   dividends   de- 
clared after  the  breach   of  trust;    or 
the  cestui  que  trust  may  demand  the 
value  of  the  stock  at  the  time  of  the 
breach   of  trust,   and   interest,   or   re- 
placing  of  similar  stock  and  dividends. 
McKim    v.    Hibbard,    142    Mass.    422 
(18S6).    A  trustee  to  use  stock  to  pay 
debts  may  assign  a  part  of  the  stock 
to  pay  a  debt  due  himself,  if  in  good 
faith  and  at  a  full  valuation.     Patter- 
son r.  Lennig,  118  Pa.  St.  571    (1888). 
"Where  trustees  are  appointed  in  1862, 
and  the  surviving  trustee  dies  in  1879 
and  his  two  executors  continue  to  ex- 
ecute the  trust,  one  being  an  English- 
man and  the  other  an  American,  the 
American  taking  charge  of  the  Ameri- 
can securities,  and  in  1883  new  trus- 
tees  are  appointed,   but   no   effort   is 
made    to    have    the    securities    trans- 
ferred from  the  executors  to  the  new 
trustees  until  1892,  and  in  the  mean- 
time the  American  executor  has  fraud- 
ulently disposed  of  the  American  se- 
curities, the  English  executor  cannot 
be  held  liable,  laches  being  a  bar.   Re 
Taylor,    81    L.    T.    Rep.    812    (1900). 


918 


en.  xix.] 


WHO   MAY    BUT?   AND   SELL   STOCK. 


[§  324. 


estate  of  stock  may  be  decreed.1  A  trustee  may  be  removed  or  held 
liable  for  bad  faith  in  voting  and  controlling  trust  estate  stock.2 
The  executor  of  an  estate  owning  stock  in  a  corporation  may  enjoin 
the  corporation  from  paying  a  back  salary  to  its  president,  who  is 
a  co-executor  of  the  estate,  even  though  the  stock  of  the  estate  was 
pledged  by  the  decedent  and  was  transferred  into  the  name  of  the 
pledg  e.3    Dire-  ed  by  trustees  of  an  estate,  who  were 

elected  directors  in  respect  of  t!.  k  so  held  in  tru-  .       ong  to  the 

ite.4  Trustees  holding  negotiable  bonds  have  the  right  to  deposit 
them  with  a  bank  with  instructions  to  collect  the  coupons  from  time 
to  time  and  credit  the  estate.6  Even  though  a  certificate  of  stock 
runs  to  a  person  as  trustee,  yet,  if,  as  a  matter  of  fact,  it  belongs  to 
him,  the  purchaser  of  the  certifical  i titled  to  the  stock  as  against 


The  mode  of  transferring  stock  on 
the  corporate  books  in  England  is 
described  in  Shepherd  r.  Harris, 
[1905]  2  Ch.  310,  and  it  was  held  that 
a  trustee  who  joins  with  his  co-trus- 
tee, a  stock  broker,  in  selling  the 
stock  as  authorized,  is  not  liable  for 
his  co-trustee  defaulting  with  the  pro- 
ceeds and  forging  the  note  and  stock 
receipt.  Where  the  market  price  of 
stock  has  been  $250  a  share,  but  by 
reason  of  purchases  to  obtain  con- 
trol the  price  is  run  up,  and  an  ex- 
ecutor sells  for  $600  a  share  and  also 
sells  some  of  his  own  at  the  same 
juice,  he  is  not  liable  even  though  the 
stock  subsequently  sells  at  $1500  a 
share.    Christy  v.  CI  :"25  111.  547 

(1907)/  See  also  §729,  infra.  Even 
though  executors  or  trustees  have  im- 
properly disposed  of  stock,  yet  a  suit 
to  recover  the  same,  from  parties  re- 
ceiving the  stock  with  notice  of  the 
facts,  must  be  brought  by  the  trustees 
or  by  the  cestui  que  trust,  after  a  de- 
mand to  the  trustees  to  bring  the 
suit  and  a  refusal  of  the  latter.  Rob- 
inson v.  Adams,  81  N.  Y.  App.  Div.  20 
(1903);  aff'd,  179  X.  Y.  558. 

i  See  §  338,  note,  infra. 

2  Where  a  majority  of  the  stock  of 
the  corporation  passes  by  will  to  a 
trustee  of  the  estate,  and  he  makes 
himself  president  and  increases  his 
salary,  and  pays  little  attention  to  the 
business,    and   tries   to   sell   the   com- 


pany out  to  a  consolidation,  and  does 
not  properly  divide  the  income  be- 
tween life  tenant  and  remaindermen, 
and  causes  the  company  to  sell  its 
reserve,  and  is  responsible  for  the 
company  losing  its  most  valuable  con- 
tract, and  is  unable  to  agree  with  a 
cestui  que  trust,  the  court  will  remove 
him  from  the  trusteeship.  Lister  v. 
Weeks,  60  N.  J.  Eq.  215  (1900).  See 
also  §  612,  infra.  Even  though  a 
trustee  of  stock  who  has  been  an  offi- 
cer and  stockholder  in  the  corpora- 
tion is  voted  a  salary,  this  is  no 
ground  for  removing  him  as  trustee, 
there  being  no  proof  that  he  voted  in 
favor  of  the  salary.  Neither  is  the 
fact  that  the  company  did  not  pay  as 
large  dividends  as  it  formerly  did, 
any  ground  for  the  removal  of  the 
trustee.  Dailey  v.  Wight,  94  Md.  269 
(1902).  Where  all  the  assets  of  a 
corporation  are  transferred  for  stock 
of  another  corporation  and  such  stock 
is  sold  by  trustees  of  the  former  to 
pay  its  debts,  the  fact  that  one  of  the 
trustees  subsequently  buys  a  portion 
of  the  stock  does  not  render  him  lia- 
ble for  such  debts.  Wing  v.  Charleroi, 
etc.  Co.,  112  Fed.  Rep.  817  (1902). 

3  Monmouth  Inv.  Co.  v.  Means,  151 
Fed.  Rep.  159  (1906).  See  also  §  612, 
infra. 

4  Re  Francis,  etc.  92  L.  T.  Rep.  77 
(1905). 

5  Re  De  Pothonier,  [1900]  2  Ch.  529. 


919 


g  325 1  who  mav  BUT  a:,  K.  [CH.  mx. 

a  claim  to  the  Btock  made  by  a  t  >n  of  the  v.  ndor.    Th<  re  Is  no  trust 
in  3uch  a  case.1 

§325.    Transferee  of  stock  from  trustee  is  protected,  when.— A 
v,  ndee  or  pledgee  of  3tock,  din  rom  a  tru  r  is  nol  pro- 

ted  in  his  iuhn  -t   in   t!  ling  as   he   le   -  r   ie 

chargeable  with  notice  of  the  fact  that  the  Btock  belongs  to  a  trust 
estate,  and  thai  the  trustee  is  usi  I  in  breach  of  the  trust  Any- 
thing that  is  sufficient  to  put  a  |  n  inquiry  i-  quiva- 
lcnt  to  actual  notice,  if  inquiry  be  nol  made  and  reasonably  satisfied. 
The  law  imputes  to  a  purchaser  the  knowledge  of  a  fact  of  which 
the  exercise  of  common  prudence  and  ordinary  diligence  would 
have  apprised  him.  This  ie  called  constructive  notice,  and  has  the 
Bame  ,  fifed  as  an  actual  notice  of  the  trust  eship.  The  most  common 
instance  of  a  constructive  notice  that  stud.  Id  belongs  to  a 
trust  estate  is  where  the  words  "trustee"  or  "in  trust,"  either  with 
or  without  the  name  of  the  cestui  que  trust,  are  written  on  the  face 
of  the  certificate  of  stock  after  the  name  of  the  person  in  wh 
name  it  stands  on  the  corporate  books,  [t  is  well  established  that 
such  words,  indicating  a  trustee  ownership,  are  notice  to  the  pur- 
chaser that  his  vendor  is  selling  trusl  property,  and  that  he  must 
ascertain  whether  the  trustee  has  power  to  sell  the  stock.2     There 

1  Amberson  v.  Johnson,  127  Ala.  490     (1891) ;  Budd  v.  Munroe,  18  Hun,  316 
,1900)  (1879).     Where  trustees  under  a  will 

2  Quoted  and  approved  in  Johnson    hold  registered  bonds,  the  registration 

v     Amberson,    140    Ala.    342    (1904).     being   to   them   as    trustees,   it   is    II- 

Where  stock  stands  in  the  name  of    legal    for    the    corporation    to    allow 

a  person  as  "trustee,"  a  pledgee  of  the    one    of   them    to    transfer   such    reg- 

same  is  bound  to  inquire  as   to  the    istered  bonds,  and  the  corporation  is 

character  of  the  trust  and  is  not  pro-    liable  for  the  same  if  such  transfer 

tected  "if  it  turns  out  that  a  reason-    is  in  breach  of  trust  on  the  part  of 

able    inquiry    would    have    disclosed    the  trustee.     Cooper   v.   Illinois,   etc. 

that  the  property  had  been  transferred    R.  R.,  38  N.  Y.  App.  Div.  22    (1899). 

in   violation    of    the   duty    or   power    In  this  case  the  bonds  had  been  reg- 

of  the  trustee."     Such  pledgee  takes    istered  in  the  name  of  the  executor 

the  stock  subject  to  the  right  of  the    of  the  estate,  who  upon  his  death  was 

cestui  que  trust  or  of  the  trustee  to     succeeded  by  two  trustees,  and  one  of 

reclaim  possession.     First  Nat.  Bank,    these  trustees  caused  the  corporation 

v.   Nat.    Broadway   Bank,    156    N.    Y.    to  transfer  the  bonds  from  the  name 

4*59   (1898).     "A  certificate  for  shares    of    such    executor    to    bearer.       The 

of  stock  running  to  'A.   B.,  trustee,'    court   held,   however,   that   a   broker, 

or     to     'A.     B.,     in     trust,'     without    who  sold  the  bonds,   was  not  liable, 

disclosing    the  '  names     of    beneficia-    although  he  knew  that  the  bonds  were 

ries  or  the  particulars  of  the  trust,  is    registered  in  the  name  of  the  execu- 

notice  to  a  purchaser  of  the   shares    tor   prior  to   the  transfer   thereof  to 

that  'A   B '  does  not  hold  them  in  his    bearer.     Where  a  trustee  has   depos- 

own  right  but  as  a  trustee."    Gerard    ited  funds  with  a  bank  as  trustee  for 

V    McCormick,    130    N.    Y.    261,    267    a  long  time,  and  obtains  a   loan  as 

920 


en.  xix.  J 


WHO   MAY   BUY   AND    SELL   STOCK. 


[§  325. 


are  many  other  facts  which  will  prevent  the  vendee  from  claiming 
that  he  is  a  bona  fide  holder  of  the  stock.  Thus,  if  the  stock  is 
pledged  to  a  bank  by  the  trustee,  who  is  a  director  of  a  bank,  and  tlio 


trustee  and  pledges  bonds  as  security, 
the  bank  may  be  a  bona  fide  holder  of 
the  same,  even  though  the  bonds  have 
been  stolen  and  have  been  issued 
twenty  years  prior  thereto  and  the 
corners  appear  to  have  been  burned. 
Depositing  funds  as  "trustee"  did  not 
give  notice  that  he  was  acting  for 
others  and  did  not  require  an  investi- 
gation as  to  his  authority.  Manhattan 
Sav.  Inst.  v.  N.  Y.  etc.  Bank,  170  N.  Y. 
58  (1902).  In  Shaw  r.  Spencer,  100 
Mass.  382  (1868),  the  court  said  that 
the  word  "trustee"  means  "trustee  for 
some  one  whose  name  is  not  dis- 
closed," and  that  a  custom  of  trade 
disregarding  such  words  on  certifi- 
cates of  stock  is  illegal  and  ineffectual 
to  protect  the  purchaser.  To  same  ef- 
fect, Jaudon  v.  National  City  Bank,  8 
Blatchf.  430  (1871) ;  s.  c,  13  Fed.  Cas. 
376;  aff'd,  Duncan  v.  Jaudon,  15  Wall. 
165,  176,  where  the  court  says  the 
purchasers  "are  chargeable  with  con- 
structive notice  of  everything  which, 
upon  inquiry,  they  could  have  ascer- 
tained from  the  cestui  que  trust."  A 
corporation  is  liable  for  allowing  a 
transfer  of  stock  standing  in  the 
name  of  a  person  as  trustee  where 
such  transfer  was  unauthorized.  Gey- 
ser-Marion, etc.  Co.  v.  Stark,  106  Fed. 
Rep.  558  (1901),  holding  also  that  a 
custom  to  the  contrary  is  not  bind- 
ing unless  the  cestui  que  trust  con- 
sented thereto,  and  that  the  presump- 
tion is  that  a  trustee  has  no  power  to 
sell  or  transfer  the  subject  of  the 
trust.  The  court  said:  "The  word 
'trustee'  means  something.  It  is  a 
warning  and  declaration  to  every  one 
who  reads  it  (1)  that  the  person  so 
named  is  not  the  owner  of  the  prop- 
erty to  which  it  relates;  (2)  that  he 
holds  it  for  the  use  and  benefit  of 
another;  and  (3)  that  he  has  no  right 
or  power  to  sell  or  dispose  of  it  with- 
out the  assent  of  his  cestui  que  trust." 


The  court  pointed  out  that  there  were 
only  three  decisions  to  the  contrary; 
two  in  California  and  one  in  Mary- 
land, the  latter  of  which  had  been 
overruled  by  Marbury  v.  Ehlen,  72 
Md.  206.  See  also  Gaston  v.  American 
Ex.  Nat.  Bank,  29  N.  J.  Eq.  98  (1878) ; 
Walsh  r.  Stille,  2  Pars.  Sel.  Cas.  (Pa.) 
17  (1842).  A  pledgee  of  stock  which 
upon  its  face  is  held  in  trust  is  bound 
to  Inquire  into  the  power  of  the 
trustee  to  make  the  pledge,  and  the 
fact  that  he  has  made  a  pledge  on  an- 
other occasion  is  not  enough.  Clem- 
ens r.  Heckscher,  185  Pa.  St.  476 
(1898).  See  also  Simons  v.  South- 
western R.  R.  Bank,  5  Rich.  Eq.  (S. 
C.)  270  (1853),  where  a  master  in 
chancery  held  the  stock  in  his  own 
name  officially;  Loring  v.  Brodie,  134 
Mass.  453  (1883);  Loring  v.  Salisbury 
Mills,  125  Mass.  138  (1878);  Sweeney 
v.  Bank  of  Montreal,  5  Can.  Law  T. 
503  (18S5);  Bank  of  Montreal  v. 
Sweeny,  L.  R.  12  App.  Cas.  617  (1887). 
In  California,  however,  it  is  held  that 
although  the  word  "trustee"  on  the 
face  of  the  certificate,  followed  by  the 
name  of  the  cestui  que  trust,  may  give 
notice  that  it  is  trust  property,  yet 
that  where  the  word  "trustee"  is  but 
a  cloak  for  an  agency,  for  the  purpose 
of  shielding  the  real  owner  from  lia- 
bility on  his  stock,  and  to  conceal  the 
fact  that  he  is  dealing  in  stocks,  the 
court  will  disregard  it,  and  will  not 
protect  the  real  owner  against  his 
agent's  unauthorized  sale  of  the  stock. 
Brewster  v.  Sime,  42  Cal.  139  (1871); 
Thompson  v.  Toland,  48  Cal.  99 
(1874).  In  Maryland  it  is  held  that 
the  word  "trustee"  added  to  the  name 
appearing  on  the  certificate  of  stock 
does  not  require  the  purchaser  to 
make  extraordinary  investigations. 
The  fact  that  the  vendor  sells  as 
trustee  is  not  notice  that  he  intends 
to   commit   a  breach  of  trust,  there 


921 


.-     I  WHO    MAV     I.  Iv.  [CH.    XIX. 

|i;mk  is  prohibited  from  loaning  to  it-  dirt  the  bank  is  doI  a 

bona  fide  bolder,  though  without  notice  or  knowledge  of  the  trusl 

ship.1 

I,,   England,  the  Eouse  of  Lords  has  decided  thai  certificates  of 
sk  in  railway  compani  ;otiable  in  any  respect,  and 

that  a  bona  fide  transferee  of  the  certil  ao1   pn  I   until 

he  bas  obtained  registry  in  the  corporate  books.2     In   this  country 
a  different  rule  prevails,  and  il  cepted  and  assume  men- 

tary  that  a  bona  fide  purchaser  for  sralui  ertificates  of  stock  be- 

longing to  a  trusl  estate,  and  sold   in  breach  of  trust,  there  being 
M  of  tli'-  trust  on  the  certificati  -,  i-  pn  tected   in  his  pur- 
chase, although  he  bas  d  red  the  transfer  on  the  corporate 

-.     A  bona  fide  purchaser  through  several  mesne  conveyan< 
starting   from  a  trustee  wh<>  Bells  the  stock  in  breach  «'L'  trust,   is 
protected.8 

being  nothing  on  the  record  to  indi-  Ch.    407.        V     hank    which    reeei . 
cate    such    intent.      Grafllin    v.    Robb,  trust  stock  as  security  for  a  loan. 
84  Md.  451    (1896).     Where  a  certifi-  afterward,      on   payment  of  the  loan, 
cate  of  stock  runs  to  a  person  abso-  transfers    the    stock    to    parties    des- 
lutely  and  passes  into  bona  fide  hands,  ignated   b              pledgor,   is   liable   to 
the  corporation   is  not  liable   for   al-  the  cestui  que  trust  for  aiding  in  the 
lowing  a  transfer,  even  though  such  latter    transfer.      Magnus    r.    Queens- 
stock  was  held  in  trust  and  the    cor-  land  Nat.  Bank,  L.  R.  37  Ch.  D.  4C6 
poration   knew   the  fact   so  to   be,   it  (1888),  aff'g  L.  R.  36  Ch.  D.  25. 
appearing  that  no  harm  was  done  by  2  Shropshire   Union,  etc.  Co.  v.  Re- 
the  transfer,  inasmuch  as  the  certifi-  gina  L.  R.   7   H.  L.  496    (1875).     Cf. 
cate    had    already    passed    into    bona  Dodds    v.    Hills,    2    Hem.    &    M.    424 
fide  hands.     Smith    v.   Nashville,   etc.  (1865);  also  §§  377,  412,  infra.    A  ces- 
R.  R.,  91  Tenn.    221    (1S92).     A  pur-  tui    que    trust    of    stock    in    England 
chaser   of    certificates    of    stock   need  may   defeat   a    bona  fide   purchaser's 
not  look  back  of  the  last  registry  of  title   to    the   stock   by   suing   for   the 
transfer   on  the  corporate  books.     A  stock  before  a  transfer  is  made  on  the 
breach  of  trust  back  of  that  does  not  corporate  books.    Roots  v.  Williamson, 
invalidate  his  title.     Y/inter  v.  Mont-  L.  R.  38  Ch.  D.  485  (1888).    In  Powell 
gomery,  etc.  Co.,  89  Ala.  544   (1890);  v.  London  &  Prov.  Bank,  [1893]  1  Ch. 
Salisbury     Mills     v.     Townsend,     109  610;  aff'd,  [1893]  2  Ch.  555,  the  trans- 
Mass.  115  (1871).    Where  stock  stand-  feree  lost  title  to  stock  which  really 
ing  in  the  name  of  a  person  as  trustee  belonged  to  a  trust  estate,  but  which 
is  sold  and  the  certificates  are  turned  stock  stood  in  the  trustee's  name  ab- 
in  for  transfer  without  the  purchaser  solutely  as  the  full   owner,  although 
seeing  them,  he  takes  good  title,  even  the  transferee  had  obtained  a  trans- 
though  there  was  a  breach  of  trust,  fer   on   the  books,   it   appearing   that 
he  not  knowing  of  such  breach  nor  the  transferee  had  filled  in  a  part  of 
of  the  trusteeship.     Notice  to  a  per-  the  essential  -blanks, 
son  attending  to  the  transfer   is  not  3  Salisbury  Mills  v.  Townsend,  109 
notice  to  the  transferee.     Stinson  v.  Mass.  115    (1871);    Stinson  v.  Thorn- 
Thornton,  56  Ga.  377   (1876).  ton,    56    Ga.    377     (1876);     Cohen    r. 
l  Albert  v.  Baltimore  Savings  Bank,  Gwynn,  4  Md.  Ch.  357  (1848).    Where, 
2   Md.   159,   171    (1852),    aff'g   1   Md.  however,    the    trustee    has    been    re- 

922 


CII.    XIX.] 


WHO   May    BUY   AND  SELL  STOCK. 


[$   32G. 


§  32G.   The  mere  fact  that  a  purchaser  of  stock  knows,  or  is  bound 
to  take  notice  from  the  certi  of  stock,  that  he  is  buying  from 

a   trustee,  and  that  th  nigs  to  the  trust  estate,   puts  tho 

purchaser  to  no  inquiry  except  that  of  ascertaining  whether  tho 
trustee  has  power  to  .-''11  the  -lock.  If  he  has  .such  power  the  pur- 
chaser will  be  protected,  although  the  trustee  uses  tho  money  for 
his  own  private  purposes,  provided  the  purchaser  lias  no  notice  of 
such  an  intent  on  the  part  of  tho  trustee.1  Tho  purchaser  has  a 
right  to  assume  that  the  object  of  the  sale  is  to  invest  the  funds  in 
;i  permanent  investment  or  to  discharge  liabilities.2  Where,  how- 
ever, the  purchaser  knows  that  his  vendor  soils  or  pledges  the  stock 
as  trustee,  and  also  knows  that  the  sale  or  pledge  is  for  the  private. 
debts  or  purposes  of  the  trustee,  the  purchaser  is  chargeable  with 
knowledge  of  the  breach  of  trust,  and   i  protected.3     Nor  is  a 

pledgee  of  .-took  from  a  trustee,  acting  as  trustee,  protected  where 
the  trustee  is  authorized  merely  to  sell  th  k.4     Power  to  sell 


moved  by  a  court  and  another  trustee 
appointed  in  the  state  of  the  corpora- 
tion, a  purchaser  of  the  certificates 
held  by  the  old  trustee  is  not  pro- 
tected, his  purchase  being  after  the  re- 
moval. Sprague  v.  Cocheco  Mfg.  Co., 
10  Blatchf.  173  (1872);  s.  c,  22  Fed. 
Cas.  960.  But  in  Holbrook  v.  New 
Jersey  Zinc  Co.,  57  X.  Y.  616  (1874),  it 

s  held  that  a  successful  suit  in  a 
state  not  the  state  of  the  corporation, 
to  remove  a  trustee,  does  not  affect  a 
hona  fide  purchaser  of  the  certifi- 
cate ffom  the  trustee,  the  purchase 
being  made  pending  the  suit;  and 
that  the  corporation  allowing  regis- 
try of  the  new  trustee  as  holder  of  the 
stock,  and  issuing  new  certificates  to 
him,  is  liable  in  damages  to  the  pur- 
chaser from  the  old  trustee. 

i  Hughes  p.  Drovers',  etc.  Bank,  86 
Md.  418  (1897);  Perry  on  Trusts, 
§  225,  3d  ed.  (1S82) ;  Lewin  on  Trusts, 
417,  7th  ed.  (1879);  Godefroi  on 
Trusts,  125,  127  (1879).  Where  the 
will  directs  that  the  life  tenant  shall 
be  allowed  to  manage  and  take  pos- 
session of  stock  constituting  the  trust 
estate,  and  the  trustee  is  exempted 
from  liability  therefor,  a  bona  fide 
pledgee  of  the  stocks  from  the  life 
tenant  is  protected.    Freeman  r.  Bris- 


tol  Sav.   Bank,   76   Conn.    212    (1903). 

2  A-ShtOD  r.  Atlantic  Bank,  85  Mass. 
217  (1861),  where  the  trustee  sold 
land,  took  notes  in  payment,  and 
stock  as  collateral,  and  sold  the  notes 
with  the  collateral. 

3  .Jaudon  v.  Xational  City  Bank,  8 
Blatchf.  450  (1871) ;  8.  c.  13  Fed.  Cas. 
376;  aff'd  sub  num.  Duncan  p.  Jaudon, 
IT.  Wall.  165;  Walsh  v.  Stille,  2  Pars. 
Sel.  Cas.  (Pa.)  17  (1842);  White  v. 
Price,  39  Hun,  394  (1886);  aff'd,  108 
N  Y.  661;  Simons  v.  Southwestern  R. 
R.  Bank,  5  Rich.  Eq.  (S.  C.)  270 
(1853);  Shaw  v.  Spencer,  100  Mass. 
382  (1868),  holding  also  that  silence 
while  the  vendee  pays  an  assessment 
is  no  waiver.  Where  the  pledgee  of 
the  trustee  knows  that  he  is  pledging 
trust  estate  stock,  and  the  pledge  is 
for  a  personal  loan  to  the  trustee,  the 
transaction  is  illegal.  Tuttle  v.  First, 
etc.  Bank,  187  Mass.  533  (1905). 
Where  the  purchaser  of  trust  estate 
stock  took  with  notice  of  the  trust, 
such  person  may  be  joined  with  the 
corporation  itself  as  parties  defendant 
in  a  suit  to  recover  back  the  stock. 
Luddington  v.  Mercantile  Nat.  Bank, 
102  X.  Y.  App.  Div.  251  (1905);  aff'd, 
182  X.  Y.  522. 

4  Loring   v.   Brodie,   134   Mass.   453 
23 


327.] 


WHO    M  \Y    I'.l   Y 


,1.    \I\. 


does  not  confer  power  to  pledge.1     Where  a  broker  has  with  aol 

It  with  a  trustee  who  was  using  trust  securities  illegally,  the 
broker  may  be  b<  Id  liable  at  law  for  conversion  or  in  equity  to 
reach  the  securities  and  account  for  the  dividends  and  their  vralue.* 
Where  the  cestuis  que  trust  are  of  full  age  and  consenl  to  tin-  trus- 
tee using  3tock  belonging  to  the  trusl  in  violation  of  the  trust  agree- 
ment, they  eannot  afterwards  complain  and  compel  the  person  buy- 
ing SUCh   .-lock   to  return    the   -aim  .  ' 

§  327.  Rights  and  liaMitie8  of  the  corporation  aUovm  iga  transf*  r 
by  a  trustee  in  breach  of  his  trust.  -Where  a  corporation  has  no- 
tice that  a  stockholder  holds  his  stock  as  trustee  for  another,  and 
the  means  of  ascertaining  the  character  of  thai  trusl  are  within  the 
power  of  the  corporation,  it  is  bound  to  refuse  to  allow  a  registry 
of  the  trustee's  transfer  until  it  is  satisfied  thai  the  trustee  has  power 
to  make  the  transfer.4     If  the  corporation  allows  the  transfer,  and 


(1883).  Pledgees  from  the  trustee 
for  antecedent  debts  are  not  bona  fide 
holders  without  notice,  even  though 
the  form  of  a  public  sale  was  gone 
through.  Darling  v.  Potts,  118  Mo. 
506  (1893). 

1  Merchants'  Bank  v.  Livingston,  74 
N.  Y.  223  (1878);  Manhattan  Bank  v. 
Walker,  130  U.  S.  267  (1889);  Webb 
v.  Graniteville  Mfg.  Co.,  11  S.  C.  396 
(1878).  The  power  of  an  agent  to 
sell  does  not  authorize  him  to  pledge. 
First  Nat.  Bank  v.  Taliaferro,  72  Md. 
164  (1890).  Power  to  sell  and  rein- 
vest does  not  give  a  trustee  power  to 
pledge.  First  Nat.  Bank  v.  Nat.  Broad- 
way Bank,  156  N.  Y.  459  (1898).  On 
this  subject  see  also  §  321,  supra,  and 
§  351,  infra. 

2  English  v.  Mclntyre,  29  N.  Y.  App. 
Div.  439  (1898).  A  stock  broker  who 
sells  stock  which  on  its  face  runs  to 
a  person  as  trustee  and  who  knows 
it  belongs  to  a  trust  estate  and  who 
pays  the  proceeds  to  the  trustee  in- 
dividually may  be  compelled  to  re- 
pay the  money  to  the  trust  estate  if 
the  trustee  has  embezzled  the  same, 
and  such  liability  may  be  enforced  by 
a  suit  in  equity.  Safe,  etc.  Co.  v.  Cahn, 
102  Md.  530   (1906). 

3  Preble  v.  Greenleaf,  180  Mass.  79 
(1901). 

9 


•i  Chapman  v.  City  Council,  28  S.  C. 
373  (1S88);  Bayard  v.  Farmers',  etc. 
!:.  52  Pa.  St.  232  (1866),  where  a 
refusal  of  the  corporation  to  transfer 
until  the  terms  of  the  trust  were  ex- 
amined by  its  attorney  and  found  to 
allow  the  sale  was  sustained.  The 
corporation  cannot,  however,  retain 
the  copies  of  the  probate  records  used 
in  investigating.  Bird  v.  Chicago,  etc. 
R.  R.,  137  Mass.  428  (1884).  Where 
a  trustee  transfers  stock,  a  corpora- 
tion may  insist  on  his  showing  his 
authority  so  to  do.  Hill  on  Care  of 
Estates,  p.  105.  In  the  transfer  of 
trust  stock  the  corporation  may  very 
properly  refuse  to  allow  a  registry 
where  the  sale  is  made  by  the  trustee 
at  a  price  far  below  its  market  value. 
Succession  of  Boullemet,  39  La.  Ann. 
1046  (1887).  Where  stock  is  trans- 
ferred to  a  trustee  by  the  executors, 
the  corporation  knowing  of  the  trust, 
and  the  corporation  subsequently  al- 
lows the  trustee  to  transfer  the  stock 
to  third  persons,  the  corporation  is 
liable  to  the  cestui  que  trust  if  such 
last-mentioned  transfer  is  fraudulent 
and  in  breach  of  trust.  Maybury  r. 
Ehlen,  72  Md.  206  (1890).  If  the  will 
gives  the  executrix  power  to  sell  the 
stock,  the  corporation  is  protected  in 
allowing  transfers  by  the  executrix 
24 


CII.    XIX.] 


WHO   MAY    BUY    AND    SELL    STOCK. 


[§  327. 


the  trustee  Lad  no  power  to  make  it,  the  corporation  is  liable  to  the 
i    dui  que  trust*     The  fact  that  the  certificate  runs  to  the  holder 
as  "trustee"    is   sufficient  notice  to  the  corporation.-     Notice  to  a 
ird  of  directors  is  n  to  all  subsequent  boards.3     The  corpora- 

tion is  bound  to  see  that  the  sale  by  the  trustee  is  made  in  accordance 
with  the  terms  of  the  trust.  Thus,  it  is  liable  if  it  permits  a  sale 
and  transfer  by  one  trustee  when  there  are  two  trustees;  and  a 
general  power  of  attorney  by  the  other  trustee  authorizing  sales  will 
not  jo-.  the  corporation  in  its  registry  of  a  transfer  signed  by  one 

only.4     It  is  liable  for  allowing  an  illegal  registry  of  a  trustee's  trans- 


and  trustee,  even  though  it  did  not 
know  the  contents  of  the  will.  Al- 
though the  transfer  is  to  a  bank,  the 
corporation  is  not  bound  to  know  that 
the  transfer  is  a  pledge  and  not  a 
sale.  Peck  v.  Providence  Gas  Co.,  17 
R.  I.  275  (1891).  Where,  upon  reor- 
;  anizatlon,  the  committee  issues 
transferable  certificates  exchangeable 
into  stock  of  the  new  corporation 
when  it  is  formed,  the  new  corpora- 
tion is  liable  for  allowing  an  exchange 
by  a  person  to  whom  a  trustee  has 
illegally  transferred  the  certificates 
issued  to  him.  Mobile,  etc.  Ry.  p. 
Humphries,  7  S.  Rep.  522  (Miss. 
1890).  Where  trustees  under  a  will 
hold  registered  bonds,  the  registra- 
tion being  to  them  as  trustees,  it  is 
illegal  for  the  corporation  to  allow 
one  of  them  to  transfer  such  regis- 
tered bonds,  and  the  corporation  is 
liable  for  the  same  if  such  transfer  is 
in  breach  of  trust  on  the  part  of  the 
trustees.  Cooper  v.  Illinois,  etc.  R.  R., 
38  N.  Y.  App.  Div.  22  (1899).  In  this 
case  the  bonds  had  been  registered  in 
the  name  of  the  executor  of  the  estate, 
who,  upon  his  death,  was  succeeded 
by  two  trustees,  and  one  of  these 
trustees  caused  the  corporation  to 
transfer  the  bonds  from  the  name  of 
such  executor  to  bearer.  The  court 
held,  however,  that  a  broker  who  sells 
the  bonds  is  not  liable,  although  he 
knew  that  the  bonds  were  registered 
in  the  name  of  the  executor  prior  to 
the  transfer  thereof  to  bearer.  Where 
stock  is  specifically  bequeathed  in 
trust  for  a  certain  person  during  her 


life  and  then  for  her  children,  and 
the  corporation  allows  the  executor 
to  transfer  the  stock  to  the  trustee,  as 
trustee  for  the  life  tenant  only,  and 
afterwards  allows  the  trustee  to  trans- 
fer the  stock  to  bona  fide  hands,  the 
corporation  is  liable  for  allowing  the 
second  transfer.  Wooten  v.  Wilming- 
ton, etc.  R.  R.,  128  N.  C.  119  (1901). 
See  also  §  560,  infra. 

i  Quoted  and  approved  in  Young  v. 
New  Standard,  etc.  Co.,  148  Cal.  306 
(1905). 

2  See  §  325,  supra.  In  the  case  of 
Stockdale  v.  South  Sea  Co.,  Barn.  Ch. 
363  (1740),  the  court  said,  however: 
"These  great  companies  are  only  to 
consider  the  person  in  whose  name 
the  stock  is  standing,  unless  the  trust 
of  that  stock  is  declared  in  their 
books." 

3  Mechanics'  Bank  v.  Seton,  1  Pet. 
299   (1828). 

4Bohlen's  Estate,  75  Pa.  St.  304, 
312  (1874).  Cooper  v.  Illinois,  etc.  R. 
R.,  38  N.  Y.  App.  Div.  22  (1899). 
Perry  on  Trusts,  Sec.  412.  Nor  where 
the  signatures  of  the  other  trustees 
are  forged  by  one.  Cottam  v.  Eastern 
Counties  Ry.,  1  Johns.  &  H.  243 
(1360).  In  England  one  executor  or 
trustee  cannot  assign  railway  stock. 
All  must  join.  Barton  v.  North  Staf- 
fordshire Ry.,  L.  R.  38  Ch.  D.  458 
(1888).  Cf.  Re  Taylor,  81  L.  T.  Rep. 
812  (1900).  Where  stock  stands  in 
the  name  of  two  trustees,  and  one 
signs  a  transfer  and  the  signature  of 
the  other  trustee  is  forged  thereto, 
a   stock  broker  who  caused  the  cor- 


925 


§    328.]  WHO    MAY    BUT    A'.  k'.  I-    XIX. 

fer,  when  the  trust  is  for  an  unmarried  woman,  to  I  when 

she  shall  marry.1     [f  thi  .1  cestuis  <]><<■  trust,  the  corpora- 

tion is  liable  for  allowing  one  of  them  to  transfer  the  whole  inter,  -t 
in  the  stock,  where  by  mi  of  the  corporation  the  had  1"  i  d 

istered  in  the  name  of  that  one,  and  not  in  the  name  of  the  trus- 
tee.2 It',  however,  the  cestui  que  trust  is  guilty  of  laches  in 
taking  steps  to  obtain  his  rights,  the  corporation  is  discharged.8 
Tims  even  though  the  corporation  allows  the  life  tenant  to  sell  the 
Btock   outright,  yet  it'  the  remainderman  does  sue   within   the 

period  of  limitations,  after  knowledge  of  the  facts,  the  corporation 
is  not  liable.4  The  remedy  of  a  cestui  que  trust  is  in  equity  not  at 
law.6  A  waiver  <>f  former  breaches  of  trusl  is  no  waiver  of  the  one 
complained  of,  and  a  judgment  against  the  trustee  himself  is  no  bar 
to  the  suit,  against  the  corporation,  excepl  to  the  extent  thai  satis- 
faction had  been  obtained.6  The  corporation  may  be  compelled  by 
the  court  to  purchase  an  equal  amount  of  stock  and  register  it  for 
the  bent  lit  of  the  cestui  que  trust.'1  Keith)  r  the  corporation  which 
allows  a  tnm.-t'er  by  a  trustee  nor  a  purchaser  from  the  trustee  of 
shares  of  stock  need  look  to  the  application  by  the  trustee  of  the 
purchase  price.  All  that  they  are  required  to  investigate  is  the  power 
to  transfer.8  Where  a  certificate  of  stock  rims  to  a  person  as  attor- 
ney for  another  person  and  the  latter  dies,  the  attorney  cannot  com- 
pel the  corporation  to  transfer  the  stock  on  his  signature  as  attorney, 
unless  the  executor  of  the  estate  also  joins  in  the  transfer.9 

§  328.  Sales  of  stock  by  a  guardian. — At  common  law  a  guard- 
ian may  sell  the  personal  property  belonging  to  him  as  guardian 
without  obtaining  any  special  license  or  authority,  and  a  bona  fide 
purchaser  from  him  of  such  property  is  protected,  and  is  entitled 

poration  to  make  a  transfer  thereun-  stockholder  to  hold  a  corporation  lia- 

der  is  liable  to  the  corporation,  even  ble   for   his   stock   and   dividends,   by 

though  he  acted  in  good  faith.    Oliver  reason  of  its  allowing  a  transfer  by 

v.  Governor  &  Co.,  [1902]   1  Ch.  610;  an  unauthorized   agent   of  the  stock- 

aff'd,    88    L.    T.    Rep.    244,    sub    nom.  holder,  the  subsequent  owners  of  the 

Starkey  v.   Governors,  etc.   of  Bk.  of  stock  are  not  necessary  parties.     The 

England.  defense  of  prescription   may  prevail. 

i  Magwood  v.  Railroad  Bank,  5  S.  C.  St.   Romes  v.  Levee,  etc.  Co.,   127   U. 

379    (1874).  S.  614   (1888). 

2  Farmers',  etc.  Bank  v.  Wayman,  5  c  Loring    v.     Salisbury    Mills,     125 
Gill   (Md.),  336   (1847).  Mass.  138    (1878). 

3  Albert  v.  Baltimore  Sav.  Bank,  1  7  Bohlen's    Estate,    75    Pa.    St.    304 
Md.  Ch.  407    (1849);   aff'd,  2  Md.  159  (1874).     See  also  §  284,  supra. 
(1852).  s  Hughes  v.  Drovers',  etc.  Bank,  86 

4  Yeager  v.  Bank  of  Kentucky,  106  Md.   418    (1897);    also  §326,  supra. 
S.  W.  Rep.  806  (Ky.  1908).  9  Spellissy  v.  Cook,  etc.  Co.,  58  N.  Y. 

5  Loring    v.     Salisbury     Mills,     125  App.  Div.  283   (1901). 
Mass.    138    (1878).     In    a   suit   by   a 

926 


CH.    XIX.] 


WHO   MAY   BUY  AND   SELL   STOCK. 


[§   329. 


to  the  property,  even  though  the  guardian  misappropriates  the  pro- 
ds of  the  -ale.1  This  rule  applies  to  shares  of  stock.2  In  most 
of  the  states,  however,  statutes  have  been  passed  requiring  guard- 
ians to  obtain  the  consent  of  a  court  before  selling  the  personal 
property  of  his  ward.3  If  such  a  statutory  permission  to  sell  is  re- 
quired, and  the  vendee  of  stock  has  notice  that  his  vendor  sells  as 
guardian,  the  vendee  is  bound  to  see  that  the  requisite  permission 
to  sell  has  been  given.4  A  person  taking  a  certificate  of  stock  run- 
ning to  a  guardian  and  indorsed  by  him  in  blank  must  inquire  into 
the  authority  of  the  guardian  to  dispose  of  the  stock,  and  he  must 
examine  the  proceedings  of  the  court  authorizing  the  sale  and  see 
that  the  proceedings  are  in  accordance  with  the  statute.5  An  order 
of  the  court  allowing  the  guardian  to  sell  is  nut  authority  to  him  to 
pledge  t!  :k,   and   the  pledgee   i-   bound   to  take  notice  of  that 

fact.6  Where  stock  is  sold  by  a  foreign  guardian  according  to  the 
laws  of  the  state  of  the  guardianship,  title  passes  and  the  purchaser 
is  protected.7 

§  329.   Sales  of  stock  by  an  executor  or  administrator. — It  is  the 

duty   of  an   executor   or   administrator   of   an    estate  to  collect  tin; 

its,  pay  the  debts,  and  distribute  the  remainder  according  to  the 


1  Field  v.  Schieffelin,  7  Johns.  Ch. 
150  (1823);  Ellis  v.  Essex  Merrimack 
Bridge,  19  Mass.  243  (1824),  holding 
that  a  bona  fide  purchaser  from  the 
guardian  of  a  person  non  compos 
mentis  is  protected. 

2  Lamar  v.  Micou,  112  U.  S.  452,  475 
(1884),,  the  court  saying:  "He  had  the 
authority,  as  guardian,  without  any 
order  of  court,  to  sell  personal  prop- 
erty of  his  ward  in  his  own  pos- 
session, and  to  reinvest  the  proceeds." 
See  also  Bank  of  Virginia  v.  Craig,  6 
Leigh  (Va.),  399,  432  (1835),  to  the 
same  effect,  and  holding  that  the  cor- 
poration is  not  liable  for  a  breach  of 
trust  by  the  guardian  in  selling  the 
stock.  The  court  said:  "If  the  guard- 
ian defrauds  his  ward,  his  sureties 
are  responsible;  if  the  purchaser  com- 
oines  in  the  fraud,  he  too  is  charge- 
able; but  the  bank  cannot  interfere 
and  arrest  the  transfer  of  its  stock  by 
tne  legal  holder  of  the  scrip  upon 
such  pretenses.  It  would  trammel 
and  embarrass  such  transactions  so 
as  to   impede   materially   that  trans- 


ferable character  which  is  one  of  the 
most  valuable  attributes  of  stock." 
Even  though  stock  is  given  by  will  to 
infants,  yet  the  guardian  has  power 
to  sell  it  and  the  sale  will  not  be 
disturbed,  even  though  it  was  sold  to 
relatives,  it  appearing  that  there  was 
no  market  value  to  the  stock  and  the 
price  was  a  fair  one  under  the  circum- 
stances. Cabbie  v.  Cabbie,  111  N.  Y. 
App.  Div.  426   (1906). 

"  Mass.  Rev.  Stat.,  ch.  79,  §  21. 

4  Atkinson  v.  Atkinson,  90  Mass.  15 
(1864). 

5  O'Herron  v.  Gray,  168  Mass.  573 
(1897). 

e  Webb  v.  Graniteville  Mfg.  Co.,  11 
S.  C.  396  (1878).  See  also  Manhattan 
Bank  v.  Walker,  130  U.  S.  267  (1889) ; 
and  §  326,  supra.  The  authority  of  a 
guardian  given  by  the  court  to  sell 
stock  does  not  authorize  him  to  pledge 
the  stock.  O'Herron  v.  Gray,  168 
Mass.  573    (1897). 

7  Ross  v.  Southwestern  R.  R.,  53  Ga. 
514    (1874). 


927 


329.] 


WHO    MAY    BUY    AND    SELL 


[('11.    XIX. 


provision  of  the  will  or  of  the  statute  of  distribution.1  In  order  to 
pay  the  debts  the  execu  ay  sell  the  p  pert?  of  the 

estate.  A.ccordingly,  the  rule  has  become  established  that  the  pur- 
chaser of  personal  property  from  an  executor  or  administrator  is 
not  bound   to  ascertain   whether   the  iry   in  order  to 

pay  the  debts  of  the  <  nor  to  see  that  the  proceeds  of  the  Bale 

are  applied  to  the  debts.     If  he  lm\  I  faith  and  for  value, 

he  is  protected.     These  rules  are  applicable    to  an  executor's  or  ad- 
ministrator's sales  of  J     One  of  several  ex  cutors  may  pli 
stock  owned  by  the  e          and  the  pledgee  will  be  protected,  there 
being  no  suspicious  circumstance   .     The  power  of  an  executor  to 


i  Keyling's    Case,    1    Eq.    Cas.    Abr.    transferrer  sold  the  stock  as  an  exec- 


239    (1702),   holding   that,  where  the 
executor   holds  the   stink   for  several 
years  and  it  declines  in  value,  he  is 
chargeable    with    its    value    one    year 
after  the  death  of  the  testator.     An 
executor  is  bound  to  close  at  once  a 
speculative  account.  Matter  of  Hirsch, 
116  N.  Y.  App.  Div.  367   (1906);  aff'd, 
188  N.  Y.  584.     See  also  §  459,  infra. 
2Leitch    v.    Wells,    48    N.    Y.    585 
(1872),    holding    that    the    bona    fide 
transferee   is  protected,  although  the 
executors  had  previously  set  aside  the 
same  stock  to  apply  to  the  payment  of 
a  certain   amount  chargeable   by  the 
will   to   the   estate   annually;    Wood's 
Appeal,  92  Pa.  St.  379  (1880),  holding 
that    a    bona   fide    transferee    of    the 
executor's  transferee  is  protected,  al- 
though   the    latter    would    not    have 
been;   and  this  even  though  the  exec- 
utors   transferee    was    aware   whence 
his  title  came.     The  court  held  that 
letters   of  administration  are   always 
evidence  of  power  to  sell,  and  that  an 
executorship   differed   widely   from   a 
trusteeship   as   regards    the   right   to 
sell;    Prall   v.   Tilt,   27   N.   J.  Eq.    393 
(1876);  aff'd,  28  N.  J.  Eq.  479  (1877), 
where   the   will    authorized    advances 
to  the  sons,  and  they  represented  to 
the  transferee  that  the  stock  was  so 
advanced   to   them   by   the   executor; 
Lowry     v.     Commercial,     etc.     Bank, 
Taney,    310     (1848);     s.    c,    15    Fed. 
Cas.  1040.     In  this  case  the  purchaser 
had  no  knowledge  or  notice  that  the 


utor;  Clark  v.  South  Metropolitan 
Gas  Co.,  54  L.  J.  (Ch.)  259  (1884), 
sustaining  a  sale  of  stock  by  an  ad- 
ministratrix of  an  administrator;  lie 
London,  etc.  Tel.  Co.,  L.  R.  9  Eq.  653 
(1870),  sustaining  the  title  of  a  bona 
fide  purchaser  from  the  executrix  as 
against  an  assignee  in  bankruptcy  of 
the  deceased,  the  assignee  having 
delayed  his  application  for  five 
years.  An  executor  may  transfer 
stock  of  the  estate  by  signing  his  in- 
dividual name  to  the  transfer.  Ma- 
haney  v.  Walsh,  16  N.  Y.  App.  Div. 
601  (1897).  A  bona  fide  pledgee,  from 
an  executor,  of  stock  belonging  to  the 
estate  and  which  has  been  transferred 
into  the  name  of  the  executor  as  exec- 
utor is  protected,  even  though  the 
money  from  the  loan  was  diverted. 
McCreery  v.  First,  etc.  Bank,  55  W. 
Va.  663  (1904).  A  person  is  not  such 
a  stockholder  as  can  maintain  a  su't 
against  directors  for  fraud,  where  hxs 
stock  has  been  transferred  to  another, 
nor  can  he  maintain  his  suit  on  the 
ground  that  he  owns  a  certificate  of 
stock  standing  in  the  name  of  another 
and  transferred  in  blank  on  the  back, 
such  transfer  being  signed  by  the  ad- 
ministratrix of  the  stockholder  of 
record,  no  proof  being  given  of  tne 
administratrix's  being  such  or  of  hav- 
ing executed  the  transfer.  Thompson 
v.  Stanley,  73  Hun,  248  (1893);  aff'd, 
147  N.  Y.  713. 


928 


CH.    XIX. J 


WHO    MAT    BUY    AND    SELL    STOCK. 


[§  329. 


pledge  is  as  broad  as  his  power  to  sell.1  The  fact  that  stock  is  specif- 
ically bequeathed  to  the  executors  as  trustees  does  not  prevent  the 
executors  selling  or  pledging  such  stock.  The  pledgee  or  purchaser 
is  protected  and  need  not  inquire  into  the  necessity  of  the  sale  or 
pledge.2  An  executor  is  entitled  to  have  stock  belonging  to  the  estate 
transferred   into  his  own  name  as  ator,  in  order  that  he  may 

conveniently    vote   it  and   draw   dividend  But   if   the    executor 

transf(  rs  estate  stock  into  his  own  name  personally  this  in  itself  is 
a  wrongful  conversion,  unless  ii  is  explained,  and  he  may  be  held 
liable  therefor.4  The  executors  in  the  state  of  the  don  dent  may 
transfer  I  ck  of  the  estate,  and  convey  a  title  which  the  pur- 

chaser of  the  certificate  may   require  the  i  ation   to  recognize 

although  the  corporation  itself  is  domiciled  in  another  state;5  but 
the  administrator  or  executor  cannot  compel  the  corporation  to  allow 
the  transfer,  inasmuch  as  a  foreign  administrator  or  executor  has  no 


i  Schell  v.  Barton,  198  Pa.  St.  600 
(1901);  Schell  v.  Deperven,  198  Pa. 
St.  591  (1901).  Schell  v.  Deperven, 
198  Pa.  St.  600.  An  executor  has 
power  to  pledge  a  bond  owned  by  the 
estate,  and  the  pledgee,  if  bona  fide, 
is  protected.  Smith  v.  Second  Nat. 
Bank,  169*N.  Y.  467  (1902).  See  also 
§  474,  infra. 

2  Schell  v.  Barton,  198  Pa.  St.  600 
(1901);  Schell  v.  Deperven,  198  Pa. 
St.  591  (1901);  Schell  v.  Deperven, 
198  Pa.  .St.  600.  An  executor  may 
transfer  the  stock  to  pay  the  dece- 
dent's debts,  although  it  is  bequeathed 
for  life  with  remainder  over.  Frank- 
lin v.  Bank  of  England,  1  Russ.  575 
(1826).      See   §474. 

3  The  corporation  is  liable  in  dam- 
ages for  refusal  to  make  such  trans- 
fer, even  though  the  corporation  has 
a  lien  on  the  stock  for  a  debt  owed 
it  by  the  decedent.  Under  the  statutes 
of  California  this  rule  applies  to  an 
alien  corporation  doing  business  in 
that  state,  the  statutes  of  the  state  re- 
quiring such  corporations  to  make 
transfers  in  that  state.  It  applies 
even  though  the  statutes  of  Great 
Britain  forbid  transfers  of  stock 
"without  administration  upon  such 
property  under  the  laws  of  England 


and  Great  Britain."  London,  etc. 
Bank  v.  Aronstein,  117  Fed.  Rep.  601 
(1902). 

4  Holland    v.    Ball,     193    Mass.    80 
(1906).     But  see  98  L.  T.  Rep.  533. 

5  Middlebrook   v.  Merchants'   Bank, 
3  Keyes  (N.  Y.),  135   (1866);  Luce  v. 
Manchester,   etc.  R.  R.,  63  N.  H.   588 
(1886);  Hobbs  v.  Western  Nat.  Bank, 
12  Fed.  Cas.  265   (1880).    An  executor 
or  administrator  may  transfer  stock 
in  a  foreign  corporation  without  tak- 
ing out  letters  in  the  state  incorporat- 
ing the  company.    Re  Cape  May,  etc. 
Co.,  16  Atl.  Rep.  191  (N.  J.  1889).    In 
Maryland  there  is  a  statute  prohibit- 
ing such  transfers  except  in  a  certain 
way.     See   Rev.   Code,   1888,   art.   93, 
§  79.    Although  a  foreign  administra- 
tor cannot  bring  suit  on  a  claim,  yet 
he    may    assign    the    claim    and    the 
assignee    may    bring    suit.      Maas    v. 
German  Sav.  Bank,  73  N.  Y.  App.  Div. 
524    (1902);    aff'd,  176  N.  Y.  377.     To 
the  effect  that  it  is  legal  to  pay  a  debt 
or    deliver    personal    property    to    a 
foreign     executor,     administrator,     or 
guardian,  see  Schluter  v.  Bowery,  etc. 
Bank,  117  N.  Y.   129    (1889);    Wuest- 
hoff  v.  Germania,  etc.  Ins.  Co.,  107  N. 
Y.   591    (1888).     Cf.   Greves  v.   Shaw, 
173  Mass.  205   (1899). 


(59) 


929 


§  329.] 


WHO   -MAY    l;rv    :       i       ILL   ST( 


[CH.   XTX. 


standing  in  court1  So  also  as  regards  executors  appointed  in  jui 
dictions  out  of  the  United  States.2  The  rule  is  differenl  in  Cali- 
fornia, where  by  statute  stock  descends  to  the  1.  and  the  rule 
may  be  differenl  where  an  inheritance  tax  is  a  lien  on  the  Btock  and 
has  Qot  been  paid.4  Under  the  collateral  inheritance  tax  statu 
the  corporation  may  be  liable  for  the  tax  if  it  allows  a  transfer  with- 
out payment  of  the  tax  by  the  estate.5     An  executor  who  Bells  stock 


i  Hutchins  V.  State   Bank,  53  Mass. 
421    (1847).     A  f(  executor  can- 

not compel  a  corporation  to  transfer 
stock,  inasmuch  as  lie  cannot  as  exec- 
utor mainlain  an  action  at  law  or  in 
equity  in  the  state.  Matter  of  Fitch, 
160  N.  Y.  87,  95   (1899). 

2  Alfonso's    Appeal,    70   Pa.    St.    347 
(1872),  holding  that,  in  Pennsylvania, 
executors  of  a  decedent,   whose  dom- 
icile was  in  Cuba,  have  no  authority, 
under   letters   testamentary   in   Cuba, 
to   transfer   stock   in   a   Pennsylvania 
corporation.      The    court    said:     "Do- 
mestic creditors,  legatees,  or  next  of 
kin  should  not  be  sent  abroad  in  quest 
of   property   to   answer   their   claims, 
when  the  decedent  left  property  with- 
in the  jurisdiction   of  the  state  that 
can    be    applied    to    meet    their    de- 
mands."   Under  the  statutes  of  Penn- 
sylvania an  English  executor  or  the 
executor  of  an  executor  of  the  estate 
of  an  English  stockholder  in  a  Penn- 
sylvania corporation  may,  after  filing 
in     Pennsylvania     an     authenticated 
copy   of  the  will,   transfer   shares   of 
stock  standing  in  the  name  of  the  de- 
ceased in  a  Pennsylvania  corporation 
without  taking  out  letters  of  adminis- 
tration   in    Pennsylvania.      Grimes    v. 
Pennsylvania  R.   R.,   189   Pa.   St.   619 
(1899).     Where  a  person  resident  in 
England      purchases     certificates      of 
stock'  in   a   French   corporation,    and 
fails   to    have   the    certificates    trans- 
ferred   on   the   books,    an   administra- 
tion on  such  certificates  may  be  taken 
out    in    England.      In    the    Goods    of 
Agnese  [1900],  P.  60. 

3  Even  though  a  Minnesota  executor 
of  a  deceased  Minnesota  stockholder 
in  a  California  corporation  sells  the 


stock,  yet  if  a  local  administrator  has 
been  appointed  in  California  the  sale 
and    tXi  by    the    Minnesota   exec- 

utor is  not  good,  inasmuch  as  by  the 
California  statutes  personal  property 
descends  to  the  heirs  the  same  as  real 
estate.  Moreover,  the  situs  of  the 
stock  is  where  the  corporation  exists. 
Murphy  v.  Crouse,  135  Cal.  14  (1901). 

-i  Under  the  Massachusetts  statute 
imposing  a  tax  on  inheritances,  stock 
owned  by  a  citizen  of  New  York  in  a 
Massachusetts  corporation  is  subject 
to  such  tax,  and  even  though  the  New 
York  executor  has  transferred  such 
stock,  yet  upon  ancillary  administra- 
tion being  taken  out  in  Massachusetts 
the  title  of  the  New  York  executor  is 
subordinate  to  the  title  of  the  ancil- 
lary administration.  The  court  said 
that  the  statute  assumed  that  in  such 
cases  a  local  administrator  or  exec- 
utor would  be  appointed.  Greeves  v. 
Shaw,  173  Mass.  205  (1899).  Stock 
in  a  consolidated  interstate  railroad 
holding  a  charter  in  Massachusetts 
and  also  in  New  York  is  subject  to 
the  Massachusetts  inheritance  tax. 
Moody  v.  Shaw,  173  Mass.  375  (1899). 

5  In  Atty.  Gen.  r.  New  York,  etc. 
Co.,  [1898]  1  Q.  B.  205;  aff'd,  H.  of  L., 
[1899]  A.  C.  62,  the  court,  in  holding 
that  an  English  corporation  was  lia- 
ble for  an  inheritance  tax  on  shares 
of  stock  which  it  had  allowed  to  be 
transferred  on  its  books  by  American 
executors  of  the  estate  of  a  deceased 
American  owning  such  stock,  said: 
"The  American  will,  as  regards  these 
English  assets,  had  no  validity  what- 
ever in  this  country,  nor  had  the 
American  executors  any  right  under 
it  to  receive  the  testator's  assets  here. 


930 


CH.    XIX.] 


WHO    MAY    BUY   AND    SELL    STOCK. 


[§   329. 


without  authority  is  liable  for  the  loss  to  the  estate  thereby  at  that 
time,  but  is  not  liable  for  profits  made  by  himself  subsequently  in 
dealing  in  that  stock.1 

An  executor  may  pledge  estate  stock  at  his  bank  on  a  represen- 
tation that  the  money  is  to  be  used  for  the  estate,  and  the  bank 
will  be  protected,  although  the  note  given  by  the  executor  is  re- 
newed several  times,  and  the  proceeds  of  the  transaction  were  passed 
to  the  executor's  private  account.2  In  delivering  stock  to  a  life 
tenant  the  executor  may  indorse  on  the  certificate  that  it  is  to  lie  held 
by  the  legatee  under  the  terms  of  the  will.-'1  A  bona  fide  purcha 
of  stock  from  a  life  tenant,  to  whom  the  administration  improperly 
transferred  it,  is  protected.  The  remainderman's  remedy  is  on  the 
administrator's  bond.4  But  a  pledge  of  stock  by  an  executor  does 
not  protect  the  pledgee,  where  the  pledgee  does  not  rely  on  the  execu- 
tor's power,  but  requires  other  ineffectual  precautions  to  be  taken.5 
When'  the  transferee  of  the  executor  knows  that  the  transaction  is 
not  for  the  benefit  of  the  (state,  but  is  a  breach  of  trust,  he  is  not 
protected.8     Where  distribution  is  made  in  kind,  a  party  who  peti- 


Untll  they  had  taken  out  representa- 
tion to  their  testator  in  this  country, 
they  were  pure  strangers  to  the  Eng- 
lish assets.  This  American  will,  to 
the  knowledge  of  all  parties,  was 
never  to  come  into  operation  as  a  will 
in  this  country;  the  American  exec- 
utors were  never  to  become  executors 
in  this  country,  it  being  the  express 
intention  of  all  parties  that  they 
should  not." 

i  Hiiler  v.  Ladd,  85  Fed.  Rep.  703 
(1898).  If  the  administrator  sells  to 
himself  through  "dummies,"  he  may 
be  compelled  to  disgorge.  Carter  v. 
Good,  57  Hun,  116  (1890).  Even 
though  an  executor  sells  for  $30,000 
stock  which  he  had  inventoried  at  a 
higher  price,  yet  he  is  not  liable  for 
the  difference  if  the  sale  was  in  good 
faith.  In  re  Semple's  Estate,  189  Pa. 
St.  385   (1899). 

2  Goodwin  v.  American  Nat.  Bank, 
48  Conn.  550  (1881);  Gottberg  v.  U. 
S.  Nat.  Bank,  13  N.  Y.  Supp.  841 
(1890),  where  the  bonds  were  even 
registered  in  the  names  of  both  ex- 
ecutors and  were  pledged  by  one. 
Under  the  English  act,  where  shares 
are   registered   in  the  names  of  two 


executors  jointly,  the  signature  of 
both  to  a  transfer  is  necessary,  and 
the  company  is  liable  if  it  permits  a 
transfer  by  one.  Barton  v.  London, 
etc.  Ry.  62  L.  T.  Rep.  164  (1889). 

3  De  Loney  v.  Hull,  58  S.  E.  Rep. 
349   (Ga.  1907). 

4  Keeney  v.  Globe  Mill  Co.,  39  Conn. 
145  (1872).  Where  by  the  will  of  a 
resident  of  New  York,  duly  probated 
in  New  York,  two  of  the  executors  be- 
ing residents  of  New  York,  stock  Is 
given  to  one  person  in  trust  for  an- 
other in  a  Connecticut  corporation, 
such  trustee  cannot  bring  suit  in  the 
Connecticut  courts  to  compel  the  exec- 
utors to  transfer  the  stock  to  him, 
even  though  ancillary  letters  have 
been  taken  out  in  Connecticut  and  one 
of  the  executors  was  a  resident  of 
Connecticut,  and  even  though  the 
trustee  had  attached  dividends  in 
Connecticut.  Russell  v.  Hooker,  67 
Conn.  24    (1895). 

5  Moore  v.  American,  etc.  Co.,  115  N. 
Y.  65  (1889) 

6  Prall   v.   Hamil,    28    N.    J.   Eq.    66 
(1877).     The   facts   in   this   case   dif- 
fered from  those  in  Prall  v.  Tilt,  27 
N.  J.  Eq.  393  (1876),  in  that  the  trans- 
it 


§  329.] 


WIK)    MAY    BUY   AND    SELL    ST< 


[en.    XIX. 


tioned  for  ibution  of  the  "pro]  I  on  d  ind 

that  the  property  should  have  been  sold  and  the  money  .li~tril.ut.sl.' 
Replevin  Lies  by  an  administrator  to  recover  a  certificate  of  Btock 
which  he  had  illegally  pledged  sis  administrator.2  Where  the  exec- 
utor, who  is  also  the  Life  tenant,  wrongfully  pledges  the  stock,  his 

cutor  may  rightfully  use  the  funds  of  his  estate  to  redeem  Buch 
stock.8     A  residuary  !  rann.it  file  the  bill  in  equity  to  Bel  aside 

ale  0f  by  thi  sutors  in  compliance  with  a  contract  of 

made  by  the  deceased,  the  administration  of  the  estate  no1  yet 
being  terminated.  Bis  remedy  is  in  the  probate  court4  Sometimes 
statutes  are  found  requiring  tutors,  when  selling  personal  prop- 
erty 0f  t'  ite,  to  -.'ll  the  same  at  public  auction.  When  Buch 
a  statute  exists,  a  purchaser  al  private  sale  is  not  a  bona  fide  pur- 
chaser, and  is  no1  protected,  and  is  liable  for  the  stock  and  for  the 
dividends  paid  thereon  after  his  purchase.5     The  bona  fide  transferee 


feree  knew  that  the  stocK  was   still 
owned  hy   the   executrix.     A   suit   in 
equity  lies  to  set  aside  an  illegal  sale 
of   stock   by   an    executor.     White    v. 
Price,  108  N.  Y.  661   (1888) ;   s.  c,  39 
Hun,   394    (1886),   the    court   saying: 
"A   person   who  takes   title   from   an 
executor    in    payment    of    the    execu- 
tor's personal  debt  is  not  a  purchaser 
in  good  faith,  and  acquires  no  rights 
over  the  prior  title  or  equities  of  other 
persons."    Also,  that  a  purchaser,  buy- 
ing with  knowledge  that  the  right  of 
the  executor  to  sell  is  denied  and  is 
being   contested,    is   not   a   bona   fide 
holder.    Cf.  Keane  v.  Robarts,  4  Madd. 
Ch.    332    (1819),    where   it   was   held 
that,  where  the  executor  did  business 
through  an  agent,  the  application  of 
the    proceeds    from    the    sale    of    the 
stock  to  the  running  account  between 
the  executor  and  his  agent  was  legal. 
A  pledgee  with  notice  of  stock  pledged 
by  an  executor  in  breach  of  his  duty 
may  be  compelled  to  give  up  the  stock. 
Odd  Fellows'  Sav.  Bank's  Appeal,  123 
Pa.   St.   356    (1889).     A  pledgee  who 
takes  with  knowledge  that  the  execu- 
tor   is   giving    the    pledge    in    breach 
of  trust  cannot  foreclose  the  pledge. 
Bell  v.  Farmers',   etc.  Bank,   131  Pa. 
St.   318    (1890).     Where   an   executor 
pledges,  for  his  personal   debt,  stock 

9 


belonging  to  the  estate,  in  breach  of 
trust,  the  pledgee  is  not  protected, 
even  though  the  corporation  issued  a 
new  certificate  to  the  pledgee,  by  mis- 
take, as  absolute  owner,  and  he  can- 
not hold  the  corporation  liable  for 
retaining  the  new  certificate  upon  its 
being  delivered  for  transfer  to  a  pur- 
chaser with  notice.  Davis  r.  National, 
etc.  Bank,  50  Atl.  Rep.  530  (R.  I. 
1901).  Where  an  executor  pledges 
stock  and  bonds  of  the  estate  to  a 
bank,  the  bank  is  protected,  even 
though  thereafter  the  executor  checks 
out  the  money  to  his  own  order,  and 
even  though  the  loan  was  in  form  to 
the  executor  personally,  it  being  un- 
derstood that  it  was  for  the  benefit 
of  the  estate.  Lyman  v.  National 
Bank,  etc.,  181  Mass.  437  (1902). 

1  Hurley  v.  Hewett,  89  Me.  100 
(1896). 

2  Parks  v.  Mockenhaupt,  133  Cal. 
424  (1901). 

3  In  re  Orne's  Estate,  192  Pa.  St.  626 
(1899). 

4  Jordan  v.  Taylor,  98  Fed.  Rep.  643 
(1899). 

5  Nutting  v.  Thomasson,  57  Ga.  418 
(1876),  the  court  saying  also  that  fac- 
tors or  brokers  acting  for  third  per- 
sons are  also  liable;  Nutting  v.  Board- 
man,  43  Ga.  598   (1871),  holding  that 

32 


CH.    -XIX. J 


WHO   MAY   BUT  AND   SELL   STOCK. 


[§   330. 


of  such  a  purchaser,  however,  is  protected.1  An  executor  may  have 
the  duties  of  a  trustee  to  perform,  and  then  become  subject  to  the 
rule-;  governing  trustees  in  their  transfers  of  stock.2  Executors 
should  sell  stocks  belonging  to  the  estate,  unless  there  is  to  be  a  dis- 
tribution in  kind,  and  if  they  do  not  sell,  they  may  be  liable  for  a 
decline  in  values.3  It  is  very  dangerous  for  a  director  to  be  person- 
ally interested  in  the  purchase  of  a  stock  from  himself  as  executor.' 

§  330.  Duty  and  liability  of  the  corporation  in  sales  by  executors 
or  administrators.— -There  has  been  great  difficulty  in  ascertain- 
ing the  rights  and  duties  of  the  corporation  in  allowing  and  refus- 
ing to  allow  a  registry  on  the  corporate  hooks  of  a  sale  of  stock  by 
an  executor  or  administrator.  The  Hank  of  England,  at  an  early 
day,  assumed  the  power  to  refuse  to  allow  a  registry  of  an 
utor's  transfer  ck  that  had  been  specifically  bequeathed,  un- 

-  the  executor  satisfied  the  bank  that  the  sal<  accessary  to 

pay  the  debts  of  the  estate.  The  courts,  however,  compelled  it,  to 
allow  registry   without  investigating  specific  legacies  or  the  appli- 


the  administrator's  bondsmen  are  not 
proper  parties  to  the  suit;  Weyer  v. 
Second  Nat.  Bank,  57  Ind.  198  (1877), 
holding  the  purchaser  liable.  If  the 
executor  uses  the  proceeds  of  sales  of 
stock  for  his  own  personal  purposes, 
he  is  liable  for  the  dividends  declared 
after  such  sales  up  to  the  time  of  ac- 
counting, and-  for  the  market  value  of 
the  stock  at  the  time  of  accounting. 
A  person  taking  stock  from  him  with 
knowledge  of  the  breach  of  trust  is 
also  liable.  McGeary's  Appeal,  6  Atl. 
Rep.  763  (Pa.  1S86).  Gradual  sales 
by  the  executors  at  a  private  sale  will 
be  sustained  where  a  public  sale 
would  have  depressed  the  value  of  the 
stocks,  and  no  public  sale  was  re- 
quested by  the  parties  interested. 
Kaiser's  Succession,  48  La.  Ann.  973 
(1896).     See  111  S.  W".  Rep.  817. 

i  Nutting  v.  Thomason,  46  Ga.  34 
(1872);   s.  c,  57  Ga.  418. 

2  White  v.  Price,  39  Hun,  394 
(1886);  aff'd,  108  N.  Y.  661;  Prall  v. 
Tilt,  27  N.  J.  Eq.  393  (1876).  See  also 
§§  323,  324,  supra. 

3  See  §§  723,  724,  supra.  An  admin- 
istrator is  justified  in  selling  stock 
when  he  fears  a  decline  in  its  value, 
but  he  must  be  free  from  motives  of 


self-interest.  Fluck  v.  Lake,  54  N.  J. 
Eq.  638  (1896).  Executors  are  not 
liable  for  a  decline  in  the  value  of 
stocks  during  their  executorship,  even 
though  it  is  their  duty  to  sell  such 
stocks,  if  it  is  shown  that  the  stocks 
began  declining  and  they  did  not  sell 
because  they  hoped  that  the  price 
would  recover.  Matter  of  Thompson, 
41  N.  Y.  Misc.  Rep.  420  (1903).  Where 
the  administrator  fraudulently  sells 
stock  for  one-eighth  of  its  market 
value  he  may  be  held  personally  li- 
able. Moore  v.  Woodson,  99  S.  W. 
Rep.  116  (Tex.  1906). 

4  An  executor  who  buys  stock  from 
the  estate  at  one  price  and  sells  it  at 
another  may  be  compelled  to  pay  over 
the  difference.  Matter  of  Sandrock, 
49  N.  Y.  Misc.  Rep.  371  (1906).  Where 
a  legatee  writes  to  the  executor  that 
she  has  been  offered  a  certain  price 
for  stock  which  has  been  bequeathed 
to  her,  and  that  he  could  have  it  for 
that  price  and  he  buys  it,  she  cannot 
have  the  sale  set  aside,  even  though 
he  failed  to  disclose  facts  which  he 
knew  and  which  showed  the  stock  to 
be  worth  much  more.  O'Neile  v. 
Ternes,  32  Wash.  528  (1903).  An  ex- 
ecutor   may    take    part    in    and    per* 


933 


§  330.] 


WIlo    M  W    BUY    AND   SELL   STOCK. 


[CH.    MX. 


cation  of  the  proceeds  of  the  Bale.1  In  this  country  the  same  rale 
prevails.2  The  eases  of  Lowry  v.  Commercial  ».V  Farmers'  Bank 
of  Baltimore,8  and  Stewarl  v.  Firemen's  [ns.  Co.,4  clearly  establish 
the  rule  that,  where  the  corporation  has  reasonable  notice  of  the 
fact  thai  the  executor  is  committing  a  breach  of  trust,  such  notice 
arising  from  the  fad  that  the  transfer  is  made  several  years  after 
the  estate  should  have  been  wound  up,  the  corporation  is  under  ob- 
ligation to  refuse  to  allow  a  registry  of  the  transfer;  and,  having 
allowed  it,  the  corporation  is  liable  to  the  parties  injured  thereby. 
While  a  corporation  may,  under  ordinary  circumstances,  allow  an 
executor  or  administrator  to  register  a  transfer  of  stock  from  him- 
self to  a  purchaser  from  him,  yet,  when  so  long  a  time  has  elapsed 
between  the  taking  out  of  1<  fcti  ••-  and  the  transfer  that  the  executor 
has  become  practically  a  trustee,  then  the  purchaser  and  the  corpo- 
ration  must   use   the  same   precautions  as   in   sales   by   a   trustee.8 

sonally  subscribe  for  stock  in  a  cor-    state  of  need  exists.  Hutchins  v.  State 
poration  formed  to  take  over  an  em-    Bank,  53  Mass.  421   (1847).     See  also 

Peck  v.  Providence  Gas  Co.,  17  R.  I. 
275    (1892). 

3  Taney,  310  (1848);  s.  c,  15  Fed. 
Cas.  1040.  The  court  said:  "The  bank 
not  only  enabled  the  executor  to  per- 
petrate the  wrong  by  permitting  the 
transfer,  but  co-operated  in  it  by  cer- 
tifying that  the  title  of  transferee  was 


barrassed  and  unprofitable  partner- 
ship in  which  the  estate  is  interested. 
Houghteling  v.  Stockbridge,  13G  Mich. 
544  (1904). 

l  Pearson  v.  Bank  of  England,  2 
Bro.  Ch.  529  (1789);  Bank  of  Eng- 
land v.  Moffat,  3  Bro.  Ch.  260  (1791); 
Hartga  v.  Bank  of  England,  3  Ves.  Jr. 
55  (1796);  Bank  of  England  v.  Par-  good.  Justice,  therefore,  requires  that 
sons,  5  Ves.  Jr.  665  (1800);   Bank  of    it  should  bear  the  loss." 


England  v.  Lunn,  15  Ves.  Jr.  568 
(1809);  Austin  v.  Bank  of  England, 
8  Ves.  Jr.  522  (1803);  Marryatt  v. 
Bank  of  England,  8  Ves.  Jr.  524,  n 
(1793);  Aynsworth  v.  Bank  of  Eng 
land,  8  Ves.  Jr.  524,  n.  (1793) ;  Frank- 
lin v.  Bank  of  England,  1  Russ.  Ch. 
575  (1826) ;  Churchill  v.  Bank  of  Eng- 
land, 11  M.  &  W.  323  (1843);  Hum- 
berstone  v.  Chase,  2  Y.  &  C  Exch.  209 
(1836),    where    the    executor    repre- 


4  53  Md.  564  (1880),  holding  also 
that  the  corporation  was  bound  to 
take  notice  of  the  contents  of  the  will. 
Where  the  executors  ask  for  a  trans- 
fer of  stock,  but  the  company  refuses 
on  the  ground  that  they  have  no 
power  to  transfer  the  same,  and  af- 
terwards the  executors  declare  in 
writing  that  the  stock  does  not  be- 
long to  the  estate,  the  executors  can- 
not hold  the  corporation  liable  for  re- 


sented   that   the   specific   legatee   had  fusing  to  make  the  transfer  as  stated 

died.     It   is    "necessary"   and   proper  above.     Livezey  v.  Northern   Pac.  R. 

for  executors  to  unregister  registered  R.,  157  Pa.  St.  75  (1893). 

bonds  before  selling  them.     Re  Gas-  5  Where  an  executor  holds  stock  for 

quoine,  [1894]  1  Ch.  470.  nine  years  and  then  sells  it  in  breach 

2  Bayard  v.  Farmers',  etc.  Bank,  52  of   trust,   the   purchaser   is   bound   to 

Pa.  St.  232   (1866).    Where  the  execu-  take  notice.  The  executorship  becomes 


trix  has  power  given  by  the  will  to 
apply  the  stock  to  her  own  use  in 
case  of  need,  the  corporation  is  not 
bound   to   ascertain    whether    such   a 


a  trusteeship.  Peck  v.  Bank  of  Amer- 
ica, 16  R.  I.  710  (1890).  Where  an 
executrix  has  power  by  the  will  to 
sell  stock  held  in  trust  for  heirs,  the 


934 


en.  xix.] 


WIIO    MAY    BUY   AND    SELL    STOCK. 


[§  330. 


Where,  by  statute,  executors'  sales  are  to  be  at  public  auction,  the 
corporation  is  bound  to  ascertain  whether  the  statute  was  complied 
with,  and  is  liable  for  allowing  a  registry  when  the  sale  was  a  pri- 
vate one.1  In  general,  a  corporation  has  a  right  to  assume  that  the 
executor  is  transferring  the  stock  for  the  purposes  of  the  estate.  It 
is  not  obliged  to  inquire  into  the  purposes  of  the  parties,  nor  to  in- 
vestigate whether  the  transaction  is  in  good  faith  or  is  fraudulent,2 
nor  to  examine  the  will.3  Where,  however,  the  stock  is  specifically 
bequeathed,  and  the  executor  transfers  the  stock  to  a  life  tenant 
absolutely,  the  corporation,  being  chargeable  with  notice  of  the  terms 
of  the  will,  may  Ik'  liable  to  the  remainderman.4     Where  a  decree 

corporation  is  not  liable  for  a  trans-  Bridge,   9  R.  I.  590    (1870),  although 

fer  by  her  in  breach  of  trust,  the  cor-  the    statute    declares    that    executors 

poration  having  no  knowledge  there-  should  be  held  liable  for  double  the 

of.     The  fact  that  the  stock  is  trans-  appraised  value  of  the  property  if  they 

ferred  to  banks  which  have  no  power  sold     at    private    sale.     In     Citizens' 

to  purchase  is  not  notice  to  the  cor-  Street  R.  R.  v.  Robbins,  144  Ind.  071 

poration.     The    executorship    in    this  (189G),    the    administratrix     had    il- 


case  was  merged  into  a  trusteeship. 
Peck  v.  Providence  Gas  Co.,  17  R.  I. 
275    (1892).     Where  stock    is   specif- 


lcgally  sold  stock  to  a  party,  who  then 
caused  the  corporation  to  sell  all  its 
property   to   another   corporation.     A 


ically   bequeathed   to  an   executor   as  subsequent  administrator  sued  to  set 
trustee,  and  five  years  thereafter  the  aside  the  sale  of  the  corporate  prop- 
executor  is  discharged,  but  continues  erty  or  for  damages.     The  court  held 
as  trustee,  and   two  years   thereafter  that,  inasmuch  as  the  purchasing  cor- 
he  fraudulently  pledges  the  stock  as  poration   had   expressly   assumed   the 
executor,  the  pledgee  is  not  protected,  liabilities  of  the  vendor  corporation, 
since  the  lapse  of  time  was  sufficient  it  must  pay  for  the  value  of  the  stock, 
to  put  him  on  inquiry.     Schell  v.  De-  inasmuch   as   the  vendor   corporation 
perven,  198  Pa.  St.  591  (1901);  Schell  was  liable  for  allowing  the  transfer. 
v.  Deperven,  198  Pa.  St.  600.    See  also  2  Crocker  v.  Old  Colony  R.  R.,   137 
§329,  sjipra.  Mass.  417   (1884).     See  also  Carter  v. 
i  Weyer    v.    Second    Nat.    Bank,    57  Manufacturers'  Nat.  Bank,  71  Me.  448 
Ind.    19S    (1877).      A   contrary   view  (1880);    Goodwin    v.    American    Nat. 
seems  to  be  held  in  Southwestern  R.  Bank,  48  Conn.  550  (1881). 
R.    v.  Thomason,   40   Ga.   408    (1869).  3  Although  the  administrator  trans- 
In   Indiana,   where   an   administrator  fers  the  stock  to  the  "heirs  and  dis- 
cannot  sell   personal  property  except  tributees,"    the    corporation    is    pro- 
in  a  certain  way,  the  corporation  is  tected  in  issuing  absolute  certificates 
liable  to  the  estate  if  it  allows  a  trans-  to  such  distributees,  and  is  not  bound 
fer  of  stock  on  its  books  under  a  sale  to  learn  or  know  of  a  will  to  the  ef- 
by  the  administrator  who  has  not  com-  feet  that  the   distributee  had   only  a 
plied   with  the  law.     The   purchaser,  life  interest.     Smith  v.  Nashville,  etc. 
however,   who   does   not   see   the    old  R.  R.,  91  Tenn.  221  (1892),  the  corpo- 
certificates,  but  takes  new  certificates  ration  in  this  case  having  had  no  ac- 
issued    by    the    corporation,    is    pro-  tual  notice  of  the  existence  of  a  will, 
tected.     Citizens'   Street  Ry.   v.   Rob-  4  See    §  560,    infra,    and    Wooten   v. 
bins,  128  Ind.  449   (1891).     A  sale  of  Wilmington,  etc.  R.  R.,  128  N.  C.  119 
stock  by  an  executor  at  private  sale  (1901). 
was  sustained   in   Wilson   v.   Central 

935 


§  330.] 


wno    MAY    ni'V    AND    SELL   STOCK. 


[CII.    XIX. 


directs  the  transfer  of  certain  stock  in  the  distribution  of  an 
and  the  corporation  makes  such  tran  and  thereafter  the  decree 

[s  reversi  '1  on  appeal,  the  executors  may  bring  Buil  to  have  the  trans- 
fer canceled.  The  suil  is  properly  in  equity.1  Questions  relative 
to  whether  the  law  of  th<  of  the  corporation  or  the  law  of  tin- 

state  of  a  deceased  stockholder  shall  govern  are  considered  else- 
where.2 


i  Ashton  v.  Heggerty,  130  Cal.  516 
(1900).  Under  the  statutes  of  Cali- 
fornia, even  though  stock  is  distrib- 
uted by  executors  in  accordance  with 
a  decree  of  distribution,  and  the  dis- 
tributees sell  the  stock  and  it  is  trans- 
ferred on  the  books  of  the  company, 
nevertheless,  if  the  decree  is  reversed 
on  appeal,  the  transfers  are  void  and 
the  company  is  liable  for  dividends 
paid  in  the  meantime  to  such  purchas- 
ers. In  a  suit  by  the  executors  to 
recover  such   dividends  the  purchas- 


ers need  not  be  made  parties.  Ashton 
v.  Zeila  Min.  Co.,  134  Cal.  408  (1901). 
('/.  SS  363,  3S8,  infra. 

2  See  §12,  supra.  Where  a  citizen 
of  Tennessee  is  a  stockholder  in  a 
Mississippi  corporation  and  he  dies 
and  his  will  is  probated  in  Tennessee 
and  he  gives  his  stock  to  a  certain 
person,  that  person  can  compel  the 
Mississippi  corporation  to  transfer  it, 
even  though  the  will  would  not  be 
good  in  Mississippi.  Delta,  etc.  Co.  >'. 
Pearce,  45  S.  Rep.  981  (Miss.  1908). 


936 


CHAPTER  XX. 

SALES   OF   STOCK— THE   FORMATION   AND    PERFORMANCE  OF  THE 
CONTRACT-GAMBLING  SALES— FRAUDULENT  SALES. 


A.     FORMATION       AND     PERFORMANCE     OF  I 
CONTRACTS   TO   SELL   STOCK. 

§  331.  Shares   of   stock    are    transfer- 
able. 

332.  Restrictions     on    right     to     Bell 

stock  and  contracts  against 
selling. 

333.  "Pools,"   "corners,"   and   combi- 

nations in  stock. 

334.  Contract  for  sale  of  stock  may 

be  valid  without  delivery  or 
specific  time  for  delivery — 
Construction  of  various  con- 
tracts. 

335.  336.  Remedies  for  breach  of  a 

contract  to  sell  stock — Ten- 
der. 

337,  338.  Specific  performance  as  a 
remedy  for  breach  of  a  con- 
tract to  sell  stock. 

339,  340.  Statute  of  frauds  as  af- 
fecting sales  of  stock. 

B.   GAMBLING   SALES   OF  STOCK. 

341."  What  are  gambling  sales  of 
stock. 

342.  Statutes  prohibiting  wager  con- 
tracts, and  also  certain  stock 
contracts. 


§  343.  Test  of  legality  of  stock  trans- 
action. 

344.  When  intent  to  deliver  is  ques- 

tion for  the  jury  and  when 
not. 

345,  346.  Gambling    stock    contracts 

as  affecting  the  relations  be- 
tween the  principal  and  his 
broker. 
347,  348.  Gambling  stock  transac- 
tions as  affecting  notes, 
bonds,  mortgages,  etc.,  grow- 
ing out  thereof. 

C.     FRAUD     AS     AFFECTING      A     SALE     OF 
STOCK. 

349.  Extent  of  subject  treated  herein. 

350.  What  has  been  held  to  consti- 

tute a  fraud  herein. 

351.  Fraudulent  sale  by  agent,  etc., 

in  breach  of  trust. 

352.  353.  Fraud  may  be  by  corporate 

reports  or  prospectus. 

354.  Remedies  for  the  fraud. 

355.  Action  for  deceit. 

356.  Remedy  in  equity. 

357.  Fraud  in  selling  stock  may  be 

criminal. 


A.    FORMATION  AND  PERFORMANCE  OF  CONTRACTS  TO  SELL  STOCK. 

§  331.  Shares  of  stock  are  transferable.— -That  shares  of  stock  in 
a  corporation  are  transferable  the  same  as  other  personal  property 
is  a  principal  of  law  coeval  with  the  existence  of  stock  itself.  The 
few  decisions  holding  that  shares  of  stock  were  real  estate  were 
exceptional  rulings,  and  are  no  longer  considered  good  law.1  Courts 
of  law  and  of  equity  have  guarded  jealously  the  facilities  for  the 
transfer  of  title  to  stock,  and  all  unreasonable  attempts  to  restrain 


i  See  §  12,  supra. 
937 


§§   332-334.]  CONTRACTS  TO  SELL — GAMBLING  SA]  PC.  [cil.  XX. 

the  right  of  passing  title  have  be<  d  declared  void  as  againsi  public 
policy.  The  right  to  transfer  Btock  is  of  vital  importance,  since  the 
two  chief  causes  of  the  phenomenal  growth  of  corporations  in  recent 
times  are  the  limited  liability  of  the  members  and  the  readiness  of 
buying  or  selling  an  interest  in  thi  oration  by  a  tra         ■  of  the 

stock  a  person  has  therein.  The  common  law  regards  shares  of 
stock  as  p<  rsonal  pro]  i  .  capable  of  alienation  or  succ<  ssion  in  any 
of  the  modes  by  which  personal  property  may  be  transferred.1 

§  332.  Restrictions  on  right  to  sell  stock  and  contracts  against 
selling. — By-laws  restricting  ti  ock  and  contract-  against 

selling  arc  generally  made  in  connection  with  contracts  for  vol 
at  elections  so  as  to  control  the  management  of  corporations.  Ti 
two  classes  of  contracts,  to  sell   together  and  to  vo  ther,  are 

closely  allied,  and  consequently  are  treated  under  the  subject  of 
"Elections/'  in  another  part  of  this  work.2 

§  '6o3.  "Pools,"  "corners," and  combination*  in  stock. — This  sub- 
ject also  is  closely  connected  with  the  subjects  of  restrictions  on  tin- 
right  to  vote  and  pooling  arrangements  for  the  purpose  of  control- 
ling elections,  and  consequently  is  considered  elsewhere.8 

§  334.  Contract  for  sale  of  stock  may  be  valid  without  delivery  or 
specific  time  for  delivery—  Construction  of  vaynous  contracts. — Gen- 
erally a  sale  of  stock  is  attended  with  an  immediate  delivery  of  the 
certificates  therefor,  or  it  is  agreed  that  the  certificates  shall  be 
delivered  at  some  specified  time  in  the  future.  If,  however,  the 
vendor  offers  to  sell  his  stock  and  the  vendee  accepts  the  oiler,  the 
contract  is  complete  and  binds  both  parties,  although  nothing  lias 
been  said  as  to  the  time  when  the  certificates  of  stock  shall  be  de- 
livered. The  law  implies  that  the  contract  will  be  performed  by  a 
delivery  of  the  certificates  immediately  or  within  a  reasonable  time, 
and  either  party  may  insist  upon  carrying  out  the  contract.4  It  has 

1  Mobile  Mut.  Ins.  Co.  v.  Cullom,  49  4  Quoted  and  approved  in  Mason 
Ala.  558  (1873);  Cole  v.  Ryan,  52  v.  Lievre,  145  Cal.  514  (1904),  holding 
Barb.  168  (186S) ;  Heart  v.  State  that  where  an  offer  to  buy  is  accepted 
Bank,  2  Dev.  Eq.  (N.  C.)  Ill  (1831);  and  the  vendor  forwards  a  draft  for 
Allen  v.  Montgomery  R.  R.,  11  Ala.  the  price  the  sale  is  binding,  even 
437,  451  (1847);  Boston  Music  Hall  though  the  certificates  are  not  for- 
Assoc.  v.  Cory,  129  Mass.  435   (1880);  warded  with  the  draft. 

Sargent  v.  Franklin  Ins.  Co.,  25  Mass.  "The  performance  of  a  contract,  or 

90    (1829);    Chouteau    Spring   Co.   v.  the  tender  of  performance,  is  no  part 

Harris,   20  Mo.  382    (1855);    Poole  v.  of  the  contract.   The  making  of  a  con- 

Middleton,     29     Beav.     646      (1S61);  tract  is  one  thing,   but  the  perform- 

Brightwell      v.     Mallory,      10     Yerg.  ance   thereof,    or   the   tender   of   per- 

(Tenn.)  196  (1836).  formance,  is  another  and  quite  differ- 

2  See  §  622,  infra.  ent  thing.    The  contract  set  up  in  the 

3  See  §§  621a,  622,  infra.  paragraph  in  question  is  an  executory 

one,  by  which  the  plaintiff  agreed  to 
938 


CH.  XX.]  CONTRACTS  TO   SELL GAMBLING   SALES,  ETC. 


[§  334. 


been  held  that  an  option  for  which  nothing  is  paid  is  unilateral,  and 
hence,  even  though,  by  a  subsequent  writing,  the  option  is  exercised, 


sell  to  the  defendant  the  shares  of  the 
stock,  and  the  defendant  agreed  to  pay 
him   therefor   the   sum   of   $25.     No 
time  was  fixed  for  the  performance; 
the  law  will  imply,  therefore,  that  it 
was  to  be  performed  immediately,  or 
perhaps    within    a    reasonable    time. 
Had  a  future  day  been  agreed  upon 
for  the  performance  of  the  contract 
on  each  side,  there  could  have  been 
no  doubt  as  to  its  validity,  or  the  right 
of  either  party  to  enforce  it,  he  hav- 
ing done  all  he  was  required  to  do  on 
his  part.     The  fact  that  no  time  was 
agreed  upon  for  performance  does  not 
change  the  character  of  the  contract. 
The  contract  did  not  pass  any  title  to 
the  stock,  but  it  was,  nevertheless,  a 
valid  contract,  and  one  which  either 
party  can  enforce,  he  having  been  in 
no  default  himself."     Such  is  the  law 
as    laid    down    in    Bruce    r.     Smith, 
44  Ind.  1  (1873);  Kerchner  v.  Gettys, 
18   S.  C.  521   (1S82);   Cheale  v.  Ken- 
ward,   3    De   G.   &  J.   27    (1858).     An 
offer  which  is  accepted  with  a  partial 
payment  made  in  cash  is  a  completed 
sale,  and  not  a  mere  option  to  pur- 
chase, even  though  the  buyer  offered 
to    execute    a   collateral    note,    which 
would-be  the  equivalent  of  a  forfeit- 
ure of  the  partial  payment,  if  the  sale 
was    not   completed.     Cooper    v.    Bay 
State,    etc.    Co.,    127    Fed.    Rep.    482 
(1904).    A  contract  by  which  the  ven- 
dors of  the  entire  capital  stock  of  the 
company    agree    that    the    purchaser 
shall   have   entire   control    and   man- 
agement  of   the   business   for   fifteen 
months,  and  elect  officers  and  direc- 
tors during  that  time,  at  the  end  of 
which  time  he  is  to  pay  for  the  stock, 
it  appearing  that  third  parties  were 
not   affected    thereby,   is   legal.     Bor- 
land v.  Prindle,  etc.  Co.,  144  Fed.  Rep. 
713  (1906).    A  contract  by  which  the 
president  agrees  to  give  fifty  shares 
of  stock  to  an  employee  who  lives  up 
to  his  contract  with  the  corporation, 


has  no  consideration  and  cannot  be 
enforced,  although  it  might  be  other- 
wise if  the  employee  could  prove  that 
he  entered  into  the  contract  with  the 
corporation  by  reason  of  such  prom- 
ise.    Petze  v.  Leary,  117  N.  Y.  App. 
Div.  829   (1907).    A  transfer  of  stock 
by  several  persons  to  a  trust  company 
for  five  years  under  an  agreement  by 
one  of  them  to  buy  the  stock  at  that 
time   if  the  other  parties  wished,   is 
not  enforceable  if  they  wait  over  a 
year  after  the  expiration  of  the  five 
years    before    giving   notice    of   their 
wish  to  sell.     Hollis  v.  Libby,  101  Me. 
302    (1906).     An   offer   to   buy   stock 
after  six  months  at  a  price  fixed  may 
be  accepted  sixty  days  after  such  six 
months.     Ellis's  Adm'r  v.  Durkee,  79 
Vt.    341    (1906).      Usage    may    deter- 
mine what  is  a  reasonable  time   for 
delivery.    Seven  days  held  reasonable. 
Stewart   v.    Cauty,    8    M.    &    W.    160 
(1841).     In  a  contract  by  which  one 
"agrees  to  deliver"  to  the  other  cer- 
tain stock  at  a  certain  price,  perform- 
ance   is    to    be    within    a    reasonable 
time,  and  the  vendor  may  tender  the 
stock    and   then    sue    for    the    price. 
Boehm  v.  Lies,  60  N.  Y.  Super.  Ct.  436 
(1892).     A  contract  of  sale  may  be 
an  executed  contract,  even  though  it 
reads  that  the   parties  "have   agreed 
to    sell."     State   v.   Whited,   etc.,   104 
La.  125    (1900).     Where  two  persons 
own  a  share  of  stock  in  common,  each 
agreeing  to  pay  one-half  of  future  as- 
sessments, and  one  of  them  gives  his 
interest  to  the  other  if  the  latter  will 
pay  future  assessments,  this  is  a  sale 
and  transfers  title.    Boll  v.  Camp,  118 
Iowa,   516    (1902).     Specific  perform- 
ance of  a  contract  to  sell  stock  will 
not  be  enforced,   where  the   time   of 
performance   and   of  payment   is   not 
fixed,    and    where    five    years    have 
elapsed,   and   where   the   vendee,    the 
corporate     secretary,     misrepresented 
the  value  of  the  stock  to  the  vendor. 


939 


§  834.] 


rTRACTS  T  •  LMBLING 


|  CH.  NX. 


it  caunol  be  enforced  tinsl  the  purchaser,  then    being  no  new 

consideration  at  the  time  of  thi  sise  of  the  option.1     A  contract 


Todd    v.    Diamond  Iron    Co.,    8 

liuust.  (  Del.)  372  (1889).  An  agr 
ment  to  transfer  stock  at  any  time  to 
a  trustee  for  creditors  is  not  enforce- 
able against  the  ent  estate  of 
the  deceased  stockholder.  Chafee  /. 
Sprague,  10  R.  I.  189  (1888).  A  vague 
offer  to  sell  stock,  with  a  statement 
that  the  stock  could  probably  be  sent 
witn  a  draft,  even  when  accepted  with 
a  direction  to  Bend  it  on,  does  not 
make  a  binding  contract.  Topi  iff  v. 
McKendree,  88  Mich.  148  (1891). 
Where  stock  is  sold  on  condition  that 
the  vendee  shall  be  "in  a  position  to 
take  up  the  stock,"  the  condition  Is 
fulfilled  if  the  vendee  accepts  the 
stock  and  acts  as  a  director,  and  holds 
the  stock  for  five  months.  Wills  v. 
Fisher,  112  N.  C.  529  (1893). 

i  Wescott  v.  Mitchell,  95  Me.  377 
(1901).  A  unilateral  contract  is  not 
binding.  A  consideration  must  exist 
or  the  covenants  be  mutual.  Jordan 
v.  Indianapolis,  etc.  Co.,  61  N.  E.  Rep. 
12  (Ind.  1901);  S.  c,  159  Ind.  337. 
Under  an  option  to  pay  a  certain 
sum  by  a  certain  date  or  else  return 
the  stock,  records,  etc.,  notice  of 
such  return  must  be  given  on  or 
before  the  date  personally,  even 
though  the  vendor  lives  out  of  the 
state.  Otherwise  the  parties  are  lia- 
ble for  the  price.  Guss  v.  Nelson,  14 
Okl.  296  (1904). 

In  the  case  of  Clark  v.  Campbell,  23 
Utah,  569  (1901),  the  court  discussed 
the  question  of  whether  an  option, 
given  without  consideration,  was  bind- 
ing. Where  an  option  to  purchase 
stock  provides  for  immediate  delivery 
in  the  hands  of  a  third  person,  and 
for  payment  by  instalments  in  case 
the  option  is  exercised,  the  payment 
of  the  first  instalment  constitutes  an 
exercise  of  the  entire  option.  Obery 
v.  Lander,  179  Mass.  125  (1901).  An 
option  to  sell  mining  stock,  with  no 
definite  time  fixed  as  to  the  duration 


the  option,  may  be  r<  roked  thi 
aths    later,    no   sale    having    been 
Le  in  tin'  meantir  I  a  Bub 

quel  by  the  owner  of  the  st> 

to  a  party  whom 
the    party   receiving   the  option   b 
bee;,  I  latlng  with  does  not  enl  11 

h  parly  receiving  the  option  to 
any  interest  in  the  sale.  Rees  v.  Pel- 
low,  97  F<  l.  Rep.  167  I  1899),  the  court 
holding  that  such  an  option  may  be 
terminated  at  any  time  in  good  faith. 
The   various  stockholders  of  a  com- 

Lbly  a  first 
Ion  of  thirty  days  to  purchase  their 
of  stock  wheni  ver  any  one  de- 
sires to  sell,  each  contracting  for  him- 
self,   the    contract    further    providing 
that  Buch  thirty  days  are  to  commence 
in  case  of  the  death  of  a  stockholder, 
so  far  as  his  stock  was  concerned,  and 
they  may  further  contract  that  anoth- 
er person  is  to  have  a  similar  option 
in   case  the  first  option   is  not  exer- 
cised.   A  party  entitled  to  such  option 
may  have  specific  performance  of  it. 
The  mutual  covenants  of  the  contract 
are  a  sufficient  consideration  to  sup- 
port it.     Scruggs  v.  Cotterill,  67  N.  Y. 
App.  Div.  583    (1902).     A  contract  of 
sale  of  stock,  to  be  delivered  in  blocks 
of  five  shares  or  more  as  called  for 
by  the  vendee,  is  not  an  option,  but 
an  obligation  on  the  part  of  the  ven- 
dee to  purchase,  and  if  he  does  not 
call  for  the  stock  it  may  be  tendered 
within    a    reasonable    time    and    the 
price  recovered,  and  the  vendor  may 
obtain  judgment  and  retain  the  stock 
until    payment    is    made.      Cragin    v. 
O'Connell,    50    N.    Y.    App.    Div.    339 
(1900);   aff'd,  169  N.  Y.  573.     An  op- 
tion to  sell  certain  stock  at  a  certain 
price  "on  or  after  three  months  from 
November  6,  1891,"  must  be  exercised 
within   a   reasonable   time   thereafter 
and  cannot  be  exercised  seven  years 
thereafter.     McCracken  v.  Harned,  66 
N.  J.  L.  37   (1901).     An  offer  to  buy 


940 


(11.  XX.]  NTRACTS  —  .AMBLING   SALES,   ETC. 


f§  334. 


whereby  the  vendee  of  bant  stock  agrees  not  to  sell  it  until  he  has 
first  offered  it  to  the  vendor  at  thi  value  of  the  stock,  sustains 

a  suit  for  damages  if  the  vendee  sells  without  first  making  such  offer. 
The  damage  is  nominal  unless  special  damage  is  proved,  and  damage 
cannot  be  r<  !   for  1  ss  of  control  of  the  corporation  by  reason 

3uch  breach.1  Where  the  vendor  says,  in  his  contract,  "I  have 
sold"  certain  stock,  deliverable  at  seller's  option,  within  a  specified 
time,  a  sale  in  praesenti  is  made,  and  the  vendor  assumes  to  have 
the  stock  and  to  hold  it  for  the  I  of  the  purchaser  until  de- 

livery.- An  agreemenl  to  pay  for  property  when  a  corporation  is 
created  is  enforceable  after  an  organization  is  effected  even  thouerh 
it  is  not  a  legal  incorporate  n.3  A  -ale  of  stock  with  an  agreement 
to  take   it  hack  whenever  the  vendee  di  in  enforceable  con- 

tract, evi  n  though  i!  oral.4 

Great  difficulty  often  arises  in  determining  whether  a  contract  of 


stock,  open  to  acceptance  after  Janu- 
ary 1,  must  be  accepted  before  July 
9.  Park  r.  Whitney,  148  Mass.  278 
(1S89).  An  option  to  purchase  stock 
within  three  years  is  enforceable, 
though  one  party  has  an  option  which 
the  other  has  not.  Seddon  v.  Rosen- 
baum,  85  Va.  928  (18S9).  An  option 
running  to  two  persons  cannot  be  ex- 
ercised by  one  of  them.  Pratt  r. 
Prouty,  104  Iowa,  110  (189S).  A  per- 
son holding  stock  in  escrow  under  an 
option  agreement  may  interplead  be- 
tween the  parties  in  interest  if  they 
make  conflicting  claims.  Walker  v. 
Bamberger,  17  Utah,  239  (1898). 
AVhere  the  owner  of  stock  offers  to 
sell  it  to  a  person  at  a  certain  price, 
the  offer  to  remain  open  until  a  cer- 
tain date,  the  contract  is  not  unilat- 
eral, if  the  latter  accepts  the  offer 
within  that  time.  If  the  vendor  then 
avoids  the  vendee  so  that  the  vendee 
is  unable  to  tender  the  money,  tender 
is  excused  and  the  vendor  may  sue 
the  vendee  for  breach  of  contract. 
Guilford  v.  Mason,  24  R.  I.  386  (1902). 
An  agreement  giving  the  owner  of 
stock  the  right  to  tender  it  to  another 
person  at  a  stated  price  must  be  exer- 
cised within  a  reasonable  time.  If  he 
delays  in  exercising  his  option  for  six- 
teen mon:hs,  and  in  the  meantime  the 
stock  has  declined  in  value,  he  cannot 


enforce  it.    Electric,  etc.  Co.  v.  Smith, 
113  X.  Y.  App.  Div.  C15   (1906). 

i  Cothran   r.   Witham,   123    Ga.   190 
(190.-,). 

irrie  r.  White,  45  N.  Y.  822 
(1871).  When  the  option  is  exercised, 
the  time  of  delivery  as  fixed  is  as 
though  that  time  had  been  specified 
in  the  original  contract.  Kelley  v. 
Upton,  5  Duer,  336  (1856),  holds  oth- 
erwise where  the  contract  has  also 
the  words  "at  buyer's  option  in  ninety 
days."  Such  a  contract  is  executory 
as  to  time  of  passing  title,  and  ten- 
der is  necessary. 

3  Childs  v.  Smith,  46  N.  Y.  34 
(1871),  rev'g  55  Barb.  45.  If  stock 
is  sold  conditionally,  and  the  condi- 
tion does  not  happen,  the  sale  is  void. 
Mitchell  v.  Wedderburn,  68  Md.  139 
(1887).  See  also  §335,  infra.  A  sale 
of  stock  to  be  paid  for  if  the  buyer  ob- 
tained control  of  the  company  and 
within  four  years  sold  its  property  or 
received  profits  for  a  certain  sum,  is  a 
conditional  sale  and  title  does  not 
pass  until  one  of  the  conditions  is  ful- 
filled. Kennedy  v.  Lee,  147  Cal.  596 
(1905).  If  both  the  vendor  and  ven- 
dee of  stock  are  ignorant  that  the 
charter  has  expired,  this  does  not  in- 
validate the  sale.  Brooks  v.  Camak, 
60  S.  E.  Rep.  456   (Ga.  1908). 

4  See  §  339,  infra. 


941 


§  334.]  CS  TO  SELL — GAMBLING  SALES,   ETC.  jrn.xx. 

Bale  ;  ,ck  La  an  executed  or  is  merely  an  executory  contracl  of 
sale.  There  are  a  few  general  rulea  on  this  Bubject,1  bul  each  con- 
tract for  the  sale  of  stock  is  construed  and  enforced  by  the  courts 
according  to  the  intenl  of  the  parties  as  manifested  by  the  written 
terms  and  conditions  of  the  contracl  itself.  Various  contracts  rela- 
tive to  the  sale  of  Btock  are  explained  and  referred  to  in  the  n< 
below.2 


l  A  contract  of  sale  of  stock  w;is 
worded  as  follows: 

"I  hold  Of  the  stock  of  the  Wash- 
ington and  Hope  Railway  Compa 
$33,250  or  1,350  slians,  which  is  sold 
to  Paul  i\  Beardsley  [the  appellee], 
and  which,  though  standing  in  my 
name,  belongs  to  him,  Bubject  to  a 
payment  of  $8,000,  with  interest  at 
same  rate  and  from  same  date  as  in- 
terest on  my  purchase  of  Mr.  Alder- 
man's stock." 

The  court  hold  that  this  was  an 
executed  contract  by  which  the  owner- 
ship of  the  stock  passed  to  the  pur- 
chaser, with  a  reservation  of  title, 
simply  as  security  for  the  purchase- 
money— an  equitable  mortgage.  The 
court  pointed  out  the  difference  be- 
tween an  executed  and  executory  con- 
tract of  sale  as  follows: 

"If  an  agreement  to  sell,  the  moving 
party  must  be  the  purchaser.  If  a 
sale,  an  executed  contract  with  reser- 
vation of  s.ecurity,  the  moving  party 
is  the  vendor,  the  one  retaining  se- 
curity. If  an  agreement  to  sell,  the 
moving  party,  the  purchaser,  must 
within  a  reasonable  time  tender  per- 
formance or  make  excuse  therefor. 
If  an  executed  contract,  a  completed 
sale,  then  the  moving  party  is  the 
vendor,  the  security-holder,  and  he 
assumes  all  the  burdens  and  risks  of 
delay.  .  .  .  It  is  not  always  easy 
to  determine  whether  an  instrument 
is  a  contract  of  sale  or  one  to  sell; 
yet  certain  rules  of  interpretation 
have  become  established. 
Where  the  buyer  is  by  the  contract 
bound  to  do  anything  as  a  considera- 
tion, either  precedent  or  concurrent, 
on  which  the  passing  of  the  property 


depends,   the   property   will   not    i 
until  the  condition  be  fulfilled,  <-\   a 
though   the  goods  may  have  been   ac- 
tually delivered  into  the  possession  of 
the  buyer."     Beardsley  v.  Boards! 
138  T.   S.  262    I  1891 ). 

-  An  antecedent  oral  agreemenl  that 
the  vendor  of  stock  will  not  engage 
in  the  same  business  is  not  admissible 
in  a  suit  on  the  contract  of  sale.  Os- 
good v.  Skinner,  mi  111.  229  (1901). 
A  contract  to  take  stock  at  the  end 
of  Ave  years  at  a  fixed  price  is  not 
invalid  under  the  statute  against  op- 
tions. Kant/.ler  r.  Benzingor,  u  1  »  111. 
589  (1905).  Where  the  owner  of  stock 
in  two  corporations  offers  to  pay  for 
property  by  either  of  said  stocks  and 
the  property  owner  accepts  the  price 
named,  and  agrees  to  take  stock  in 
payment  "in  either"  of  the  corpora- 
tions, this  does  not  necessarily  mean 
the  stockholder's  option.  Aldrich  v. 
Bay  State,  etc.  Co.,  186  Mass.  489 
(1904).  It  is  no  defense  to  a  note 
that  it  was  for  stock  and  was  to  be 
paid  for  out  of  dividends,  where  the 
defendant  is  the  only  witness  to  prove 
such  facts.  Fuller  v.  Law,  207  Pa.  St. 
201  (1903).  A  representation  by  the 
vendee  that  he  wishes  to  buy  all  the 
stock  and  will  pay  the  vendor  any  dif- 
ference between  the  amount  then  paid 
per  share  and  the  highest  price  he 
should  pay  for  any  other  of  the  same 
stock,  gives  no  cause  of  action  on  the 
part  of  the  vendor,  even  though  the 
vendee  as  trustee  buys  other  stock 
for  more  than  that  price.  Schraft  v. 
Fidelity  T.  Co.,  73  N.  J.  L.  57  (1906). 
The  remedy  of  a  corporation  against  a 
person  who  has  received  stock  from 
a  third  person  under  an  agreement  to 


942 


('][.  XX.  J  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§    334. 


Even  though  a  contractor,  who  receives  practically  the  entire  capi- 
tal stock  for  work  to  be  done,  does  not  fultill  the  contract,  and  even 


sell  treasury  stock  is  not  a  forfeiture    construction  work,  and  he  sublets  the 


of  the  stock  so  given.  Falk  v.  Schmitz, 
etc.  Co.,  44  Wash.  612  (1906).  A 
pledgee  may  show  a  sale  by  proving 
that  he  sent  the  stock  to  a  broker 
who  reported  the  sale,  and  the  pledgee 
credited  the  pledgor  with  the  pro- 
ceeds and  notified  him  thereof,  to 
which  the  pledgor  assented.  Smith  v. 
Becker,  129  Wis.  396  (1906).  Even 
though  the  company's  name  is  signed 
to  a  contract  by  which  the  owners  of 
the  stock  sell  the  stock,  yet  the  com- 
pany is  not  liable  for  a  breach  of  the 
contract  on  the  part  of  either  party, 
or  for  fraudulent  representations 
made  in  connection  with  it.  Home, 
etc.  Co.  v.  Collins,  31  Ind.  App.  493 
(1903).  A  corporation  cannot  enforce 
a  contract  by  which  the  seller  of  its 
stock  agrees  with  the  purchaser  that 
the  corporate  accounts  will  be  col- 
lected and  that  the  debts  do  not  ex- 
ceed a  certain  amount.  Rochester,  etc. 
Co.  r.  Fahy,  111  N.  V.  App.  Div.  748 
(1906).  See,  in  general,  Lindley, 
Company  Law,  6th  ed.,  pp.  676-688. 
An  agreement  of  a  party  to  sell  bonds 
for  another  party  at  a  certain  price 
may  be  enforced  by  the  party  who  is 
to  give  the  bonds  to  the  other  party  to 
sell.  Plumb  v.  Campbell,  129  111.  101 
(1888).  The  fact  that  the  corporation 
loses  a  large  amount  of  money  after 
a  partner  agrees  to  take  stock  as  a 
part  of  his  share  of  the  partnership 
assets  does  not  allow  him  to  decrease 
the  price  which  it  was  estimated  to 
be  worth.  Donahue  v.  McCosh,  70 
Iowa,  733  (1886).  Only  a  de  facto 
corporation  need  be  proved.  Reynolds 
v.  Myers,  51  Vt.  444  (1879). 

The  memoranda  of  the  contract,  to- 
gether with  the  certificates  of  stock, 
are  sufficient  presumptive  evidence 
of  the  existence  of  the  corporation 
and  the  legal  issue  of  the  stock.  Mann 
r.  Williams,  143  Mass.  394  (1887). 
Where  stock  is  issued  to  a  person  for 


contract  and  agrees  to  divide  the 
stock  with  others  who  are  to  share 
the  expense  of  construction,  they  all 
are  liable  to  the  subcontractor.  Mc- 
Fall  r.  McKeesport,  etc.  Co.,  123  Pa. 
St.  259  (1889).  An  underwriter  may 
be  held  liable,  even  though  the  entire 
amount  is  not  underwritten,  there  be- 
nothing  in  the  agreement  requir- 
ing that.  Knickerbocker  T.  Co.  r. 
is,  143  Fed.  Rep.  587  (1900). 
Where  a  pros  offering  for  sale 

trustee's  transferable  certificates, 
states  that  such  certificates  represent 
stock  deposited  with  the  trustee,  the 
stock  being  in  an  English  corpora- 
lion,  the  trustee  is  personally  liable 
if  it  turns  out  that  the  English  cor- 
poration had  a  prior  lien  on  the  stock 
to  the  full  extent  of  its  value.  The 
trustee  was  bound  to  take  notice  of 
the  lien  created  by  the  by-laws  of  the 
English  corporation.  The  rule  of  ca- 
veat emptor  has  been  relaxed  so  as  to 
create  an  implied  warranty  of  title 
on  the  part  of  the  seller.  Even 
though  tho  trustee  acted  as  agent,  yet, 
the  principal  not  being  disclosed,  the 
trustee  is  liable.  McClure  v.  Central 
Trust  Co.,  165  N.  Y.  108  (1900).  A 
broker  who  claims  to  be  acting  for  an 
undisclosed  principal  in  contracting 
for  the  purchase  of  bonds,  and  who 
stipulates  that  he  shall  not  be  per- 
sonally liable,  cannot  enforce  such 
contract  if  in  fact  he  was  the  prin- 
cipal himself.  Paine  V.  Loeb,  96  Fed. 
Rep.  164  (1899).  In  the  case  of  Clews 
v.  Jamieson,  89  Fed.  Rep.  63  (1898), 
where  the  broker  was  authorized  to 
sell  at  229  and  actually  did  sell  at 
221,  the  court  held  that  the  principal 
could  not  adopt  and  enforce  the  con- 
tract, inasmuch  as  the  broker  was 
not  authorized  to  sell  at  that  price, 
and  the  contract  not  binding  the  prin- 
cipal when  made  did  not  bind  the 
other  parties.     Even  though  a  person 


943 


334.] 


WACTS  TO  SELL — GAMBLING  BALE   I         [CH.  XX. 


though  be  disposes  of  some  of  the  stock,  yet,  unless  liquidated  damaj 
for  such   breach  are  specified   in  the  contract  or  actual  damage  is 


accepts  the  offer  of  a  broker  to  sell 
securities,  and  afterwards  buys  them 
direct  from  the  broker's  principal,  the 
broker  cannot  maintain  a  suit  against 
the  vendee.  Mason  v.  Chicago,  B.,  etc. 
Ry.,  156  Fed.  Rep.  959  (1907).  Even 
though  the  president  of  a  corporation 
brings  about  a  sale  of  all  its  stock, 
under  a  contract  by  which  the  cor- 
poration la  to  pay  him  a  certain  sum, 
nevertheless  he  cannot  collect  that 
sum  from  the  corporation  itself.  Wood 
v.  Manchester,  etc.  Co.,  54  N.  Y.  App. 
Div.  522  (1900).  It  is  legal  for  a  per- 
son to  contract  with  the  directors  of 
an  insurance  company  to  purchase  at 
least  sixty-five  per  cent,  of  the  stock 
of  the  company,  the  same  offer  being 
made  to  all  the  stockholders,  even 
though  it  is  proposed  to  thereupon 
wind  up  the  company.  Garrett  Co.  v. 
Morton,  65  N.  Y.  App.  Div.  366  (1901). 
Where  a  person  has  turned  in  securi- 
ties under  a  plan  of  consolidation 
which  states  the  aggregate  capacity  of 
properties  which  it  is  proposed  to  ac- 
quire, or  so  many  of  them  as  the  or- 
ganizers may  deem  best,  the  party 
cannot  withdraw,  where  the  plan  has 
been  carried  out,  even  though  less 
than  half  of  the  properties  have  been 
actually  acquired.  And  even  though 
the  preliminary  contract  provided  for 
the  acquisition  of  a  certain  company, 
yet,  if  the  consolidated  company  ac- 
quires practically  all  the  stock  and 
bonds  of  that  company,  the  party 
turning  in  securities  cannot  withdraw, 
and  especially  cannot  reclaim  the  se- 
curities as  against  a  transferee  in 
good  faith  who  had  no  notice  of  per- 
sonal representations.  Jewell  v.  Mc- 
Intyre,  62  N.  Y.  App.  Div.  396  (1901) ; 
aff'd,  172  N.  Y.  638.  Where  the 
stockholders  transfer  a  portion  of 
their  stock  to  one  of  their  number  to 
be  disposed  of  by  him  for  the  interests 
of  the  company  and  to  raise  money  to 
carry  on  business,  he  may  use  a  por- 


tion of  the  same  to  reimburse  one  of 
the  stockholders  for  stock  which  the 
latter  used  in  the  interest  of  the  com- 
pany. Playa,  etc.  Co.  v.  Cage,  60  N.  Y. 
App.  Div.  1  (1901);  aff'd,  172  N.  Y. 
630.  Where  the  evident  intent  of  a 
contract  of  sale  of  stock  with  partial 
deliveries  was  that  the  entire  amount 
should  be  taken  by  the  vendee,  he 
cannot  have  specific  performance  to 
the  extent  of  a  majority  of  the  stock 
only.  Clowes  v.  Miller,  71  Conn.  287 
(1901).  A  sale  of  stock  in  a  com- 
pany to  be  organized  is  legal.  Van 
Dam  v.  Tapscott,  40  N.  Y.  App.  Div. 
36  (1899).  Where  the  incorporators 
named  in  a  special  charter  organize 
by  subscribing  one  share  each  and  al- 
lowing another  person  to  subscribe  for 
the  remainder,  he  at  the  same  time 
entering  into  a  personal  contract  with 
them  that  he  would  construct  the 
street  railway  called  for  by  the  char- 
ter within  a  certain  time,  and  for 
failure  so  to  do  he  was  to  "return  the 
charter,"  a  suit  by  the  original  incor- 
porators to  cancel  his  subscription 
and  to  obtain  control  of  the  board  of 
directors  will  not  lie,  inasmuch  as  the 
contract  was  an  attempt  to  transfer 
the  corporate  franchise.  Simonds  v. 
East  Windsor,  etc.  Ry.,  73  Conn.  513 
(1901).     See  85  N.  E.  Rep.  102. 

Where,  in  order  "to  enable  the  com- 
pany to  keep  its  stock  in  the  owner- 
ship of  stockholders  of  its  own  chcos- 
ing,"  each  stockholder  enters  into  an 
agreement  with  the  corporation  that 
in  case  he  wishes  to  sell  his  stock  it 
shall  first  be  appraised  and  then  of- 
fered to  the  corporation  before  it  is 
offered  to  any  one  else,  the  refusal  of 
the  board  of  directors  to  make  an  ap- 
praisal, in  accordance  with  the  agree- 
ment, does  not  render  the  corporation 
liable  in  damages,  inasmuch  as  it  is 
clear  that,  even  though  the  stock  were 
appraised,  the  corporation  would  not 
buy    it.     Withon    v.    Batchelder,    etc. 


944 


CII.  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  334. 


proved,  the  corporation  itself  can  recover  nothing  for  such  breach, 
the  only  purpose  of  the   corporation  being  that  particular   enter- 


Corp.,  179  Mass.  169  (1901).  It  may 
be  shown  by  parol  that  a  written  sale 
of  stock  was  to  be  binding  only  in  case 
an  agent  had  not  already  sold  the 
stock.  Reiner  v.  Crawford,  23  Wash. 
669  (1901).  Where  a  corporation  hav- 
ing treasury  stock  in  its  treasury  sells 
all  its  assets  to  another  corporation, 
excepting  its  patent  rights,  such  sale 
is  not  a  sale  of  the  treasury  stock 
within  the  meaning  of  a  prior  stock- 
pooling  contract  cf  the  old  corporation 
that  certain  other  stock  should  be  sold 
before  such  treasury  stock  was  sold. 
Myers  v.  Buell,  67  N.  Y.  App.  Div. 
290  (1901).  Stockholders  in  selling 
their  stock  in  connection  with  the 
transfer  of  all  the  property  to  a  new 
corporation  may  reserve  what  may  be 
thereafter  realized  from  a  suit.  In- 
dependent, etc.  Co.  v.  Anderson,  106 
La.  95  (1901);  see  106  La.  55.  The 
vendee  who  agrees  to  pay  in  addition 
to  a  certain  price  a  specified  sum 
whenever  the  same  is  received  by  him 
from  the  corporation  is  not  liable  on 
the  contract  if  he  sells  the  stock  be- 
fore receiving  anything  from  the  cor- 
poration. Hamilton  v.  Miller,  24  Ind. 
App.  617  (1900).  An  agreement  of 
the  borrower  of  stock  to  pay  for  the 
same  in  case  the  stock  is  not  returned 
accrues  when  the  stock  is  sold  by  the 
pledgee  en  default  of  the  borrower, 
and  the  statute  of  limitations  then  be- 
gins to  run.  Jones  v.  Powning,  25 
Nev.  399  (1900).  A  contract  to  return 
borrowed  stock  or  pay  for  it  is  a  debt. 
Dibble  v.  Richardson,  171  N.  Y.  131 
(1902).  A  contract  whereby  a  per- 
son receives  stock  and  agrees  to  re- 
turn it  within  a  specified  time  or  else 
pay  a  specified  sum  is  not  a  bailment, 
and  hence  if  the  stock  is  not  returned 
at  the  specified  time  the  specified 
price  may  be  recovered,  even  though 
the  party  at  a  later  time  desires  to  re- 
turn the  stock.  Haskins  v.  Dern,  19 
Utah,  89   (1899).    A  stockholder  may 


hold  liable  in  damages  a  person  who 
has  broken  his  agreement  to  loan 
money  to  the  corporation,  the  consid- 
eration of  such  agreement  having 
been  furnished  by  the  stockholder. 
But  if  the  agreement  did  not  provide 
for  any  particular  duration  of  the 
loan,  only  nominal  damages  can  be 
recovered.  Kelly  v.  Fahrney,  97  Fed. 
Rep.  176  (1899).  Where  an  agree- 
ment for  the  pooling  and  voting  of 
stock  provides  that  any  holder  of 
trustees'  certificates  may  en  six 
months'  notice  demand  from  the  trus- 
tee repayment  of  the  price  which  he 
paid  for  the  stock,  such  demand  may 
be  enforced  by  a  suit  and  the  money 
collected  from  the  trustee.  Wagga- 
man  v.  Nutt,  88  Md.  265  (1898).  When 
a  subscriber  to  stock  agrees  to  sell 
$5,000  worth  of  the  same  at  its  "orig- 
inal cost,"  such  cost  is  the  cost  to  the 
subscriber  and  not  the  par  value,  nor 
the  cost  including  loans  by  the  sub- 
scriber to  the  corporation.  Eagan  v. 
Clasbey,  5  Utah,  154  (1887).  Where  a 
person  sells  goods  to  a  corporation 
and  agrees  to  take  payment  in  stock, 
he  must  take  the  stock  at  par,  even 
though  its  actual  and  market  value  is 
much  less  than  par.  Tilkey  v.  Au- 
gusta, etc.  R.  R.,  83  Ga.  757  (1889). 
A  contract  calling  for  "original 
ground-floor,  or  treasury  stock"  means 
any  of  the  stock  that  is  issued,  where 
the  statutes  prohibit  fictitious  stock. 
All  the  stock  is  then  presumed  to  be 
"ground-floor"  stock  and  to  represent 
at  par  the  actual  value  received.  Will- 
iams v.  Searcy,  94  Ala.  360  (1891).  A 
contract  by  a  corporation  that  it  will 
issue  its  stock  for  one-fifth  of  its  par 
value  is  void  under  the  Alabama  con- 
stitutional prohibition.  The  sub- 
scriber having  sold  his  contract  to 
another  person  cannot  collect  on  such 
sale.  Williams  v.  Evans,  87  Ala. 
725  (1889).  See  ch.  Ill,  supra.  An 
agency  to  sell  the  stock  of  a  company 


(60) 


945 


§  334.] 


COXTKACTS  TO  SELL — GAMBLING  SALES,  ETC. 


XX. 


prise,  and  no  business  having  been  transacted  by  the  corporation  in 
consequence  of  such  breach  of  the  contract.1  A  person  who  makes 
a  contract  with  a  syndicate  by  which  the  latter  agrees  i"  Bel]  hi 


refers  to  the  stock  then  issued  by 
the  company.  Gates  r.  National,  etc. 
Union,  46  Minn.  419  (1891).  An  ex- 
ecutory contract  to  purchase  stock  is 
not  such  a  claim  against  the  estate  of 
an  insolvent  vendee  as  to  be  prova- 
ble against  the  assigm  ie.  Be  Ives,  11 
N.  Y.  Supp.  650  (1890).  A  vendor  of 
the  stock  of  a  street  railway  company 
may  collect  damages  for  breach  of  the 
contract  of  the  vendee  to  construct  the 
street  railway  to  certain  land  owned 
by  the  vendor,  even  though  the  cor- 
poration, the  stock  of  which  was  sold, 
had  agreed  to  acquire  cerlain  rights  of 
•way  and  had  not  done  so.  Blagen  v. 
Thompson,  23  Oreg.  239  (1S92). 
Where  a  vendor  of  stock,  in  addition 
to  the  price  received,  is  to  have  an 
additional  sum  equal  to  the  highest 
price  paid  to  any  others  for  their 
stock,  he  cannot  recover  such  addi- 
tional price  by  proof  that  the  vendee, 
in  order  to  stop  a  stockholder's  suit, 
paid  a  higher  price  for  other  stock. 
Stewart  v.  Huntington,  124  N.  Y.  127 
(1890).  An  executory  agreement  by 
the  holder  of  a  note  that  he  will  can- 
cel it  in  payment  for  stock  is  a  con- 
tract by  itself,  and  is  no  defense  to 
the  note.  It  is  not  a  satisfaction  of 
the  note  nor  a  substituted  contract. 
It  may,  however,  give  a  right  to  dam- 
ages. Hayes  v.  Allen,  160  Mass.  286 
(1894).  Where  an  employee  is  to  re- 
ceive certain  stock  if  he  remains  in 
the  employ  of  the  company  up  to  a 
certain  date,  a  receiver  of  his  property 
prior  to  that  date  cannot  demand  the 
stock  prior  to  that  date.  Delahunty 
v.  Hake,  10  N.  Y.  App.  Div.  230  (1896). 
The  holder  of  an  option,  who  there- 
after takes  the  stock  and  agrees  to 
pay  for  it  or  return  it  within  a  cer- 
tain time,  must  pay  for  it  if  he  keeps 
the  stock  beyond  that  time.  Stevens 
v.  Hertzler,  109  Ala.  423  (1896).  An 
agreement  to  sell  and  deliver  all  the 


stock  of  a  corporation  within  a  cer- 
tain time  is  valid  oven  though  the 
promisor  does  not  own  or  control  the 
stock.  He  may  be  sued  for  damages 
for  a  breach.  Wamsley  v.  II  I...  Hor- 
ton  Co.,  77  I  Inn.  317  (1894).  Where 
the  proposed  seller  offers  to  sell  at  a 
certain  price,  and  the  buyer  accepts 
the  offer  payable  on  three  days'  sight 
draft,  and  on  the  next  day  the  buyer 
asks  for  certain  explanations  before 
confirming  his  offer,  the  seller  may 
refuse  to  carry  out  the  sale.  Cameron 
V.  Wright,  21  N.  Y.  App.  Div.  395 
(1897);  at'fd,  163  N.  Y.  586.  Where 
stock  is  placed  in  escrow  to  become 
the  property  of  a  person  in  case  he  is 
obliged  to  pay  a  certain  obligation, 
and  he  is  so  obliged  to  pay,  the  cred- 
itors of  the  party  placing  the  stock  in 
escrow  cannot  reach  the  stock  nor 
redeem  it.  Pabst,  etc.  Co.  v.  Montana, 
etc.  Co.,  19  Mont.  294  (1897).  Where 
upon  the  sale  of  stock  it  is  placed  in 
the  hands  of  a  third  person  to  be  de- 
livered when  paid  for,  and  is  partly 
paid  for,  it  is  conversion  for  the  per- 
son so  holding  the  certificates  to  de- 
liver them  to  still  another  person  on 
the  order  of  the  vendor.  Kahaley  v. 
Haley,  15  Wash.  678  (1896).  Where  a 
person  makes  a  contract  with  a  cor- 
poration to  sell  a  certain  amount  of 
its  preferred  stock,  and  in  return 
he  is  made  treasurer  at  a  monthly 
salary  for  a  year,  and  indefinitely 
thereafter,  and  he  actually  takes  some 
of  the  stock  himself  and  pays  for  it, 
but  is  discharged  because  he  does  not 
sell  the  stock  as  agreed,  he  can  re- 
cover on  his  contract,  the  company 
having  refused  to  return  the  money 
he  has  paid.  Hinchman  v.  Matheson, 
etc.  Co.,  115  N.  W.  Rep.  48  (Mich. 
1908). 

l  South  African,  etc.  Co.  v.  Peck, 
120  Fed.  Rep.  88  (1903).  See  also 
§  766c,  infra. 


946 


CH.  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC.  [§   334. 

and  securities  within  one  year  at  a  price  not  less  than  the  price 
specified  by  contract,  and  agrees  that  he  shall  receive  a  stipulated 
price  at  the  end  of  the  year,  may  sue  for  the  difference  between  the 
value  of  the  securities  at  the  end  of  the  year  and  the  price  at  which 
they  were  to  be  sold.1  A  contract  whereby  a  stockholder  delivers  cer- 
tain stock  for  money  to  be  paid  to  the  corporation,  the  money  to  be 
repaid  out  of  dividend.-  and  in  other  ways,  and  the  stock  then  to  be 
returned,  is  a  conditional  sale  and  not  a  Loan  to  the  corporation.2  A 
sale  of  stock  to  be  paid  for  out  of  dividends,  the  vendee  having  the 
power  to  make  payments  in  cash  whenever  he  desires  to,  obligates 
the  vendee  to  pay  within  a  reasonable  time,  irrespective  of  the  divi- 
dends. Such  a  contract  is  not  void  for  uncertainty,  nor  as  being 
without  consideration."  Where  a  note  is  given  in  payment,  for  stock, 
and  recites  on  its  face  that  it  is  for  value  received,  parol  evidence 
is  not  admissible  to  show  that  the  sale  was  on  condition  that  the 
stock  would  afterwards  pay  a  certain  dividend,  ami  in  case  such 
dividend  was  not  paid  the  note  was  not  to  he  paid.4  Nor  can  it  be 
shown  by  parol  that  a  written  contract  to  deliver  a  certain  amount 
of  stock  was  to  be  satisfied  by  the  delivery  of  a  less  amount5  If  a 
contract  of  sale  is  conditional  on  the  stock  being  increased,  and  the 
vendor  prevents  such  increase^  the  vendee  is  entitled  to  recover  back 

i  Gause  v.  Commonwealth  Trust  Co.,  mercial,    etc.    Bank   v.    Pott,    89    Pac. 

Ill  N.  Y.  App.  Div.  530   (1906).     In  a  Rep.  431  (Cal.  1907). 

suit  against  a  trust  company  for  fail-  4  Dinkier     v.     Baer,     92     Ga.     432 

ure  to  sell  securities,  as  it  agreed  to  (1893). 

do  for  a  certain  price,  the  plaintiff  6  Where  a  stockholder  has  agreed 
must  prove  damage  by  reason  of  the  to  sell  and  deposit  in  a  trust  company- 
breach  of  covenant  to  sell  as  distin-  seven  hundred  and  twenty  shares,  but 
guished  -frcm  a  breach  of  covenant  to  only  deposited  six  hundred  and  eighty- 
pay  money.  Gause  v.  Commonwealth  seven  shares,  and  the  vendor  has  on 
T.  Co.,  100  N.  Y.  App.  Div.  427  his  part  deposited  the  purchase  price 
(1905).  with  the  trust  company  to  be  paid  on 

2  Crimp  v.  McCormick  Const.  Co.,  the  delivery  of  the  seven  hundred  and 
71  Fed.  Rep.  356  (1896).  See  also  twenty  shares,  the  vendor  cannot  re- 
§76,  swpra.and  125  N.  Y.  App.  Div.  399.  scind  on  the  ground  that  there  was  a 

3  Stewart  v.  Herron,  82  N.  E.  Rep.  contemporaneous  oral  understanding 
956  (Ohio  1907).  A  contract  under  that  six  hundred  and  eighty-seven 
which  stock  is  transferred  to  be  paid  shares  would  be  sufficient.  Dady  v. 
for  by  dividends,  cannot  be  rescinded  O'Rourke,  172  -N.  Y.  447  (1902).  A 
by  the  transferrer  as  being  without  contract  by  a  person  with  another  to 
consideration.  White  v.  Cooper  Co.,  purchase  all  of  certain  stock  held  by 
Ohio  Circuits  (1903),  p.  703;  aff'd,  72  a  third  person  is  broken  by  a  failure 
Ohio  St.  615.  A  provision  in  the  con-  to  purchase  only  a  part  thereof;  but 
tract  that  the  vendor  of  stock  shall  where  there  are  other  provisions  in 
have  all  the  dividends,  may  be  shown  the  contract  sufficient  to  support  it, 
to  mean  that  he  was  to  apply  the  the  rule  may  be  different.  Stokes  v. 
dividends  to  the  purchase  price.    Com-  Foote,  172  N.  Y.  327  (1902). 

947 


§  334.] 


i.l.     GAMBLING  SALES,  ETC.  [cii.  XX. 


a  partial  paynu  al  alr<  ady  made  by  him.1  Where  a  p(  rson  contra 
fc0  give  to  am  ther  person  a  fourth  interest  in  any  mines  which  the 
former  may  buy,  the  former  musl  give  the  latter  a  fourth  oi  stock 
which  the  former  purchases  in  a  mining  company.2  But  an  ag 
ment  of  various  stockholders  in  Beveral  Btreel  railway  companies  to 
form  a  new  corporation  and  transfer  their  interesl  thereto,  and  divide 
the  new  stock  in  a  certain  proportion,  do<  constitute  such  a  part- 

ner, nip  as  to  entitle  one  to  sue  the  others  for  an  accounting  of  profits, 
where  the  others  had  formed  Buch  a  corporation  with  other  part:    . 
leaving  out   the  Brat-named  party.8     Where  the  vendor  guaranl 
that  the  vendee  can  sell  the  Btock  within  a  year  at  a  certain  price, 
and  i!  Is  it  after  the  year  al  a  less  price,  he  may  recover 

the  difference  Erom  the  vendor.4     The  agreemenl  of  vendors  of  stock 
to  protect  the  vendee  against  the  payment  of  existing  claims  of  a  cor 
poration  is  no1  enforceable  until  payment  is  actually  mad  .       Many 


i  Lovell  r.  Jacobs,  150  N.Y.  84(1896). 

2  Dennison  r.  Cbapman,  105  Cal.  447 

(1895). 

3  Scbantz  V.  Oakman,  163  N.  Y.  148 
(1900).  Cf.  §§705-707,  infra,  and 
§  320,  supra. 

4  Lobeck    v.    Duke,     50     Neb.     568 
(1897).     The  vendor  may  guarantee 
that  the  stock  will  be  at  par  within  a 
certain  time.     Suit  lies  if  it  is  not  at 
par  within  that  ime.     Hill  v.  Smith, 
21     How.     283      (1858).      A     contract 
guaranteeing  a  certain  dividend  over 
and  above  certain  corporate  expenses 
does  not  include  payment  of  salaries, 
etc.     Central,  etc.  Assoc,  v.  James,  81 
Ga.  762  (188S).    A  guaranty  upon  the 
sale   of   stock  that  certain   dividends 
will  be  declared  is  enforceable  against 
the   guaranteeing   firm,    even   though 
they    acted    as   agents    for   an   undis- 
closed principal.     Their  obligation  is 
primary,  and  not  that  of  guarantors 
for  the  company.     Kernochan  v.  Mur- 
ray, 111  N.  Y.  306    (1888).     See  also 
as  to  guarantees,  §  775,  infra.    Where 
the   vendors   of    stock   guaranty   that 
the  stock  shall  be  non-assessable  until 
they  have  advanced  $30,000,  a  stock- 
holder who  is  held  liable  on  a  statu- 
tory liability  may  hold  the  guarantors 
liable  if  they  have  not  paid  the  $30,- 
000.      Omo    v.   Bernart,    108   Mich.    43 

(1895).     A   guaranty  by   an   outside 


party  that  upon  the  winding  up  of  a 
corporation  the  stock  should   receive 
so  much,  passes  to  a  purchaser  of  the 
stock,  the  transfer  having  been  made 
subject   to   the  agreement.     Bacon    P. 
Grossmann,   71    N.   Y.   App.   Div.    574 
(1902).     A  contract  whereby  a  stock- 
holder sells  his  stock  to  an  individual 
who  guarantees  that  the  former  will 
be  employed  at  a  stated  salary  by  the 
corporation  for  two  years  is  enforce- 
able against  the  person  so  purchasing 
the   stock,   even   though  the   corpora- 
tion  passes   into   the   hands  of   a   re- 
ceiver   before    the   expiration    of    the 
two    years    and    the    employment    is 
thereby  stopped.    Kinsman  v.  Fisk,  37 
N.  Y.  App.  Div.  443    (1899). 

5  Cochran  v.  Selling,  36  Oreg.  333 
(1899).  Where  in  the  sale  of  the 
stock  of  a  street  railroad  a  warranty 
is  made  that  the  liabilities  of  the 
company  do  not  exceed  a  certain  sum, 
a  note  given  in  payment  for  the  stock 
may  be  defeated  if  the  liabilities  ex- 
ceed that  sum.  Millsaps  v.  Merchants', 
etc.  Bank,  71  Miss.  361  (1893).  A  cor- 
poration cannot  enforce  a  promise 
made  by  a  stockholder  to  a  purchaser 
of  his  stock  that  he,  the  vendor,  would 
pay  the  corporate  debts.  German  St. 
Bank  v.  Northwestern,  etc.  Co.,  104 
Iowa,  717  (1898).  See  also  §354, 
infra. 


948 


CH.  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  334. 


cases  are  referred  to  in  the  notes  below  relative  to  the  contracts  and 
rights  of  agents,  promoters,  and  partners,  in  the  purchase  or  sale  of 
stock.1 


i  For  a  sale  of  stock  where  the  ven- 
dee was  to  divide  with  the  vendor 
the  amount  for  which  the  stock 
should  be  resold  by  the  vendee,  see 
Jones  i\  Kent,  80  N.  Y.  585  (1S80). 
An  agreement  to  divide  the  profits  on 
stock  in  consideration  of  information 
to  be  furnished  is  enforceable.  Par- 
sons v.  Robinson,  59  N.  Y.  Super.  Ct. 
546  (1891);  aff'd,  133  N.  Y.  537.  But 
an  agreement  to  set  on  foot  and  to 
help  carry  along  a  congressional  in- 
vestigation into  the  affairs  of  a  cor- 
poration, in  anticipation  that  it  would 
depress  the  market  value  of  its  stock, 
which  it  did,  and  to  furnish  the  de- 
fendants with  information  from  time 
to  time  respecting  damaging  facts 
brought  out  against  it  upon  the  in- 
vestigation to  enable  them  to  take  ad- 
vantage of  the  market,  in  considera- 
tion of  sharing  in  the  profits  of  their 
speculation,  is  void  as  against  public 
policy;  and  the  courts  will  not  permit 
a  recovery  upon  such  an  agreement. 
Veazey  r.  Allen,  173  N.  Y.  359  (1903). 
A  contract  whereby  an  agent,  one  of 
the  partners,  is  to  have  half  of  what 
he  could  sell  partnership  shares  of 
stock  for,  is  legal  and  enforceable  by 
him.  Wight  v.  Wood,  85  N.  Y.  402 
(1881).  A  promoter  who  has  brought 
about  the  sale  of  a  large  plant  to  new 
parties,  who  have  agreed  to  organize 
a  new  corporation  and  give  the  pro- 
moter a  certain  amount  of  stock 
therein,  cannot,  upon  the  ground  that 
he  is  being  defrauded  of  his  commis- 
sions, enjoin  the  parties  from  closing 
the  transaction  irrespective  of  the 
promoter,  nor  can  he  have  specific  per- 
formance of  the  contract  to  incorpo- 
rate a  company  and  deliver  the  stock. 
There  is  no  fiduciary  relation  between 
the  parties;  the  value  of  the  stock  can 
be  estimated  in  damages;  there  was 
no  allegation  of  defendant's  insolv- 
ency,   and    the    promoter   has   ample 


remedy  at  law  for  damages.  Avery  v. 
Ryan,  74  Wis.  591  (18S9).  A  prom- 
ise and  contract  of  promoters  to  sub- 
scribers to  certain  bonds  may  create 
an  equitable  lien  on  the  bonds  en- ' 
forceable  in  equity.  Badgerow  r.  Man-  l 
hattan  Trust  Co.,  64  Fed.  Rep.  931 
(1894).  Where  stock  is  purchased 
to  be  resold  on  joint  account,  and  - 
one  party  refuses  to  live  up  to  the 
contract,  the  other  may  dispose  of  the 
stock  on  the  best  terms  possible.  Dav- 
idor  v.  Bradford,  129  Wis.  524  (1906). 
Where  minority  stockholders  agree  to 
finance  the  company  if  they  are  given 
control  of  its  business  and  under  such 
agreement  do  finance  the  company  and 
the  majority  stockholders  then  take 
control,  the  minority  stockholders 
may  have  a  receiver  appointed,  if  the 
company  is  not  able  to  repay  money 
advanced  on  their  credit.  Wood,  etc. 
Co.  v.  American,  etc.  Co.,  62  Atl.  Rep. 
768  (N.  J.  1906).  Even  though  pro- 
moters send  to  a  person  a  printed 
form  of  application  for  stock,  and  he 
signs  and  returns  the  same,  this  does 
not  obligate  them  to  allot  to  him  such 
stock  or  any  part  thereof.  Feitel  v. 
Dreyfous,  117  La.  756  (1906).  A  stock- 
holder who  unites  with  other  stock- 
holders in  depositing  his  stock  with 
a  third  person  with  authority  to  sell, 
and  the  latter  does  so,  may  bring  suit 
against  the  purchaser  for  the  pur- 
chase price.  Dowling  v.  Wheeler,  117 
Mo.  App.  169  (1906).  The  question 
of  whether  a  sale  or  pledge  was  in- 
volved in  the  relations  between  a 
contractor  and  the  party  who  finan- 
ciered the  matter  for  him  was  in- 
volved in  Griggs  v.  Day,  58  N.  Y. 
Super.  Ct.  385  (1890),  finally  decided 
in  158  N.  Y.  1  (1899).  The  fact  that 
a  vendee  makes  out  a  check  to  a  per- 
son and  delivers  it  to  him  in  payment 
for  stock  does  not  prove  that  the  lat- 
ter is  the  vendor  and  liable  for  mis- 


949 


§  3. 


CONTRACTS  TO  BELL — GAMBLING  SALES,  ETC.  [CH.  XX. 


§  :);;:>.  Remedies  for  breach  of  a  contract  to  sell  stock  Tt  rider. — 
A  person  who  is  under  contraci  to  sell  and  deliver  sharee  of  stock 
ni;iv  fulfil]  tlif  obligation  on  his  part  by  tendering  to  the  vendee 
certificates  of  stock,  duly  indorsed  by  himself,  and  containing  a 


representations.  Aron  v.  De  Castro, 
j:;i  N.  Y.  048  (1892).  Fur  a  breach 
of  an  agreement  to  give  a  certain 
quantity  of  stock  in  payment  for  serv- 
ices to  be  performed,  the  person  en- 
titled to  the  stock  may  sue  for  dam- 
ages. Alford  V.  Wilson,  20  Fed.  Rep. 
9G  (1SS4).  The  corporation  is  not  li- 
able for  the  breach  of  an  agreement 
among  the  organizers  as  to  the  distri- 
bution of  stock.  Snmmerlin  r.  Fron- 
teii/a,  etc.  Co.,  41  Fed.  Rep.  249 
(1890). 

Where  the  promoters  of  a  comp;iny 
agree  to  sell  property  to  the  company 
in  consideration  of  a  certain  numb<  r 
of  paid-up  shares,  specific  perform- 
ance may  be  had.  See  Fyfe  v.  Swabey, 
16  Jur.  49  (1851),  M.  R.  As  to  pro- 
moters' contracts,  see  §§  705-707,  in- 
fra. Where  a  party  to  a  contract  rela- 
tive to  an  incorporation  and  division 
of  the  stock  sues  to  recover  his  inter- 
est according  to  the  contract,  the 
court  will  decree  a  proper  division  of 
the  stock,  all  parties  being  allowed 
the  amounts  invested  by  them  in  for- 
warding the  enterprise.  Bates  v.  Wil- 
son, 14  Colo.  140  (1890).  Where  the 
owner  of  a  patent  agrees  to  convey  it 
to  a  corporation  for  stock,  and  then  to 
divide  the  stock  with  others,  he  may 
be  compelled  to  perform  his  agree- 
ment. But  where  the  patentee  does 
not  convey  the  patent  to  the  corpora- 
tion, but  conveys  to  another  corpora- 
tion, the  latter  is  protected  in  its  title, 
though  some  of  its  incorporators  and 
directors  knew  all  the  facts.  Davis, 
etc.  Co.  v.  Davis,  etc.  Co.,  20  Fed.  Rep. 
699  (1884).  Where  a  patentee  agrees 
with  a  promoter  to  sell  the  patent  to 
the  corporation  for  stock,  and  divide 
the  stock  with  the  promoter,  but  the 
patentee,  after  obtaining  the  stock, 
sells  the  certificates  to  a  bona  fide  pur- 
chaser, the  latter  is  protected,  though 


the  transfer  is  not  registered  on  the 
corporate  books.  The  purchaser  may 
come  into  a  suit  instituted  by  the  pro- 
moter against  the  corporation  to  com- 
pel a  transfer.  Thurber  v.  Crump.  86 
Ky.  408  (18s7).  Where  a  person  holds 
property  in  trust  or  as  agent  for  oth- 
ers, and  conveys  that  property  to  a 
corporation  for  its  .shares  of  stock, 
the  p<  runs  who  had  an  equitable  In- 
terest in  the  property  may  compel 
this  agent  or  trustee  to  transfer  to 
themselves  such  stock.  But  all  the 
principals  or  cestui*  '/'"'  trust  must 
be  made  parties  to  the  suit.  O'Connor 
r.  Irvine,  7  1  Cal.  435  (18S7).  Where 
there  is  a  joint  operation  in  stocks,  a 
"pool,"  the  transactions  being  carried 
on  in  the  name  of  one  only,  the  oth- 
ers may  have  specific  performance 
leading  to  a  division  of  the  stocks. 
Johnson  v.  Brooks,  46  N.  Y.  Super.  Ct. 
13  (1880);  Thornton  v.  St.  Paul,  etc. 
Ry.,  45  How.  Pr.  416  (1873);  s.  c, 
dismissed,  6  N.  Y.  Week.  Dig.  309 
(1878).  Equity  has  jurisdiction  to 
compel  the  transfer  of  stock  as  be- 
tween parties.  Thus,  where  stock  is 
isued  in  payment  for  property,  and 
the  party  to  whom  the  certificate  is  is- 
sued refuses  to  divide  it  among  the 
owners  of  the  property,  as  provided 
by  contract,  a  court  of  equity  may 
compel  the  division,  and  may  enjoin 
any  election  of  the  corporation  until 
such  division  is  made.  Archer  v. 
Amer.,  etc.  Co.,  50  N.  J.  Eq.  33  (1892). 
It  is  a  question  of  fact  whether  a  per- 
son selling  stock  is  an  agent  or  vendee 
of  the  person  from  whom  he  obtained 
the  stock,  and  whether  the  latter  is 
liable  on  misrepresentation  made  by 
such  person.  Henneberger  v.  Matter, 
88  Mich.  396  (1891);  Florida,  etc.  Co. 
v.  Merrill,  52  Fed.  Rep.  77  (1892).  A 
party  selling  stock  is  not  liable  for 
the  false  representations  of  the  vendee 


950 


OIL  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§   335. 


power  of  attorney  authorizing  the  vendee  to  obtain  a  registry  of  the 
transfer  on  the  corporate  hooks.1  If  the  vendor  causes  the  stock 
to  be  transferred  on  the  corporate  book  to  the  vendee,  this  is  suffi- 
cient.2    If  the  defendant  is  not  in  the  state  at  the  time  when  tender 


to  another  person  to  whom  the  vendee 
is  reselling  the  stock.  Masterton  v. 
Boyce,  6  N.  Y.  Supp.  65  (1889).  A  cor- 
poration cannot  enforce  a  contract  by 
which  the  seller  of  its  stock  agrees 
with  the  purchaser  that  the  corporate 
accounts  will  be  collected  and  that  the 
debts  do  not  exceed  a  certain  amount. 
Rochester,  etc.  Co.  v.  Fahy,  111  N.  Y. 
App.  Div.  748  (1906);  affd,  188  N.  Y. 
629.  For  the  allegations  in  a  com- 
plaint by  one  promoter  against  an- 
other for  breach  of  contract  in  selling 
the  stock  for  the  benefit  of  the  enter- 
prise and  for  mismanaging  the  corpo- 
ration, see  Woolf  r.  Barnes,  46  N.  Y. 
Misc.  Rep.  169  (1905).  Failure  of  the 
vendee  to  complete  the  purchase  in 
accordance  with  the  contract,  in 
which  contract  certain  other  persons, 
who  had  agreed  to  purchase  the  stock, 
join,  renders  all  of  them  jointly  liable. 
Walter  r.  Rafalsky,  113  N.  Y.  App. 
Div.  223  (1906);  affd,  186  N.  Y.  543. 
i  "When  certificates  of  shares  are 
given  to  a  purchaser  they  are  analo- 
gous to  the  sale  of  chattels,  and  the 
assignment  and  delivering  of  the  cer- 
tificates is  a  symbolical  delivery  of  the 
shares  themselves."  Noyes  v.  Spauld- 
ing,  27  Vt.  420  (1855);  Duchemin  v. 
Kendall,  149  Mass.  171  (1889);  Mer- 
chants' Nat.  Bank  v.  Richards,  6  Mo. 
App.  454  (1879);  Eastman  v.  Fiske,  9 
N.  H.  182  (1838);  Murfn  v.  Barnum, 
24  Barb.  283  (1857);  Bruce  r.  Smith, 
44  Ind.  1  (1S73).  Cf.  Moore  v.  Hud- 
son River  R.  R.,  12  Barb.  156  (1851). 
It  is  not  a  sufficient  tender  to  deposit 
the  certificates  of  stock  with  the  clerk 
of  the  court  unindorsed.  Subsequent 
indorsement  after  the  stock  has  been 
sold  for  non-payment  of  assessments 
is  insufficient.  Kelley  r.  Owens,  120 
Cal.  502  (1898);  aff'd,  52  Pac.  Rep. 
797  (1898).  Where  a  firm  contracts  to 
sell  stock,  and  then  both  members  of 


the  firm  die,  a  tender  of  certificates 
standing  in  the  names  of  the  indi- 
vidual members  of  the  firm,  and  not 
signed  in  blank,  is  not  a  sufficient 
tender.  Nicholls  v.  Reid,  109  Cal. 
630  (1895).  See  also  Holmes,  etc. 
Manuf.  Co.  v.  Holmes,  etc.  Metal  Co., 
53  Hun,  52  (1889);  aff'd,  127  N.  Y. 
252.  Where  the  vendor  brings  into 
court  a  certificate  for  fifty-six  shares 
of  stock,  and  the  sale  was  for  only  fif- 
ty-one shares,  he  cannot  recover  the 
purchase  price.  Hamilton  v.  Finne- 
gan,  117  Iowa,  623  (1902).  Where 
a  stockholder  "agrees  to  turn  over"  to 
two  parties  all  the  stock  owned  by 
him  in  a  certain  corporation  it  is  suf- 
ficient delivery  if  the  stock  is  already 
held  by  one  of  them  in  pledge,  all  of 
which  is  known  to  the  other.  Fuehr- 
man  v.  McCord,  107  N.  Y.  App.  Div. 
12  (1905) ;  aff'd,  186  N.  Y.  566. 

2  White  v.  Salisbury,  33  Mo.  150 
(1862).  See  Merchants'  Nat.  Bank  v. 
Richards,  6  Mo.  App.  454  (1879); 
aff'd,  74  Mo.  77.  Wbere  an  executory 
sale  of  stock  is  made,  with  a  forfeit  in 
case  it  is  not  completed,  and  the  ven- 
dor, without  the  knowledge  of  the  ven- 
dee, causes  the  stock  to  be  trans- 
ferred to  the  vendee  on  the  books  of 
the  company,  and  the  company  fails, 
and  the  next  day  the  parties,  without 
knowledge  of  the  failure,  close  the 
transaction,  the  vendor  may  be  held 
liable  on  the  statutory  liability  on 
such  stock.  May  v.  McQuillan, 
129  Mich.  392  (1902).  In  Oklahoma 
it  is  held  that  the  vendor  of  stock  in 
suing  for  the  price,  must  allege  tender 
and  refusal  of  stock,  and  that  the 
plaintiff  was  able,  willing  and  ready 
to  deliver,  even  though  the  vendor 
had  transferred  the  stock  to  the  ven- 
dee on  the  books  and  had  tendered 
the  new  certificate,  but  brought  suit 
to  enforce  the  contract  instead  of  to 


951 


§  3; 


PBAOTS  TO  SELL — GAMBLING  BALES,  ETC.  [CII.  XX. 


should  be  made,  tender  may  be  made  when  he  returns.1  A  tender 
of  a  certificate  indorsed  in  blank,  aol  by  the  vendor,  bul  by  Borne 
previous  owner,  is  insufficient  The  vendee  is  oo1  obliged  to  trace 
his  vendor's  title  from  the  name  appearing  on  the  certificate.3  A 
contracl  to  buy  stock  in  a  Weal  Virginia  corporation  cannot  be  en- 
forced by  tendering  stock  in  a  Connecticut  corporation.8  An  ag] 
mi  llt  to  deliver  Btock  in  a  company  to  be  formed,  nothing  being  said 
aa  to  any  preferred  stock,  is  not  fulfilled  by  delivering  common  stock, 
where  there  is  preferred  issued  also.4  The  vendor  in  order  to  sue 
for  the  purchase  price  must  keep  on  hand  or  within  control  from  the 
lMm.  0f  tender  to  the  time  of  trial  the  stock  involved.6  Where  ten- 
der of  th<  is  made  in  court  and  the  vendor  obtains  judgment 
for  the  price,  the  tendeT  is  presumed  to  have  been  continued.8 
A  tender  followed  up  by  producing  the  certificat<  s  in  eouri  and  filing 
them  with  the  clerk  on  the  trial  ia  sufficient.7  A  person  holding  an 
option  or  right  to  buy  stuck  need  not  make  a  technical  common-law 
tender  of  the  money,  inasmuch  as  there  is  something  to  be  per- 
formed on  both  sides,  and  hence  if  the  purchaser  cannot  find  the 
vendor  after  due  March  for  him  and  the  purchaser  then  notifies  the 
vender  by  letter,  there  is  a  sufficient  tender  on  his  part.8     Ti  nder  of 

recover     damages     for     its     breach.        6  West  v.  Averill,  etc.  Co.,  109  Iowa, 
Haynes  r    Brown,  89  Pac.  Rep.   1124     488  (1899).    See  also  Cragin  v.  O'Con- 

(Okl.   1907).  nell>  50  N-  Y>  AlJp-  Div-  339    (190°): 

i  Edmonds  v.  Evarts,  146  Mich.  4S5  aff'd,   1G9   N.   Y.   573.     In  a  partition 

flQQgx  suit,  where  the  defendant  claims  that 

2  Hare  v.  Waring,  3  M.  &  W.  362,  he  is  entitled  to  a  deed  from  the  plain- 
380  (183S),  per  Parke,  B.  "The  party  tiff  on  delivering  a  certain  amount  of 
is  to  convey  and  deliver  certificates  stock,  the  defendant  need  not  bringN 
showing  either  on  the  face  of  them  or  the  stock  into  court  and  make  a  ten- 
from  the  indorsements  that  the  title  is  der  upon  the  trial.  The  decree  may 
in  the  person  conveying."  provide  that  the  deed  shall  be  made 

3  Craig  Silver  Co.  v.  Smith,  163  upon  the  delivery  of  the  stock.  Hey- 
Mass.  262   (1895).  man  v.  Swift,  91  N.  Y.  App.  Div.  352 

4  Mcllquham  v.  Taylor,  [1895]  1  Ch.  (1904).  Where  the  purchaser  of  a 
53  See  also  Faulkner  v.  Robinson,  plant  and  stock  is  sued  for  the  price 
70  S  W.  Rep.  990  (Tex.  1902).  An  and  judgment  is  recovered,  he  may  af- 
agreement  that  a  note  may  be  paid  terwards  bring  suit  for  the  stock  and 
by  certain  stock  in  case  the  stock  is  for  dividends  paid  after  the  time  when 
not  sold  when  the  note  becomes  due  he  would  have  been  entitled  to  the 
is  effective  only  in  case  the  stock  is  stock,  if  he  had  fully  complied  with 
tendered  when  the  note  becomes  due,  his  contract.  Beaty  v.  Johnston,  66 
and  if,  in  the  meantime,  the  stock  has  Ark.  529  (1899).  See  §  476  and  note 
been  largely  increased,  the  tender  is  1,  p.  1041. 

not  good     Tranter  v.  Hibbard,  108  Ky.        7  Wisconsin  Lumber  Co.  v.  Greene, 

•••65  (1900)  etc-  Co-  127  Iowa  350  <1904)- 

*  s  Ortmann  v.  Fletcher,  117  Mich.  501        8  Guilford   r.   Mason,   22    R.    I.    422 

MeQ8^  (1901);   s.  c,  53  Atl.  Rep.  284.     Even 

(1898).  s52 


CH.  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  335. 


stock  may  be  made  by  the  vendors  depositing  the  same  in  a  bank  and 
notifying  the  vendees  of  such  deposit,  where  the  vendees  are  nine  in 
number  and  the  sale  is  to  all  of  them  jointly,  and  where  such  delivery 
is  a  reasonable  one.  Even  though  such  tender  is  made  after  the 
day  fixed  by  the  contract,  yet,  if  other  features  of  the  contract  have 
been  carried  out  by  the  vendor,  a  tender  after  the  day  fixed  may  be 
sufficient.1  An  owner  of  stock,  having  the  option  to  sell  the  same 
to  a  person  on  a  certain  day,  must  tender  it  on  that  day,  even  though 
it  is  a  holiday  other  than  Sunday.  The  fact  that  the  tender  was  made 
later,  ami  the  vendee  took  time  to  consider  and  then  returned  the 
stock,  and  the  fad  that  the  vendee  afterwards  offered  to  take  a  part 
of  the  stock,  is  not  a  waiver  of  the  tender.2  Tender  need  not  be 
made  where  the  ability  to  make  a  tender  i~  -Iioaii,  and  the  other  party 
refuses  to  accepl  tender  and  denies  the  contract.3  In  England,  where 
n  transfer  of  shares  ls  to  he  made  by  a  deed,  it  is  the  duty  some- 
times of  the  vendor,4  and  sometimes  of  the  vendee/'  to  furnish  the 
necessary  iU'vd,  according  to  the  custom  of  the  market  in  which  the 


though     a     promoter    by     agreement    part  of  the  securities  under  a  contract 


made  with  a  foreign  corporation,  be- 
fore the  incorporation  of  a  mining 
company,  was  to  have  one  share  of 
stock  for  his  services  for  every  ten 
slaixes  which  he  obtained  subscrip- 
tions for,  and  the  company  accepted 
the  subscriptions,  yet  he  cannot  hold 
it  liable  for  the  value  of  the  stock 
to  be  received  by  him  as  commissions 
where  he  merely  demanded  it  by  let- 
ter and  the  company  offered  to  deliver 
it  after  suit  was  brought.  Teeple  v. 
Hawkeye,  etc.  Co.,  114  N.  W.  Rep.  906 
(Iowa  1908). 

i  Kauffman  v.  Reader,  108  Fed.  Rep. 
171  (1901).  It  is  a  sufficient  tender 
if  the  stock,  duly  assigned,  is  sent  to 
a  bank  at  the  purchaser's  place  of  busi- 
ness with  instructions  to  transfer  the 
same  to  the  purchaser  on  payment  of 
the  amount  due  and  the  bank  notifies 
the  purchaser  to  that  effect,  especially 
where  the  purchaser  had  notified  one 
of  the  vendors  that  he  would  not  per- 
form. Osgood  v.  Skinner,  211  111.  229 
(1904). 

2  Page  v.  Shainwald,  169  N.  Y.  246 
(1901). 

3  Eames     r.    Haver,    111    Cal.    401 
(1896).    Where  the  vendor  delivers  a 


of  sale,  and  the  vendee  retains  the 
same  and  claims  that  they  had  always 
been  his  property,  the  vendor  need  not 
tender  the  remainder  before  suing  for 
the  purchase  price,  but  is  liable  to  the 
vendee  for  the  part  not  so  tendered. 
Stokes  v.  Mackay,  147  N.  Y.  223 
(1895).  No  tender  is  necessary  under 
a  contract  giving  the  right  to  return 
stock  one  year  after  date,  where,  be- 
fore the  termination  of  the  year,  the 
original  vendor  refused  tender  and 
ordered  the  vendee  not  to  return  and 
stated  that  the  stock  was  worthless, 
which  was  a  fact.  Williams  v.  Pat- 
rick, 177  Mass.  160  (1900).  A  tender 
of  the  stock  need  not  be  made  by  the 
vendor  if  the  vendee  declines  to  com- 
plete the  contract  on  the  ground  that 
the  contract  was  not  legal.  West  v. 
Averill,  etc.  Co.,  109  Iowa,  488  (1899). 
No  tender  of  the  stock  need  be  made 
if  the  vendor  repudiates  the  contract. 
Maguire  v.  Halsted,  18  N.  Y.  App.  Div. 
228  (1897).  A  tender  may  be  waived. 
Kuhn  v.  McKay,  7  Wyo.  42   (1897). 

4  Shaw  v.  Rowley,  16  M.  &  W.  810 
(1847). 

5  Stephens   v.   De   Medina,   4   Q.   B. 
422   (1843). 


953 


335.] 


CAM,  ETC. 


[CH. 


sale  is  made.  1 f,  after  the  v.  nd<  e  accepts  a  tender  of  the  certifi 
the  corporation  refuses  to  allow  a  registry  and  transfer  on  the  cor 
porate  books,  the  vendor  is  Liable  to  him,  since  the  registry  is  held 
to  have  been  guaranteed.1  The  sendee  may  decline  to  accepl  the 
certificates  if  the  Btock  has  been  attached.2  Bui  the  vendee  cannol 
decline  the  tender  on  the  ground  thai  the  corporation  has  issued 
stock  a1  a  discount,  nor  because  it  has  mortgaged  its  property.8  A 
contract  whereby  stock  is  Bold  t<>  be  paid  for  in  the  future  i^  nol 
forfeited  by  mere  failure  t«»  pay  as  agreed  upon.' 


n.   27 


is: 


i  Wilkinson    v.    Lloyd,    7    Q. 
(1845). 

2 Eastman    v.    Flake,   9    N.    H. 
(1838). 

aNoyes    v.    Spaulding,    27    Vt.    420 
(1855).      See   also    $350,   etc.,    infra. 

4  Chater  v.  San  Francisco,  etc.  Co., 


fall.  Matthews  v.  duly,  61  N.  Y.  651 
(1875).  Although  a  party  to  whom 
bonds  and  Btock  have  been  sold  or 
Issued  to  be  paid  Cor  in  Instalments 
baa  paid  in  part  and  is  unable  to  pay 
tlic  remainder,  the  vendor  cannol  re- 
scind and  demand  back  the  securil 


19  Cal.  219  (1861),  where  payment  unless  he  returns  the  money  already 
was  made  in  notes  and  labor,  and  the  paid.  A;  i  Water-works  Co.  v. 
notes  were  not  paid.  Subsequent  div-  Venner,  18  N.  Y.  Supp.  379  (1892). 
idends  on  the  stock  are  to  be  applied  Where  the  owner  of  a  majority  of  the 
to  the  payment  of  such  notes  when  stock  sells  it,  the  purchase  price  be- 
the  dividends  have  been  received  by  ing  only  paid  in  part,  and  retains  the 
the  vendor.  A  sale  of  stock  to  take  stock  in  his  own  name  until  the  full 
effect  when  a  note  given  in  payment  price  is  paid,  he  cannot  be  compelled 
is  paid  does  not  enable  the  vendee  to  to  deliver  the  stock  or  to  refrain  from 
claim  the  stock  long  subsequently,  the  ousting  the  vendee  from  the  presi- 
note  not  having  been  paid.  Davison  dency  of  the  corporation,  where  the 
v.  Davis,  125  U.  S.  90  (1888).  Where,  vendee  fails  to  meet  the  other  pay- 
however,  two  parties,  one  owning  ments,  even  though  the  vendee  has 
stock,  the  other  bonds,  contract  to  ex-  proceeded  to  improve  the  property, 
change  the  same,  delivery  being  in  es-  Stockton  v.  Russell,  54  Fed.  Rep.  224 
crow  at  once,  and  absolutely  after  the  (1892).  For  failure  to  deliver,  the 
performance  of  certain  things,  a  fail-  measure  of  damages  is  the  difference 
ure  of  one  party  to  perform  on  his  in  the  market  value  at  the  date  of  the 
part  enables  the  other  to  have  the  contract  and  at  the  date  fixed  in  the 
contract  canceled  by  a  court  of  equity,  contract  for  the  delivery,  or  the  date 


Wilson  v.  Roots,  119  111.  379  (1887). 
Where  no  certificates  of  stock  are 
issued  and  a  stockholder  delivers 
an     assignment     of     her     stock     for 


of  the  breach  of  the  contract.  The 
price  at  which  the  vendee  had  resold 
is  not  admissible  unless  the  vendor 
had   notice    thereof.     Coffin   v.    State, 


a  specified  sum,  delay  in  paying  the    144  Ind.  578  (1896).    A  company  may 


sum  does  not  enable  the  vendor  to  sell 
the  stock  in  the  meantime  to  some  one 
else.  Judson  v.  Stonnington  Min.  Co., 
128    Mich.    103     (1901).      Where    fifty 


give  a  person  an  option  to  subscribe 
for  shares  of  stock  in  the  company. 
If  the  company  sells  its  assets  before 
such   option    is    exercised,    the    party 


shares    of    stock    are    sold,    but    only    holding    the    option    may    exercise    it 


twenty-five  shares  are  delivered,  and 
the  vendor  declines  to  deliver  the  bal 
ance,    a   suit   by    the   vendor    on   the 


and  sue  for  damages.  The  price  at 
which  the  company  sold  its  assets  is 
the  basis  of  the  damage.     Re   South 


ground  of  fraud  and  a  rescission  will    African,   etc.   Co.,   74   L.   T.   Rep.   769 

954 


(II.  XX.] 


CONTRACTS  TO  Si 


-GAMBLING  SALES,  ETC. 


[§  335. 


A  person  who  is  under  contract  to  purchase  stock  cannot  defeal 
that  contract  by  the  fact  that  the  corporation  was  insolvent  at  the 
time  the  contract  was  entered  into.1  An  agreement  to  deliver  stock 
free  and  clear  of  all  incumbrances  does  not  refer  to  incumbrances 
against  the  corporation.2  The  legality  of  the  sale  of  stock  is  governed 
by  the  law  of  the  state  within  which  it  is  made.3  It  is  no  defense  to 
a  contract,  to  buy  stock  for  the  vendee  to  allege  that  the  directors 
have  committed  an  ultra  vires  act  in  issuing  other  stock  at  a  dis- 
count.4    A  purchaser  of  stock  in  a  de  facto  corporation  cannot  re- 


(1896);    aff'd,  77  L.  T.  Rep.  377.     A    claim,  in   order  that  he  may   pay  or 


person  who  contracts  to  sell  to  an- 
other, on  or  before  three  years  from 
date,  certain  stock  at  a  certain  price, 
interest  to  be  paid  by  the  vendee  in 
the  meantime,  and  the  stock  to  be 
deposited  in  escrow,  cannot  recover 
the  price  at  the  end  of  the  three  years 
if  he  has  not  deposited  the  stock  in 
escrow  as  agreed.  Umfrid  v.  Brooks, 
14  Wash.  675  (1896).  An  agreement 
of  a  stockholder  that  if  he  sells  a 
certain  amount  of  his  stock  he  shall 
sell  to  another  stockholder  his  remain- 
ing stock  does  not  apply  where  he 
transfers  only  a  portion  of  the  first- 
mentioned  stock.  Burden  v.  Burden, 
8  N.  Y.  App.  Div.  160  (1896);  aff'd, 
159  N.  Y.  2S7  (1899).  See  also  §  766c, 
infra. 

i  See  §  350,  infra.  A  seller  cannot 
treat  a  contract  as  abandoned  sim- 
ply because  the  purchaser  does  not 
make  payments  promptly  in  accord- 
ance with  the  contract,  unless  the  pur- 
chaser refuses  in  such  a  way  as  to 
show  that  he  intends  to  renounce  the 
contract.  Monarch,  etc.  Co.  v.  Royer, 
etc.  Co.,  105  Fed.  Rep.  324  (1900). 
Where  the  buyer  does  not  pay  for 
shipments  as  called  for  by  the  con- 
tract, the  seller  may  repudiate  the 
contract.  Hull,  etc.  Co.  v.  Empire, 
etc.  Co.,  113  Fed.  Rep.  256  (1902).  If 
the  seller  claims  that  the  amount  al- 
ready paid  is  forfeited  by  the  failure 
of  the  purchaser  to  pay  one  of  the 
instalments  when  due,  it  is  his  duty 
to    inform    the    purchaser     of    such 


tender  such  amount.  Cushman  v. 
Jewell,  7  Hun,  525  (1876).  Where  an 
executory  contract  for  the  sale  of 
(hat tils  provides  that  the  purchase 
price  Khali  be  paid  in  instalments, 
and  that  title  shall  not  pass  until  the 
price  is  fully  paid,  and  the  vendor 
permits  the  vendee  to  retain  posses- 
sion and  make  other  payments,  after 
the  whole  contract  price  is  due,  he 
may  not  seize  the  property  and  ter- 
minate the  contract  for  non-payment 
until  he  has  demanded  payment. 
O'Rourke  v.  Hadcock,  114  N.  Y.  541 
(1889). 

2  Williams  v.  Hanna,  40  Ind.  535 
(1872). 

3  Dow  v.  Gould,  etc.  Co.,  31  Cal.  629, 
653     (1867).      See    also    §343,    infra. 

4  Faulkner  v.  Hebard,  26  Vt.  452 
(1854).  A  preferred  stockholder  may 
agree  with  the  corporation  that  his 
stock  shall  be  common  stock  in  con- 
sideration of  the  corporation  waiving 
the  right  to  redeem  such  preferred 
stock  as  provided  by  the  terms  of  such 
stock  in  the  original  issue  thereof. 
A  purchaser  of  other  stock  in  the  cor- 
poration cannot  when  sued  on  the 
contract  of  purchase  set  up  that  such 
agreement  in  regard  to  the  preferred 
stock  was  illegal.  A  pledgee  of  such 
preferred  stock  is  not  bound  thereby, 
but  if  the  debt  is  afterwards  paid  his 
objection  falls.  Pendleton  v.  Harris- 
Emerey  Co.,  124  Iowa,  361  (1904). 
That  fraud  is  a  defense,  see  §§  349-357 
infra. 


955 


§  33 


•    IN  TRACTS  TO  SELL — GAMBLING  SALES,   ETC.  [cil.  XX. 


organize* 


pudiate  the  sale  on  the  ground  that  the  company  was  Dot  properly 
I.1 
§336.  Difficulty  is  often  experienced  in  determining  what  the 
measure  of  damages  is  for  breach  of  a  contract  relative  to  the  Bale 
of  stock.  In  certain  cases,  where  the  stock  has  been  delivered  <>r  ten- 
dered, the  measure  of  damages  is  the  purchase  price  fixed  by  the  con- 
tract itself.2     'Jin'  vendor  may   tender  the  stock  to  the  vendee  and 


1  Burwash  r.  Ballou,  82  X.  B.  R<  p. 
355   (111.  1907).     See  also  g  334,  m/. 

In  a  suit  by  the  vendor  of  the  stock 
for  the  price,  it  is  no  defense  that  the 
corporation  had  not  recorded  its  cer- 
tificate of  Incorporation  with  the  re- 
corder of  deeds  as  required  by  statute, 
it  being  shown  that  the  certificate 
had  been  filed  with  the  secretary  of 
state  and  the  corporation  organized 
and  is  doing  business.  Marshall  V. 
Reach,   81   N.  E.  Rep.  29    (111.  1907). 

2  A  vendor  may  tender  the  stock 
and  sue  for  the  purchase  price.  Prest 
v.  Cole,  183  Mass.  283  (1903).  A  ven- 
dor may  recover  the  price  of  the  stock 
as  specified  in  the  contract.  Osgood 
v.  Skinner,  211  111.  229  (1904). 
Where  the  stock  is  sold  to  be  deliv- 
ered thereafter,  and  the  vendee  re- 
fuses to  accept  the  stock,  the  vendor 
may  tender  the  stock  and  then  sue  for 
the  contract  price.  In  Mobley  v.  Mor- 
gan, 6  Atl.  Rep.  694  (1886),  the  court 
said:  "The  court  refused  to  instruct 
the  jury  that  it  was  necessary  for 
Morgan  to  sell  the  stock  on  the  mar- 
ket for  the  best  price  he  could  get, 
and  that  the  measure  of  damages 
would  be  the  difference  between  the 
price  thus  obtained  and  the  contract 
price;  and  this  refusal  is  assigned  for 
error.  Of  course,  the  seller  would  be 
at  liberty,  after  tender  and  refusal,  to 
adopt  this  course;  but  it  was  not 
essential  to  his  right  of  action.  The 
measure  of  damages  was  the  differ- 
ence between  the  market  price  of  the 
stock  at  the  time  of  the  breach  and 
the  contract  price.  This  is  the  ordi- 
nary rule;  but  there  was  evidence  that 
the  stock  had  no  value,  and  there  is 
no  certainty — indeed,  no  proof — that 


upon  a  resale  any  price  could  have 
been  obtained  for  the  stock,  or  that  it 
had  any  market  value  when  Parker 
lit. illy  refused  to  take  it.  Under 
these  circumstances  we  see  no  reason 
why  the  price  agreed  to  be  paid 
should  not  lie  adopted  as  the  measure 
of  dam.'  -  .  if  that  was  the  only  mode 
by  which  full  compensation  could  he 
made  for  the  breach  of  contract  by  the 
purchaser." 

In  Barnes  r.  Brown,  130  N.  Y.  372 
(1892),  the  court  said:  "In  the  ab- 
sence of  special  circumstances  in  an 
action  for  conversion  of  personal  prop- 
erty as  well  as  one  for  failure  to  de- 
liver it  in  performance  of  a  contract 
where  consideration  has  been  re- 
ceived, the  value  of  the  property  at 
the  time  of  such  conversion  or  de- 
fault, with  interest,  is  the  measure  of 
compensation."  As  to  remedies  for 
a  breach,  see  also  Benjamin  on  Sales. 
For  the  measure  of  damage,  see  ch. 
XXXV,  infra.  The  vendor  of  stock 
which  has  been  delivered  to  a  third 
person,  according  to  the  agreement, 
may  sue  for  the  price  irrespective  of 
the  market  value  of  the  stock.  Obery 
v.  Lander,  179  Mass.  125  (1901).  As 
regards  the  pleadings  in  an  action  by 
a  vendor  of  stock  to  recover  damages 
against  the  vendee  for  refusal  to  ac- 
cept and  pay  for  stock  which  the  lat- 
ter had  agreed  to  accept  at  a  stated 
price,  one  year  from  date,  if  the  for- 
mer desired  to  sell,  see  Struthers  v. 
Drexel,  122  U.  S.  487  (1887).  The  ven- 
dor on  tendering  the  stock  is  entitled 
to  sue  for  the  purchase  price.  Reyn- 
olds v.  Callender,  19  Pa.  Sup.  610 
(1902).  The  remedy  of  a  person,  who 
has  sold  his  stock  to  another  person, 


956 


CH.  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  336. 


sue  for  the  price,  or  may  sell  after  notice  to  the  vendee  and  then 
sue  for  the  difference,  or  may  retain  the  stuck  and  sue  for  the  dif- 


who  had  agreed  to  pay  him  the  same 
price  that  the  latter  received  for  other 
similar  stock,   but  who  paid  the  for- 
mer less,  is  at  law  and  not  in  equity. 
Martin    p.    Wilson,    155    Fed.    Rep.    97 
(1907).     Where  the  contract  of  pur- 
chase says    "I  take,"  the  vendor  may 
tender  the  stock  and  sue  for  the  full 
purchase  price,  this  being  net  a  prom- 
ise  to   purchase    but   an    actual    pur- 
chase.    Graham  v.   Burgiss,   59   S.   E. 
Rep.    29    (S.    C.    1907);    holding    also 
that   the    vendor    may    assign   to   an- 
other person  his  right  to  tender  the 
stock  and  sue  for  the  purchase  price. 
"Where  the  price  is  fixed  in  the  con- 
tract  the    measure   of   damages   in   a 
suit  against  the  vendee  for  failure  to 
take    the    stock   is    the    price    agreed 
upon  and  not  the  difference  between 
the    market    price    and    the    contract 
price.     Lydon   r.   Sullivan,   101   S.   W. 
Rep.    940     (Ky.    1907).      The    vendor 
may  claim  damages  for  a  breach,  in 
that  the  vendee  does  not  pay  the  con- 
tract price  and  take  the  stock,  or  he 
may   bring   an   action   "in   effect   for 
the  specific  performance  thereof,"   in 
which  case  he  must  allege  readiness 
to    deliver     the     stock.        Corning   v. 
Roosevelt,  11  N.  Y.  Supp.  758   (1890). 
For  breach  the  vendor  may  tender  the 
stock    and    then    sue    for    the    entire 
price.     The  judgment  will  allow   the 
vendor  to  retain  the  stock  until  the 
judgment    is    satisfied.      Finlayson    v. 
Wiman,  84  Hun,  357   (1895).     Where 
the  vendee  agrees  to  give  a  note  and 
the  stock  as  collateral,  but  gives  the 
note  only,  the  vendor  may  return  the 
note  and  sue  at  once  for  the   price. 
Rennyson  v.   Reifsnyder,    1   Pa.   Dist. 
Rep.  758  (1892).     The  court  will  com- 
pel  the  vendee   to  take  and   pay  for 
stock  where  it  would  compel  the  ven- 
dor to  deliver  the  stock  if  he  defaulted 
on  the  contract  to  sell.   Bumgardner  v. 
Leavitt,  35  W.  Va.  194  (1891).    Where 
the    vendor    gets    judgment    for    the 


price  of  the  stock  sold  but  not  deliv- 
ered, the  court  will  order  him  to  de- 
posit the  stock  with  the  court  or  lose 
his  judgment.  McKeever  v.  Dady,  18 
N.  Y.  Supp.  439    (1892). 

In  Perin  v.  Megibben,  53  Fed.  Rep. 
86  (1892),  the  court  granted  specific 
performance  of  a  contract  to  sell  stock 
in  behalf  of  the  vendor  and  against 
the  vendee.  The  court  said:  "The 
agreement  was  in  form  a  contract  to 
buy  all  the  shares  of  stock  in  the  in- 
corporated companies.  The  language 
of  the  contract  shows  that  the  real 
agreement  was  to  buy  certain  real 
estate,  together  with  the  personal 
property  connected  with  its  use  for 
milling  and  distilling  purposes.  With- 
out discussing  the  question  whether 
the  sale  of  shares  of  stock  can  be 
specifically  enforced  in  equity,  it  is 
sufficient  to  say  that  the  sale  here  was 
in  fact  a  sale  of  real  estate,  and  the 
circumstance  that  personalty  was  in- 
cluded in  the  sale  would  not  affect 
the  power  of  a  court  of  equity  to  af- 
ford relief  by  requiring  specific  per- 
formance." The  measure  of  damages 
for  breach  of  a  contract  to  purchase 
stock  is  the  difference  between  the 
contract  price  and  the  market  value 
of  the  stock  at  the  time  and  place  of 
delivery,  with  interest.  Corser  v. 
Hale,  149  Pa.  St.  274  (1892).  Where 
a  vendee  refuses  to  carry  out  an  ex- 
ecutory contract  for  the  sale  of 
shares,  the  measure  of  damages  is 
the  difference  between  the  price  as 
fixed  by  the  contract  and  the  value  of 
the  stock  at  the  time  of  tender  and  re- 
fusal of  the  vendee  to  fulfill.  See 
Barned  v.  Hamilton,  2  Ry.  &  Canal 
Cas.  624  (1841);  Tempest  v.  Kilner,  3 
C.  B.  249  (1846),  and  Stewart  v. 
Cauty,  8  M.  &  W.  160  (1841) ;  Shaw  v. 
Holland,  15  M.  &  W.  136  (1846).  If  a 
person  sells  and  conveys  property  to 
a  company  to  be  paid  for  in  stock, 
which  the  vendee  refuses  to  deliver, 


957 


§  336.] 


CONTB  '  GAMBLING  BALI 


['    !!.  XX. 


ference  between  the  contracl  and  market  price.1     The  supreme  court 
of  the  United  States  laye  down  the  rule  that  the  vend 


the  vendor  may  recover  the  value  of 
the  stock.  Humaston  r.  Telegraph 
Co.,  20  Wall.  20  (  lsT:1,).  Where  an 
agent  to  sell  stock  is  to  have  any 

b  of  price  over  ;i  suai  named  to  him 
hy  the  vendor,  and  the  agent  find 
customer  at  an  advanced  price  and 
the  vendor  refuses  to  sell,  the  agent 
may  recover  such  profit  as  he  lost 
thereby.  Mattingly  v.  Roach,  84  Cal. 
207  (1890).  See  also,  as  to  agents, 
§  334,  supra.  Where  the  vendor,  after 
tendering  the  stock,  assumes  to  be 
the  owner  and  directs  a  sale  and  gives 
a  proxy  to  vote,  he  can  recover  only 
the  difference  between  the  market 
price  at  the  time  of  delivery  and  the 
contract  price.  Hamilton  v.  Finnegan, 
117  Iowa  623  (1902).  Where  a  party 
holding  stock  in  escrow  refuses  to 
deliver  when  he  should  and  in  a  suit 
for  conversion,  instead  of  depositing 
the  stock  in  court,  sets  up  a  defense 
which  is  without  merit,  the  value  of 
the  stock  and  dividends  and  interest 
may  be  recovered.  Clarke  v.  Eureka, 
etc.  Bank,  123  Fed.  Rep.  922  (1903); 
aff'd,  130  Fed.  Rep.  325.  Where  a  per- 
son sells  stock,  nothing  being  paid 
down,  but  by  the  contract  on  speci- 
fied dates  any  decline  in  the  market 
price  of  the  stock  should  be  paid  by 
the  vendee  to  the  vendor  and  any 
rise  should  be  paid  by  the  vendor  to 
the  vendee,  and  the  vendor  dies,  his 
estate  is  entitled  to  the  full  selling 
price  on  the  next  accounting  day,  and 
if  the  vendee  does  not  pay  on  a  de- 
mand at  that  time,  and  the  stock  sub- 
sequently advances  in  price,  the  ven- 
dee cannot  have  specific  performance, 
neither  can  he  recover  damages  if  the 
contract  price  exceeded  the  market 
value  when  payment  should  have  been 
made.  Re  Schwabacher,  98  L.  T.  Rep. 
127   (1907). 

i  See  the  cases  in  the  preceding 
note.  The  vendor's  remedies  for  a 
breach  of  a  contract  to  buy  stock  are: 


i  l  i  To  hold  the  stock  for  t;  -lee 

and    require    payment    of   the   en; 

price;  (2)  to  sell  after  notice  to  the 
'lee  and  sue  for  the  difference  be- 
in  the  contract  price  and  the  sell- 
price;  (3)  to  retain  the  Btock  and 
sue  for  the  difference  between  the 
contract  price  and  the  market  value 
price.  In  re  Ives,  11  N.  Y.  Supp.  650 
i  L890).  No  tender  is  necessary  when 
the  suit  is  for  damages  and  the  ven- 
dor intends  to  retain  the  stock.  Nyse- 
wander  /•.  Lowman,  l  u  l  ind.  5S4 
(1890).  When  suit  is  brought  to  re- 
cover the  price  of  stock  sold,  a  deliv- 
ery or  tender  must  be  Bhown.  Holmes, 
etc.  Co.  v.  Morse,  53  Hun,  58  (1889); 
aff'd,  127  N.  V.  252.  Where  a 
party  is  sued  on  a  note  he  may  re- 
coup by  setting  up  that  the  note  was 
given  to  plaintiff  on  plaintiff's  agree- 
ment to  assign  and  deliver  certain 
shares  of  stock,  which  was  not  ten- 
dered until  eight  months  after  the 
time  agreed  upon.  Hill  v.  Southwick, 
9  R.  I.  299  (1869).  For  failure  to 
deliver,  the  measure  of  damages  is  the 
difference  in  the  market  value  at  the 
date  of  the  contract  and  at  the  date 
fixed  in  the  contract  for  the  delivery, 
or  the  date  of  the  breach  of  the  con- 
tract. The  price  at  which  the  vendee 
had  resold  is  not  admissible  unless 
the  vendor  had  notice  thereof.  Coffin 
v.  State,  144  Ind.  578  (1896).  An 
agreement  to  sell  a  certain  amount  of 
stock  in  a  corporation  to  be  organized 
with  a  specified  capital  is  not  ful- 
filled by  tendering  stock  of  a  corpora- 
tion with  a  less  capital.  Faulkner  v. 
Robinson,  70  S.  W.  Rep.  990  (Tex. 
1902).  Liquidated  damages,  specified 
in  a  contract  in  case  of  failure  of  a 
party  not  transferring  property  in 
consideration  of  stock  to  be  issued 
by  a  corporation,  cannot  be  proved 
against  his  bankrupt  estate,  the  stock 
never  having  been  issued  and  the 
property    never    transferred,    and    no 


958 


CH.  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  336. 


upon  tlio  vendee  refusing  to  fulfill,  may  sell  the  same  to  the  highest 
Lidder  at  a  time  and  place  mentioned  in  a  notice  to  the  vendee,  and 
may  hold  the  hitter  liahle  for  the  difference  between  the  price  agreed 
upon  and  the  price  realized  at  such  sale.  At  such  sale  the  vendor 
may  purchase,  wide  publicity  of  the  notice  having  been  given  and 
full  opportunity  for  competition  at  the  sale  having  been  offered.1  The 
statute  of  limitations  may  be  a  bar  to  the  action.2 

The  vendee's  remedy  for  a  failure  on  the  part  of  the  vendor  to 
deliver  is  an  action  for  damages  3  or  a  bill  in  equity  to  obtain  spe- 


actual  damage  having  been  suffered. 
Northwest,  etc.  Co.,  v.  Kilbourne,  etc. 
Co.,  128  Fed.  Rep.  256  (1904).  Where 
the  vendor  does  not  tender  the  stock, 
he  cannot  recover  the  contract  price, 
but  only  the  difference  between  that 
price  and  the  market  value.  Andrews 
v.  Watson,  Ohio  Circuits  (1887),  p. 
686.  This  same  case  arose  three  years 
later  in  Ohio  Circuit  Courts  (1901), 
p.  692,  and  it  was  then  held  that,  there 
being  a  conflict  of  testimony  as  to 
whether  a  tender  was  made,  that  was 
a  question  for  the  jury,  and  that  the 
measure  of  damages  was  the  differ- 
ence between  the  contract  price  and 
the  market  price,  the  purchaser  hav- 
ing repudiated  the  contract  and  there- 
by waived  tender.  A  contract  where- 
by the  vendee  of  bank  stock  agrees 
not  to  sell  it  until  he  has  first  offered 
it  to  the  vendor  at  the  book  value  of 
the  stock,  sustains  a  suit  for  damages 
if  the  vendee  sells  without  first  mak- 
ing such  offer.  The  damage  is  nom- 
inal unless  special  damage  is  proved, 
and  damage  cannot  be  recovered  for 
loss  of  control  of  the  corporation  by 
reason  of  such  breach.  Cothran  v. 
Witham,  123  Ga.  190  (1905).  A  per- 
son who  makes  a  contract  with  a 
syndicate  by  which  the  latter  agrees 
to  sell  his  stock  and  securities  within 
one  year  at  a  price  not  less  than  the 
price  specified  by  contract,  and  agrees 
that  he  shall  receive  a  stipulated 
price  at  the  end  of  the  year,  may  sue 
for  the  difference  between  the  value 
of  the  securities  at  the  end  of  the 
year    and    the    price    at    which    they 


were  to  be  sold.  Gause  v.  Common- 
wealth Trust  Co.,  Ill  N.  Y.  App.  Div. 
530  (1906). 

1  Clews  r.  Jamieson,  182  U.  S.  461, 
497  (1901). 

2  The  statute  of  limitations  runs 
against  a  receipt  reciting  a  first  pay- 
ment of  stock  "standing  in  my  name 
but  owned  by  him,  and  he  remaining 
responsible  for  the  balance  of  the  in- 
stalments when  called  in,"  there  being 
no  agreement  as  to  the  future  dispo- 
sition of  the  stock  and  of  dividends. 
Cone  v.  Dunham,  59  Conn.  145  (1890). 
A  sale  of  a  certificate  to  the  effect  that 
when  stock  is  issued  a  specified 
amount  will  be  issued  to  the  holder  is 
a  valid  sale  and  is  not  defeated  by  the 
statute  of  limitations.  Meehan  v. 
Sharp,  151  Mass.  564  (1890).  Where 
certain  owners  of  stock  place  it  in  the 
hands  of  a  trustee  for  sale  and  the 
trustee  invites  subscriptions  thereto, 
the  subscription  contract  providing 
for  payment  of  one-third  down  and  the 
balance  when  called  for,  the  statute 
of  limitations  is  no  bar  to  an  action 
for  the  two-thirds,  although  six  years 
have  elapsed  since  the  first  payment 
was  made.  Williams  v.  Taylor,  120  N. 
Y.  244  (1890).  See  also  note  3,  p.  972, 
infra. 

3  A  person  entitled  by  contract  to 
purchase  stock  of  another  may  col- 
lect damages  against  the  latter  for 
failure  to  comply  with  the  terms  of 
the  agreement.  Rand  v.  Wiley,  70 
Iowa,  110  (1886).  For  failure  to  de- 
liver, the  measure  of  damages  is  the 
difference  in  the  market  value  at  the 


959 


§  33 


CONTRACTS  TO     ELL— GAMBLING  SALES,  KTC. 


[CH.  XX. 


cific  performance.3  In  almosl  all  cases,  however,  his  remedy  ia  an 
action  for  damages  only,  inasmuch  as  specific  performance  of  a 
of  personality  is  rarely  granted.  In  a  suit  by  the  vendee  for  breach 
of  warranty  of  title,  the  damage  i-  the  purchase  price  and  interest, 
and  !i"i  the  value  of  the  stock  and  the  dividends.2  Where  the  vendee 
has  paid  the  price  of  the  Btock  and  has  1  fused  delivery  he  may 

recover  the  value  of  the  stock  at  th<  ■  of  demand.8     In  a  suit 

against   the  vendor  for  failure  to  deliver  .   the  damag       may 

include  Lo  I  anticipated  profits,  if  Buch  loss  was  within  the  contem- 
plation of  the  par  a  measure  of  liability  in  case  of  breach, 


date  of  the  contract,  and  at  the  date 
fixed  in  the  contract  for  the  delivery, 

or  the  date  of  the  breach  of  the  con- 
tract.   The  price  at  which  the  vendee 
has  resold  is  not  admissible  unless  the 
vendor  had  notice   thereof.    Coffin   v. 
State,  144  Ind.  578  (1896).   The  meas- 
ure of  damages  in  a  suit  brought  by 
the  purchaser  of  stock  for  failure  of 
the  vendor  to  fulfill  is  the  difference 
between   the   contract   price   and   the 
market  value  of  the  stock  on  the  day 
of    delivery.     Market    quotations    are 
evidence  of  value  of  stock  only  when 
such  quotations  are  based  on  actual 
sales.  Where  there  have  been  no  sales, 
evidence  of  a  bid  for  the  stock  is  not 
admissible,  unless  it  is  shown  under 
what  circumstances  the  bid  was  made, 
and    whether    it    was    in    good    faith 
and  with  intent  to  fulfill.     Wildes  v. 
Robinson,    50    N.    Y.    App.    Div.    192 
(1900).     In  a  suit  by  a  purchaser  of 
stock  for  failure  of  the  seller  to  de- 
liver,   the    damage    is    the    difference 
between  the  purchase  price   and  the 
actual   value   of   the    stock.     Written 
reports   of   the   corporation  to   public 
officials    not    purporting    to   give   the 
value  of  the  property  are  insufficient 
to   prove  value.     Patterson  v.   Plum- 
mer,   10   N.   Dak.   95    (1901).     Where 
a  person  is  paid  for  stock  and  fails  to 
deliver,  the  measure  of  damages  for  a 
breach    of    the    contract    is    what    it 
would  cost  the  party  to  purchase  the 
stock  which  he  is  entitled  to.     If  he 
cannot  purchase  it,  then  the  par  value 
of  the  stock  is  the  measure  of  value, 


Inasmuch  as  he  would  have  had  to 
pay  that  to  t lie  corporation  in  order  to 
have  had  the  stock  issued  to  him. 
Barnes  v.  Seligman,  55  Hun,  339 
(1890);  afl'd,  130  N.  Y.  372.  Where  a 
vendor  of  stock  in  a  corporation 
which  has  a  franchise,  but  nothing 
else,  is  entitled  to  two  thousand 
shares  of  full-paid  stock  at  a  later 
date,  according  to  the  contract  of  sale, 
his  measure  of  damages  for  failure  of 
the  vendee  to  deliver  the  two  thou- 
sand shares  is  nominal  damages, 
where  there  was  no  market  or  actual 
value  for  the  stock.  Barnes  v.  Brown, 
130  N.  Y.  372  (1892).  Where  the 
vendor  of  stock  is  unable  to  obtain 
the  stock  for  delivery  by  reason  of 
an  injunction  against  the  corporation, 
the  vendee  may  sue  for  the  return  of 
the  purchase-money.  Rose  v.  Foord, 
96  Cal.  152  (1892).  That  damages  are 
a  sufficient  remedy,  see  1  University 
Law  Rev.  218   (1894). 

1  See  §  337,  infra. 

2  Morgan  v.  Hendrie  Bros.,  etc.,  34 
Colo.  25   (1905). 

3  Belden  v.  Krom,  34  Wash.  1S4 
(1904).  Where  the  vendee  pays  for 
bonds,  but  the  vendor  does  not  de- 
liver, the  measure  of  damages  is  no: 
necessarily  the  market  value  of  the 
bonds,  'but  they  may  be  shown  to  be 
worth  more  or  less  than  the  market 
value.  If  there  is  no  market  value 
the  real  value  can  be  proved  by  other 
facts.  Henry  v.  North  American,  etc. 
Co.,  158  Fed.  Rep.  79   (1907). 


960 


Cir.  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC.  [§§   337,  338. 

and  if  the  breach  was  the  approximate  cause  of  the  loss  and  if  the 
loss  is  made  out  with  reasonable  certainty.1 

§  3  3  7.  Specific  performance  as  a  remedy  for  breach  of  a  contract 
to  sell  stock. — It  frequently  happens  that  the  person  who  has  con- 
tracted to  purchase  stock  is  particularly  anxious  to  procure  that  stock, 
and  that,  under  the  circumstances  of  the  case,  the  stock  is  worth 
to  him  a  value  not  to  be  compensated  for  by  mere  money  damages. 
This  cannot  happen  in  the  case  of  a  contract  to  sell  securities 
issued  by  the  gov<  rnment,  since  they  may  be  easily  purchased  in  the 
market  Accordingly  it  is  well  established,  both  in  England  and 
America,  that  a  contract  for  the  sale  of  government  securities  will 
not  bo  specifically  enforced  by  a  court  of  equity,  but  the  vendee 
may  sue  the  vendor  in  an  action  at  law  for  damages  for  breach  of 
contract.2 

§  338.  An  entirely  different  rule  prevails  as  regards  contracts  for 
the  sale  of  stock  of  private  corporations.  If  the  stock  contracted 
to  be  sold  is  easily  obtained  in  the  market,  and  there  arc  no  partic- 
ular reasons  why  the  vendee  should  have  the  particular  stock  con- 
tracted for,  he  is  left  to  his  action  for  damages.3  But  where  the  value 
of  the  slock  is  not  easily  ascertainable,  or  the  stock  is  not  to  be  ob- 
tained readily  elsewhere,  or  there  is  some  particular  and  reasonable 
cause  for  the  vendee's  requiring  the  stock  contracted  to  be  deliv- 
ered, a  court  of  equity  will  decree  a  specific  performance  and  com- 
pel the  vendor  to  deliver  the  stock.4 

This  rule,  as  applicable  to  contracts  for  the  sale  of  railway  stock, 
was  clearly  established  in  England  in  1841,  in  the  case  of  Duncuft 
v.  Albrecht.5     Contracts  for  the  sale  of  stock  not  only  in  railroad,  but 

i  Crocker-Wheeler    Co.    v.    Bullock,  purchase  of  shares,  yet  when  shares 

134  Fed.  Rep.    241    (1904),  a  case  in-  are   dealt  in   largely  on  the  market, 

volving  a  plan  to  consolidate  two  com-  and  any  one  can  go  and  buy  them,  as 

peting  corporations.  appears  to  be  the  fact  in  this  case, 

2  Ross  v.  Union  Pac.  Ry.,  Woolw.  26,  there  is  no  reason  why  they  should 
32  (1863);  s.  c,  20  Fed.  Cas.  1245,  not  be  in  the  same  position  as  govern- 
1247;  Cud  or  Cuddee  v.  Rutter,  1  P.  ment  stock  is  in  the  case  of  a  con- 
Wins.  570  (1719);  s.  c,  5  Vin.  Abr.  tract  for  the  sale  and  purchase  of 
538  (1720);  Dorison  v.  Westbrook,  5  such  stock."  Re  Schwabacher,  98  L. 
Vin.     Abr.     540     (1722);     Cappur    v.  T.  Rep.  127  (1907). 

Harris,  Bunb.  135   (1723);   Buxton  v.  4  Quoted  and  approved  in  Ryan  v. 

Lister,   3   Atk.    383    (1746).     Cf.   Dol-  McLane,  91  Md.  175   (1900);   Schmidt 

oret   v.   Rothschild,   1    Sim.   &  S.    590  v.    Pritchard,    112    N.    W.    Rep.    801 

(1824) ;  Colt  v.  Nettervill,  2  P.  Wms.  (Iowa  1907),  and  Hills  v.  McMunn,  83 

304    (1725).     See  also  South,  etc.  Co.  N.  E.  Rep.   963    (111.  1908). 

v.  Wallington,  [1898]  A.  C.  309.  5  12  Sim.  189  (1841);  Parish  v.  Par- 

3  "It  is  within  the  power  of  a  court  ish,  32  Beav.  207  (1863),  granting  also 
of  equity  to  decree  specific  perform-  an  accounting  of  dividends;  Poole  v. 
ance   of   a  contract  for  the  sale  and  Middleton,     29     Beav.     646      (1861); 

(61)  961 


§  338.] 


CO:  ■   '  -GAMBLIH 


[CH. 


als«>  in  mining  and  ether  private  corporations  will  be  specifically  en- 
forced under  some  circumstance  -.' 


Turner  r.  Moy,  32  L.  T.  Rep.  56 
(1875);  Beckitt  r.  Bilbrough,  8  Hare, 
188  (1850),  dictum.  Contra,  dictum  iu 
Ross  v.  Union  Pacific  Ry.,  Woolw.  26, 
32  (1863);  s.  c,  20  Fed.  Cas.  1245, 
1247,  per  Miller,  J.  In  Cheale  v.  Ken- 
ward,  3  De  G.  &  J.  27  (1858),  the 
court  said:  "There  is  no  doubt  that  a 
bill  will  lie  for  a  sp<  rformance 

of  an   agr<  ement  to  transfer  railv. 
shares.     This  was  set  at  rest  by  Dun- 
cuft  r.  Albrecht,  12  Sim.  189  (1841)." 
i  Treasurer     v.     Commercial     Coal 
Min.  Co.,  23  Cal.  390   (1863).     A  sale 
with     a     right     to     repurchase     may 
amount  to  a  pledge  and  the  party  may 
maintain  a  bill  in  equity  to  recover 
back  the  stock  in  payment,  it  appear- 
ing that  it  has  no  ascertainable  mar- 
ket value  and  has  a  peculiar  value  to 
plaintiff,    greater    than    the    market 
value  at  the  time  of  transfer.    Eich- 
baum    v.    Sample,     213    Pa.    St.     216 
(1906).     Where   it  is  decided   that  a 
litigant    who    claims    stock    does    not 
own  it,  he  cannot  afterwards  in   an- 
other  case   claim   that  the   stock   be- 
longed  to  the  corporation.     Leigh  v. 
National,  etc.  Co.,  224  111.  76    (1906). 
Specific  performance  will  be  granted 
to  compel  a  corporation  to  issue  com- 
mon stock  in  payment  for  property  in 
accordance  with  a  contract  of  the  cor- 
poration, where  the  stock  has  no  mar- 
ket value,  and  it  appears  that  there 
have    never   been   any   sales   of   such 
stock.    Selover  v.  Isle,  etc.  Co.,  91  Minn. 
451    (1904).  Specific  performance  lies 
where    stock    in    dispute    carries   the 
control   of  the  corporation   and   such 
control    is    important   and    the    stock 
has  no  certain  market  value,  but  great 
intrinsic  value  if  properly  controlled. 
Sherwood  v.  Wallin,  1   Cal.  App.   532 
(1905).     A  person  having  an  option 
on  bonds,  which  the  vendor  is  to  use 
in  foreclosing  and  buying  in  and  re- 
organizing the  property,  cannot  main- 
tain   a    suit    against    the   vendor   for 


stock  issued  by  the  reorganized  com- 
pany to  represent  such  bonds,  where 
the  agreement  is  not  sufficiently   i 
plicit   for   specific    performance.      Pat- 
terson   r.    Farmington,    etc.    Ry.,    7S 
Conn.  628  (1904).    Where  the  pledgor 
agrees  to  sell  the  stock  to  the  pledg<  ■. 
but  the  corporation  claims  a  lien  an  1 
refuses  to  transfer  it,  and   for  three 
years  the   pledgee   does   nothing   and 
the  stock  quadruples  in  value,  specific 
performance   will   not   be  granted   at 
the  instance  of  the  pledgee.     Schimpff 
v.   Dime,   etc.   Bank,   20S   Pa.   St.   380 
(1904).    Where  the  vendee  files  a  bill 
for  fraud  and  yet  asks  that  the  vendor 
be   required   to  deliver  the  stock,   he 
thereby  affirms  the  transaction.     Chi- 
cago,  etc.   Bank  v.   Ball,   208   111. 
(1904).    The  vendor  in  a  contract  for 
the  sale  of  the  stock  and  property  of 
a  railroad  and  a  coal  mining  company 
specific  performance  where 
the   railroad   has  been  delivered  and 
the  vendee   refuses  to  take  the  coal 
properties.      McCullough    r.    Souther- 
land,    153    Fed.   Rep.    418    (1907).      A 
construction   company   may   maintain 
a  bill  in  equity  against  a  street  rail- 
way company  to  compel  the  latter  to 
deliver    to   the    former   four-fifths    of 
the  latter's  capital  stock  and  certain 
mortgage  bonds  in  accordance  with  a 
contract   between   them   for   the   con- 
struction   of   the    road,    inasmuch   as 
such  stock  cannot  be  procured  on  the 
market   and   has   no   general    market 
value,  and  whatever  value  it  has  was 
given  to  it  chiefly  by  the  construction 
work.     Even  though  it  turns  out  that 
prior  to  the  commencement  of  the  suit 
the    railroad   company    had    sold    the 
stock  and  since  the  commencement  of 
the  suit  had  sold  the  bonds,  yet  the 
court   may   render   a   decree    for   the 
value  of  the  stock  and  bonds.  Altoona, 
etc.   Co.   v.   Kittanning,   etc.   Ry.,   126 
Fed.  Rep.  559  ( 1903 ) .   A  vendee  of  stock 
who  has  filed  a  bill  in  equity  for  spe- 


9G2 


CH.  XX.]  CONTRACTS  TO  SELL GAMBLING  SALES,  ETC. 


[§  338. 


The  New  York  court  of  appeals  has  recently  held  that  a  vendee 
of  stock  may  be  granted  specific   performance  of  the  contract  on 


cific  performance  will  not  be  granted 
an  injunction  against  the  stock  being 
voted  by  the  vendor  in  the  meantime, 
where  the  former  does  not  allege  that 
the  vendor  is  insolvent  or  is  about  to 
dispose  of  the  stock.  Lucas  v.  Milliken, 
139  Fed.  Rep.  816  (1905).  A  person 
who  has  been  induced  by  fraudulent 
misrepresentations  to  exchange  stock 
for  other  stock  may  have  rescission 
without  proving  damage,  the  suit  be- 
ing very  similiar  to  one  for  specific 
performance,  and  it  being  alleged  that 
the  actual  value  of  the  stock  cannot 
be  shown.  Jahn  v.  Reynolds,  115  N. 
Y.  App.  Div.  647  (1906).  Where  a 
pledgee  brings  suit  to  obtain  pos- 
session of  the  pledge,  which  had  been 
wrongfully  diverted,  and  during  the 
suit  the  pledge  becomes  worthless, 
a  supplemental  complaint  may  be 
served  alleging  that  fact  and  demand- 
ing the  value  of  the  pledge  at  the 
time  demand  was  made  therefor.  Cen- 
tral T.  Co.  r.  West  India,  etc.  Co.,  109 
N.  Y.  App.  Div.  517  (1905).  A  pur- 
chaser of  stock  cannot  have  specific 
performance  where  the  only  advan- 
tage of  getting  the  stock  is  a  financial 
advantage,  even  though  there  have 
been  no  sales  of  the  stock,  and  it  is 
not  listed  and  it  will  be  difficult  to 
ascertain  its  value.  The  remedy  at 
law  is  sufficient.  Clements  i\  Sher- 
wood-Dunn, 10S  N.  Y.  App.  Div.  327 
(1905) ;  aff'd,  187  N.  Y.  521.  A  vendee 
cannot  compel  specific  performance 
simply  on  the  ground  that  there  had 
been  no  sales  of  the  stock  and  that 
it  would  be  difficult  to  ascertain  its 
value.  The  value  may  be  ascertained 
by  the  corporate  contracts  and  busi- 
ness and  dividends,  etc.  Butler  v. 
Wright,  103  N.  Y.  (  App.  Div.,  463 
(1905)  ;  rev'd  on  another  ground  in 
186  N.  Y.  259.  Specific  performance 
to  compel  the  delivery  of  stock  in  ac- 
cordance with  a  contract,  by  which 
it  was  to  be  issued   in   payment  for 


services,  will  not  be  granted,  unless 
it  is  alleged  and  proven  that  it  has  a 
peculiar  value  or  that  the  plaintiff 
could  not  recover  at  law  the  damages 
for  the  breach.  Kennedy  v.  Thomp- 
son, 97  N.  Y.  App.  Div.  296  (1904). 
Where  a  stockholder  delivers  his 
stock  to  the  president  to  be  used  to 
induce  a  person  to  loan  money  to  the 
corporation,  and  the  president  instead 
of  so  using  it  converts  it  to  his  own 
use,  the  stockholder  may  maintain  a 
suit  in  equity  to  recover  back  the 
stock,  and  the  statute  of  limitations 
does  not  begin  to  run  until  he  has  dis- 
covered or  should  have  discovered  the 
facts.  Slayback  v.  Raymond,  93  N.  Y. 
App.  Div.  326  (1904).  A  bill  in  equity 
does  not  lie  to  compel  an  underwrit- 
ing .syndicate  to  assign  to  plaintiff  an 
interest  therein,  which  they  had  con- 
tracted to  sell  to  him,  even  though  he 
alleges  that  the  value  is  uncertain 
and  that  specific  performance  is  the 
only  full  and  adequate  relief.  Gilbert 
v.  Bunnell,  92  N.  Y.  App.  Div.  284 
(1904).  A  suit  in  equity  does  not  lie 
to  recover  the  value  of  bonds  which  a 
depository  refuses  to  give  up,  even 
though  the  bonds  are  not  dealt  with 
on  the  market  and  are  obligations  of 
a  corporation,  which  has  been  fore- 
closed. The  remedy  is  trover  or  re- 
plevin. Sawyer  v.  Atchison,  129  Fed. 
Rep.  100  (1904).  A  contractor  who 
constructs  a  road  for  stock  to  be  de- 
livered may  maintain  a  bill  in  equity 
for  the  delivery  of  the  stock  after  the 
road  is  completed,  where  he  shows  that 
he  cannot  prove  the  pecuniary  value 
of  the  stock,  and  hence  that  damages 
at  law  would  not  be  sufficient.  Baum- 
hoff  v.  St.  Louis  &  K.  R.  Co.,  104  S.  W. 
Rep.  5  (Mo.  1907).  Specific  perform- 
ance of  a  contract  to  sell  stock  may 
be  had  where  its  value  is  not  easily 
ascertainable.  Manton  v.  Ray,  18  R. 
I.  672  (1894).  See  also  Frue  v. 
Houghton,    6    Colo.    318    (1882),    and 


963 


CONTRACTS  TO  SELL — GAMBLING  BALES,   ETC. 


[ill.  XX. 


showing  that  the  stuck  had  never  been  listed  on  any  exchange  and 
had  no  quoted  value  or  any  definite  market  price  or  any  certain  value 


§  61,  supra.  Where  the  control  of  a 
railroad  is  deposited  with  a  third 
party  to  be  delivered  to  the  vendee 
upon  certain  things  happening,  and 
such  things  do  happen,  he  may  have 
specific  performance,  the  stock  having 
no  ascertainable  value.  Rumsey  v. 
New  York,  etc.  R.  R.,  203  Pa.  St.  579 
(1902).  In  Leach  r.  Fobes,  77  .Mass. 
506  (1858),  specific  performance  of  a 
contract  to  convey  land  and  stock  was 
gnmted  chiefly  because  of  the  land 
part  of  the  contract.  Todd  v.  Taft, 
89  Mass.  371  (1863),  decreed  specific 
performance  of  contract  to  convey 
railway  shares.  See  also  Baldwin  r. 
Commonwealth,  11  Bush  (Ky.),  417 
(1875);  Ashe  v.  Johnson,  2  Jones,  Eq. 
(N.  C.)  149  (1S55).  As  to  when 
specific  performance  of  a  contract  to 
sell  stock  will  be  specifically  enforced, 
see  also  1  White  &  T.  Lead  Cas.  914- 
923,  etc.  As  to  possibility  of  manda- 
tory injunction,  see  authorities  in 
High  on  Injunctions.  Specific  per- 
formance of  a  contract  relative  to 
stock  is  not  an  absolute  right  and  will 
not  be  granted  if  it  would  result  in 
injustice  to  either  party.  Shinkle  v. 
Vickery,  156  Mo.  1  (1900).  Specific 
performance  will  be  granted  where 
the  stock  has  no  market  value  and 
cannot  be  purchased  in  the  market; 
but  where  the  contract  is  an  uncon- 
scionable one  and  by  mistake  omits 
an  important  provision,  specific  per- 
formance will  not  be  granted.  Newton 
v.  Wooley,  105  Fed.  Rep.  541  (1900). 
An  agreement  of  several  parties  to 
sell  their  property  to  a  corporation 
in  exchange  for  stock  of  the  latter, 
the  amount  of  stock  going  to  each  to 
be  determined  by  arbitrators,  will  not 
be  specifically  enforced  where  the  ar- 
bitrators have  fixed  the  value  in  an 
illegal  way.  Any  party  may  withdraw 
from  such  a  contract  prior  to  the  time 
when  it  has  been  signed  by  all.  Con- 
solidated,  etc.   Co.  v.  Nash,  109  Wis. 


490  (1901).  Where  a  purchaser  of 
stock  knew  or  had  reason  to  know 
that  the  stock  was  not  owned  by  the 
vendor  personally,  but  by  a  firm  in 
which  he  was  interested,  the  pur- 
chaser cannot  have  specific  perform- 
ance, but  will  be  remitted  to  a  court 
of  law.  Jones  v.  Tunis,  99  Va.  220 
(1901).  Specific  performance  may 
not  be  granted  where  the  defendant 
has  not  got  the  stock  to  deliver. 
Booth  r.  Dingley,  111  N.  W.  Rep.  851 
(Mich.  1907).  Specific  performance 
will  not  be  granted  at  the  instance  of 
the  purchaser  of  stock  where  the  pur- 
chase is  from  the  committee  of  a 
pool  of  such  stock,  where  it  is  shown 
that  the  pooling  agreement  required 
a  vote  of  three-fourths  of  the  stock 
in  the  pool  before  a  sale  could  be 
made,  and  it  is  also  shown  that  the 
contract  of  purchase  was  partly  an 
option  in  that  the  purchaser  was  to 
forfeit  a  deposit  he  had  already  made, 
in  case  he  did  not  fulfill,  and  it  being 
further  shown  that  in  another  suit  the 
complainant  had  stated  the  value  of 
the  stock,  and  it  being  further  shown 
that  the  purpose  of  the  contract  was 
to  obtain  control  of  a  large  system  of 
railroads,  including  the  board  of  di- 
rectors. Ryan  v.  McLane,  91  Md.  175 
(1900).  Even  though  stock  has  no 
market  value  and  no  dividends  have 
been  paid,  yet  in  an  action  for  spe- 
cific performance  it  must  be  alleged 
that  the  stock  had  no  value  that  could 
be  estimated  in  an  action  for  damages. 
Moulton  v.  Warren,  etc.  Co.,  81  Minn. 
259  (1900).  A  corporation  cannot 
have  specific  performance  of  an  agree- 
ment of  a  person  to  purchase  its  de- 
bentures. The  remedy  is  an  action 
for  damages.  South,  etc.  Co.  v.  Wal- 
lington,  [1898]  A.  C.  309,  aff'g  [1897] 
1  Q.  B.  692.  Where  an  insolvent  cor- 
poration which  has  never  issued  any 
certificates  of  stock  resolves  by  a  vote 
of  its  stockholders  to  apply  its  assets 


964 


CH.  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  338 


capable  of  exact  ascertainment,  and  that  the  defendant  owned  ninety- 
two  per  cent,  of  the  stock  and  controlled  the  balance.     The  court 


to  the  extent  of  their  value  to  the 
payment  of  the  debts,  and  that  new 
stock  be  issued  to  the  stockholders 
upon  their  paying  therefor  in  full, 
and  one  stockholder  sells  his  inter- 
est in  the  original  stock,  and  the  pur- 
chaser for  seven  years  does  not  com- 
plain, he  cannot,  after  the  corpora- 
tion has  become  prosperous,  claim 
that  he  is  entitled  to  the  old  stock  or 
any  interest  in  the  corporation.  Stod- 
dard v.  Decatur,  etc  Co.,  184  111.  53 
(1900).  A  subscriber  for  stock  who 
has  given  his  note  in  payment  may 
file  a  bill  in  equity  to  compel  the  cor- 
poration to  recognize  him  as  a  stock- 
holder, where  the  corporation  denies 
that  he  is  a  stockholder  and  has  is- 
sued all  its  stock  to  other  parties  who 
took  with  notice.  It  is  unnecessary 
to  bring  into  the  suit  the  other  parties 
who  actually  have  the  stock,  the  stock 
having  been  held  by  the  company  as 
collateral  security.  Morey  v.  Fish,  etc. 
Co.,  108  Wis.  520  (1901).  See  also 
§  58,  supra.  A  contract  between  the 
owner  of  property  and  a  promoter,  by 
which  the  former  agrees  to  sell  his 
property  to  a  corporation  to  be  formed 
by  the  latter,  with  a  specified  capital 
stock,  cannot,  a  year  after  the  trans- 
action has  been  carried  out,  be  made 
the  basis  of  a  suit  in  equity  to  com- 
pel the  promoter  to  cancel  excessive 
stock  which  was  issued  to  the  pro- 
moter, there  being  no  allegation  that 
the  promoter  still  had  the  stock.  The 
remedy  of  the  vendor  is  at  law.  Even 
though  several  vendors  to  the  cor- 
poration had  a  similar  claim,  yet  one 
of  them  cannot  file  such  a  bill  in 
equity  in  behalf  of  himself  and  others. 
Brehm  v.  Sperry,  92  Md.  378  (1901). 
As  applicable  to  manufacturing  cor- 
porations, see  Chater  v.  San  Fran- 
cisco, etc.  Co.,  19  Cal.  219  (1861). 
Granted  in  a  towboat  association  case 
in  White  r.  Schuyler,  1  Abb.  Pr.  (N. 
S.)   300   (1865).    Refused  in  the  case 


of  stock  in  a  land  association.  Jones 
v.  Newhall,  115  Mass.  244  (1874).  And 
in  a  paper  company.  Noyes  v.  Marsh, 
123  Mass.  286  (1877).  See  Cushman 
v.  Thayer  Mfg.  Co.,  76  N.  Y.  365 
(1879),  the  court  saying:  "While  the 
general  rule  is*for  courts  of  equity 
not  to  entertain  jurisdiction  for  a 
specific  performance  on  the  sale  of 
stock,  this  rule  is  limited  to  cases 
where  a  compensation  in  damages 
would  furnish  a  complete  and  satis- 
factory remedy."  This  case,  however, 
was  net  a  case  of  specific  performance 
of  a  sale  of  stock,  but  of  compelling 
the  corporation  to  register  a  transfer. 
See  also,  in  general,  Austin  v.  Gillas- 
pie,  1  Jones,  Eq.  (N.  C.)  261  (1854); 
Nutbrown  v.  Thornton,  10  Ves.  Jr.  160 
(1804);  Shaw  v.  Fisher,  5  De  G.,  M. 
&  G.  596  (1855);  Wynne  v.  Price,  3 
G.  &  Sra.  310  (1849);  Wilson  v.  Keat- 
ing, 7  W.  R.  484  (1859);  aff'd,  4  De 
G.  &  J.  588;  Oriental,  etc.  Steam  Co. 
V.  Briggs,  2  Johns.  &  H.  625  (1861); 
Paine  v.  Hutchinson,  L.  R.  3  Eq.  257 
(1866);  aff'd,  L.  R.  3  Ch.  App.  388; 
Shepherd  v.  Gillespie,  L.  R.  5  Eq.  293 
(1867);  Bermingham  r.  Sheridan,  33 
Beav.  660  (1864);  Strasburg  R.  R.  v. 
Echternacht,  21  Pa.  St.  220  (1853); 
Fallon  v.  Railroad  Co.,  1  Dill.  121 
(1871);  s.  c,  8  Fed.  Cas.  977.  In  re- 
gard to  a  specific  performance  of  a 
trust  of  stock,  see  Ferguson  v.  Pasch- 
all,  11  Mo.  267  (1848) ;  Cowles  r.  Whit- 
man, 10  Conn.  121  (1834);  Clark  v. 
Flint,  39  Mass.  231  (1839);  Mechan- 
ics' Bank  v.  Seton,  I  Pet.  299  (1828); 
Gage  v.  Fisher,  5  N.  Dak.  297  (1895). 
Specific  performance  of  a  contract  to 
sell  stock  will  be  decreed  where  the 
stock  has  no  recognized  market  value 
and  cannot  be  bought  in  the  market. 
Goodwin,  etc.  Co.'s  Appeal,  117  Pa.  St. 
514  (1888).  Specific  performance  was 
refused  in  Eckstein  v.  Downing,  64 
N.  H.  248  (1886),  there  being  no  evi- 
dence that  the  vendee  had  any  wish 


965 


§  338.] 


CONTRACTS  TO  GAMBLING  SALES,  ETC. 


[cn.  xx. 


further  held  that  the  decision  of  such  a  case  rests  in  t'lie  sound  elis- 


or reason  for  wishing  to  own  that  | 
ticular  stock  or  stock  in  that  particu- 
lar corporation.  See  also  Cruse  v. 
Paine,  L.  R.  6  Eq.  641  (18G8).  Where 
a  stockholder,  who  is  also  a  director, 
contracts  to  give  a  person  a  certain 
amount  of  stock  if  he  will  do  certain 
work  for  the  corporation,  and  the 
board  of  directors,  including  this  di- 
rector, discharge  such  person  without 
cause,  and  thus  prevent  completion, 
a  court  of  equity  will  compel  a  de- 
livery of  the  stock.  Price  v.  Minot, 
107  Mass.  49  (1871).  In  suits  in 
equity  to  compel  a  transfer  of  stock, 
parties  interested  by  a  purchase  from 
the  defendant  should  be  brought  in. 
O'Connor  v.  Irvin  ,  74  I  J.  435  (1887). 
Specific  performance  of  a  contract  to 
sell  stock  will  be  decreed  where  the 
property  of  the  corporation  is  real 
estate — a  distillery — and  the  real 
transaction  is  a  sale  of  the  entire 
property.  Megibben  v.  Perin,  49  Fed. 
Rep.  183  (1892);  rev'd  on  another 
point  in  Perin  v.  Megibben,  53  Fed. 
Rep.  86  (1892).  Specific  performance 
Avill  not  be  decreed  where  there  is 
doubt  both  as  to  the  contract  actually 
being  made  and  as  to  the  considera- 
tion, one  party  being  dead.  Hibbert 
r.  Mackinnon,  79  Wis.  673  (1S91). 
Where  a  debtor  agreed  to  transfer 
stock  as  collateral  security  for  a  debt, 
and  died  insolvent  before  doing  so, 
the  court  refused  to  enforce  specific 
performance  of  the  agreement  to  the 
injury  of  other  creditors.  City  F.  Ins. 
Co.  v.  Olmstead,  33  Conn.  476  (1S66). 
The  vendee  may  file  a  bill  in  equity 
for  a  specific  performance.  Willis  v. 
Jefferis,  51  Atl.  Rep.  1110  (N.  J.  1902). 
Specific  performance  of  a  contract  to 
deliver  stock  for  services  was  granted 
in  Le  Vie  v.  Fenlon,  39  N.  Y.  Misc. 
Rep.  265  (1902).  In  general,  see  also 
Stevens  v.  Wilson,  18  N.  J.  Eq.  447 
(1867).  An  alleged  vendee's  suit  for 
a  dividend  is  res  judicata  as  to  a  suit 
for  the  stock.  Shepard  v.  Stockham, 
45  Kan.  244   (1891). 


Where  a  person  claims  that  he  has 
a  contract  for  the  purchase  of  stock 

Which  the  stockholder  vendor  is  about 
to  sell  or  has  already  sold  to  nth 
and  the  first-named  person  brings  a 
suit  in  equity  to  obtain  the  stock,  he 
must  show,  first,  that  it  is  a  case  for 
specific  performance;  and  second,  that 
the  stock  was  impressed  with  a  trust, 
and  that  the  last  purchaser  took  with 
notice  of  that  trust.  See  1  White  &  T. 
Lead.  Cas.  914,  919,  and  Pooley  r. 
Budd,  11  Beav.  34,  43,  44  (1851). 

Lindley  on  Company  Law  (5th 
ed.),  pp.  499,  500,  states  the  rule  as 
follows:  "A  contract  for  the  sale  of 
shares  by  one  individual  to  another  is 
distinguishable  in  many  respects  from 
a  contract  for  the  allotment  and  ac- 
e  of  shares  in  a  company,  and 
Lord  Romilly  refused  to  decree  spe- 
cific performance  of  a  contract  of  this 
kind,  on  the  ground  that  the  decree 
would  be  ineffectual,  as  the  shares 
might  be  transferred  immediately 
aftcr  the  contract  was  performed. 
Sheffield  Gas,  etc.  Co.  r.  Harrison,  17 
Beav.  294  (1853);  Bluck  v.  Mallalue, 
27  Beav.  398  (1859);  Columbine  V. 
Chichester,  2  Ph.  Ch.  27  (1846).  .  .  . 
In  this  last  case  there  were  cir- 
cumstances to  show  that  specific  per- 
formance was  impossible."  Page  586: 
"In  order  that  specific  performance 
of  an  agreement  to  take  or  deliver 
shares  in  a  company  may  be  decreed, 
it  is  necessary  that  the  agreement 
should  be  concluded  and  binding 
(which  it  was  not  in  Oriental,  etc.  Co. 
v.  Briggs,  4  De  G.,  F.  &  J.  191— 
1861),  and  be  untainted  by  fraud 
(which  was  not  the  case  in  New 
Brunswick,  etc.  Co.  v.  Muggeridge,  4 
Drew.  686—1859,  and  1  Drew.  &  Sm. 
363;  or  in  Maxwell  r.  Port  Tennant, 
etc.  Co.,  24  Beav.  495—1858),  or  un- 
fairness (as  to  agreements  between 
co-directors,  see  Flanagan  v.  Great 
Western  Ry.,  L.  R.  7  Eq.  116—1868), 
and  be  capable  of  being  performed  by 
the    defendant    (Ferguson   v.  Wilson, 


966 


CH.  XX.]  CONTRACTS  TO  SELL— GAMBLING  SALES,  ETC.  [§   338. 

m  lion  of  the  court.1  The  stockholders  in  a  private  trading  cor- 
poration may  agree  that,  upon  the  death  of  any  one  or  more  of  them 
the  remainder  shall  have  the  right  to  purchase  the  stock  of  the  dece- 
denl  at  its  value.  This  is  not  invalid  as  against  public  policy  or  as 
an  improper  restraint  of  the  power  of  alienation.  The  court  may 
grant  specific  performance  of  such  contract2  The-  various  stock- 
holders of  a  company  may  give  interchangeably  a  first  option  of 
thirty  days  to  purchase  their  shares  of  stock  whenever  any  one  desires 
to  sell,  each  contracting  for  himself,  the  contract  further  providing 
that  such  thirty  days  are  to  commence  in  case  of  the  death  of  a 
stockholder,  so  far  as  his  stock  was  concerned,  and  they  may  further 
contract  that  another  person  is  to  have  a  similar  option  in  case  the 

L  R  2  Ch  App  77— 1SGG;  Colum-  cruing  subsequently  to  the  sale 
bine  'v.  Chichester,  2  Ph.  ch.  27-  (Wynne  v.  Price,  3  De  G.  &  S.  310- 
1846)  and  not  involve  any  breach  of  1849).  As  to  the  right  of  a  mortgagee 
trust  (Fry  Sp  Perf.,  p.  177,  2d  ed.;  of  shares  to  an  idemnity  from  his 
and  see  Flanagan  v.  Great  Western  mortgagor,  see  Phene  v.  Gillan,  5 
Rv  L  R  7  Eq  116-1868),  or  per-  Hare,  1  (1845);  and  the  seller  will 
formance  by  either  party  of  obliga-  be  compelled  to  account  for  any 
tions  the  performance  of  which  a  moneys  he  may  have  received  from  an 
court  cannot  practically  enforce  (Flan-  improper  subsequent  sale  to  another 
.,„m  ,  Great  Western  Ky.,  7  Eq.  116  person  (Beckitt  v.  Bilbrough,  8  Hare, 
J1868.   gt(  lerburn,  3  K.    188-1850).      The    court    has,     how- 

&  J    39*— 1857)  "     Page  587:   "An  ac-    ever,  refused   to  compel  a  purchaser 
tion  will  lie' for  specific  performance    of  scrip  to  accept  shares,  and  indem- 
of   a  contract   for   the   purchase   and    nify  the  seller  from  calls  upon  them 
sale  of  shares   if  it  is  capable  of  being     (Jackson    v.    Cocker,    4    Beav.    59- 
;,;:;formed     s'ee  as  to  this,  Berming-    1841.      Compare    this    with    the    las 
ham     r      Sheridan      33     Beav.     660-    case) ;    and   to  compel  an  allottee  of 
L864    and  compare  Poole  v.  Middleton,    shares  to  accept  them,  and  to  execute 
09      Beav       646-1861);     .     .     -     and    the    company's    deed    in    respect    of 
the    purchaser   will    be   compelled   to    them    (Sheffield,  etc.  Gas  Co.  v.  Har- 
the  pH-'    although  it  may  have    rison,    17    Beav.    294-1853);    and    to 
been  expressed  to  be  paid  in  the  deed    compel   the   promoters  of  a  company 
of  transfer   if  in  fact,  it  was  not  thus    to   deliver  shares  to  a  subscriber  to 
mid:(\Vilson'r  Keating,  27  Beav.  121,    the  Company    (Columbine  V.  Chiches- 
^di^eG    &J.  588    affg7W.  R.     ter,    2    Ph.    Ch.     27-1846.       In    this 
484-1359)      The  case  seems,  at  first    case,  however,  the  promoters  did  not 
stent   to  have  been  a  hard  one  upon    appear  to  have  any  shares  which  they 
the    defendant-    but  the    deed    stated    could  allot).     Neither  will  the  court 
hLt  had  paid  the  money,  and  this    interfere  to  compel  the  completion  o 
he  knew  was  not  the  fact.    He  could    a    gratuitous    and    intended    transfer 
not    therefore,   be   treated  as  having     (see  Milroy  v.  Lord,  4  De  G,,  F.  &  J. 
been  misled  by  the  plaintiff  or  by  the     264-1862)." 

contents  of  the  deed;  and  will  be  com-        I  Butler  v.  Wright,   186   NY.    259 
nened    to    accept    a    transfer    of    the     (1906).    See  161  Fed.  Rep.  438 
shares  he  has  bought  and  to  indem-        2  Fitzsimmons  v.   Lindsay,   205    Pa. 
nifv  the  seller  from  all  liabilities  ac-    St.  79   (1903). 

967 


§338.] 


CONTRACTS  TO  SELL — GAMBLING  ! 


[CH.  XX. 


t  option  is  not  exercised.     A  party  entitled  to    nch  a  may 

have  specific  performance  of  it.1 

In    Pennsylvania  it  is   held   that   specific  rmance   will   bo 

granted  at  the  instance  of  the  vendee  in  a  contracl   for  tl  ■  of 

five-sixths  of  the  capital  of  the  company  and  a  portion  of  its 

bonds,   inasmuch  as  such  stock  and  bonds  canno  I   else- 

where and  a  money  judgment  would  doI  afford  a  substitute  for  the 
sale;  and  it  is  further  held  that,  even  though  the  vendor  has  sold 
the  stock  to  other  parti'  if  tin-  Latter  took  with  notice  of  the 

prior  contract,  they  may  1"-  joined  as  panics  defendant  and  com- 
pelled to  deliver  up  the  .-t  <.<•]<.- 


l  The  mutual  covenants  of  the  con- 
tract are  a  sufficient  consideration  to 
support  it.  Scruggs  v.  Cotterill,  67 
N.  Y.  App.  Div.  583  (1902).  In  the 
case  of  Jones  v.  Brown,  171  .Mass.  318 
(1898),  in  a  close  corporation,  the 
stockholders  made  a  contract,  the  es- 
sential parts  of  which  are  set  forth 
in  the  opinion  of  the  court,  providing 
for  the  purchase  of  the  stock  of  a 
certain  stockholder  in  case  of  his 
death,  and  for  the  purchase  of  the 
stock  of  any  other  stockholder  who 
ceased  to  be  connected  with  the  cor- 
poration. The  former  stockholder 
having  died,  the  court  granted  specific 
performance  of  the  contract  and  com- 
pelled his  estate  to  deliver  the  stock 
upon  payment  of  the  specified  price. 
A  court  will  enjoin  a  party  from  vot- 
ing upon  or  disposing  of  his  stock  in 
a  corporation  pendente  lite  where  the 
plaintiffs  show  that  they  transferred 
the  stock  to  the  defendant  on  the 
latter's  agreement  not  to  sell  the 
same,  except  with  the  consent  of  the 
former,  and  that  when  he  did  sell  the 
stock  three-fourths  of  the  proceeds 
should  belong  to  the  former,  and  it 
appearing  further  that  the  defendant 
had  given  the  stock  to  his  sister  with- 
out consideration.  Weston  v.  Gold- 
stein, 39  N.  Y.  App.  Div.  661  (1899). 
Where  one  person  advances  money  to 
another  to  purchase  a  certain  stock 
on  an  agreement  that  they  will  co- 
operate, and  in  case  the  latter  wishes 
to  sell  he  will  not  sell  to  unfriendly 


parties  without  giving  the  former  the 
first  chance  to  purchase,  and  the  stock 
is  in  the  possession  of  the  former  as 
urity  for  the  loan,  a  sale  by  the 
latter  to  an  unfriendly  party  with 
notice  of  the  facts  is  not  sufficient  to 
sustain  a  bill  in  equity  to  compel  the 
first-named  party  to  transfer  the  stock 
to  such  purchaser.  The  court  said: 
"One  or  more  stockholders  in  a  cor- 
poration may  agree  to  stand  together 
in  carrying  out  an  honest  business 
policy  consistent  with  what  they  be- 
lieve to  be  to  the  best  interests  of  all 
the  stockholders.  This  was  not  a 
pooling  agreement,  to  vest  the  govern- 
ment of  the  corporation  for  a  time  in 
certain  members  of  it,  or  to  yield  the 
control  to  a  few  who  might  dominate, 
regardless  of  the  interests  of  the 
many.  It  was  intended  to  maintain 
a  status  of  independence  for  the  rail- 
way company  that  it  might  be  opera- 
ted under  the  purposes  of  its  char- 
ter." Rigg  v.  Reading,  etc.  Ry.,  191 
Pa.  St.  298  (1899).  See  also  §622, 
infra. 

2  Northern,  etc.  R.  R.  v.  Walworth, 
193  Pa.  St.  207  (1899).  The  court 
held  also  that  the  fact  that  the  con- 
tract recited  that  the  seller  merely 
claimed  to  be  the  owner  of  the  stock 
did  not  render  the  contract  so  uncer- 
tain as  to  prevent  specific  perform- 
ance, and  that  the  fact  that  the  con- 
tract provided  that  the  buyer  pur- 
chased only  on  condition  that  his  ex- 
amination of  the  books  should  be  sat- 


968 


CH.  XX.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§   338. 


Specific  performance  is  often  granted  as  between  several  parties 
each  of  whom  is  entitled  to  a  certain  part  of  stock  which  is  re- 
ceived by  or  held  in  the  name  of  one  of  them.  A  court  will  com- 
pel him  to  distribute  the  stock  in  accordance  with  the  contract.1 
Such  cases  arise  often  in  "pools"  of  stock,  and  in  selling  property 
to  the  company  in  consideration  of  stock,  and  in  buying  stock  in 
the  names  of  other  persons  or  agents.  Tims,  where  parties  to  a 
construction  contract  agreed  to  divide  the  stock  in  a  certain  way,  a 
court  of  equity  will  grant  specific  performance  and  order  transfers 
of  the  stock,  it  having  no  market  value  and  the  remedy  at  law  be- 
ing inadequate.2  A  promoter  cannot  maintain  a  suit  in  equity  to 
have  specific  performance  of  an  agreement  to  deliver  to  him  certain 
stock,  the  complaint  asking  for  the  par  value  of  the  stock  if  specific 
performance  is  not  granted,  unless  it  is  alleged  that  the  stock  had  a 
peculiar  value  or  that  it  was  difficult  or  impi  s>il»le  to  ascertain  the 
value  of  the  stock  or  other  facta  are  alleged  showing  that  there  is 
no  adequate  remedy  at  law.3     A  promoter  who  is  to  have  five  per 


isfar  tory  and  should  corroborate  the 
correctness  of  a  statement  as  to  lia- 
bilities, did  not  prevent  specific  per- 
formance, and  that  the  fact  that  the 
seller  agreed  that  all  debts  of  the 
company  should  be  paid  on  the  day  of 
the  transfer  did  not  prevent  specific 
performance. 

i  Where  it  is  agreed  between  two 
brothers  that  one  shall  buy  stock  in  a 
corporation  in  joint  account,  and  this 
is  done,  and  the  one  purchasing 
charges  his  brother  with  the  cost  of 
the  portion  of  the  stock,  and  this  ac- 
count is  accepted,  a  suit  in  equity  lies 
to  obtain  the  stock  upon  payment 
therefor,  the  corporation  being  a  close 
corporation.  Rand  v.  Whipple,  71  N. 
Y.  App.  Div.  62  (1902).  Where,  by 
contract  between  two  stockholders 
owning  an  equal  share  in  the  corpora- 
tion, future  stock  acquired  by  either 
of  them  is  to  belong  one-half  to  each, 
such  contract  may  be  specifically  en- 
forced. Stewart  v.  Pierce,  116  Iowa, 
733   (1902).     See  also  §320,  supra. 

2  Krohn  v.  Williamson,  62  Fed.  Rep. 
869  (1894);  affd,  66  Fed.  Rep.  655. 
See  also  §§  333,  334,  supra,  and  §  705, 
infra,  and  Jones  v.  Brown,  171  Mass. 
318  (1898).     See  69  Atl.  Rep.  899. 


3  Bateman  v.  Straus,  86  N.  Y.  App. 
Div.  540  (1903).  A  promoter  who  is 
entitled  to  a  portion  of  the  stock  may 
have  specific  performance  and  an  in- 
junction where  the  defendant  is  not 
responsible  and  there  have  not  been 
enough  sales  of  stock  to  fix  its  value 
sufficient  to  constitute  a  market  value. 
Rau  v.  Seidenberg,  53  N.  Y.  Misc.  Rep. 
3S6  (1907).  Where  a  person  who  ob- 
tains options  and  purchases  stock  for 
another  is  to  have  an  interest  in  the 
profits  on  the  sale  of  the  same,  it  is 
immaterial  whether  it  is  a  technical 
partnership  or  a  mere  joint  venture, 
inasmuch  as  the  same  legal  rules  ap- 
ply, in  a  suit  by  the  former  for  an  ac- 
counting by  the  latter.  Spier  v.  Hyde, 
92  N.  Y.  App.  Div.  467  (1904).  A  suit 
between  promoters  relative  to  the  di- 
vision of  stock  received  for  promot- 
ing, was  sustained  in  Boice  v.  McCor- 
mick,  106  N.  Y.  App.  Div.  539  (1905). 
A  promoter  cannot  maintain  a  suit  in 
equity  to  collect  from  an  inventor  one- 
half  of  what  the  latter  received  in 
stock  and  cash,  even  though  the  con- 
tract between  the  two  gave  the  for- 
mer such  one-half.  His  remedy  is  at 
law.  Everett  v.  De  Fontaine,  78  N.  Y. 
App.  Div.  219  (1903).    Of.  §  705,  infra. 


969 


§338.]  rTRACTSTO  GAMBLINGS  ETC.  [til. 

cent  of  t1  h  may  have  nee  wh<  re  tl  no 

stock  "ii  the  markel  and  its  value  cannot  be  ascertained.1 

Specific  performance  may  also  I  i    aid  to    •  bed  where  a  cor- 

poration  is  ordered   I;.   a  court  to  i  rtificates  of  stuck  to  its 

stockholders.2     Princi]  somewhat  similar  to  the  above  are 

involved  in  suits  brought  by  a  purchaser  of  stock  to  compel  1! 
poration  to  transfer  the  Btock  on  the  corporate  b        .    and  in  suits 
instituted  by  claimants  of  Btock  against  other  parties  claiming  the 
Bame  stock;  '  or  by  the  corporation  to  recover  bad  k  improperly 

issued.8 

Specific  performance  will  nol    I         anted  where  the  pur] 
the  purchaser  of         ■  is  to  obtain  control  of  a  national  bank,  when 
the  change  in  management  would  probably  be  to  the  detrimenl   of 
the   bank.6     Where   the  vendor's   i  cl    is   to   deliver  stock   and 

construct  a  railway,  the  court  will  u  specific  performai 

since  part  of  the  contract  is  d  be  subjecl  of  such  compulsory 

performance.7     Specific  performance  of  a  contracl  to  deliver  bonds 
will  not  be  granted  where  the  part;  :ing  1  not 

himself  able  to  fully  perform.8     A  vendor  cannot  have  specific  per- 
formance win  re  he  had  told  the  v<  that  a  certain  pi  rson  of  re- 
sponsibility had  offered  a  high  r  price  for  the  Btock,  when  in   I 
such  person,  after  making  the  offer,  had   investigated  and  then  hud 

i  Dennison  v.  Keasbey,  200  Mo.  408  court  of  equity  has  decreed  specific 
(1906).  A  promoter  may  have  spe-  performance  of  a  sale  of  stock." 
cific  performance  of  a  contract  by  7  Ross  v.  Union  Pac.  Ry.,  Woolw.  26 
which  he  interested  capital  in  a  com-  (1S63),  per  Miller,  J.;  s.  c,  20  Fed. 
pany  formed  to  take  over  and  work  a  Cas.  1245.  The  court  will  not  decree 
patent,  for  which  he  was  to  receive  specific  performance  of  a  contract  of 
one-half  the  stock.  Butler  v.  Mur-  a  company  to  deliver  its  stock  to  a 
pliy,  106  Mo.  App.  287  (1904).  An  constructor  of  its  road,  even  though 
oral  agreement  between  parties,  to  the  latter,  the  complainant,  is  willing 
locate  and  develop  mining  claims,  was  to  perform.  The  court  cannot  corn- 
sustained  in  a  suit  by  one  against  the  pel  the  latter  to  perform  and  hence 
other  for  stock  received  for  a  mining  will  not  tie  up  the  stock  of  the  for- 
claim,  which  the  latter  transferred,  mer.  Peto  v.  Brighton,  etc.  Ry.,  1 
and  the  statute  of  frauds  was  held  to  Hem.  &  M.  468  (1S63).  See  also  Deitz 
be  no  bar.  Mack  v.  Mack,  39  "Wash.  r.  Stephenson,  95  Pac.  Rep.  803  (Oreg. 
190  (1905).  1908). 

2  See  §  61,  supra,  and  §  766c,  infra,  s  Stokes  v.  Stokes,  148  N.  Y.  708 
relative  to  contractors.  (1896).     The  holder  of  a  written  op- 

3  See  §  '      .  infra.  tion  on  stock  cannot  have  specific  per- 

4  See  §  " '    ,  infra.  formance  decreed,  where  it  is  shown 

5  See  §  387,  infra.  by  oral  evidence  that  it  was  not  to  be 

6  Foil's  Appeal,  91  Pa.  St.  434  exercised,  unless  another  option  on 
(1879),  the  court  saying:  "I  know  of  real  estate  was  exercised  at  the  same 
no  instance  in  this  state  in  which  a  time.      Reynolds    v.    Hooker,    76    Vt. 

184  (1904). 
970 


en.  xx.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§    338. 


withdrawn  the  offer.1  If  the  vendor  is  not  in  possession  of  the  de- 
sired stock,  specific  performance  will  not  be  granted,2  except  to  the 
amount  of  stock  which  he  has.3  But  where  a  person,  who  is  under 
contract  to  deliver  certain  stuck,  gives  the  stock  to  a  relative  for 
nothing,  the  party  entitled  to  the  stock  by  contract  may  compel  such 
relative  to  give  up  the  stock.4  Although  a  court  of  equity  refuses 
to  grant  specific  performance,  yet  it  will  not  always  send  the  party  to 
a  court  of  law,  but  in  some  of  the  states  will  grant  him  damages.5 
Where  a  vendee  of  stock  seeks  specific  performance  he  must  tender 
the  price,  ami  cannot  first  demand  that  the  stock  be  deposited  in  a 
bank.6  In  a  suit  for  specific  performance  of  a  sale  of  stock,  the 
complaining  vendee  may  have  a  preliminary  injunction  against  the 
vendor's  selling  to  other.-.7  Where  a  vendee  of  Btock  brings  action 
for  a  specific  performance,  and  obtains  judgment,  the  judgment 
should  be  in  the  alternative,  either  for  the  -leek  or  for  damages 
specified  in  the  decree.8     In  a  -nit  by  a  claimant  of  stock  to  obtain 

i  Moline  Plow  Co.  v.  Carson,  72  Fed.     that  the  defendant  has  not  obtained 


Rep.  387  (1895). 

~  Columbine  v.  Chichester,  2  Ph. 
Ch.  27  (1S46).  Specific  performance 
as  to  issuing  stock  is  not  decreed 
when  performance  is  impossible.  Sum- 
merlin  17.  Fronteriza,  etc.  Co.,  41  Fed. 
Rep.  249  (1890).  An  injunction 
against  a  transfer  in  the  meantime 
may  be  granted.  Ruttman  r.  Hoyt, 
N.  Y.  L.  J.,  July  19,  1890. 

3  Turner  v.  Moy,  32  L.  T.  Rep.  5G 
(1875).  In  the  case  of  Lamb,  etc. 
Co.  v.  Lamb,  119  Mich.  568  (1899) 
where  a  party  claiming  to  be  the  rea. 
owner  cf  stock  filed  a  bill  to  compei 
the  holder  of  such  stock  to  deliver 
up  the  same,  but  it  appeared  that  the 
defendant  had  already  disposed  of  the 
stock  before  the  commencement  of 
the  suit,  the  court  refused  to  grant 
relief,  even  though  it  further  ap- 
peared that  the  defendant  had  other 
stock  in  the  same  corporation  equal 
in  amount  to  the  stock  in  issue. 

4  Graham  v.  O'Connor,  73  L.  T.  Rep. 
712   (1896). 

5  Wonson  v.  Fenno,  129  Mass.  405 
(1880).  Cf.  Austin  v.  Gillaspie,  1 
Jones  Eq.  (N.  C.)  261  (1854).  A  suit 
to  obtain  stock  which  the  defendant 
had  contracted  to  obtain  and  deliver 
does  not  fail,  even  though  it  appears 


it,  inasmuch  as  the  complaint  would 
sustain  a  judgment  for  damages  for 
breach  of  contract.  Grant  v.  Walsh, 
36  Wash.  190  (1904).  Even  though 
'idor  of  stock  in  an  agreement 
providing  for  general  releases  and  the 
jiving  of  certain  new  notes  cannot 
obtain  a  specific  performance,  the 
court  being  unable  to  grant  complete 
specific  performance,  yet  the  court 
may  retain  the  suit  and  assess  dam- 
ages for  that  part  of  the  contract 
which  cannot  be  specifically  enforced. 
Lyle  v.  Addicks,  62  N.  J.  Eq.  123 
(1901). 

8  Wescott  v.  Mulvane,  58  Fed.  Rep. 
305  (1893),  holding  also  that  if  the 
vendee,  after  obtaining  an  injunc- 
tion against  a  sale  of  the  stock  by  the 
vendor  to  others,  withdraws  his  de- 
mand for  specific  performance  and 
asks  merely  for  damages,  the  injunc- 
tion will  be  dissolved. 

7  McLure  v.  Sherman,  70  Fed.  Rep. 
190  (1895).  In  a  suit  to  recover  stock 
an  injunction  is  more  readily  granted 
than  in  a  suit  to  recover  other  kinds 
of  personal  property.  Currie  ?;.  Jones, 
138  N.  C.  189  (1905).  See  also  §§  363, 
391,  579,  infra. 

s  Eastman  v.  Reid,  101  Ala.  320 
(1893).    In  a  suit  to  recover  certain 


971 


§  338.] 


CONTRACTS  TO  SELL — GAMBLING  .-ALLS,  ETC. 


i<  II.   XX. 


the  stock  from  another  person,  the  corporation  is  a  proper  but  not 
a  necessary  party.1  But  in  a  suit  to  compel  a  corporation  to  trans- 
fer to  the  plaintiff  stock  standing  on  its  books  in  the  name  of  a  third 
person,  the  corporation  and  the  third  person  are  both  necessary 
parties.2  Laches  may  constitute  a  bar  to  the  bill  in  equity  to  enforce 
specific  performance.8     Where  a  person  claims  to  hold  Btock  in  a  cor- 


stock,  even  though  the  plaintiff  al- 
leges conversion  and  asks  judgm 
for  the  value  of  the  stock,  yet  if  he 
makes  the  corporation  a  party  de- 
fendant, and  also  all  the  parties  inter- 
ested in  the  stock,  and  the  court  de- 
crees a  cancellation  of  the  outstand- 
ing certificate,  and  the  issue  of  a  i. 
one  to  plaintiff,  the  defeated  party 
cannot  complain  that  the  judgment 
should  have  been  for  money  damages. 
Crawford  v.  Ft.  Dodge,  etc.  Co.,  L25 
Iowa,  658  (1904).  A  bill  in  equity  to 
compel  delivery  of  stock  or  pay  its 
value,  followed  by  an  arbitration  giv- 
ing an  award  to  that  effect,  is  pro; 
Brock  v.  Lawton,  210  Pa.  St.  195 
(1904). 

i  Quoted  and  approved  in  Lucas  v. 
Milliken,  139  Fed.  Rep.  816  (1905), 
holding  that  in  a  suit  by  a  vendee 
against  a  vendor  of  stock  to  compel 
specific  performance,  the  corporation 
is  but  a  nominal  party  and  is  not 
considered  in  deciding  whether  the 
suit  may  be  removed  to  the  federal 
court.  Williamson  v.  Krohn,  66  Fed. 
Rep.  655  (1895);  Johnson  v.  Kirby, 
65  Cal.  482  (1884).  In  a  suit  be- 
tween stockholders  as  to  the  title  to 
stock  the  corporation  is  a  proper 
party  defendant,  but  is  a  nominal 
party,  and  is  not  considered  in  deter- 
mining whether  the  suit  is  removable 
to  the  United  States  court.  Higgins 
v.  Baltimore,  etc.  R.  R.,  99  Fed.  Rep. 
640  (1900).  And  see  §§356,  363,  391, 
579,  infra.  The  corporation  is  a 
proper  but  not  a  necessary  party  to  an 
action  by  one  person  to  compel  an- 
other person  to  transfer  stock  to  him 
in  accordance  with  the  contract.  Say- 
ward  v.  Houghton,  82  Cal.  628  (1890). 
Where  a  citizen  of  Wisconsin  claims 
stock  in  a  Wisconsin  corporation  as 


against  a  citizen  of  Illinois  in  whose 
name  the  stock  stands  on  the  corpo- 
rate books,  the  corporation  is  a  neces- 
sary party  defendant  and  the  case 
cannot  be  removed  to  the  federal 
courts.  Rogers  v.  Van  Nortwick,  45 
Fed.  Rep.  513  (1891).  The  corpora- 
tion is  a  proper  party  defendant  Ken- 
dig  v.  Dean,  97  U.  S.  423  (1878); 
Budd  V.  Munroe,  18  Hun,  316  (1879); 
Crump  v.  Thurber,  115  U.  S.  56 
(1885).  The  reason  of  this  rule  is 
that  complete  possession  of  the  stock 
can  be  obtained  only  by  obtaining  a 
transfer  of  that  stock  on  the  corpo- 
rate books  to  the  plaintiff.  Where,  in 
a  suit  for  specific  performance,  the 
corporation  is  joined  as  a  party  de- 
fendant, in  order  to  obtain  a  transfer 
on  the  books,  it  is  a  necessary  party, 
and  the  other  defendant  cannot  re- 
move the  case  to  the  federal  court  if 
the  complainant  and  the  corporation 
are  citizens  of  the  same  state.  Pat- 
terson v.  Farmington,  etc.  Ry.,  Ill 
Fed.  Rep.  262  (1901).  A  state  court 
may  decree  that  national  bank  stock 
standing  in  the  name  of  one  person 
belongs  to  another  person.  The  bank 
is  not  necessarily  a  party  defendant. 
In  re  Fisher's  Estate,  128  Iowa,  18 
(1905). 

2  St.  Louis,  etc.  Ry.  v.  Wilson,  114 
U.  S.  60  (1885).  In  a  suit  by  the  ven- 
dee to  obtain  possession  of  the  stock 
in  the  hands  of  a  third  person,  the 
price  having  been  paid,  the  vendor  is 
not  a  necessary  party.  Leigh  v. 
Laughlin,  222  111.  265  (1906).  See 
also  §  391,  supra. 

3  An  agreement  transferring  a  por- 
tion of  the  stock  in  a  mining  corpo- 
ration cannot  be  enforced  in  a  court 
of  equity  eight  years  after  the  com- 
plainant had  made  a  demand  for  the 


972 


CH.  XX.  J 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§ 


OOO. 


poration,  as  against  another  person,  and  sues  the  corporation  with- 
out joining  the  second  claimant,  the  latter  is  not  bound  by  the  judg- 
ment, even  though  he  is  notified  of  the  suit,  it  appearing  that  he  was 
not  allowed  to  take  part  in  the  trial.1     A  suit  by  the  purchaser  of  a 


stock,  the  statute  of  limitations  at 
law  being  a  bar.  Moore  v.  Nickey,  133 
Fed.  Rep.  289  (1904).  Where  for  fifty 
years  a  claimant  of  stock  takes  no 
proceedings  to  obtain  it  and  during 
that  time  other  persons  claim  the 
stock  and  have  possession  of  it  and 
have  received  dividends  upon  it 
laches  is  a  bar  to  a  suit  by  the  former 
to  recover  the  stock.  Livingston  v. 
Proprietors',  etc.,  15  Fed.  Cas.  691 
(1879);  s.  c,  16  Blatch.  549.  Where 
a  stockholder  delivers  his  stock  to  the 
president  to  be  used  to  induce  a  per- 
son to  loan  money  to  the  corporation, 
and  the  president  instead  of  so  us- 
ing it  converts  it  to  his  own  use,  the 
stockholder  may  maintain  a  suit  in 
equity  to  recover  back  the  stock,  and 
the  statute  of  limitations  does  not  be- 
gin to  run  until  he  has  discovered  or 
should  have  discovered  the  facts. 
Slayback  v.  Raymond,  93  N.  Y.  App. 
Div.,  326  (1904).  Delay  in  instituting 
a  suit  to  compel  the  delivery  of  stock 
which  parties  had  earned  in  common, 
is  not  fatal,  short  of  the  statute  of 
limitations.  Eno  v.  Sanders,  39 
Wash.  238  (1905).  Seven  years' 
delay  in  bringing  suit  for  spe- 
cific performance  is  a  bar.  York  v. 
Passaic,  etc.  Co.,  30  Fed.  Rep.  471 
(1887).  Five  years'  delay  held  fatal 
where  "the  relations  of  the  parties 
have  changed  and  the  stock  has  great- 
ly appreciated  in  value."  Mundy  v. 
Davis,  20  Fed.  Rep.  353  (1884). 
Where  a  person  sells  stock  to  be  de- 
livered within  a  reasonable  time,  and 
receives  the  money  for  it,  but  is  un- 
able to  perform  his  contract  by 
reason  of  an  injunction,  the  statute 
of  limitations  begins  to  run  from  the 
vendee's  demand  for  the  return  of  the 
purchase-money.  Rose  v.  Foord,  96 
Cal.  154    (1892).     Three  years'  delay 


in  bringing  action  for  specific  per- 
formance, the  stock  in  the  meantime 
having  increased  tenfold  in  value,  is 
fatal.  Rogers  v.  Van  Nortwick,  87 
Wis.  414  (1S94).  Specific  perform- 
ance will  not  be  granted  to  the  vendee 
of  stock  where  he  has  delayed  for 
over  two  years  in  commencing  suit 
and  in  the  meantime  the  situation 
has  materially  changed  and  the  ven- 
dee commenced  the  suit  for  the  bene- 
fit of  other  parties.  Ringler  v.  Jetter, 
35  N.  Y.  Misc.  Rep.  750  (1901).  Where 
one  of  the  partners  in  a  firm  organ- 
ized to  locate,  develop  and  operate 
mines  does  not  turn  into  the  firm  a 
mine  located  by  him,  but  transfers 
the  same  to  a  corporation  for  stock, 
and  the  other  partners  delay  for  two 
years  after  knowledge  thereof  before 
filing  a  bill  claiming  an  interest  in 
the  stock,  and  in  the  meantime  the 
corporation  has  expended  money  and 
the  stock  may  have  passed  into  other 
hands,  the  court  will  refuse  relief  on 
the  ground  that  the  firm  evidently 
intended  to  deny  any  obligation  if  the 
mine  turned  out  to  be  worthless,  but 
to  claim  an  interest  if  it  turned  out 
to  be  valuable.  Curtis  v.  Lakin,  94 
Fed.  Rep.  251  (1899).  A  court  of 
equity  may  enforce  a  written  agree- 
ment for  the  delivery  of  stock.  A 
court  of  equity  has  jurisdiction  al- 
though the  party  who  contracted  to 
deliver  the  stock  has  disposed  of  the 
stock  for  cash.  The  lapse  of  time  is 
no  bar  to  the  suit,  there  being  a 
complete  breach  of  trust,  unless  such 
lapse  is  exceptionally  great,  the  facts 
having  been  concealed.  Wood  r.  Per- 
kins, 57  Fed.  Rep.  258  (1893).  See 
also  note  2,  p.  959,  supra. 

i  Fifth,  etc.  Society  v.  Holt,  184  Pa. 
St.  572  (1898). 


973 


§  3      i 


CONTBACTS  TO  BELL      GAMBLING  BALI 


|  ('II.   XX. 


certificate  "1"  stock  to  compel  delivery  may  be  broughl  at  the  place 
where,  the  certificate  is,  and  absent  defendants  may  be  served  by 
publication.3  Where,  pending  an  appeal  from  a  decree  ordering  a 
person  to  turn  stock  over  to  another,  the  former  pays  assessments 
on  the  stock,  be  can  recover  these  ass  3smente  from  the  latter  it' 
the  decree  is  affirmed.2  Upon  an  appeal  from  final  judgment,  an 
interlocutory  judgment  ordering  the  transfer  •  ck  from  a  trus- 

tee I"  the  party  entitled  to  the  same  will  not  be  enforced,  provided 
the  party  is  allowed  to  vote  thereon.3  If  a  decree  directs  the  transf<  c 
of  certain  stock  in  the  distribution  of  an  estate,  and  the  corporation 
makes  such  transfer,  and  thereafter  the  decree  is  reversed  on  appeal, 
the  executors  may  bring  suit  to  have  the  tra  ■  canceled.4  Where 
a  sale  of  st.K-k  is  decreed  and  an  appeal  taken  and  a  bond  given  on 
appeal,  and  the  stock  depreciates  during  the  appeal  and  the  decree 
is  affirmed,  the  liability  on  the  bond  is  the  amount  of  the  depre- 
ciation.6 


i  Ryan    V.   Seaboard,   etc.  R.   R.,   S3     r.  Rocky   Bar,   etc.  Co.,   29  Wash.   726 


Fed.  Rep.  889  (1897).  A  suit  lies  in 
a  New  Jersey  court  to  compel  the 
transfer  of  stock  in  a  New  Jersey  cor- 
poration, even  though  the  stockholder 
of  record  is  a  non-resident  and  is  not 
served  Within  the  state.  Andrews  r. 
Guayaquil,  etc.  Ry.,  G9  N.  J.  Eq.  211 
(1905). 

A  suit  to  recover  back  stock  which 
has  been  illegally  transferred  by 
a  trustee  may  be  brought  in  the 
state  where  the  corporation  was  in- 
corporated, even  though  the  holder 
oi  the  outstanding  certificate  is  a 
non-resident  inasmuch  as  the  latter 
may  be  served  by  publication.  Peo- 
ple's Nat.  Bank  v.  Cleveland,  117  Ga. 
908  (1903).  A  citizen  of  Alabama  can- 
not maintain  in  the  courts  of  Alabama 
a  suit  to  enjoin  non-residents  from 
transferring  stock  in  a  non-resident 
corporation  where  the  defendants  are 
not  personally  served  within  the  state. 
Rucker  r.  Morgan,  122  Ala.  308 
(1899).  Where  a  corporation  has  not 
yet  issued  stock  as  called  for  by  a 
contract,  a  claimant  of  such  stock 
may  bring  suit  in  the  state  where 
corporation  was  organized  to  obtain 
the  stock,  even  though  the  other 
claimant  is  a  non-resident.     Jennings 


(1902).     S  163. 

^  Irvine     r.     Angus,     93    Fed.     Rep. 
629    (1899). 

i    v.  Rossiter,  109  X.  Y.  App. 
Div.  32   i  1905). 

■i  The   suit   is    properly    in    equity. 
Ashton    v.    Heggerty,    130    Cal.    516 

100).  Under  the  statute  of  Califor- 
nia, even  though  stock  is  distributed 
by  executors  in  accordance  with  a  de- 
cree of  distribution,  and  the  distribu- 
tees sell  the  stock  and  it  is  trans- 
ferred on  the  books  of  the  company, 
nevertheless  if  the  decree  is  reversed 
on  appeal,  the  transfers  are  void  and 
the  company  is  liable  for  dividends 
paid  in  the  meantime  to  such  pur- 
chasers. In  a  suit  by  the  executors  to 
recover  such  dividends  the  purchasers 
need  not  be  made  parties.  Ashton  v. 
Zeila  Min.  Co.,  134  Cal.  408  (1901). 
Where,  in  accordance  with  a  judg- 
ment, stock  is  delivered  and  the  party 
receiving  it  sells  it  and  thereafter  the 
judgment  is  reversed,  such  stock  can- 
not be  recovered  back  from  the  trans- 
feree. Thaxter  v.  Thain,  100  N.  Y. 
App.  Div.  488  (1905).  See  also 
§§  330,  391,  supra. 

5  Welch  v.  Welch,  60  S.  W.  Rep. 
409   (Ky.  1901). 


974 


CH.  XX.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§   339. 


§  339.  Seventeenth  section  of  statute  of  frauds  as  affecting  sales  of 
stock. — In  England  the  rule  is  firmly  established  that  the  seven- 
teenth section  of  the  statute  of  frauds,  relating  to  contracts  for  the 
sale  of  "goods,  wares,  and  merchandise,"  does  not  apply  to  sales  of 
stock.  No  delivery,  payment  of  earnest  money,  or  memorandum 
in  writing  is  necessary  in  order  to  render  the  contract  of  sale  valid. 
This  principle  of  law  was  doubted  in  the  early  cas<  s,]  but  was  deter- 
mined by  the-  case  of  Humble  v.  Mitchell,  in  1S39.2  In  1838  this 
question  arose  in  this  country,  apparently  for  the  first  time,  and  it 
was  decided  in  Tisdale  v.  Harris,3  chiefly  on  the  authority  of  the 
early  English  c;  that  a  contract  for  the  sale  of  stock  was  within 

the  seventeenth  section  of  the  statute  of  frauds.     This  decision  has 
been  uniformly  followed  in  America.4 


i  Mussell  v.  Cooke,  Finch's  Prec.  in 
Ch.  533   (1720),  holding  that  the  stat- 
ute   applied,    but    was    not    properly 
pleaded;  Pickering  v.  Appleby,  1  Com. 
Rep.    353     (1721),    not    decided,    the 
judges  being  divided  six  and  six;  Colt 
v.   Xettervill,   2  P.  Wins.   304    (172 
not  decided,  the   lord   chancellor   E 
lug  it  was  too  difficult  to  decide  on  a 
demurrer;    Crull   v.  Dodson,  Sel.  C 
Ch.    t.    King    (2d    ed.,    p.    113—1725), 
statute  held  to  apply. 

2  11  A.  &  E.  205,  followed  in  Dun- 
cuft  v.  Albrecht,  12  Sim.  1S9  (1841), 
the  court  saying  that  the  statute  ap- 
plies only  to  goods  capable  of  part  de- 
livery; Hibblewhite  v.  McMorine,  C  M. 
&  W.  200,  214  (1840);  Tempest  v.  Kil- 
ner,  3  C.  B.  249  (1846);  Heseltine  v. 
Siggers,  1  Exch.  85G  (184S). 

3  37  Mass.  9. 

4  Baltzen  v.  Nicolay,  53  N.  Y.  467 
(1873),  rigidly  applying  the  rule; 
North  17.  Forest,  15  Conn.  400  (1843), 
where  the  court  said:  "Such  contracts 
fall  clearly  within  the  mischiefs 
which  the  legislature  by  the  statute 
intended  to  remedy.  There  is  as  much 
danger  of  fraud  and  perjury  in  the 
parol  proof  of  such  contracts  as  in 
any  other;''  Pray  V.  Mitchell,  60  Me. 
430  (1872);  Fine  v.  Hornsby,  2  Mo. 
App.  61  (1876)  ;  Colvin  v.  Williams,  3 
liar.  &  J.  (Md.)  3S  (1810);  Sher- 
wood  v.  Tradesman's  Nat.  Bank,  16 
N.  Y.  W.  Dig.  522   (1883);   French  v. 


Sanger,  X.  Y.  L.  J.,  July  22,  1892.  Cf. 
Brownson  v.  Chapman,  63  N.  Y.  625 
(1S7">).      Contra,    dictum,    Vawter    v. 
Griffin,  40  Ind.  593,  602   (1872).     See 
Reed,   Stat,   of  Frauds,   §  234;    Hagar 
r.  King,  38  Barb.  200   (1862),  holding 
that    the    sale    of    railroad    bonds    is 
within  the  statute.    This  decision  was 
i       iruled   In   58   Barb.    148.     An  oral 
agreement  to  sell  stock,  the  price  be- 
ing more  than  $50,  is  void  under  the 
statute    of    frauds,    even    though    the 
agreement  involved  other  stock  which 
was  actually  delivered   and  paid  for. 
Tompkins  v.   Sheehan,  158  N.  Y.  617 
(1899).    A  sale  of  stock  is  within  the 
meaning  of  the  statutes  of  frauds  rela- 
tive to  the  sale  of  goods.    Raymond 
r.   Colton,   104   Fed.  Rep.   219    (1900). 
The   written    agreement    of   the    pur- 
chaser to  buy  stock  does  not  satisfy 
the  statute   of  frauds   if  there   is  no 
written   agreement  of  the  vendor   to 
sell.     Mcllroy  v.  Richards,  112  N.  W. 
Rep.  489    (Mich.  1907).       A  subscrip- 
tion for  stock   is  not  a  contract  for 
the    sale    of    goods,    etc.,    within    the 
meaning    of    the    statutes    of    fraud. 
ibb  r.  Baltimore,  etc.  R.  R.,  77  Md. 
92  (1893).    In  Florida  the  statute  ap- 
plies,   the    word    "personal"    property 
being  used.     Southern  Life  Ins.  Co.  v. 
Cole,    4    Fla.    359,    378     (1852).      See 
also   Mason    r.   Decker,   72   N.   Y.   595 
(1878),  affirming  10  Jones  &  S.  115; 
Johnson  v.  Mulry,  4  Rob.  (N.  Y.)  401 


97E 


§  339.] 


CONTRACTS  TO  BELL      GAMBLING  SAL] 


[CH.  XX. 


A  broker,  however,  as  a  common  agent,  may  make  the  memo- 
randum for  both  parties.1  A  principal  cannot  defend  againsl  :i  -nit 
by  his  agenl  for  the  price  of  Btock  purchased  by  the  Latter  for  the 
former,  on  the  ground  that  the  order  was  oral  and  void  by  tin-  stat- 
ute "I"  frauds.2  A  pari  paymenl  of  the  consideration  makes  the  con- 
tracl  valid,8  and  a  paymenl  in  property  '  or  servii  Bees.     Tin' 


(1867),  holding  that  the  NVw  York 
Stock  Jobbing  Ad  <  Laws  X.  Y.  1858, 
ch.  L34),  4 1 i « 1  not  affect  the  application 

of  tin'  Btatute  of  frauds.  The  statute 
is  not  sufficiently  pleaded  by  alleging 
that  t he  contract  of  sale  of  stock 
"was  void  in  law  and  not  binding 
upon  him."  Vaupell  v.  Woodward,  2 
Sandf.  Ch.  143  (1844).  The  question 
of  whether  there  was  a  delivery  suf- 
ficient to  case  of  sale  of  stock 
out  of  the  statute  of  frauds  was  sub- 
mited  to  the  jury  in  Hinchman  v.  Lin- 
n,  124  U.  S.  38  (18S8),  discussed  in 
N.  Y.  D.  Reg.,  Jan.  28,  1888.  A  con- 
tract to  sell  stock  at  the  yendi  e's  op- 
tion within  three  years  is  not  void  by 
the  statute  of  frauds,  since  the  option 
may  be  exercised  within  a  year.  Sed- 
don  r.  Rosenbanm.  85  Va.  928  (1889). 
A  subscription  payable  when  the  road 
reaches  a  certain  point  becomes  ab- 
solutely payable  then  upon  demand. 
The  statute  of  frauds  does  not  apply 
to  such  a  subscription.  Webb  v.  Balti- 
more, etc.  R.  R.,  77  Md.  92  (1893). 
An  oral  subscription  is  not  void  by 
the  statute  of  frauds.  Reed  v.  Gold, 
102  Va.  37  (1903).  See  §52,  supra. 
i  Colvin  r.  Williams,  3  Har.  &  J. 
(Md.)  38  (1810).  Without  a  memo- 
randum in  writing  a  contract  for  the 
sale  of  stock  is  not  enforceable,  al- 
though made  in  the  Stock  Exchange, 
whose  rules  provide  that  the  contract 
shall  be  enforceable.  Ryers  v.  Tuska, 
14  N.  Y.  Supp.  926  (1891).  Where 
a  stockholder  in  a  letter  offers 
a  commission  to  a  broker  to  sell  his 
stock,  this  is  sufficient  to  satisfy  the 
statute  of  frauds.  Jones  v.  Wattles, 
66  Neb.  533    (1902). 

2  Wiger  v.  Carr,  111  N.  W.  Rep.  657 
(Wis.  1907). 

3  Thompson  v.  Alger,  53  Mass.  428 


(1847).    A  check  is  a  :  iyment, 

taking  a  sale  of  stock  out  of  the  Btat- 
ute of  frauds.  McLure  /-.  Sherman, 
70    Fed.    Rep.    i:h>    ,  An   oral 

agn  ement  to  purch  iroid 

by  the  statute  of  frauds,  notwithstand- 
ing the  vendor  <  hums  thai  he  n 
as  president  and  delivered  the 
stock  in  escrow,  there  being  a  con- 
fllct  of  testimony  on  that  subj 
Reynold*  v.  Scriber,  11  Or.  407  I  1902). 
Where  a  partial  payment  is  made  on 
the  stock  the  contract  is  not  void  by 
;  frauds.  So  also  where 
an  oral  contract  is  subsequently  em- 
lied  in  letters  the  statute  of  frauds 
dees  not  apply.  Cooper  v.  Bay  State, 
etc.  Co..  1-7  Fed.  Rep.  482  (1901). 
Where  two  oral  contracts  between  two 
sons  for  the  sale  of  stock  are  void, 
under  the  statute  of  frauds,  a  subse- 
ment  on  one  of  such  con- 
tracts does  not  validate  the  other, 
unless  at  the  time  of  such  payment 
the  other  is  restated  and  validated  by 
reason  of  such  payment.  Koewing  v. 
Wilder,  128  Fed.  Rep.  558  (1904).  A 
sale  of  stock  for  $50  or  more  is  with- 
in the  statute  of  frauds;  but  if  the 
purchaser  agrees  to  and  did  give  up  a 
lucrative  position  and  accept  a  fixed 
salary  from  the  corporation  there  is 
part  performance  on  his  part  and  the 
vendor  is  bound.  Hightower  v.  Ans- 
ley,  126  Ga.  8  (1906).  Where  a  party 
has  bought  various  stocks  through 
other  persons  and  made  payment  on 
account,  the  statute  of  frauds  is  not 
applicable  to  a  purchase  of  a  particu- 
lar stock.  Berwin  v.  Bolles,  183 
Mass.  340    (1903). 

4  Eastern  R.  R.  v.  Benedict,  76  Mass. 
212    (1857). 

5  White   v.    Drew,   56    How.   Pr.    53 
(1878),   holding   that   the    furnishing 


976 


CH.  XX.] 


CONTRACTS  TO  SELL— GAMBLING  SALES,  ETC. 


[§   339. 


usual  transfer  on  the  back  of  a  certificate  of  stock,  when  signed 
by  the  stockholder,  is  sufficient  to  satisfy  the  statute  of  frauds.1 
The  statute  does  not  apply  as  between  partners  for  the  purpose  of 
buying  stock.2  A  contract  for  the  sale  of  stock  in  a  corporation  not 
incorporated  has  been  held  not  to  be  within  the  statute.3  The 
tute  must  be  pleaded  in-order  to  be  effective  as  a  defense.4  The 
assignee  of  a  contract  for  the  sale  of  stock,  void  by  the  statute  of 
frauds,  takes  nothing  by  the  assignment.5  An  agreement  by  the 
vendor  of  stock  to  take  it  back  at  any  time  is  not  affected  by  the 
statute,  and  such  an  agreement  is  a  part  of  the  executed  sale.6   Where 


of  reliable  information  is  sufficient. 
An  oral  agreement  to  deliver  stock 
in  part  payment  for  services  to  be 
rendered  cannot  be  enforced  against 
tbe  party  agreeing  to  deliver  tbe 
stock,  even  though  the  services  have 
been  performed.  Franklin  v.  Matoa, 
etc.  Co.,  158  Fed.  Rep.  941  (1908). 

l  Flowers   v.   Steiner,   108   Ala.    440 
(1895).     Where  stock  is  sold  and  the 
certificate  transferred  to  the  vendee, 
and  is  then  attached  to  a  note  given 
in   payment  of  part  of  the   purchase 
price,  this  constitutes  a  delivery  and 
acceptance  of  the  stock,  and  the  stat- 
ute of  frauds  does  not  invalidate  the 
sale.      Dinkier    v.    Baer,    92    Ga. 
(1893).     In  Cameron  v.  Tompkins,  72 
Hun,  113  (1893),  it  was  held  that  the 
statute  of  frauds  prevented  the  collec- 
tion of  a  note  which  was  given  in  pay- 
ment for  stock,  even  though  the  stock 
was  collateral   security  for  the  note, 
and   even   though   there   were   letters 
prior  to  the   sale   in   which   the  pro- 
posed sale  was  referred  to.    The  court 
said:    "A   contract   to   sell    shares   of 
stock    in    a    private    corporation    is 
within  the  third  section  of  the  statute 
of  frauds  of  the  state  of  New  York." 
2Tomlinson    v.    Miller,    7    Abb.  Pr. 
(N.  S.)   364   (1869).     Nor  as  between 
persons,  one  of  whom  buys  stock  in 
his   own    name   for   the   joint   benefit 
of  both.    Stover  v.  Flack,  41  Barb.  162 
(1862).     A  division  of  bonds  by  oral 
agreement  between  partners  is  not  a 
sale  within  the  meaning  of  the  stat- 
ute of  frauds.     Mason  v.  Spiller,  186 
Mass.  346    (1904). 


3  Gadsden    v.    Lance,    McMull    Eq. 
(S.  C.)  87  (1841);  Green  v.  Brookins, 

lich.  48,  54  (1871),  where  a  person 
was  induced  to  subscribe  on  parol 
contract  that  a  purchaser  for  the  stock 
would  afterwards  be  found.  In  Massa- 
chusetts, on  similar  facts,  except  that 
a  certain  person  agreed  to  purchase,  a 
contrary  decision  was  rendered. 
Boardman  v.  Cutter,  128  Mass.  388 
(18S0). 

4  Porter  v.  Wormser,  94  N.  Y.  431, 

450   (1884). 

5  Mayer  V.  Child,  47  Cal.  142  (1873). 
BFitzpatrick  u.  Woodruff,  96  N.  Y. 

561    (1884);    Thorndike   v.   Locke,    98 
Mass.  340  (1867);  Fay  r.  Wheeler,  44 
Vt.    292    (1872);    Bank    of    Lyons    v. 
Demmon,  Hill  &  D.  Supp.  398  (1844). 
An   agreement   by   promoters   with   a 
subscriber  for  stock  that  they  would 
take  the  stock  from  him  within  a  cer- 
tain time,  if  he  desired,  is  valid  and 
enforceable.    Meyer  v.  Blair,  109  N.  Y. 
600   (188S);  Morgan  v.  Struthers,  131 
U.   S.   246    (1889).     An  agreement  to 
take  back  bonds  if  the  vendee  desires 
to  return  them  is  valid  and  enforce- 
able.    Johnston  v.   Trask,   116   N.   Y. 
136(1889).    A  guaranty  that  a  vendor 
will  take  back  the  stock  sold   if  the 
vendee    desires    is    enforceable,    even 
after  the  company  sells  out  to  another 
company  for  its  shares  of  stock,  the 
vendee     not    assenting.       Richter    v. 
Frank,  41  Fed.  Rep.  859   (1890).     An 
agreement  of  the  vendor  to  buy  back 
the  stock  is  enforceable.     Graham  v. 
Houghton,   153  Mass.   384    (1891).     A 
broker's  agreement  to  take  bonds  back 


(62) 


977 


§  83 


CONTRACTS  TO  SELL — (IAMBI. I : 


XX. 


the  vendor  of  .-t.  ck  ag  :k,  and  in  the  meantii 

corporation  fails  and  the  stock  is  ed,  the  vendor  musl  refu 


at  a  certain  price  at  any  time  la  en- 
forceable, where  the  bon>l  were  sold 
In  1888,  and  in  1890,  when  the  bonds 
were  tendered  back,  the  broker  de- 
layed action  and  said  he  would  take 
them  at  any  time,  and  In  1895  a  final 
i  nder   was   made,  and   In  ait 

was  commenced.  Lydig  v.  Bi 
177  Mass.  212  (1900).  In  a  suit  on  a 
note  given  in  payment  for  stock  the 
defendant  may  prove  an  oral  agree- 
ment showing  that  he  had  a  right  to 
return  the  Stock  and  demand  hack  the 
note.  Germania  Bank,  etc.  v.  Osborne, 
81  Minn.  272  (1900).  The  joint  guar- 
antee by  several  parties  of  a  specified 
dividend   for  a  specil  le  on  cer- 

tain stock,  in  order  to  bring  about  its 
sale,  together  with  their  agreement  to 
purchase  the  stock  at  par  at  the  end 
of  the  time,  and  if  they  fail  to  do  so 
to  continue  to  pay  the  guaranteed  div- 
idends, is  enforceable  against  all  for 
the  guaranteed  dividends  for  the  speci- 
fied time,  but  as  to  the  purchase  is 
enforceable  against  those  only  upon 
whom  a  demand  is  made  that  t' 
purchase  the  stock  in  accordance  with 
the  agreement.  Rogers  v.  Burr,  105 
Ga.  432  (189S).  The  oral  agreement 
of  the  agent  of  the  buyer  that  the 
buyer  would  repurchase  the  stock  is 
void  by  the  statute  of  frauds,  because 
this  is  a  separate  contract.  Morse  v. 
Douglass,  112  N.  Y.  App.  Div.  798 
(1906).  An  agreement  of  the  vendor 
to  buy  back  the  stock  in  one  year  if 
the  vendee  desired  is  not  void  by  the 
statute  of  frauds.  Gurwell  v.  Morris, 
2  Cal.  App.  451  (1905).  An  oral 
agreement  that  the  vendor  will  buy 
the  stock  back  again  at  the  same  price 
is  so  improbable  that  strong  evidence 
is  necessary  to  establish  it.  Blair  v. 
Minzesheimer,  124  N.  Y.  App.  Div.  177 
(1908).  The  Illinois  statute  against 
options  does  not  apply  to  a  contract 
by  which  the  vendor  of  stock  agrees 
to  buy  it  back  at  the  end  of  five  years 
if  the  vendor  so  desires,  the  vendee 


on  his  part   agreeing  not  to  sell   tie- 
stock    to   any    one    in    the 
without  fl]  Ing  it   I  or. 

v.  Binnian,  182  111.  608  <  18! 
An  r  of  lie 

to  buy  ti:i  m  back  at  tlie  sai'  at 

If  the  vei         wishes  is 
not    a    gam  ilii  If    /•. 

Nat.    Bank    of    Illinois,    178    til. 
..     Whi 
.t   to    return    the   Stock    within    a 
onable  tin  Btatute  of  limita- 

tions on  BUCh  right  is  not  to  begin  to 
run  until  a  reasi  l 
date    of   the   contract.     Oaks    v.   Tay- 

Y.    App.    Div.    177    I 
The  a.u  t  of  the  vendor  of  st' 

to  buy  it  back  at  the  price  paid,  and 
one  'it.  a  month  in  addition,  is 

not  usurious  as  a  matter  of  law.  Phil- 
lips v.  Mason,  66  Hun,  580  (1893). 
"Where  the  vendor  agrees  to  refund 
the  money  upon  the  return  of  the 
stock  sold,  the  vendee  cannot  sue  for 
the  money  uiUess  he  returns  the  stork. 
Henderson  r.  Wheaton,  139  111.  581 
(1S91).  Where  stock  is  sold  with  a 
contract  on  the  part  of  a  vendor  that 
he  will  repurchase  it  if  desired  "at 
the  end  of  one  year,"  the  time  may 
be  extended  by  oral  agreement.  Weld 
r.  r.arker,  153  Pa.  St.  465  (1893).  The 
vendee,  in  enforcing  the  contract  of 
the  vendor  to  take  the  stock  back, 
must  make  and  allege  a  tender.  Tay- 
lor v.  Blair,  59  Hun,  347  (1891).  An 
agreement  of  the  vendor  to  repur- 
chase the  stock  at  the  option  of  the 
purchaser  at  the  end  of  one  year  be- 
comes enforceable  at  the  end  of  one 
year,  excluding  the  day  of  the  con- 
tract from  the  count.  A  custom  of 
brokers  to  the  contrary  does  not  ap- 
ply to  such  a  transaction.  An  ex- 
tension of  the  time  by  the  original 
vendor  by  agreement  does  not  waive 
his  rights.  Weld  v.  Barker,  153  Pa. 
St.  465  (1893).  Where,  however,  the 
vendee  turns  in  his  stock  on  a  reor- 
ganization  and  takes   new   stock,   he 


978 


en.  xx.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§   339. 


to  the  vendee  tlie  assessment  as  well  as  the  purchase  price.1  Where 
the  vendee  agrees  in  writing  to  resell  the  stock  to  the  vendor  at  a 
specified  price,  an  oral  notice  by  the  vendor  that  he  wishes  to  re- 
purchase is  sufficient,  but  he  must  tender  the  money  unless  such 
tender  is  excused  by  the  conduct  of  the  vendee.2 

So,  also,  the  agreement  of  third  parties  to  take  the  stock,  or  to 


cannot  enforce  the  vendor's  contract. 
Kolsky  v.  Enslen,  103  Ala.  97  (1894). 
Where  a  party  has  a  right  to  re- 
turn the  stock  and  receive  back  his 
money,  he  may,  after  making  a  ten- 
der, do  any  acts  in  regard  to  the 
stock  reasonably  necessary  to  protect 
his  interest,  and  yet  not  lose  his  right 
to  rescind.  But  where  he  directs  a 
sale  of  the  stock,  and  gives  a  proxy 
thereon  and  attends  meetings,  he 
waives  his  right  to  rescind.  Jessop 
v.  Ivory,  158  Pa.  St.  71  (1893);  s.  c, 
172  Pa.  St.  41.  A  receipt  given  by  a 
udor  may,  by  its  wording,  be  a 
contract  on  the  part  of  the  vendor 
to  take  the  stock  back  if  the  vendee 
omes  dissa  Jessop  v.  Ivory. 

172   Pa.   St.  44    (  L895).     Where  it  is 

,   between  tie-  vendor  and   \ 
dee  stockholder  that  the  vaoi  uld 

he  paid  to  the  corporation  in  order 
to  meet  corporate  debts,  and  the  ven- 
dor agreed  to  repay  the  money  if  the 
stock  became  worthless,  the  statute  of 
frauds  does  not  prevent  the  vendee 
from  recovering  the  money,  even 
though  the  contract  was  oral.  Kil- 
bride v.  Moss,  113  Cal.  432  (1S96). 
Where -a  corporation  issues  stock  in 
payment  for  a  patent  right  and  agrees 
to  take  back  the  stock  and  pay  the 
par  value  thereof  at  the  end  of  five 
years,  if  the  purchaser  so  wishes,  the 
purchaser  may  enforce  the  agreement. 
Browne  v.  St.  Paul  Plow  Works,  62 
Minn.  90  (1895).  The  vendee  having 
the  right  to  return  stock  within  a 
year  does  not  waive  that  right  by 
authorizing  the  vendor  to  sell  it. 
Corey  v.  Wroodin,  81  N.  E.  Rep.  260 
i  Mass.  1907).  A  contract  to  repur- 
chase stock  may  be  assigned  by  the 
holder  of  the  stock.  Mitchell  v.  Tay- 
lor,  27   Oreg.   377    (1895).     A   verbal 


agreement  to  take  the  stock  back  is 
not  good  as  against  a  note  given  in 
ment.  Riley  v.  Treanor,  25  S.  W. 
Rep.  1054  (Tex.  1894).  The  right  to 
rescind  and  tender  back  stock  after 
one  year  can  be  exercised  only  by  a 
tender  after  the  year  and  not  before; 
but  the  tender  is  waived  if  the  vendor 
states  that  he  will  not  accept  the  ten- 
der. The  fact  that  the  vendee  has 
sold  some  of  the  stock  is  immaterial 
if  he  has  other  shares  to  take  the 
place  of  the  part  sold.  The  fact  that, 
by  ;igieement,  the  property  has  been 
merged  in  another  corporation  in  the 
meantime  is  immaterial.  Schultz  v. 
O'Roui  .Mont.   418    (1896).     An 

cement  to  repurchase  at  the  end 
of  a  year  if  thirty  days'  notice  is 
given  is  effective  if  the  thirty  days' 
notice  is  given  at  any  time  before 
the  expiration  of  the  year.  Maguire 
V.  Halsted,  18  N.  Y.  App.  Div.  228 
(1S97).  An  agreement  to  reimburse 
a  party  as  to  stock  "at  or  before"  a 
certain  date  cannot  be  enforced  by 
the  promisee  prior  to  the  expiration 
of  the  specified  time.  Wilson  v.  Bick- 
nell,  170  Mass.  259  (1898).  An  agree- 
ment to  take  back  stock  on  a  certain 
day  if  the  purchaser  so  desires  does 
not  enable  the  purchaser  to  tender 
the  stock  back  after  that  day.  Cabot 
v.  Kent,  20  R.  I.  197  (1S97). 

i  Gay  v.  Dare,  103  Cal.  454   (1894). 

2  Hanson  r.  Slaven,  98  Cal.  377 
(1893).  W7here  the  vendor  of  stock 
has  the  right  to  repurchase  in  case  a 
certain  event  does  not  occur,  and  it 
does  not  occur,  and  the  vendee  tenders 
back  the  stock  and  the  vendor  refuses 
to  purchase,  this  puts  an  end  to  his 
option.  Hooker  v.  Midland,  etc.  Co., 
215  111.  444  (1905).  See  116  N.  W.  Rep. 
S69,  and  95  Pac.  Rep.  1061. 


979 


§  339.] 


CONTRACTS  TO  SELL      GAMBLING  SALES,  ETC. 


[CH.  XX. 


protect  from  loss  the  party  1. uving  it,  is  enforceable  if  founded  on 
a  sufficient  consideration.1 


i  Where  a  stockholder  subscribes 
for  an  increased  capital  stock  on  the 
agreement  of  parties  to  take  the  stock 
if  the  subscriber  does  not  want  it,  the 
hitter  may  hold  the  former  liable  tor 
the  difference  between  what  the  latter 
pays  for  the  stock  and  what  he  is 
able  to  sell  it  for.  Herd  v.  Thompson, 
149  Pa.  St.  434  (1892).  A  guaranty 
that  the  vendee  of  stock  shall  not  lose 
money  by  the  pun  base  may  be  en- 
forced by  the  vendee  when  he  proves 
that  the  stock  has  no  market  value, 
and  that  he  has  tried  to  sell  it  but 
has  failed.  Phipps  P.  Sharps,  142  Pa. 
St.  597  (1891).  A  statement  of  a 
party  who  is  endeavoring  to  sell  stock 
for  another,  that  he  will  see  the  latter 
whole  in  the  matter,  creates  no  liabil- 
ity on  the  part  of  the  former.  Mar- 
tin's Estate,  131  Pa.  St.  638  (1890). 
An  agreement  of  a  stockholder  that 
another  stockholder  shall  be  made 
"whole"  for  any  loss  due  to  not  selling 
stock  is  without  consideration  and 
void.  Martin's  Estate,  4  Ry.  &  Corp. 
L.  J.  449  (Orphans'  Ct.  Phil.  1S8S).  A 
person  who  writes  to  a  party,  when 
the  latter  subscribes  for  stock,  that 
the  former  will  ply  the  subscription 
if  the  road  is  not  completed  within 
a  certain  time,  is  a  surety  and  may 
be  held  liable.  Allison  V.  Wood,  147 
Pa.  St.  197  (1892).  The  agreement 
of  a  person  with  a  subscriber  for  stock 
that  he  will  pay  to  the  latter  one  hun- 
dred cents  on  the  dollar  for  the  stock 
within  ninety  days  is  not  enforceable 
unless  the  subscriber  tenders  the  stock 
and  demands  the  money  within  that 
time;  and  a  guaranty  to  save  the  sub- 
scriber harmless  from  any  loss  as  a 
stockholder  does  not  guaranty  against 
loss  by  a  decline  in  the  value  of  the 
stock  itself.  Morris  v.  Veach,  111  Ga. 
435  (1900).  Where  a  vendor  of  ma- 
chinery to  a  corporation  takes  its 
bonds  in  payment  therefor  on  the 
promise  of  the  officers  that  they  will 


purchase  the  bonds  at  par  at  any  time 
within  six  months,  he  may  tender  the 
bonds  and  sue  for  the  purchase  price. 
Erie,  etc.  Works  v.  Thomas,  139  Fed. 
Rep.  995  (1905).  A  corporation  in 
selling  its  stock  may  agree  to  repur- 
chase it  at  a  specified  time  if  the  ven- 
dee so  desires  and  if  the  president 
also  makes  such  agreement  he  also 
may  be  held  liable.  Ophir,  etc.  Co. 
v.  Brynteson,  143  Fed.  Rep.  829 
(1906).  The  written  agreement  of  a 
third  person  to  purchase  stock  fr 
the  vendee  thereof  at  the  same  pi 
after  six  months  is  enforceable,  it 
being  made  as  a  part  of  the  original 
purchase,  and  if  such  right  is  to  exist 
after  six  months,  it  must  be  exer- 
cised within  a  reasonable  time  after 
the  six  months  expire.  Moench  v. 
Hower,  11.".  N.  W.  Rep.  229  (Iowa 
1908).  An  oral  promise  by  a  stock- 
holder that  he  would  repay  at  any 
time  after  one  year  the  amount  paid 
by  an  individual  to  the  corporation 
for  stock,  if  the  latter  did  not  receive 
a  profit  of  twenty  per  cent.,  is  void 
under  the  statute  of  frauds.  Moore  v. 
Vosburgh,  66  N.  Y.  App.  Div.  223 
(1901).  The  promise  of  the  directors 
of  a  corporation,  inducing  a  person 
to  purchase  stock  from  the  corpora- 
tion, that  they  will  pay  enough  to 
make  the  dividend  eight  per  cent,  as 
long  as  the  corporation  exists,  is  not 
void,  under  the  statute  of  frauds,  and 
is  enforceable.  People,  etc.  v.  Most, 
36  N.  Y.  Misc.  Rep.  139  (1901).  A 
person  induced  to  subscribe  by  an 
agreement  of  a  third  person  to  pur- 
chase the  stock  at  par  at  any  time 
may  collect  from  the  latter  the  dif- 
ference between  the  price  at  which 
the  former  sells  and  the  par  value, 
the  latter  having  declined  to  perform. 
Lewis  v.  Coates,  93  Mo.  170  (1888). 
See  also  §  334,  supra.  A  memoran- 
dum, "We  agree  to  pay  A.  Rampacker 
the  par  value  of  this  stock  .  .  .  upon 


980 


CH.  XX.]       CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC.  [§§  340,  341. 

§  340.  Other  sections  of  statute  of  frauds  as  affecting  sales  of 
stock. — The  provision  of  the  statute  of  frauds  relative  to  answer- 
ing for  the  debts,  defaults,  or  miscarriages  of  another  does  not  apply- 
to  a  guaranty  that  there  will  be  a  certain  dividend  on  stock  pur- 
chased,1 nor  to  broker's  relation  towards  his  client.2  An  oral  agree- 
ment of  the  vendor  to  repay  to  the  vendee  any  money  lost  by  the 
latter  by  reason  of  the  failure  of  the  corporation  is  void  by  the 
statute  of  frauds.3  The  provision  of  the  statute  relative  to  transfers  ( 
of  land  does  not  apply  to  stock,4  since  shares  of  stock  are  personals- 
property.5  A  transfer  of  stock  for  the  purpose  of  defrauding  the 
transferrer's  creditors  is  void,  and  a  court  of  equity  will  set  it  aside,0 
or  the  stock  may  be  attached  or  sold  under  execution  the  same  as 
though  no  attempt  at  transfer  had  been  made.7  An  oral  agree- 
ment whereby  one  party  makes  a  loan  to  the  corporation  in  consid- 
eration of  the  other  party  keeping  the  former  in  control  and  giving 
him  an  option  on  the  latter's  stock  does  not  sustain  a  suit  for  dam- 
ages, even  if  broken  by  the  latter,  inasmuch  as  it  is  void,  under  the 
statute  of  frauds,  as  not  to  be  performed  within  a  year.8 

B.     GAMBLING   SALES   OF   STOCK. 

§341.  What  are  wager  stock  sales. — Executory  contracts  for  the 
sale  of  stock  may  be  made  with  an  intent  to  actually  deliver  the 
stock    or  they  may  be  made  with  an  intent  not  to  deliver  it,  but 

the  surrender  of  this  certificate,"  in-  a    reasonable    time    after    the    three 

dorsed  on  the  back  of  the  certificate  years  to  exercise  his  right  to  sell  to 

enables  him  to  tender  the  stock  and  them.      Rogers    v.    Burr,    97    Ga.    10 

collect    the    par    value,    even    though  (1895);  s.  c,  105  Ga.  432  (1898).  See 

there   was   no    consideration    for   the  also  §  775,  infra. 

promise.     Wheaton   v.   Rampacker,   3  i  Moorehouse    v.    Crangle,    36    Ohio 

Wyo.   441    (1891).     An  agreement  of  St.  130  (1880). 

persons    holding    a    majority    of    the  2  Genin   v.   Isaacson,    6   N.   Y.    Leg. 

stock,  they  being  directors  also,  that  Obs.   213    (1848);   Rogers  v.  Gould,  6 

a  person  purchasing  stock  from  them  Hun,   229    (1875). 

shall  be  general  manager,  and  may  at  3  Gansey  v.  Orr,  173  Mo.  532  (1903). 

the  end  of  two  years  sell  the  stock  Cf.  note  1,  p.  9S0. 

back  to  them  at  a  stated  price,  is  con-  4  Watson  v.  Spratley,  10  Exch.  222 

trary  to  public  policy  and  void.     The  (1854);    Powell  v.  Jessopp,   18   C.   B. 

vendors  need  not  repurchase.    The  ar-  336    (1856);    Walker   v.    Bartlett,    18 

rangement  is  unfair   to  the  corpora-  C.  B.  845  (1856);  Ashworth  v.  Munn, 

tion.    Wilbur  r.  Stoepel,  82  Mich.  344  L.  R.  15  Ch.  D.  363,  368  (1880). 

(1890).     Where   certain   stockholders  5  See  ch.  I,  supra. 

agreed   with    a    subscriber    for   stock  6  See  §  481,  infra. 

that  he  shall  receive  certain  dividends  7  See  §  484,  infra. 

and  that  they  will  take  his  stock  if  s  Gazzam  v.  Simpson,  114  Fed.  Rep. 

he  desires  after  three  years,  he  has  71  (1902). 

9S1 


§  341.] 


.  n;\(  i  i.i.  -GAMBLING  BALI 


[CH.  XX. 


to  pay  in  cash  the  amounl  Loe1  or  won  by  the  ria  or  full  of  the  mar- 
price  of  the  stock.     A  sale  with  the  former  intent  is,  al  com- 
mon  law,    legal    and   valid.1      A    sale   with   the   latter   intent    La   a 
gambling  or  wager  contract,  and  is  not   enforceable  .       Tin 


i  Irwin   v.   Willlar,   110   U.   S.   499, 
508    (1884),   the  court  saying:    "The 
generally    accepted    doctrine    of    this 
country  is    .    .    .    that  a  contract  for 
the  sale  of  goods  to  he  delivered  at  a 
future  day   is  valid,   even  though  the 
seller    has    not    the    goods    nor    any 
other  means  of  getting  them  than  to 
into    the   market    and    buy    them; 
but    such    a    contract    is    only    valid 
when   the    parties   really   intend   and 
ee   that   the  goods   are   to   he   de- 
livered by  the  seller  and  the  price  to 
be  paid  by  the  buyer;    and   if   under 
guise  of  such  a  contract  the  real  in- 
tent be  merely  to  speculate  in  the  rise 
.  !•   tall   of  prices,  and  the  goods  are 
not  to  be  delivered,  but  one  party  is 
to  pay  to  the  other  the  difference  be- 
tween   the    contract    price    and    the 
market  price  of  the  goods  at  the  date 
fixed  for  executing  the  contract.  t; 
the     whole     transaction     eonstiti: 
nothing  more   than   a  wager,   and   is 
null  and  void.     And  this  is  now  the 
law  in  England  by  force  of  the  statute 
of  8  and  9  Vict.,  c.  109,  §  18,  altering 
the  common  law  in  that  respect."     In 
England  it  is  held  that  although  the 
parties  may  have  contemplated  that, 
as  a  whole,  there  would  be  a  mere  pay- 
ment of  differences  between  them,  yet, 
inasmuch  as  the  actual  contracts  en- 
tered  into   involved   the   liability   for 
the  actual  delivery  of  the  stock  dealt 
with,   they  were  not   gaming   or  wa- 
gering transactions.     Universal  Stock 
Exch.  v.   Stevens,   66   L.  T.   Rep.   612 
(1892).    It  may  be  speculation;  never- 
theless it  is  valid.     Clarke  v.  Foss,  7 
Biss.   540    (1878);    s.   c,   5   Fed.   Cas. 
955;  Smith  v.  Bouvier,  70  Pa.  St.  325 
(1872) ;  Kirkpatrick  v.  Bonsall,  72  Pa. 
St.  155  (1872),  where  the  court  said: 
"We    must    not    confound    gambling, 
whether   it   be   in   corporation   stocks 
or  merchandise,   with   what   is   com- 


monly termed  Lion.    Merchants 

speculate  upou  the  future  prices  of 
that  in  which  they  deal,  and  buy  and 
sell  accordingly."  Hatch  v.  Douglas, 
48  Conn.  116  (1880);  Flagg  v.  Bald- 
win, 38  N.  J.  Eq.  219  (1881);  Kent 
r.  Miltenberger,  13  Mo.  App.  503 
(1883).  If  deliveries  are  made  the 
transaction  is  not  gambling.  Pratt 
v.  Boody,  65  X.  J.  Eq.  L7B  (1896).  A 
tion  organized  to  act  as  a 
broker  in  buying  and  selling  grain  is 
ject  to  the  same  rule  as  regards 
gambling  contracts  that  individuals 
are.  Peck  v.  Doran,  etc.  Co.,  57  Hun, 
343  (1890).  An  agreement  of  the  ven- 
dor of  bonds  to  buy  them  back  at  the 
same  price  at  a  certain  time  if  the 
vendee  wishes  is  not  a  gambling  con- 
tra. |  W  if  v.  Nat.  Bank  of  Illinois, 
17s  111.  85   (1899). 

2  "Wagers  at  common  law  are  valid 
and  enforceable  in  the  courts;"  and, 
with  certain  exceptions  growing  out 
of  the  peculiar  subject  of  the  wager, 
they  have  been  held  to  be  valid  con- 
tracts. Dewey,  Contracts  for  Future 
Delivery,  etc.  (1886),  p.  10.  To  same 
effect:  Good  r.  Elliott,  3  T.  R.  693 
(1700);  Gilbert  v.  Sykes,  16  East,  150 
(1812);  Atherfold  r.  Beard,  2  T.  R. 
610  (1788);  Morgan  r.  Pebrer,  4  Sco. 
230  (1837);  Hussey  v.  Crickitt,  3 
Camp.  168  (1811);  Grants.  Hamilton, 

3  McLean,  100  (1842);  s.  c,  10  Fed. 
Cas.  978;  Campbell  v.  Richardson,  10 
Johns.    406    (1813);    Bunn    v.    Riker, 

4  Johns.  426  (1809);  Johnson  v.  Fall, 
6  Cal.  359  (1856);  Johnston  v.  Rus- 
sell, 37  Cal.  670  (1869);  Dewees  r. 
Miller,  5  Harr.  (Del.)  347  (1851); 
Porter  v.  Sawyer,  1  Harr.   (Del.)   517 

(1832);    Griffith   v.   Pearce,   4    Houst. 

(Del.)     209     (1870);     Richardson    v. 

Kelly,  85  111.  491   (1877):   Petillon  v. 

Hippie,   90    111.   420    (1878);    Trenton, 

etc.  Ins.  Co.  v.  Johnson,  24  N.  J.  L. 


9S2 


CH.  XX.] 


JTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§   341. 


tial  difference  between  a  wager  contract  and  a  contract  not  a  wager 
is  whether  there  is  an  intent  to  deliver  the  property  sold.1  Even 
though  the  original  intent  was  not  to  deliver,  yet  a  subsequent  actual 
sale  and  purchase  validates  the  transaction.2  "In  order  to  invali- 
date a  contract  as  a  wagering  one,  both  parties  must  intend  that 
instead  of  the  delivery  of  the  article  there  shall  be  a  mere  payment 


.",:•;  (1S54) ;  Dunman  v.  Strother,  1 
Tex.  89  (1846);  McElroy  v.  Carmi- 
chael,  6  Tex.  454  (1851);  Wheeler 
v.  Friend,  22  Tex.  683  (1859);  Monroe 
v.  Smelly,  25  Tex.  586  (1860).  I  ■ 
tra:  In  Pennsylvania — Edgell  v.  Mc- 
Laughlin, G  Whart.  176  (1841);  Phil- 
lips r.  Ives,  1  Rawle,  36  (1828); 
Brua's  Appeal,  55  Pa.  St.  294  (1867); 
in  Vermont — Collamer  v.   Day,   2  Vt. 

144  (1829);  Tarleton  v.  Baker,  18  Vt. 
9  (184:3);  in  New  Hampshire — Clark 
r.  Gibson,  12  N.  H.  3SG  (1841);  Win- 
chester v.  Nutter,  52  N.  H.  507 
(]  72);  in  Maine — McDonough  v. 
Webster,  68  Me.  530  (1878);  Gilmore 
v.  Woodcock,  69  Me.  118  (1879);  Mis- 
souri— Waterman  v.  Buckland,  1  Mo. 
App.  45  (1876);  and  Massachusetts — 
Ball  v.  Gilbert,  53  Mass.  397  (1S47); 
Babcock  v.  Thompson,  20  Mass.  446 
(1826);    Sampson  v.  Shaw,  101  Mass. 

145  (1S69).  The  supreme  court  of 
the  United  States  said,  in  Irwin  v. 
Williar,  110  U.  S.  499  (1884):  "In 
England  it  is  held  that  the  conti 
although  wagers,  were  not  void  at 
common  law,  .  .  .  while  generally, 
in  this  country,  all  wagering  contracts 
are  held  to  be  illegal  and  void  as 
against  public  policy,"  citing  Dickson 
v.  Thomas,  97  Pa.  St.  278  (1881); 
Gregory  v.  Wendell,  40  Mich.  432 
(1879);  Lyon  v.  Culbertson,  83  111. 
33  (1876);  Melchert  v.  American  U. 
Tel.  Co.,  3  McCrary,  521  (1882);  s.  a, 
11  Fed.  Rep.  193  and  note;  Barnard 
v.  Backhaus,  52  Wis.  593  (1881) ;  Love 
v.  Harvey,  114  Mass.  80  (1873);  Em- 
brey  v.  Jemison,  131  U.  S.  336  (1889). 
A  contract  for  the  sale  and  purchase 
of  stocks  with  no  intent  of  delivery, 
but  merely  to  pay  differences,  is  il- 
legal.   Re  Gieve,  [1899]  1  Q.  B.  794. 

l  Roundtree  v.  Smith,  108  U.  S.  269 

9S3 


(1883);  Re  Hunt,  26  Fed.  Rep.  739 
(1886).  Mr.  Dewey  (Contracts  for 
Future  Delivery  and  Commercial 
Wagers,  p.  28)  states  the  rule  accu- 
rately as  follows:  "Where  the  parties 
to  a  contract  in  the  form  of  a  sale 
agree  expressly  or  by  implication,  at 
the  time  it  is  made,  that  the  contract 
is  not  to  be  enforced,  that  no  delivery 
is  to  be  made,  but  the  contract  is  to 
be  settled  by  the  payment  of  the  dif- 
ference between  the  contract  price 
and  the  market  price  at  a  given  time 
in  the  future,  such  a  transaction  is  a 
wager,"  citing  many  cases.  If  there 
is  an  intent  to  deliver,  then  the 
transaction  is  legal,  though  the  par- 
ties "exercise  the  option  of  settling 
the  difference  in  price,  rather  than 
make  delivery  of  the  property."  Ward 
V.  Vosburgh,  31  Fed.  Rep.  12  (1887). 
As  regards  sales  and  margins  see 
§  457,  infra.  In  Indiana,  it  was  held 
that  a  note  given  in  New  York  to  set- 
tle a  gambling  cotton  debt  was  gov- 
erned by  New  York  laws  as  to  its  le- 
gality. Sondheim  v.  Gilbert,  117  Ind. 
71  (1888).  An  order  from  a  person 
in  Tennessee  to  New  York  stock  brok- 
ers to  buy  or  sell  stock  on  the  New 
York  Stock  Exchange  is  governed  by 
the  law  of  New  York  as  to  its  legality. 
Berry  v.  Chase,  146  Fed.  Rep.  625 
(1906). 

2  In  re  Taylor,  etc.,  192  Pa.  St.  304 
(1899).  Where  the  broker  actually 
buys  the  securities  for  the  customer 
the  transaction  is  not  gambling,  even 
though  the  securities  are  afterwards 
resold,  and  where  the  purchaser  takes 
up  stocks  still  held  by  the  broker  he 
legalizes  all  the  past  transactions. 
Young  v.  Glendenning,  194  Pa.  St.  550 
(1900). 


§  341.]  CONTRACTS  TO  SELL — GAMBLING  SAL]  [CH.  XX. 

of  the  difference  between  the  contrad  and  the  markel  price."1  A 
sale  for  future  delivery,  although  a  "short"  sale,  is  aol  a  gambling 
contract  per  se.2  An  "option,"  "put,"  "call,"  '\<tru<l«llr,''  or  other 
similar  stock-exchange  contract,  may  be  made  with  an  intent  to 
actually  deliver  the  stock,  and,  if  so,  arc  unobjectionable  and  are 
enforceable.8 

The  fact  that  stock  transactions   were  carried  on  by  "margins" 
is  no  evidence  that   they   were  gambling  contracts,4    excepting   in 

i  Clews  v.  Jamieson,  182  U.  S.  461,  by  purchasing  them  after  making  the 

489(1901).  contract."       See     also     §457,     infra. 

z  Clews  v.  Jamieson,  182  U.  S.  4G1,  There   are   many   cases    to    the   same 

489  (1901).  effect.    See  Noyes  v.  Spaulding,  27  Vt. 

:i  For  definitions  of  these  terms,  see  420  (1S55);  Shales  v.  Seignoret.  1  Ld. 

§  445,  n.,  infra.    A  "put"  is  not  per  se  Kayni.   110  (1700);  Frost  v.  Clarkson, 

conclusive  evidence  of  an   intent   not  7  Cow.  25    (1827);    Dewey,  Contracts 

to  deliver.     Bigelow   v.   Benedict,   70  for  Future  Delivery.,  p.  ;i7;    Thacker 

N.  Y.  202    (1877).     A  "straddle"  Col-  v.  Hardy,  L.  R.  4  Q.  B.  D.  685  (1878), 

lows  the  same  rule.     The  parties  may  holding  that,  if  the  intent  at  the  time 

have    intended   to   deliver   the   stock,  of  buying  was  to  deliver,  it  is  not  a 

Harris    v.    Tumbridge,    83    N.    Y.    92  wager,  even  though  that  intent  be  af- 

(1880);    Story  v.    Salomon,  71   N.   Y.  terwards  i             d.     As  to  the  legality 

420    (1877).     Cf.  Ex  parte  Young,   6  of  a  "corner,"  see  §  621b,  infra.  Where 

Biss.   53    (1874);    s.   c,   30   Fed.   Cas.  there   is   evidence  of   some   intent   to 

828;    Webster  v.  Sturges,   7   111.  App.  deliver,   the   transaction   is   not   gam- 

560    (1880);    Tenney   v.   Foote,    4    111.  bling.      Cothran   r.   Ellis,   125    111.   496 

App.    594    (1879);    Lyon    v.    Culbert-  (188S).      A    sale    delivery    to    be    in 

son,  83  111.  33  (1876);  Gilbert  v.  Gau-  twelve  months,  or,  if  vendor  wishes, 

ger,  8  Biss.  214   (1878);  s.  c,  10  Fed.  before   then,   is  not  a  gambling  con- 

Cas.  345.     A  short  sale  is  not  per  se  tract.      Perryman   v.   Wolffe,    93    Ala. 

a   wager   nor   is    it   presumed    to   be.  290  (1890). 

Maxton    v.    Gheen,    75    Pa.    St.    166  -i  Sawyer  v.  Taggart,  14  Bush  (Ky.) 

(1874);    Hess  v.   Rau,   95   N.   Y.   359  727     (1879);    Wall    v.    Schneider,    59 

(1884);   Knowlton  v.  Fitch,  52  N.  Y.  Wis.    352    (1884);    Bartlett   v.    Smith, 

288   (1873);  White  v.  Smith,  54  N.  Y.  13  Fed.  Rep.  263   (1882);   Whitesides 

522  (1874);  Cameron  r.  Durkheim,  55  v.   Hunt,   97   Ind.   191    (1884);    Union 

N.  Y.  425  (1874);  Third  Nat.  Bank  v.  Nat.  Bank  v.  Carr,  15  Fed.  Rep.  438 

Harrison,    10    Fed.    Rep.   243    (1882).  (1S83);    Hatch  v.   Douglas,   48   Conn. 

These  decisions  rest  upon  the  princi-  116   (1880).     A  purchase  of  stock  on 

pie   of  law   laid   down   in   Stanton  v.  margin   is   net   neoessarily  gambling, 

Small,  3  Sandf.   230    (1849),   that  "a  but  is  gambling  if  there  is  no  inten- 

contract  for  the  sale  of  goods  to  be  de-  tion  to  deliver  but  merely  to   settle 

livered  at  a  future  day  is  not  invali-  the   loss   or   gain.     Wagner   v.   Hilde- 

dated    by    the    circumstance    that    at  brand,  187  Pa.  St.  136   (1898).     Many 

the  time   of  the  contract  the  vendor  other   cases   do  not   directly   pass   on 

neither  has  the  goods  in  his  posses-  this  question,  but  assume  that  the  de- 

sion,   nor  has   entered   into  any  con-  posit  of  a  margin,  as  a  security  to  the 

tract  to  buy  them,  nor  has  any  rea-  broker,  does  not  prove  an  intent  not 

sonable  expectation  of  becoming  pos-  to  have  a  delivery  of  the  stock.  Where 

sessed  of  them  at  the  time  appointed  the  customer  called  for  the  stock,  and 

for  delivering  them,   otherwise  than  it  is  tendered  to  him,  the  broker  may 

984 


CH.  XX.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§   341. 


Maryland  and  Xew  Jersey.  In  these  states  this  fact  alone  seems  to 
be  sufficient  evidence  of  a  wager.1  A  cotton  mill  may  purchase 
cotton  to  be  delivered  in  the  future  and  may  put  up  a  margin  to 
carry  the  contract.2  A  wager  contract  is  not  proved  by  the  fact 
that  the  party  selling  stock  to  be  delivered  at  a  future  time  intends 
to  purchase  that  amount  of  stock  in  time  for  the  delivery,  or  vice 
versa.3  "An  executory  contract  for  the  sale  of  goods  for  future  de- 
livery is  not  infected  with  the  quality  of  a  wager  by  reason  of  the 
fact  that  at  its  date  the  vendor  had  not  the  goods,  and  had  not  en- 
tered into  any  arrangement  to  provide  them,  and  had  no  expecta- 
tion of  receiving  them,  unless  by  subsequently  going  into  the  mar- 


recover  the  price,  even  though  the 
stock  was  first  bought  on  a  margin. 
Anthony  p.  Unangst,  174  Pa.  St.  10 
(1896).  Transactions  on  margins  are 
not  necessarily  gambling.  Hopkins 
v.  O'Kane,  1C9  Pa.  St.  478  (1895).  But 
see  Ruchizky  v.  De  Haven,  97  Pa.  St. 
202  (1881);  Dickson  v.  Thomas,  97 
Pa.  St.  278  (1881);  Fareira  r.  Gabell, 
89  Pa.  St.  89  (1879) ;  Maxton  v.  Gheen, 
75  Pa.  St.  166  (1874);  North  v.  Phil- 
lips, 89  Pa.  St.  250    (1879). 

i  Flagg  v.  Baldwin,  38  N.  J.  Eq. 
219  (1884).  See  also  Justh  v.  Holli- 
day,  2  Mackey,  346  (1883).  A  pur- 
chase on  margin  is  gambling  per  se. 
Cover  r.  Smith,  82  Md.  586  (1896). 
A  broker  cannot  enforce  a  contract 
between  himself  and  his  customer, 
where  the  customer  testifies  that  he 
put  up  $100  as  a  margin  for  one  hun- 
dred shares  of  stock,  and  that  if  the 
stock  advanced  a  point  he  would 
have  a  profit,  and  if  it  declined  a 
point  he  would  lose  the  $100,  and 
also  another  $100  to  be  paid.  Billings- 
lea  v.  Smith,  77  Md.  504   (1893). 

2  Sampson  v.  Camperdown  Cotton 
Mills,  82  Fed.  Rep.   833    (1897). 

3  In  Ashton  r.  Dakin,  7  W.  R.  384 
(1859),  the  court  held  it  not  to  be  a 
wager  contract  to  order  a  broker  to 
buy  stock,  "and  let  the  bargain  be  so 
as  to  the  day  of  payment  that  you 
may  have  an  opportunity  of  reselling 
it  for  me  by  such  a  day,  when  I  ex- 
pect the  market  will  have  risen,  and 
then  you  will  pay  the  seller  for  me 


with  the  money  you  receive  from  the 
purchaser,  and  I  shall  receive  the 
gain  from  you,  if  any,  or  pay  you  the 
loss."  So,  also,  Smith  v.  Bouvier,  70 
Pa.  St.  325  (1872),  holds  that  stocks 
bought  and  sold  upon  speculation  are 
not  necessarily  wager  contracts.  A 
person  may  sell  without  owning  the 
stock,  and  at  time  of  delivery  buy  to 
deliver,  and  yet  the  transaction  be 
not  a  wager,  where  the  jury  finds 
that  there  was  an  intent  to  deliver 
in  both  the  selling  and  buying.  See 
also  Thacker  v.  Hardy,  L.  R.  4  Q.  B. 
D.  685  (1878);  Sawyer  v.  Taggart,  14 
Bush  (Ky.)  727  (1879).  In  Massa- 
chusetts it  is  held  that  the  contract  is 
not  gambling  merely  because  there 
was  an  expectation  that  only  differ- 
ences would  be  settled.  Barnes  v. 
Smith,  159  Mass.  344  (1893).  Where 
the  seller  of  grain  does  not  intend  to 
deliver  the  property  sold,  but  simply 
to  settle  the  difference  in  price,  the 
transaction  is  illegal  under  a  statute, 
whether  his  brokers  and  the  pur- 
chaser knew  of  his  intention  or  not. 
Margins  lost  in  such  transactions  can- 
not be  recovered  back.  Connor  v. 
Black,  132  Mo.  150  (1896).  A  pur- 
chase of  corn  may  be  legal  although 
made  to  fill  certain  sales  which  the 
party  had  made  previously.  A  mort- 
gage given  to  a  broker  for  advance- 
ments made  in  the  transaction  is 
valid.  Douglas  v.  Smith,  74  Iowa,  468 
(1888). 


9S5 


342.] 


CON  IMBLING  SAL] 


[('II.  XX. 


and  buying  them."  '     A  bona  fide  3ale  of  grain  d<  liverable  in  ;i 
tain   month;  on  a  day  to  be  fixed  by  seller,   is  ao1    a   gamb 
conl  ract.2 

§342.    Statutes  proh  >ager  contracts,  and  also  certain 

stock  contracts. — There  are  two  classes  of  statutes  affecting 
sales   as   regards   their   speculative  character.     One   class   does   do! 
specify  sales  of  stock,  bu1  declares  in  general  terms  thai  all  gam- 
ing and  wagering  contrac  w>id,  thereby  rendering  actions 
for  the           ei-_v  of  money  won  on  Buch  wagers  unsustainable.    Such 

statutes  exist   in    England8  and   New-  York.4     The  se 1  *  1  class  of 

statute-;  j-  more  explicit,  and  prohibits  specified  transactions  in  stock, 
irrespective  of  whether  such  tra      ictions  be  wager  •■"in  or  not 

Statutes  affecting  speculative  sal  -  of  stock  exist  in  many  of  the 
states.     In  Massach  i       are  prohibited ; B  in  Ohio,  sales 

of  stock  for  future  delivery,  which  the  vendor  has  not  on  hand  or 
the  vendee  the  means  to  pay  for;6  in  Qlinois,  all  options  are  made 
gambling  contracts  and  are  yoid;  '  in  Gri  .  short  sales  cannol  be 


1  Conner  v.  Robertson,  37   La.   Ann. 
814  (18S5),  the  court  saying  also  that 
Lorymer    v.    Smith,    1    Barn.    &    C.    1 
(1822),  has  been  repeatedly  overru 
See  also  supra,  p.  984,  n.  3. 

2  White  v.  Barber,  123  U.  S.  392 
(1887). 

38  &  9  Vict.,  c.  109,  §18;  Grize- 
wood  v.  Blane,  11  C.  B.  526  0  1  >. 
Agreements  between  buyers  and  sell- 
ers of  stock  to  pay  or  receive  the  dif- 
ferences between  their  prices  on  one 
day  and  their  prices  on  another  day 
are  gaming  and  wagering  transac- 
tions within  the  meaning  of  the  stat- 
ute. Thacker  v.  Hardy,  L.  R.  4  Q.  B. 
D.  685  (1878).  The  statute  does  not 
necessarily  affect  "corners"  in  stocks. 
Barry  v.  Croskey,  2  J.  &  H.  1  (1861). 
As  to  the  application  of  this  statute, 
see  also  Heiman  v.  Hardie,  12  Ct.  of 
Sess.  406   (Sc,  4th  ser.,  1885). 

4  1  N.  Y.  Rev.  Stats.  662,  §  8  (vol. 
Ill,  p.  1962,  7th  ed.).  As  applied  to 
stock  cases,  see  Kingsbury  v.  Kir- 
wan,  77  N.  Y.  612  (1879);  Story  v. 
Salomon,  71  N.  Y.  420  (1877);  Har- 
ris r.  Tumbridge,  83  N.  Y.  92  (1880); 
Yerkes  v.  Salomon,  11  Hun,  471 
(1877). 

5  Mass.  Gen.  Stat.,  ch.  105,  §  6.    For 


cases  arising  under   this  and  similar 
s,  see   How.'   v.   Starkweather, 
17     M  10     (1821);     Sargent     v. 

Franklin  Ins.  Co.,  25  -Mass.  90  (1829); 
B  i  n  tl  v.  Mead,  9  '  i.  337  ( 1865) ; 
Brigham  v.  Mead,  92  Mass.  245  (1865) ; 
73  Mass.  160  (1856)  ; 
Durant  v.  Burt,  9S  Mass.  161  (1867); 
Brown  v.  Phelps,  103  Mass.  313 
(1869);  Price  v.  Minot,  107  Mass.  49 
(1871);  Colt  v.  Clapp,  127  Mass.  476 
(1879);  Rock  v.  Xicholls,  85  Mass. 
I  ;  Wyman  v.  Fiske,  85  Mass. 
238  (1801);  Pratt  v.  American  Bell 
-ph.  Co.,  141  Mass.  225  (1886),  fol- 
lowing the  decisions  under  the  New 
York  statute,  from  which  the  statute 
in  question  was  copied. 

In  Pennsylvania,  by  statute,  sales 
for  future  delivery  were  formerly  pro- 
hibited. See  Pa.  Laws  1841,  p.  398, 
§  6.  This  statute,  however,  has  been 
repealed.  For  decisions,  see  Krause 
v.  Setley,  2  Phila.  Rep.  32  (1856); 
Chillas  v.  Snyder,  1  Phila.  Rep.  289 
(1S52). 

6  Ohio  Laws,  1885,  p.  254.  Gam- 
bling contract  in  grain.  Lester  v. 
Buel,  49  Ohio  St.  240  (1892). 

7  111.  Rev.  Stat.  (Starr  &  C),  p.  791, 
IF  178.     For  decisions,  see  Wolcott  v. 


9S6 


CH.  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  342. 


enforced.1  A  state  statute  declaring  illegal  all  options  to  sell  or  buy 
at  a  future  time  is  constitutional,  even  though  it  may  interfere  with 
what  would  otherwise  be  legitimate  contracts.2  The  California  con- 
stitutional provision  making  void  all  contracts  for  sales  of  stock  on 
a  margin  and  providing  for  recovery  back  of  money  paid  on  such 
contracts  is  constitutional,  even  though  it  applies  to  bona  fide  trans- 
actions as  well  as  gambling  transactions.3  In  New  York,  the  statute 
of  1S12,4  re-enacted  in  the  Revised  Statutes  of  1828,5  prohibiting 
short  sales,  was  repealed  by  implication  by  the  statute  of  1858,  de- 
claring the  sale  to  be  valid  though  there  be  no  consideration  or  pay- 
ment of  consideration,  or  no  ownership  by  the  vendor  of  such  stock 
at  the  time  of  the  sale.  Various  other  states  have  statutes  on  this 
subject.0     Wbere  a  customer  gives  u,  his  broker  in  Missouri  an  order 


Heath,  78  111.  433    (1875);   Pickering 
v.   Cease,   79    111.   328    (1875);    Pixley 
V.    Boynton,   79   111.   351    (1875);    San- 
born v.  Benedict,  78  111.   309   (1875); 
Cole   v.   Milmine,   88   111.   349    (1878). 
This  statute  is  restricted  by  the  deci- 
sions to  cases  where  the  transaction 
is    to    be    "adjusted    only    by    differ- 
ences."    But  see  Ward   v.  Vosburgh, 
31  Fed.  Rep.  12  (1887).    A  contract  to 
repurchase  stock  sold,  if  the  purchaser 
desires,  is  not  invalid  under  a  statute 
prohibiting   option   contracts   for   the 
sale  of  stock  for  future  delivery.    Os- 
good  v.   Skinner,   211  111.   229    (1904). 
In   Illinois,   by  statute,   an  option   to 
buy   coal    at    a   future   time   is   void. 
Osgood  v.  Bauder,  75  Iowa,  550  (1888). 
A  sale  with  an  agreement  of  the  ven- 
dor   to    take    the   stock   back   at   the 
same  price  and  interest  within  a  cer- 
tain time  if  the  vendee  desired  is  not 
a  gambling  contract  under  the  Illinois 
statute.     Richter   v.    Frank,    41    Fed. 
Rep.   859    (1890).     Concerning  an  in- 
dictment  under  the   Illinois  law   for 
keeping  a  "bucket  shop,"  see  Soby  v. 
People,  134  111.  66  (1890).    In  Illinois, 
by  statute,  a  "put"  is  void.    Schneider 
v.    Turner,    130   111.    28    (1889).     The 
statute  against  cornering  the  market 
applies  to  a  purchase  of  corn  to  raise 
its  price.     Foss  v.  Cummings,  149  111. 
353   (1894). 

l  Ga.  Code,  §  2638. 


987 


2  Booth    v.    Illinois,    1S4    U.    S.   425 
(1902). 

3  Otis  v.  Parker,  187  U.  S.  606 
(1903).  A  suit  by  a  customer  against 
a  broker  to  recover  back  moneys  paid 
on  gambling  stock  transactions  was 
sustained  under  the  California  statute 
in  Stilwell  v.  Cutter,  146  Cal.  657 
(1905).  In  California  the  relation 
of  a  broker  and  customer  is  that  of 
vendor  and  vendee,  and  hence  a  com- 
pleted delivery  of  stock  is  not  in  viola- 
tion of  the  constitutional  provision 
against  sales  of  stock  on  margin.  Con- 
radt  v.   Lepper,  13  Wyo.  473    (1905). 

4  2  R.  L.  187,    §  18. 

r>  1  R.  S.,  p.  710,  §  6.  For  cases  com- 
ing under  this  statute,  see  Dykers  v. 
Townsend,  24  N.  Y.  57  (1861),  disap- 
proving Stebbins  v.  Leowolf,  57  Mass. 
137,  143  (1849).  See  also  Thompson 
v.  Alger,  53  Mass.  428  (1847),  on  the 
New  York  statute;  Staples  v.  Gould, 
9  N.  Y.  520  (1854),  (criticising  Gram 
v.  Stebbins,  6  Paige,  124—1836); 
Frost  v.  Clarkson,  7  Cow.  24  (1827); 
Cassard  v.  Hinmann,  14  How.  Pr.  84 
(1856);  aff'd,  1  Bosw.  207.  In  New 
York  a  director  is  prohibited  from 
selling  "short."  Penal  Code,  §  610. 
In  Arkansas  a  broker  and  others  are 
liable  criminally  for  doing  business 
in  futures.  Fortenbury  v.  State,  47 
Ark.  188  (1886). 

c  A  promissory  note  is  void  under 


§  342.] 


CONTRACTS  TO  SELL — GAMBLING  BALES,  ETC. 


I  CI  I.  XX. 


to  buy  stock  and  the  order  is  executed  in  New  fork,  the  Btatute  of 
Missouri  rendering  illegal  the  purchase  of  Btock  withoul  Lntenl  to 
pay  for  the  same  does  no!  apply,  but  the  (-"11111101!  law,  which  i-  pre- 
sumed to  be  the  law  of  New  York,  does  apply,  and  the  transaction 
is  legal.  Moreover,  proof  that  one  of  the  parties  intruded  the 
contracl  to  be  gambling  does  not  invalidate  the  transaction,  and  the 
broker  may  recover  from  the  customer  his  Losses.1  In  California  the 
question  whether  stock  purchased  on  a  margin  violates  the  coi 
tutional  prohibition  is  one  of  fact.2  In  Massachusetts  also  the 
Btatute  enables  the  customer  to  sue  the  broker  for  any  losses,8  but 
the   Tennessee   act  against   gambling    was  had  against  the  broker,  see  Bal- 


in  futures  where  such  note  was  given 
therein.  Snoddy  v.  American  Nat 
Hank,  88  Tenn.  573  (1890).  The  Cali- 
fornia constitution  renders  void  a 
transaction  wherein  a  broker  buys 
stock  for  the  customer  with  the  brok- 
er's money  and  holds  the  stock  as  se- 


lou  v.  Willey,  180  Mass.  502  (  1902). 
In  the  case  of  Davy  r.  Bangs,  17 1 
Mass.  238  (1899),  a  customer  recov- 
ered against  a  broker  the  value  of 
stock  lost  in  a  gambling  contract, 
such  recovery  being  based  on  the 
Massachusetts  statute.     A   suit   by   a 


the  Massachusetts  statute  succeeded 
in  Allen  r.  Fuller,  1S2  Mass.  202 
(1902).  The  Massachusetts  statute 
against  gambling  transactions  in 
stock  was  enforced  in  Marks  v.  Metro- 


curlty  and  charges  the  customer  inter-    customer  to  recover  back  losses  under 

est    and    commissions.      Cashman    r. 

Root,  89  Cal.  373    (1891).     Gambling 

stock  transactions  have  been  held  void 

under  the  Kentucky  statute  in  Lyons 

v.  Hodgen,  90  Ky.  280   (1890). 

l  Edwards,  etc.  Co.  v.  Stevenson,  1G0  politan  Stock  Exchange,  181  Mass. 
Mo.  516  (1901).  A  sale  is  not  gam-  251  (1902),  where  the  defendant  was 
bling  merely  because  one  of  the  par-  to  deliver  certain  stock  at  a  certain 
ties  intended  it  so  to  be;  and  where  price  on  three  days'  notice,  or  by  mu- 
orders  are  given  in  Missouri  to  be  tual  consent  was  to  pay  any  profit 
executed  in  New  York,  the  New  York  thereon  above  that  price,  and,  on  the 
law  governs.  Gaylord  v.  Duryea,  95  other  hand,  the  margin  deposited  was 
Mo.  App.  574  (1902).  A  note  given  to  be  applied  to  any  loss.  And  it  was 
by  a  resident  of  Rhode  Island,  dated  also  enforced  in  Corey  r.  Griffin,  181 
in  Rhode  Island  but  payable  to  brok-    Mass.  229   (1902),  where,  in  order  to 

evade  the  statute,  a  customer  agreed 
to  indemnify  the  defendant  against 
all  damage.  Under  the  Kentucky 
statute  a  customer  may  recover  back 
money  lost  in  gambling  in  stocks. 
Boyd,  etc.  Co.  v.  Coates,  69  S.  W. 
Rep.  1090  (Ky.  1902).  Under  the 
Massachusetts  statute  a  customer  may 
file   a   bill   to   have   a   mortgage   can- 


ers  in  Boston  and  delivered  in  Bos- 
ton, becomes  valid  only  upon  delivery, 
and  hence  its  validity  is  governed  by 
Massachusetts  law.  Winward  v.  Lin- 
coln, 23  R.  I.  476  (1902). 

2  Kullman    v.    Simmens,    104    Cal. 
595    (1894). 

3  Crandell  v.  White,  164  Mass.  54 
(1895).  The  Massachusetts  statute 
enabling  the  principal  to  recover  back  celed,  such  mortgage  having  been  giv- 
money  paid  by  him  to  his  broker  on  en  to  pay  gambling  debts.  Rice  v. 
stock  gambling  contracts  does  not  ap-  Winslow,  182  Mass.  273  (1902).  For 
ply  where  the  broker  actually  bought  a  decision  under  the  Massachusetts 
the  securities  and  the  principal  knew  statute  to  recover  back  money  spent 
it.  Rice  v.  Winslow,  180  Mass.  500  in  connection  with  a  gambling  con- 
(1902).   For  a  case  where  a  recovery    tract,  see  Wheeler  v.  Metropolitan,  etc. 

9S8 


CH.  XX.  J 


CONTRACTS  TO  SELL GAMBLING  SALES,  ETC. 


[§    343. 


a  cause  of  action  given  by  the  statute  for  margins  paid  may  be  re- 
leased after  it  has  accrued.1  In  England  the  statute  of  1734,2  pro- 
hibiting gambling  in  the  public  funds,  was  repealed  in  I860,3  but 
the  statute  of  1S-A5  still  exists.4  The  state  may  make  it  a  criminal 
offense  for  a  person  to  gamble  in  commodities  with  no  intent  to  de- 
liver even  though  the  transactions  are  between  parties  in  two  differ- 
ent states.5  It  is  evident  from  the  history  of  these  statutes  against 
stock  gambling  that  it  is  a  difficult  and  delicate  task  to  frame  a 
statute  that  will  cure  the  evil.  The  great  danger  is  that  any  such 
statute  will  interfere  with  legitimate  transactions — transactions 
which  for  many  years  bave  been  building  the  railways  and  devel- 
oping the  material  resources  of  the  country.6 

§  343.    Test  of  legality  of  stock  transactions. — Although,  as  al- 
ready stated,   stock  sales,   wh<  re  n<>  delivery,  but  merely  a  settle- 


Exchange,  72  N.  H.  315  (1903).  In  a 
suit  by  a  customer  to  recover  losses 
from  a  broker  under  the  Massachu- 
setts statute,  the  broker  is  not  liable 
If  he  actually  purchased  the  securi- 
ties and  afterwards  sold  them  on  the 
order  of  the  plaintiff.  Post  v.  Ice- 
land, 184  Mass.  601   (1904). 

i  Wall  /-.  Metropolitan  Stock  Ex- 
change, 168  Mass.  282   (1897). 

-  7  Geo.  II.,  c.  8,  and  10  Geo.  II., 
c.  8.  For  cases  under  this  statute, 
see  Hewitt  v.  Price,  4  Man.  &  G.  355 
(1842);  Fisher  v.  Price,  11  Beav.  104 
(1848);  Mortimer  v.  McCallan,  6  M.  & 
W.  58  (1840);  Ellsworth  r.  Cole,  2 
M.  &  W.  31  (1836);  Byles  on  Bills, 
15th  ed.,  p.  161;  2  Kent,  Com.,  468, 
note  (i).  The  statute  did  not  apply 
to  stock  in  private  corporations.  Hib- 
blewhite  v.  McMorine,  5  M.  &  W.  462 
(1839),  overruling  Bryan  v.  Lewis, 
Ryan  &  M.  386  (1826). 

3  23  &  24  Vict.,  c.  28. 

4  Where  both  parties  to  a  transac- 
tion on  the  stock  exchange  intend 
that  no  stocks  shall  be  delivered,  but 
only  that  "differences"  shall  be  paid, 
the  fact  that  the  contract  provides 
that  either  party  may  require  com- 
pletion of  the  purchase  and  delivery 
or  receipt  of  the  stock  does  not  pre- 
vent the  transaction  from  being  a 
gaming  and  wagering  contract  within 


the  Gaming  Act,  1845  (8  &  9  Vict,  c. 
109),  and  therefore  void.  Universal, 
etc.  Exchange  v.  Strachan,  [1896]  A. 
C.  166,  holding  also  that  securities  de- 
posited in  connection  with  such  a  con- 
tract may  be  recovered  back. 

5  State  v.  Clayton,  138  N.  C.  732 
(1905).  In  Anderson  r.  State,  58  S.  E. 
Rep.  401  (Ga.  1907),  a  person  was 
convicted  for  violating  the  "Anti 
Bucket-Shop  Law"  of  Georgia. 

8  Dos  Passos,  Stock  Brokers  & 
Stock  Exch.  (1882),  p.  405,  says:  "The 
history  of  these  stock-jobbing  acts 
seems  to  prove  conclusively  that  they 
have  never  been  effective  in  prevent- 
ing speculations  in  stocks.  In  almost 
every  instance  in  which  they  have 
been  adopted,  after  lingering  for  years 
on  the  books,  scorned  and  violated  by 
'the  unbridled  and  defiant  spirit  of 
speculation,'  despite  the  earnest  ef- 
forts of  the  courts  to  enforce  them, 
they  have  finally  been  repealed.  It 
is,  perhaps,  better  to  allow  the  evil  to 
correct  itself,  as  it  surely  does,  than 
to  bring  the  administration  of  jus- 
tice into  confempt  by  filling  the  books 
with  useless  laws,  which  are  at  all 
times  openly  violated  and  laughed  at, 
and  which  seem  hardly  more  effective 
to  prevent  the  practices  at  which  they 
are  aimed  than  legislation  directed 
against  the  laws  of  nature." 


989 


§844.]  CONTRACTS  TO  SELL— GAMBLING  8A]  PC.  [CII.  XX. 

ment  of  gain  or  1  intended,  are   \\;i        .   and  although  such 

wagers  are  roid  |>y  the  statut(  -  ates,  and  by  tin    rul<  -  of 

public  policy  in  others,3  ye1  difficulty  is  ex]  iced  in  determining 
whether  the  parties  really  intended  to  deliver  the  stock  or  to  pay 
differences.  The  question  of  intenl  is  always  difficull  of  ascertain- 
ment and  of  positive  proof.  [1  is  pr<  eminently  a  question  for  the 
jury.  Ii  Is  accordingly  found  in  mosl  of  the  cases  involving  the 
question  whether  the  transaction  was  stock  gambling,  thai  the  court 
submitted  to  the  jury  whether  an  actual  delivery  of  the  stock  was 
intended  or  Dot.  It'  there  was  no  such  intent,  then,  as  a  matter  of 
law,  the  transaction  waa  a  wager.  If  a  wager,  it  is,  Ijy  statutes  in 
some  states,  by  public  policy  in  others,  a  void  transaction,  and  the 
parties  have  only  the  rights  given  them  on  void  contr  The  fact 

that  the  customer  is  speculating  does  not  prove  thai  he  i-  dealing 
in  differences,  nor  the  fact  that  he  buys  on  margin  nor  the  fad  that 
be  buys  option  5Te1  at  common  law  a  contrad  to  purchase  stock 
on  margin  with  no  intent  on  either  side  to  deliver  and  pay  for  the 
same,  is  a  wagering  contrad  and  is  illegal,  and  the  broker  cannot 
recover  losses  from  the  purchaser.4  At  common  law  and  by  statute 
in  Massachusetts  a  broker  cannot  recover  commissions  where  both 
parties  contemplated  buying  and  selling  on  a  margin  withoul  the 
actual  purchase  and  retaining  of  the  stuck  with  a  view  to  a  subse- 
quent sale.'' 

§  344.  When  intent  to  deliver  is  quest  ion  for  the  jury  and  ivhen 
not. — The  question  whether  the  parties  to  an  executory  sale  of  stock 
intended  to  actually  deliver  the  stock,  or  merely  to  pay  and  receive 
the  gain  or  loss,  may  be  for  the  jury.6  In  the  application  of  this 
rule,  however,  great  care  is  to  be  exercised  in  submitting  the  question 
and  charging  the  jury.  The  parties  may  be  asked  directly  whether 
t!i(  y  intended  that  a  delivery  should  be  made.7     If  one  party  intended 

i  Particularly  in  Pennsylvania  are  5  Beers  v.  Wardwell,  84  N.  E.  Rep. 

such    stock    wagers    void    by    public  306   (Mass.  1908). 

policy.     North  v.  Phillips,  89  Pa.  St.  6  Whitesides   v.   Hunt,    97   Ind.   191 

250   (1879);   Fareira  v.  Gabell,  89  Pa.  (1884);  Gregory  v.  Wendell,  39  Mich. 

St.  89  (1879);  Ruchizky  v.  De  Haven,  337   (1878);  s.  c,  40  Mich.  432.     And 

97    Pa.    St.    202    (1881);    Dickson   v.  all  the  circumstances  are  to  be  taken 

Thomas,  97  Pa.  St.  278  (1881) ;  Brua's  into  consideration.    Beveridge  v.  Hew- 

Appeal,  55   Pa.   St.   294    (1867).  itt,  8  111.  App.  467    (1881);   Hawley  v. 

2  See    §8  345,    346,   infra.     See   also  Bibb,  69  Ala.  52  (1881) ;  Brand  v.  Hen- 
Greenhood,   Pub.   Policy,   pp.   230-237.  derson,  107  111.  141    (1883);    Barnard 

3  Kendall  v.  Fries,  71  N.  J.  L.  401  v.    Backhaus,    52    Wis.    593     (1881); 
(1904).  Kirkpatrick  v.  Bonsall,  72  Pa.  St.  155 

4Gibney  v.  Olivette,  82  N.  E.  Rep.     (1872). 
41  (Mass.  1907).  7  Yerkes   v.   Salomon,   11  Hun,   471 

990 


CH.  XX.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§   344. 


to  have  a  delivery,  the  transaction  is  valid,  even  though  the  other 
party  intended  otherwise.1  As  between  a  party  and  his  broker,  how- 
ever, greater  difficulty  arises,  and  in  some  jurisdictions  the  intent 
between  them  governs  their  relations,  irrespective  of  the  intent  of 
the  party  dealing  with  them.-  The  financial  responsibility  of  the 
parties,3  and  their  other  transactions  in  the  same  line,4  are  admis- 


(1877);  Cassard  v.  Hinman,  6  Bosw. 
9,  14  (18G0) ;  First  Nat.  Bank  v.  Oska- 
loosa  Packing  Co.,  66  Iowa,  41 
(1885);  Ex  parte  Young,  6  Biss.  53 
(1874)  ;  s.  C,  30  Fed.  Cas.  828.  In  the 
case  of  Porter  v.  Viets,  1  Biss.  177 
(1857);  s.  c,  19  Fed.  Cas.  1077,  the 
court  refused  to  admit  parol  evidence 
that  the  contract  was  gambling,  f<  r 
the  reason  that  it  varied  a  written 
contract. 

i  Wall  v.  Schneider,  59  Wis. 
(1884);  Irwin  v.  Williar,  110  U.  S. 
499  (18S4);  Whitesides  V.  Hunt,  97 
Ind.  191  (18S4);  Pixlej  i?.  Boynton, 
79  111.  351  (1875);  Ward  r.  Vosburgh, 
31  Fed.  R(  p.  1-  (1887);  Powell  v. 
McCord,  121  111.  360  (1887);  Lehman 
v.  Stra  r,  2  Woods,  554  (187.r, ) ; 

s.  <■..  L5  F<  1  Cas.  254;  Conner  v.  Rob- 
ertson, 37  La.  Ann.  81 1  i  1 385).  Contra, 
Fareira  v.  Gabell,  89  Pa.  St.  89  (1879). 
Cf.  Beveridge  v.  Hewitt,  8  111.  App. 
467  (1881).  In  Tennessee,  by  statute, 
dealing  in  futures  is  gambling,  if 
either  party  does  not  intend  to  de- 
liver. See  McGrew  v.  City  Produce 
Exchange,  85  Tenn.  572  (1SS7).  If 
either  of  the  parties  intends,  at  the 
close 'of  a  series  of  transactions  in 
buying  and  selling  stocks,  to  accept 
or  make  actual  delivery  of  the  re- 
maining stock,  the  transaction  is  not 
gambling,  as  between  the  customer 
and  broker,  although  the  buying  and 
selling  are  done  upon  a  margin  in 
the  hope  of  profit  from  the  fluctua- 
tions. Dillaway  v.  Alden,  88  Me.  230 
(1895).  The  intent  of  the  principal 
not  to  have  deliveries  but  to  pay  dif- 
ferences does  not  invalidate  a  note 
given  in  settlement,  where  there  is 
no  proof  of  any  such  intent  on  the 
part  of  the  brokers.    Winward  v.  Lin- 


coln, 23  R.  I.  476  (1902).  A  gambling 
intent  on  the  part  of  one  party  is 
immaterial  where  there  was  no  such 
intent  on  the  part  of  the  other  party. 
McCarthy  v.  Weare,  etc.  Co.,  87  Minn. 
11  (1902).  The  fact  that  a  broker 
advanced  all  the  money  except  the 
margin,  and  never  delivered  any  stock 
excepting  on  one  occasion  and  re- 
mitted gains  and  collected  losses  on 
various  occasions,  is  evidence  to 
prove  that  the  contra)  I  was  a  gam- 
Ming  contract.  Sharp  v.  Stalker,  63 
N.  .1.  Eq.  596  (1902). 

2  See  §§  345,  346,  infra. 

•■:  Kirkpatrick  v.  Bonsall,  72  Pa.  St. 
(  L872)  ;  First  Nat.  Hank  v.  Oska- 
loosa  Packing  Co.,  66  Iowa,  41  (1885) ; 
Green,  7  Biss.  338  (1877);  s.  c,  10 
Fed.  Cas.  1084;  Beveridge  v.  Hewitt, 
8  111.  App.  467  (1881);  Justh  v.  Holli- 
day,  2  Mackey,  346  (1883);  North  v. 
Phillips,  89  Pa.  St.  250  (1S79);  Pat- 
terson's Appeal,  16  Rep.  59  (Pa. 
1883);  Flagg  v.  Baldwin,  38  N.  J.  Eq. 
219  (18S4);  Colderwood  v.  McCrea,  11 
111.  App.  543  (1882).  The  fact  that 
one  of  the  parties  is  already  under 
obligation  to  other  parties  to  purchase 
cotton  several  times  greater  in  value 
than  his  fortune  is  evidence  of  an  in- 
tent to  gamble.  Beadles  v.  McElrath, 
85  Ky.  230  (1887).  The  fact  that  a 
party  is  financially  unable  to  pay  for 
property  is  evidence  that  the  con- 
tract is  gambling.  Myers  v.  Tobias, 
16  Atl.  Rep.  641   (Pa.  1889). 

4  Kirkpatrick  v.  Bonsall,  72  Pa.  St. 
155  (1872);  Beveridge  v.  Hewitt,  8 
111.  App.  467  (1881);  Irwin  v.  Williar, 
110  U.  S.  499  (1884).  Contra,  Tom- 
blin  v.  Callen,  69  Iowa,  229  (1886). 
The  jury,  in  passing  upon  the  defense 
to  a  note  that  it  was  given  in  a  stock- 


991 


§  345.] 


CONTRACTS  TO  SELL — GAMBLING  BALES,  ETC. 


[OH.  XX. 


sible  as  evidence  as  to  whether  there  waa  an  intent  to  deliver  the 
stock  or  merely  to  pay  the  gain  or  loss.  The  burden  of  proving  thai 
ock  transaction  lb  a  gambling  contracl  ia  upon  him  who  affirms  it.1 
§  34  5.  Gambling  stock  contracts  as  ajf<  ding  the  relations  bettvcen 
the  principal  and  his  broker.  —  A  broker  La  hut  an  agent  of  his  prin- 
cipal. As  such  he  may  hold  the  principal  Liable  for  commissions 
and  for  losses  paid  on  stock  transactions  where  those  stock  trans- 
actions are  legitimate  and  Legal.  Where,  however,  the  stock  con- 
tracts are  of  a  wager  or  gambling  nature,  a  more  difficult  question 
arises,  and  tin-  decisions  are  irreconcilable*  In  England,  in  ls7^. 
Judge  Lindley,  in  Thacker  r.  Eardy,2  a  carefully-considered  ca 
held  that,  where  the  principal  has  been  carrying  en  gambling  trans- 
actions, he  cannol  » scape  or  repudiate  his  liabilities  to  bis  broker  in 
those  transaction-,  even  though  the  latter  knew  of  the  gambling 
character  of  the  business.  The  principal  is  Liable  to  his  broker  as 
though  the  transactions  wen-  free  from  such  objections.  This  is 
the  well .  atablished  rule  in   England.8 


gambling  operation,  may  consider  all 
the  acts  and  accounts  and  the  actual 
dealings.  Gaw  v.  Bennett,  153  Pa.  St. 
247  (1893).  As  to  the  competency  of 
evidence  herein,  and  that  evidence  of 
custom  of  settling  by  differences  is 
incompetent,  see  Scofield  r.  Black- 
marr,  4  Atl.  Rep.  208  (Pa.  18S6). 
Proof  of  intent  to  deliver  may  be  by 
the  conduct  of  the  parties  as  well  as 
the  contract.  Press  v.  Duncan,  100 
Iowa,  355    (1896). 

l  Dewey,  Contracts  for  Future  De- 
livery, p.  207,  says:  "All  the  cases  ex- 
cept Barnard  v.  Backhaus,  52  Wis. 
593  (1881);  Cobb  v.  Prell,  15  Fed. 
Rep.  774  (1883) ;  Beveridge  r.  Hewitt, 
8  111.  App.  467  (1881);  Stebbins  v. 
Leowolf,  57  Mass.  137  (1849),  and 
possibly  Chandler's  Case,  Ex  parte 
Young,  6  Biss.  53  (1874) ;  S.  c,  30  Fed. 
Cas.  828,  hold  that  these  contracts  are 
presuming  to  be  bona  fide;  and  in 
order  to  show  them  to  have  been  used 
as  covers  for  wagers,  an  agreement  to 
that  effect  must  appear  to  have  been 
made.  According  to  these  excepted 
cases,  option  contracts  are  presumed 
to  be  invalid,  and  proof  must  be  made 
that  they  are  bona  fide."  See  also 
Dewey,     Contracts     for     Future     De- 


livery, p.  46.  In  Illinois  the  burden 
of  proof  is  on  the  defendant  to  prove 
imbling  intent  on  the  part  of  both 
parties.  In  Wisconsin  a  contrary  rule 
seems  to  prevail.  See  Ward  v.  Vos- 
burgh,  31  Fed.  Rep.  12  (18S7). 

-  L.  R.  4  Q.  B.  D.  685. 

8  Be  Hart,  5  W.  N.  95  (1870); 
Cooper  v.  Neil,  13  W.  N.  128  (1878); 
Ex  parte  Rogers,  L.  R.  15  Ch.  D.  207 
(1880);  Faikney  v.  Rcynous,  4  Burr. 
2069  (1767);  Jessopp  v.  Lutwyche,  10 
Exch.  614  (1854);  Knight  v.  Cambers, 
15  C.  B.  562  (1855);  Knight  v.  Fitch, 
15  C.  B.  566  (1855);  Lyne  r.  Siesfeld, 
1  H.  &  N.  278  (1856);  Rosewarne  v. 
Billing,  15  C.  B.  (N.  S.)  316  (1863). 
In  Pidgeon  i\  Burslem,  3  Exch.  465 
(1849),  the  court  says  expressly: 
"The  case  differs  altogether  from 
those  in  which  the  contract  is  for- 
bidden, as  under  the  acts  against 
stock-jobbing,  or  where  the  purpose 
for  which  the  money  was  paid  was  il- 
legal." Contra,  Byers  v.  Beattie,  Ir. 
Rep.  2  C.  L.  220  (1867).  A  contract 
is  not  a  gaming  contract,  and  a  broker 
may  recover  the  balance  due  him  on 
account,  although  the  customer,  a  per- 
son of  small  means,  instructed  the 
broker   to  make  purchases  and  sales 


992 


CH.  XX.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  346. 


§  34G.  In  this  country  an  opposite  rule  prevails  for  the  most  part. 
The  great  weight  of  authority  holds  that,  where  the  broker  has 
knowledge  of  the  purpose  to  gamble  in  stocks  and  aids  in  carrying 
out  that  purpose,  he  cannot  recover  for  sen-ices  rendered  or  losses 
incurred  and  paid  by  himself.1  A  few  cast  -  hold  to  the  same  effect 
as  the  English  rule-  Many  cases  which  seem  to  favor  the  English 
rule  do  so  only  by  dicta,  inasmuch  as  the  trans actions  involved  in 
ire  held  not  to  be  wager  contracts.3  In  Pennsylvania 
and  New  Jersey  the  American  rule,  is  rigidly  enforced.  The  broker 
is  held  to  be  dealing  as  a  principal,  not  as  an  agent,  in  all  stock- 


and  advanced  only  a  small  part  of 
the  purchase-money,  the  balance  being 
obtained  by  the  broker  by  pledge  of 
the  security,  and  the  customer  ne 
asking  for  delivery  of  the  stock,  and, 
as  the  broker  well  knew,  did  not  pur- 
ise  as  an  investment,  but  as  a 
culation,  to  sell  again  when  the 
price  went  up,  and  the  broker  was 
paid  by  commissions  on  the  ti 
tions.  Forget  v.  Ostigny,  [1895]  A.  C. 
318.  A  customer  may  recover  from 
his  broker  margins  which  he  de- 
posited, the  transactions  having  re- 
sulted in  a  profit  to  the  customer.  Re 
Cronmire,  [1898]  2  Q.  B.  383. 

i  Irwin  13.  Williar,  110  U.  S.  499,  510 
(18S4);  Flagg  v.  Gilpin,  17  R.  I.  10 
(1890);  McLean  r.  Stuvc,  15  Mo.  App. 
317  (1884),  per  Thompson,  J.;  Ream 
r.   Hamilton,  15  Mo.  77    (1S84). 

Cf.  Kent  v.  Miltenberger,  13  Mo.  App. 
503,  511  (1S83).  See  also,  as  support- 
ing above  rule,  Everingham  v.  Meig- 
han,  55  Wis.  354  (1SS2);  Re  Green, 
7  Biss.  338  (1S77) ;  s.  c.,  10  Fed.  Cas. 
10S4;  Bartlett  v.  Smith,  13  Fed.  Rep. 
263  (18S2);  Tenney  r.  Foote,  4  111. 
App.  594  (1879);  affirmed,  95  111. 
99  (1880),  defeating  a  note  given  to 
the  broker;  Colderwood  v.  McCrea,  11 
111.  App.  543  (1882);  Webster  v.  Stur- 
ges.  7  111.  App.  560  (1880);  Barnard 
v.  Backhaus,  52  Wis.  593  (1881),  de- 
feating notes;  Beveridge  v.  Hewitt,  8 
111.  App.  467  (1SS1);  Whitesides  v. 
Hunt,  97  Ind.  191,  203  (18S4) ;  Mel- 
chert  v.  American  U.  Tel.  Co.,  11  Fed. 
Rep.  193    (1882);   First  Nat.  Bank  v. 


Oskaloosa  Packing  Co.,  66  Iowa,  11 
(1885),  holding  a  note  void;  Stewart 
v.  Schall,  65  Md.  289  (1886).  Suit 
by  broker  against  customer  for  mon- 
lost  in  purchase  of  grain  for  the 
customer.  Mohr  r.  Miesen,  17  Minn. 
228  (1891).  Brokers  are  bound  to 
know  that  banks  have  no  power  to 
purchase  cotton  futures  on  margins, 
and  cannot  recover  commissions  and 
losses  on  such  transactions.  The 
ultra  vires  contract  was  not  executed, 
inasmuch  as  the  corporation  received 
no  property.  Jemison  v.  Citizens'  Sav. 
Bank,  44  Hun,  412  (1887).  A  broker 
may  recover  commissions,  etc.,  from 
his  principal  when  the  former  knew 
nothing  of  the  latter's  intention  to 
gamble.  Lehman  v.  Feld,  37  Fed.  Rep. 
852  (18S9);  Edwards  v.  Hoeffinghoff, 
38  Fed.  Rep.  635  (1889) ;  Boyd  v.  Han- 
son, 41  Fed.  Rep.  174   (1890). 

2  Brown  v.  Speyers,  20  Gratt.  (Va.) 
296  (1871) ;  Wyman  v.  Fiske,  85  Mass. 
238  (1861),  on  the  ground  Miat  the 
note  sued  on  was  a  voluntary  pay- 
ment to  the  broker;  Warren  v.  Hewitt, 
45  Ga.  501  (1872)  ;  Marshall  v.  Thrus- 
ton,  3  Lea  (Tenn.),  741  (1879),  where 
also  a  note  had  been  given;  Jackson 
V.  Foote,  12  Fed.  Rep.  37  (1882),  also 
a  note  case,  the  court  saying  that,  as 
between  the  broker  and  his  principal, 
the  decision  probably  would  be  differ- 
ent. Cf.  Tinsley's  Case,  cited  in  10 
Fed.  Rep.  248. 

3  Lehman  v.  Strassberger,  2  Woods, 
554  (1875);  s.  c,  15  Fed.  Cas.  254; 
Rumsey  v.  Berry,  65  Me.  570   (1876)  ; 


(63) 


993 


§  346.] 


CONTRAI   rS  1"  SELL      GAM  I 


[CH. 


ictions.1     He  cannol   recover  commissions  or  I 
If  his  principal  is  an  infant,  the  br<  liable  to  Buch  infant  for 

all  sums  received  by  way  of  margins.  I  .  ever,  the  parties  <lo 
not  raise  the  question  of  the  legality  of  the  transac  the  court 

cannot.4  In  Ohio  it  is  beld  that  the  broker  may  be  made  to  account 
for  profits,  even   though  the  transaction  was  a  gambling  A 

note  and   mortgage  given   to   the   broker   in   Bettlen  am- 

bling transaction  will  not  be  interfered  with.6  The  broker  is  not 
liable  for  a  sale  of  the  stock  on  failure  of  margin,  withoul  notice 
to  the  principal,  where  the  business  is  gambling.7  A  partner  in  a 
partnership  for  the  purpose  of  carrying  on  a  gambling  business  on 
the  market  cannol  have  an  accounting  from  his  partner.8  At  com- 
mon law  a  customer  cannot  recover  margins  and  profits  from  a 
broker  on  gambling  transactions.9   A  bucket-shop  corporation   can- 


Sawyer  v.  Taggart,  14  Bush  (Ky.), 
727  (1879);  Durrant  v.  Hurt,  98  Mass. 
161  (18G7);  Williams  r.  Carr,  80  N. 
C.  294    (1879). 

lRuchizky  v.  De  Haven,  97  Pa.  St. 
202    (18S1  ). 

2  North  v.  Phillips,  S9  Pa.  St.  250 
(1879);  Plagg  v.  Baldwin,  3S  N.  J. 
Eq.  219  (1884);  Fareira  v.  Cabell,  89 
Pa.  St.  89  (1879),  holding  that  notes 
uiven  to  the  broker  are  void.  A  suit 
by  a  broker  for  balance  of  account 
fails  where  not  a  single  delivery  was 
made,  and  there  clearly  was  no  inten- 
tion to  deliver.  Snider  v.  Han 
215  Pa.  St.  538  (1906).  The  agent 
cannot  recover  commissions  where  he 
knew  the  transaction  was  gambling. 
Dows  v.  Glasfield,  4  N.  D.  251   (1894). 

3  Ruchizky  v.  De  Haven,  97  Pa.  St. 
202  (1S81).  An  infant  gambling  in 
stocks  on  a  margin  may  recover  from 
the  brokers  all  that  he  deposited  with 
them.  Mordecai  v.  Pearl,  63  Hun,  553 
(1892);  aff'd,  136  N.  Y.  625. 

4  Gheen  v.  Johnson,  90  Pa.  St.  38 
(1879);  Williams  v.  Carr,  80  N.  C. 
294  (1879).  Contra,  Minzesheimer  r. 
Doolittle,  60  N.  J.  Eq.  394   (1900). 

5  Norton  v.  Blinn,  39  Ohio  St.  145 
(1883).  Where  gambling  stock  trans- 
actions are  closed  and  the  account 
settled,  and  the  balance  due  the  cus- 
tomer   is    left    on    deposit    with    the 


broker,   the  latter  must  pay  it  over. 
.  Grim,  1 19  Pa,  St  1G3  <  L892  I. 

In  winding  up  a  solvent  bucket-simp 
corporation  a  customer  may  prove  a 
claim  for  the  amount  paid  by  him  or 
a  profit  equal  to  the  amount  which  he 
could  have  recovered  in  an  action  at 
law.  Weiss  ''.  Haight,  etc.  Co.,  156 
Rep.  877   (1907i. 

r.  Clarke  r.  Foss,  7  Biss.  540  (1878)  ; 
s.  c,  5  Fed.  Cas.  955.  Cf.  Tantum  r. 
Arnold.  42  X.  J.  Eq.  60  (1886).  At 
common  law  a  mortgage  and  note 
given  to  a  broker  for  commissions  in 
buying  and  selling  futures  and  for 
advances  are  legal.  Where  such  note 
has  been  reduced  to  judgment  in  one 
state  it  will  be  enforced  in  another 
state.  Peet  v.  Hatcher,  112  Ala.  514 
(1896). 

r  North  v.  Phillips,  89  Pa.  St.  250 
(1S79). 

8  Wright  v.  Cudahy,  168  111.  86 
(1897). 

o  Northrup  v.  Buffington,  171  Mass. 
4C8  (1898).  A  principal  cannot  call 
his  agent  to  account  on  a  gambling 
contract.  Rogers  v.  Marriott,  59  Neb. 
759  (1900).  Brokers  receiving  a 
draft  of  the  president  of  a  bank  on  the 
bank  itself  for  margins  may  be  com- 
pelled to  refund  the  money  to  the 
bank.  Lamson  v.  Beard,  94  Fed.  Rep. 
30    (1899).     On  this  point  see   §293, 


994 


CH.  XX.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC.  [§§   347,  348. 


not  maintain  a  bill  to  compel  a  board  of  trade  to  furnish  quotations 
to  it.1  A  bucket-shop  keeper  may  be  required  to  restore  trust  funds 
which  one  of  his  customers  has  used  in  gambling  in  stocks. - 

§§  347,  348'.  Gambling  stock  transactions  as  affecting  notes,  bonds, 
mortgages,  etc.,  growing  out  thereof.— -The  penalty  of  engaging  in  a 
stock-gambling  operation  is  that,  in  ease  the  transaction  is  declared 
by  a  court  of  justice  to  bo  illegal  as  a  wager  contract,  the  court  de- 
clines to  aid  either  party.3  As  a  general  rule,  all  liability  on  the 
part  of  either  party  is  unenforceable.  Money  paid  by  the  principal 
cannol  be  recovered  back.'  A  customer  who  has  made  a  eamblinff 
contract  with  a  bucket-shop  dealer  cannot  enjoin  the  latter  from 
removing  his  money  from  the  state.5  Neither  principal  can  collect 
the  gains  of  the  transaction,  and  ueither  is  liable  for  a  loss.6  Notes 
given  in  settlement  are  void  and  not  collectible,7  even  in  the  hands 


supra.  aey     deposited     with     a 

broker   to  make  gambling  sales   may 
be  recovered  back,  it  not  having  b 
used.     Munns  p.  Donovan,  etc.  Co.  117 
Iowa  516    (1902). 

i  Central,  etc.  Exeh.  p.  Board  of 
Trade,  196  111.  396  (1902).     See  g 

2joslyn  v.  Downing,  etc.  Co.,  150 
Fed.  Rep.  317   (1906).     See  §452. 

3Rees  p.  Fernie,  13  W.  R.  6  (1864), 
holding  that  the  court  will  not  aid  one 
who  has  been  tricked  in  gambling  in 
stocks.  The  Chicago  Board  of  Trade 
cannot  obtain  an  injunction  against 
the  use  of  its  quotations  by  a  bucket- 
shop  concern,  where  the  evidence 
shows  that  the  transactions  of  the 
Chicago  Board  of  Trade  were  chiefly 
in  futures,  which  were  settled  by  the 
payment  of  differences  in  violation  of 
law.  Board  of  Trade  p.  O'Dell,  etc. 
Co.,  115  Fed.  Rep.  574  (1902). 

4  Gregory  v.  Wendell,  39  Mich.,  337 
(1878);  s.  c,  40  Mich.  432  (1879); 
Wyman  v.  Fiske,  85  Mass.  238  (1861). 
Cf.  Xorton  p.  Blinn,  39  Ohio  St.  145 
(1883).  In  Tennessee,  by  statute,  a 
contrary  rule  prevails.  McGrew  p. 
City  Produce  Exchange,  85  Tenn.  572 
(1887);  Dunn  r.  Bell,  85  Tenn.  581 
(1887),  holding  also  that  where  there 
are  several  partners  or  co-conspirators 
who  take  the  principal's  money  they 
are   liable    therefor    jointly   and    sev- 


erally. Under  the  New  York  statute 
money  paid  by  a  customer  to  a 
broker  on  gambling  speculations  may 
be  recovered  back.  Peck  p.  Doran, 
etc.  Co.,  57  Hun,  343  (1890).  Where 
a  gambling  contract  is  illegal  by  stat- 
ute, a  customer  who  gave  money  to 
the  broker  to  gamble  with,  according 
to  orders,  cannot  recover  it  back. 
White  p.  Barber,  123  U.  S.  392  (1887  i  ; 
Sowles  v.  Welden  Nat.  Bank,  61  Vt. 
(1S89).  A  certificate  of  deposit 
en  to  a  broker  in  the  course  of 
gambling  transactions  may  be  recov- 
ered back.  Dempsey  v.  Harm,  12  Atl. 
Rep.  27  (Pa.  1887).  The  customer 
may  recover  back  money  deposited 
in  the  hands  of  a  third  person  for 
margins  on  a  gambling  contract.  Dau- 
ler  p.  Hartley,  178  Pa.  St.  23   (1896). 

s  Baxter    v.    Deneen,    98    Md.    181 
(1903). 

g  Grizewood  v.  Blane,  11  C.  B.  526 
(1851);  Webster  v.  Sturges,  7  111. 
p.  560  (1880);  Ex  parte  Young,  6 
Biss.  53  (1874);  s.  c,  30  Fed.  Cas. 
828;  Thompson  p.  Cummings,  68  Ga. 
124  (1881);  Yerkes  p.  Salomon,  11 
Hun,  471  (1877).  A  partner,  however, 
may  have  contribution  for  losses  paid 
at  the  express  request  of  the  other 
member  cf  the  firm.  Petrie  r.  Han- 
nay,  3  T.  R.  418   (1789). 

7  Barnard  v.  Backhaus,  52  Wis.  593 


995 


!  17,    318.]  CONTRACTS  TO  SELL— GAMBLING  SALES,  KTC. 


[CH.  XX. 


of  bona  fide  purchi  ;s  but  the  belter  rule  is  that  Buch  bona  fide 
hoL  ire  protected.2  Bonds  and  mortgages  given  b  paymenl  are 
void.8 


(1881);  Fareira  v.  Gabell,  89  Pa.  St. 
89  (1879);  Lowry  v.  Dillman,  59  w 

197  (1884);  Davis  v.  Davis.  119  Ind. 
511  (1889);  Justh  v.  Holliday,  2 
Mackey,  346  (1883);  Cunningh;un  v. 
Augusta  Nat.  Bank,  71  Ga.  400 
(1883);  Tenney  v.  Foote,  4  111.  App. 
594  (1879)  ;  affirmed,  95  111.  99.  Cf. 
Wyinan  v,  Mass.  238  (1861). 

A  person  loaning  money  and  taking 
notes  therefor  cannot  be  defeated  in 
a  suit  on  the  notes  by  ce  that 

he  knew  the  loan  was  to  be  used  in 
gambling  operations.  Defendant  must 
prove,  also,  that  plaintiff  intended  that 
the  money  should  be  so  used.  Waugh 
v.  Beck,  114  Pa.  St.  422  (1886).  Checks, 
notes,  etc.,  in  gambling  contracts  are 
void.  Kahn  v.  Walton.  46  Ohio  St. 
195  (1889);  Embrey  v.  Jemison,  131 
U.  S.  336  (1889).  Sales  and  pur- 
chases in  Ohio  on  margins  are  gam- 
bling and  void,  and  a  note  in  settle- 
ment of  such  transactions  is  void. 
Morris  v.  Norton.  75  Fed.  Rep.  912 
(1896).  Notes  given  by  the  customer 
to  the  broker  on  dealings  in  stock, 
merely  margins  being  paid,  are  il- 
legal and  not  enforceable.  Mechanics', 
etc.  Bank  v.  Duncan,  36  S.  W.  Rep. 
SS7  (Tenn.  1896).  A  note  given  by 
a  broker  for  profits  in  gambling  in 
grain  is  not  enforceable.  Nave  v.  Wil- 
son, 12  Ind.  App.  38  (1894).  If  de- 
livery was  intended  and  made,  a  note 
by  one  of  the  principals  to  the  other 
is  good,  although  the  warehouse  re- 
ceipts were  left  with  the  broker  to 
secure  advances.  Fisher  v.  Fisher,  8 
Ind.  App.  665    (1894). 

l  Barnard  v.  Backhaus,  52  Wis.  593 
(1881);  Steers  v.  Lashley,  6  T.  R.  61 
(1794);  Tenney  v.  Foote,  4  111.  App. 
594  (1879);  aff'd,  95  111.  99;  Cunning- 
ham r.  Augusta  Nat.  Bank,  71  Ga.  400 
(1883);  Lowry  v.  Dillman,  59  Wis. 
197  (1884) ;  Root  v.  Merriam,  27  Fed. 
Rep.  909  (1886). 


2  A  bona  fulr  holder  of  a  note  given 
in  stock-gambling  transactions  can 
enforce  the  same  in  Pennsylvania. 
Northern  Nat.  Bank  r.  Arnold.  L87 
Pa.  St.  356  (1898);  Crawford  v.  Spen- 
92  -Mo.  498  (1887);  Third  Nat 
Bank  v.  Harrison,  10  Fed.  Hep.  243 
i  i  382)  :  Ldlley  V.  Rankin,  55  L.  T. 
Rep.  814  (1886).  An  accommodation 
lndorser  to  the  note  may  set  up  the 
defense  of  illegality.  Justh  r.  Holli- 
day. 2  Mackey,  346  (1883).  A  note 
given  to  a  bank  is  valid,  though  the 
proceeds  were  to  pay  a  stock-gamblin- 
debt  and  the  bank  knew  that  tact 
Marshall  v.  Thruston,  3  Lea  (Tenn.) 
7  11  (1879).  Cf.  Cannan  v.  Bryce,  3 
B.  &  A.  L79   (  L819). 

8  Amory  v.  Meryweather,  2  B.  &  C. 
573  (1824) ;  Flagg  v.  Baldwin,  38  N.  J. 
Eq.  219  i  1S84);  Griffiths  r.  Sears,  112 
Pa.  St.  523  (1886):  Barnard  v.  Back- 
haus, 52  Wis.  593  (1881).  A  judgment 
entered  by  confession  on  a  bond  given 
for  a  gambling  debt  may  be  set  aside. 
Everitt  v.  Knapp,  6  Johns.  331  (1810) ; 
Beveridge  v.  Hewitt,  8  111.  App.  467 
(1881).  A  court  of  equity  will  enjoin 
the  transfer  of  a  note  and  will  de- 
cree the  cancellation  of  a  mortgage 
given  by  a  married  woman  in  pay- 
ment of  her  husband's  stock-gambling 
debts.  Tantum  v.  Arnold,  42  N.  J.  Eq. 
60  (1886).  But  will  not  where  given 
by  the  party  himself  to  his  brokers. 
Clarke  v.  Foss,  7  Biss.  540  (1878); 
s.  c,  5  Fed.  Cas.  955.  A  mortgage  to 
a  broker  to  pay  losses  on  gambling 
speculations  is  void  and  not  enforce- 
able. Walters  v.  Comer,  79  Ga.  796 
(1887).  But  see  Crawford  v.  Spencer, 
92  Mo.  498  (1887).  Where  a  citizen 
of  Alabama  gives  to  a  New  York 
broker  a  deed  of  land  in  Alabama  in 
settlement  of  futures,  its  validity  as 
to  the  futures  depends  on  the  law  of 
New  York.  Hubbard  v,  Sayre,  105 
Ala.  440    (1S95). 


996 


CH.  XX.] 


CONTRACTS  TO  SELL GAMBLING  SALES,  ETC. 


[§  349. 


Due-bills,1  acceptances,2  and  guarantees  3  of  notes  are  not  valid 
or  enforceable.  If  a  part  of  the  consideration  is  void  the  whole 
contract  and  all  securities  given  thereunder  are  void.4  In  Illi- 
nois, by  statute,  a  customer  who  deposits  securities  with  a  broker 
on  a  gambling  stock  contract  may  recover  them  back,  even  though 
he  has  not  paid  losses  incurred  by  the  transaction.5  In  New  Jer 
it  is  hold  that  purchases  and  sales  of  cotton  for  future  delivery,  the 
arrangement  being  to  pay  differences  on  the  rise  and  fall  of  prices, 
are  illegal,  and  even  though  a  judgment  is  obtained  thereon  in  New 
York  state  and  a  judgment  on  that  judgment  obtained  in  Xew 
Jersey,  yet  a  court  of  equity  will  not  set  aside  a  deed  of  land  as 
being  in  fraud  of  such  judgment,  even  though  the  gambling  nature 
of  the  transaction  is  not  pleaded,6  but  a  later  case  is  somewhat  to  the 
contrary.7  A  board  of  trade  has  a  property  interest  in  its  quotations, 
and  may  enjoin  persons  obtaining  and  using  them  without  its  per- 
mission, even  though  transactions  of  the  board  of  trade  are  gam- 
bling.8 

C.     FRAUD  AS    AI  FKCTING    A    SALE    <  >K   STO<   K. 

§  319.  Extent  of  subject  treated  herein. — In  a  previous  chapter  of 
this  treatise  the  effect  of  fraud   and    fraudulent   representations  on 


1  Rudolf  v.  Winters,  7  Neb.  125 
t  IMS).  If  a  broker  proves  that  he  in- 
tended to  purchase  the  stock  and  was 
ready  to  deliver  it,  a  due-bill  given 
by  the  customer  to  him  is  valid. 
MaeDonald  V.  Gessler,  208  Pa.  St.  177 
(1904). 

2  Steers  v.  Lashley,  6  T.  R.  61 
(1791).  RawlingS  V.  Hall.  1  Car.  &  P. 
11  (1823),  holds  that  the  broker  on 
the  witness  stand  need  not  admit  that 
the  consideration  was  a  gambling 
debt,  since  it  would  subject  him  to  a 
common-law  criminal   prosecution. 

3  Tenney  v.  Foote,  95  111.  99  (1880). 
4Tenney  v.  Foote,  95  111.  99  (1880). 

See  also  Fareira  v.  Gabell,  89  Pa.  St. 
89  (1879).  But  where,  upon  the  close 
of  a  successful  "corner,"  which  is  il- 
legal by  statute,  one  of  the  parties 
leaves  his  share  of  the  profits  with 
the  other  party  to  invest,  the  latter 
must  account  for  it  when  called  upon 
so  to  do.  Where,  upon  the  close  of  an 
unsuccessful  "corner,"  the  parties  los- 


ing settle  among  themselves,  but  one 
of  them  fraudulently  overstates  the 
losses,  he  is  liable  to  account  for  the 
amount  fraudulently  allowed  him. 
Wells  r.  McGeoch,  71  Wis.  196  (1888). 

5  Jamieson  v.  Wallace,  167  111.  388 
(1897). 

8  .Minzesheimer  /•.  Doolittle,  60  N.  J. 
Eq.  394  (1900). 

"  After  the  broker  has  obtained 
judgment  against  his  customer  and 
then  brings  suit  to  set  aside  an  il- 
legal transfer  of  property  by  the  cus- 
tomer it  is  no  defense  that  the  origi- 
nal claim  was  a  gambling  one. 
Moreover,  purchases  and  sales  by  the 
broker  for  the  customer  are  legal 
unless  it  is  proven  that  it  was  agreed 
or  understood  that  only  differences 
were  to  be  paid.  Thompson  v.  Wil- 
liamson, 67  N.  J.  Eq.  212  (1904). 

8  Board  of  Trade  v.  Christie,  etc. 
Co.,  198  U.  S.  236  (1905),  rev'g 
Christie,  etc.  Co.,  v.  Board  of  Trade, 
125  Fed.  Rep.  161   (1903).     See  §939. 


997 


§  350.] 


VCTS  TO  SELL — CAM  III. INC;  SAL! 


[CH.  XX. 


inscription  for  stock  was  fully  treated.  There  is  little  difference 
in  the  principles  of  law  ling  fraud  as  affectinj  3  of  stock 
from  fraud  as  affectii  -  f<  p  stock.  Mosl  of  the  < 
assume  that  the  same  principles  apply  to  both  kinds  of  transacti 
Consequently,  the  questions  of  whal  constitutes  fraud  herein;  what 
remedies  the  defrauded  person  has;  and  tl,  >ral  principles  gov- 
erning this  branch  of  the  law,  will  be  fully  undersl 1  only  by  a 

comparison  of  these  two  parts  of  this  work.1 

§  350.  What  hash  dto  constitute  a  fraud  herein. — It  is  dif- 

ficult to  lay  down  rul  to  what  does  and  what  does  aot  amount 

to  fraudulent  misrepresentations.  The  courts,  consequently,  lei  each 
case  stand  upon  n  facts.     Certain  of  fad  have,  however, 

been   passed   upon  astituting  fraud,  and  as  such  they  aid   in 

coming  to  a  conclusion  on  facts  in  somewhat  similar  cas<  Thus, 
it  has  been  held  to  be  a  fraudulent  representation  to  make  false 
statemenl  0  the  location,  explorations,  and  developed  stale  of  a 

mine;  -  or  that  a  patent  owned  by  the  company  was  of  great  value, 
and  that  certain  other  p<  raons  were  owners  of  stock;8  that  the  com- 
pany was  pre-]  q  iii  fad  large  overissues  of  stock  had 
been  made;4  or  that  the  corporate  property  was  free  from   incum- 


1  See  ch.  IX.  supra.  In  the  impor- 
tant case  of  Western  Ban);  v.  Addie, 
L.  R.  1,  Sc.  App.  (H.  L.)  It.')  (1867), 
part  of  the  shares  had  been  subscribed 
for  and  part  purchased.  The  courts 
applied   the   same  principles   to  both. 

2  Morgan  v.  Skiddy,  62  N.  Y.  319 
(1S75).  In  Crocker  v.  Mauley.  16-1 
111.  282  (1896),  the  court  held  that  it 
was  not  fraudulent  to  represent  chat 
the  mines  owned  by  the  company  were 
rich  and  would  pay  more  than  twenty 
per  cent,  dividends,  and  that  the  ore 
on  hand  was  of  a  certain  value,  where 
it  is  shown  that  the  vendee  made  a 
personal  examination  and  was  satis- 
fied, and  no  actual  fraud  is  shown. 
Rescission  was  refused. 

3  Miller  v.  Barber,  66  N.  Y.  558 
(1876).  A  person  induced  to  buy 
stock  on  representations  that  the  com- 
pany owns  a  valuable  patent  when  in 
fact  it  does  not  own  it,  can  recover 
back  his  money,  and  it  is  no  defence 
that  the  stock  was  worth  the  price 
paid.  A  suit  to  recover  money  paid 
may    be    treated    as    a    suit    for    re- 


scission   under    the    California    code. 
Spreckels  v.  Gorrill,  92  Pac.  Rep.  1011 
(Cal.  1907  |. 
i  Cazeaux    v.    Mall,    25    Barb.    578 

(1S57).  In  a  suit  for  false  repre- 
sentations as  to  the  condition  of  a 
company  a  subsequent  mortgage  fore- 
closure may  be  proved  if  the  condi- 
tion of  the  company  has  not  changed 
between  the  time  of  the  representa- 
tions and  such  foreclosure.  Walker 
v.  Russel,  1SG  Mass.  69  (1904).  Plain- 
tiff need  not  allege  that  he  relied 
solely  on  the  misrepresentations.  A 
false  statement  that  the  company  is 
perfectly  solvent  is  a  material  mis- 
representation and  the  fact  that  two 
or  three  years  thereafter  all  the  cor- 
porate assets  have  disappeared  and  it 
went  into  liquidation,  is  proof  of  such 
misrepresentation.  It  may  be  shown 
that  at  the  time  of  the  misrepresenta- 
tion the  company  owed  its  officers 
and  employees  a  large  sum  of  money. 
It  may  be  shown  that  the  corporate 
books  and  statements  overvalued  the 
assets.     The  treasurer,  secretary  and 


99S 


Cn.  XX.]  CONTRACTS  TO  SELL GAMBLING  SALES,  ETC. 


[§  350. 


brance; 1  or  that  the  corporation  would  guarantee  certain  dividends;  2 
or  any  false  statement  or  general  fraudulent  act,  or  fraudulent  con- 
cealment of  a  material  fact,  whereby  the  purchaser  is  induced  to  com- 
plete the  sale  of  stock.3     It  may  or  may  not  bo  a  fraudulent  repre- 

bookkeeper    is    a    competent    witness    A  misrepresentation  as  to  the  amount 


to  prove  that  at  a  certain  time  the 
company  was  not  solvent.  In  an  ac- 
tion against  the  president  for  dam- 
ages for  false  representations  it  need 
not  be  proved  that  he  had  actual 
knowledge  of  the  falsity  of  the  state- 
ments in  regard  to  corporate  affairs, 
inasmuch  as  he  was  bound  to  know 
thereof.  Norvell  v.  Pye,  95  S.  W.  Rep. 
666  (Tex.  1906).  False  representa- 
tions as  to  solvency  and  financial  con- 
dition of  the  corporation  are  material, 
and  the  purchaser  may  testify  that  he 


of  corporate  indebtedness  is  material. 
McBlwee  r.  Chandler,  198  Pa.  St.  575 
(1901).  A  jury  decided  that  a  false 
representation,  on  the  part  of  corpo- 
rate officers,  that  the  company  was 
without  debt,  was  a  fraud  on  the  ven- 
dee, and  held  its  perpetrators  liable  in 
damages.  Faville  v.  Shehan,  68  Iowa, 
241  (1885).  Where  a  corporation  is- 
sues bonds  having  the  words  printed 
on  their  face  "first-mortgage  bonds," 
en,  as  a  matter  of  fact,  there  was 
an    underlying    mortgage    which    the 


would  not  have  purchased  the  stock  party   to  whom   the  bonds  were   sold 

except  for  the  representations.     Prid-  agreed  to  pay,  but  did  not  pay,  except 

ham     r.     Weddington,     74     Tex.     354  in  part,  the  officers  and  directors  who 

S9).     It   is  fraud   to  state  falsely  took  part  in  the  issue  of  the  bonds  are 

that  the  company  is  prosperous,  that  liable  to  an   innocent  purchaser  who 

there  was  no  stock  for  sale,  and  that  relied  on  the  statement  contained  on 


defendant  was  selling  stock  of  others 
and  not  his  own.  Miller  v.  Curtiss, 
13  N.  Y.  Supp.  6i»!    (1891). 

l  It  is  fraudulent  to  represent  that 
the  corporation  is  free  from  debts 
where  it  appears  that  it  owns  land 
subject  to  a  very  re  debt. 

Tinker   v   Kier,   195   Mo.   183    (1906). 
Southwestern  R.  R.    r.   Papot,   67   I 
675,  693   (1881),  the  court  saying:  "It 
is,   we  think,  sufficient  to  show   that 


the  face  of  the  bonds.    His  measure  of 
damages  is  the  di  e  between  the 

value  of  the  bonds  as  first-mortgage 
bonds  and  second-mortgage  bonds. 
Hank  v.  Byers,  139  Mo.  627  (1897). 
A  purchaser  of  bonds  and  stock  may 
rescind  on  the  ground  that  the  vendor 
represented  that  there  was 
but  one  mortgage  on  the  property.  It 
is  immaterial  that  the  vendor  paid  off 
the    other    mortgage    after    suit    was 


the  misrepresentation  or  suppression  brought.  Stevenson  v.  Marble,  84  Fed. 
of  fact  was  of  such  a  nature  as  to  Rep.  23  (1897).  A  purchaser  of  a 
prove  that  the  property  purchased  majority  of  the  stock  of  the  corpora- 
was  of  no  value  to  the  purchaser  for  tion  from  a  stockholder  may  rescind 
the  purposes  for  which  it  was  bought,  where  a  misrepresentation  was  made 
or  that  it  would  be  reasonable  to  sup-  that  the  corporation  had  practically  no 
pose  that  the  purchaser  would  not  debts.  Merritt  v.  Ehrman,  116  Ala.  278 
have    contracted    for    it   had   he    had  (1897).  See  also  124  N.Y.App.  Div.  758 


knowledge  of  the  existence  of  this  de- 
fect." It  is  fraudulent  to  make  mis- 
statements to  the  effect  that  the  cor- 
poration is  out  of  debt  and  is  making 
certain  profits.  It  is  no  defense  that 
the  defendant  might  have  ascertained 
the  facts  from  the  corporation.  Red- 
ding r.  Wright,  49  Minn.  322    (1892). 


2  Gerhard  v.  Bates,  2  El.  &  Bl.  476 
(1853).  Representations  that  divi- 
dends would  soon  be  paid  are  not 
fraudulent,  but  statements  as  to  pres- 
ent condition  and  prospects  may  be 
for  the  jury.  Warner  v.  Benjamin,  89 
Wis.  290    (1895). 

3  See    further    illustrations    in    ch. 


999 


§  350.] 


CONTRACT-  ;.:.      Q  \    .i:Ll.\G  i 


I'll.  XX. 


sentation  to  stale  thai  th  '    La  worth  a  certain  Bum,  according 

the  circumstances  of  the  case.1     Statements  of  the  seller,  as  t<>  the 


IX,  supra.  A  vendor  of  stock  is  not 
obliged  to  mention  the  fact  that  the 
corporation  owes  debts.  Furber  v. 
Fogler,  97  Me.  5S5  (1903).  E 
though  the  president  of  a  company  in 
inducing  the  stockholders  to  sell  their 
stock  to  another  company  conceals  the 
fact  that  he  is  largely  interested  in 
the  latter  company,  this  does  not  con- 
stitute fraud.  Wann  v.  Scullin,  109 
S.  W.  Rep.  688  (Mo.  1008).  Declar- 
ing a  dividend  in  good  faith  and 
sound  discretion  is  not  fraud  by  rea- 
son of  its  turning  out  to  have  been 
Ill-advised.  Burnes  v.  Pennell,  2  H.  L. 
Cas.  497  (1849).  A  representation 
that  the  stock  "is  good  property  or  in- 
tment  and  is  about  to  make  a  divi- 
dend" is  a  false  representation  wl 
untrue,  and  where  the  person  taking 
the  stock  as  trustee  from  a  preceding 
trustee  objected  to  receiving  it  on 
count  of  his  doubt  or  ignorance  as  to 
its  character.  Lawton  v.  Kittredge, 
30  N.  H.  500  (1855).  Representations 
that  a  corporate  property  is  valuable 
and  one  of  the  best  properties  in  Col- 
orado, when  in  fact  the  company  v 
a  bubble  company,  raises  a  question  of 
fraud  for  the  jury  to  pass  upon.  Brad- 
ley v.  Poole,  98  Mass.  169  (1S67).  The 
payment  of  an  excessive  and  specula- 
tive price  for  stock  is  not  fraud  and 
is  no  ground  for  setting  the  sale  aside. 
Moffat  v.  Winslow,  7  Paige  Ch.  124 
(1838).  The  vendor  warrants  the  title 
to  the  stock,  but  not  its  quality  or 
value.  Allen  v.  Pegram,  16  Iowa,  163 
(1864).  A  sale  of  stock  in  a  company 
formed  to  purchase  a  railroad  cannot 
be  set  aside  merely  because  its  title 
to  the  railroad  fails.  State  v.  North 
Louisiana,  etc.  R.  R.,  34  La.  Ann. 
947  (1882).  In  Wright's  Appeal,  99 
Pa.  St.  425  (1882),  it  was  held  that 
the  corporation  was  not  liable  for  the 
conversion  of  stock  by  its  president, 
who  obtained  the  certificates  indorsed 
in    blank   from   the    owner   on   false 


resentations    that   the   corporation 
them.     Xcwlands  /'.  Na- 
tional, etc.  Assoc,  53  L.   T.  Rep.   2  12 

.ii    R.    R.,    L3 
X.  H.  :    3.  c,   10  N.  M.  548, 

holding  that    the    fact   that   the  earn- 
aot  distributed  by  dividends 
until  after  a   Bale  of  stock  does  not 
constitute      fraud.        A      confidential 
at  who  uses  his  position  to  obtain 
stock  of  which  the  principal  has  been 
rived  wrongfully  must  turn  it  over 
to    the     principal.       Ilardenbergh     r. 
Bacon,    33    Cal.    356    (1867).      State- 
e  part  of  the  capital 
stock  had  been  taken   by  the   parties 
id  that  the  parties  them- 
es   would    continue    the    manage- 
mi  nt    of    the    co:  and    conceal- 

ment of  the  fact  that  a  large  quantity 
of  the  stock  was  to  be  issued  for  the 
good-will  of  the  business,  and  state- 
ments ■;  to  the  conclusion  that 
all  sub  ra  for  stock  stood  on  an 
equal  footing,  constitute  material  mis- 
resentations,  and  will  sustain  a  re- 
scission of  the  subscription  if  untrue. 
Such  statements  and  concealments 
made  to  agents  or  brokers  who  are 
selling  stock  are  the  same  as  though 
made  to  the  subscribers  for  the  stock. 
Walker  v.  Anglo-Am.  etc.  Trust  Co., 
72  Hun,  334,  341  (1893). 

i  That  it  is  not,  see  Union  Nat. 
Bank  v.  Hunt,  76  Mo.  439  (1882).  A 
false  representation  that  the  stock 
sold  is  worth  eighty  cents  on  the  dol- 
lar— it  being  worth  but  forty  cents — 
will  not  sustain  an  action  for  deceit. 
Ellis  v.  Andrews,  56  N.  Y.  83  (1874). 
A  representation  as  to  the  value  of 
stock  is  material  where  the  vendor 
was  a  director,  and  evidence  may  be 
introduced  to  show  that  the  stock 
was  issued  for  property  at  an  over- 
valuation and  that  some  of  the  stock 
was  issued  without  being  paid  for. 
Shelton  v.  Healy,  74  Conn.  265  (1901). 
Where  the  vendor  misstates  the  divi- 


1000 


en.  xx.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§   350. 


value  of  the  mining  stock  which  he  is  selling  and  the  prospects,  are 
not  fraud  unless  it  is  proved  that  he  knew  or  believed  to  the  con- 
trary.1 A  representation  by  the  vendor  of  bonds  that  the  bonds  are 
good  and  will  be  paid  is  a  matter  of  opinion  merely.2  False  repre- 
sentations that  the  surplus  is  intact  and  the  securities  good  for  tluir 
face  value,  and  that  another  party  was  trying  to  buy  the  stock,  arc 
mat<  rial.3 

It  is  a  fraud  on  the  vendee  of  stock  to  sell  him  as  paid-up  stock 
that  which  is  not  paid  up,  although  issued  as  paid  up,  the  vendor 
having  participated  in  the  issue.4     It  is  fraud  in  the  vendor  to  rep- 


dends  paid  and  represents  that  the 
stock  is  worth  par,  it  may  be  shown 
that  at  the  same  time  he  sold  similar 
stock  to  others  at  fifty-five  cents  on 
the  dollar.  Gilluly  v.  Hosford,  88  1 
Rep.  1027  (Wash.  1907).  It  is  fraud- 
ulent to  represent  that  the  stock  is 
worth  par  when  in  fact  it  is  worth- 
less. If  the  vendor  persuades  the 
vendee  to  make  no  inquiries,  the  lat- 
ter may  recover,  although  he  made 
none.  The  measure  of  damages  is  not 
the  value  of  the  land  given  for  the 
stock,  but  the  difference  between  the 
actual  and  the  represented  value  of 
the  stock.  Nysewander  v.  Lowman, 
124  Ind.  584  (1890).  False  re] 
tations  may  consist  of  statements  that 
the  stock  is  worth  a  certain  price  and 
is  sold  to  plaintiff  at  a  reduced  price 
in  order  to  obtain  his  services.  Max- 
ted  v.  Fowler,  94  Mich.  106  (1892). 
False  statements  as  to  the  value  of 
stock  and  the  dividends  it  would  pay 
and  the  purpose  for  which  it  was  in- 
corporated are  sufficient  to  sustain  re- 
scission. Murray  v.  Tolman,  102  111. 
417  (1S96).  Misrepresentations  as  to 
the  value  of  the  stock  and  the  condi- 
tion of  the  company  are  material. 
Blacknall  r.  Rowland,  116  N.  C.  389 
(1895).  The  statements  by  the  vendor 
of  what  purports  to  be  a  certificate 
of  bank  stock,  that  the  bank  was  or- 
ganized and  that  the  stock  was  worth 
par,  and  that  the  vendor  knew  this 
to  be  the  case  because  he  was  one  of 
the  first  stockholders,  and  that  the 
stock  was  a  good  high  dividend-pay- 


ing stock,  constitute  a  warranty,  and 
the  vendee  may  sue  for  damages  if 
the  facts  are  not  as  stated,  the  meas- 
ure of  damages  being  the  difference 
between  the  value  of  the  stock  as  rep- 
resented and  its  actual   value.    Titus 

Poole,  73  Hun,  383  (1893);  aff'd, 
145  X.  Y.  414  (1895).  Where  an  heir 
sells  stock  at  a  nominal  figure,  it  be- 
ing   considered    worthless,    and    then 

:  ns  that  it  has  value  and  buys 
it  back  at  a  low  figure  on  his  state- 
ment that  it  had  no  value  and  that  he 
wished  to  keep  it  on  acount  of  its 
having  been  held  by  his  father,  an 
action  for  damages  for  deceit  lies. 
Edelman  v.  Latshaw,  180  Pa.  St.  419 
(1897).  Cf.  s.c,  159  Pa.  St.  C44  (1894). 
See  Lynch  v.  Murphy,  171  Mass.  307 
(1898).     See  12G  N.  Y.  App.  Div.  257. 

1  Crosby  v.  Emerson,  142  Fed.  Rep. 
713  (1906).  "'Puffing*  mining  claims 
or  making  glowing  predictions  as  to 
how  such  claims  will  'pan  out'  does 
not  amount  to  such  false  representa- 
tions as  will  authorize  a  court  of 
chancery  to  set  aside  a  sale  of  stock 
in  a  mining  company  when  the 
parties  are  compos  mentis  and  deal  at 
arm's  length."  Burwash  v.  Ballou,  82 
X.  E.  Rep.  355   (111.  1907). 

2  Kimber  v.  Young,  137  Fed.  Rep. 
744   (1905). 

3  Hawley  v.  Wicker,  117  N.  Y.  App. 
Div.  638  (1907). 

•i  Sturges  v.  Stetson,  1  Biss.  246 
(1858);  s.  c,  23  Fed.  Cas.  311,  hold- 
ing that  the  vendee  is  not  liable  on  a 
note  given  in  payment  thereof;    Fos- 


1001 


§  350.] 


I  BELL      GAMBLING  SAL] 


|  ''11.  XX. 


nt  thai  property  is  to  be  turned  in  by  him  to  the  corporation 
at  a  certain  price  and  then  to  refuse  to  carry  out  the  latter  con- 
tract1 Where  the  vendor  agrei  el]  at  a  value  to  be  ascertained 
by  an  examination  of  the  corporate  books  and  affairs,  it  is  fraud  in 
the  vendee  to  caus  memoranda  to  be  made  by  the  employi 
of  the  corporation.2  The  vendee  of  stock  may  sue  for  dan  for 
deceit,  where  the  vendor  fraudulently  repri  :  the  dividends 
that  had  hem  paid  on  :  ck.s  A  mi  ation  as  to  the 
amount  of  property  held  by  the  «•  rporation  is  material.4  W'l 
a  person  owns  a  majority  of  i!  rporation  and  sells 
it,  and                .  ith  the  purchaser  to  obtain  the  stock  held  by  others 


dick   v.  Sturges,  IB  L858) ; 

s.  c.  9  Fed.  Cas.  501,  holding  thai  the 
vendee  may  recover  back  money  paid; 
Reeve  v.  Dennett,  1  (5  M 

8.   C,    Ill 

of  $1,000,000  was  Issued  for  a  w< 
less    patent;    holding    also    that    the 

mlsn  presentations      may      invalid! 

o  a  second  ami  subsequent  pur- 
chase of  stock,  even  though  in  the 
meantime  the  vendee  has  becom* 
director  in  t lie  corporation.  A  person 
who  deeds  land  in  exchange  for  stock 
which  is  represented  to  be  full  paid 
may  have  the  sale  rescinded  where 
only  $3  are  had  been  paid  in  on 

the    stock.      Coolidge    v.    Rhodes, 
111.24  (1902).   The  purchaser  of 
may  maintain  a  suit  to  recover  back 
the  price  on  the  ground  that  the  ven- 
dor  sold    to   the    company,    for   three 
million  dollars  par  value  of  its  sti 
property    worth    not    more    than    two 
hundred    and    fifty    thousand    dollars 
and    made    misrepresentations    in    re- 
gard to  it  and  also  misrepresented  the 
capacity    of    the    property.      Stern    v. 
Stern.  122  N.  Y.  App.  Div.  821   (1907). 
i  Seaman     v.     Low,     4     6osw.     337 
(1S59). 

2  Hager  v.  Thomson,  1  Black,  80 
(1861).   S      126  N.  Y.  App.  Div.  237. 

3  Hand:  Waldron,  IS  R.  I.  5G7 
(1894).  A  claim  by  a  purchaser  of 
stock  against  the  directors  for  falsely 
representing  that  the  stock  was  earn- 
ing dividends,  when  in  fact  the  stock 
was  sold  to  raise  money  to  pay  illegal 


dividends,    is  aable.     Keeler    v. 

Dunham,    111    X.    v.    App.    Div.    94 
I  191 

'  Boddy    v.    Henry,    113    [owa,    4G2 
'  19  '■  on  by  the  ven- 

dor of  a  bond  that  it  w  ired  by 

a  n  ■!  real  ■  worth  half 

a  million,  when,   in   fact,  Dig  corpora- 

I  owned  no  re  BUfflcii 

to  sup]  tion   for  false  repre- 

the  vendor  re- 
ferred to  other  people  as  authority  for 
the  lent.     Whiting  v.  Trice.  172 

Ma  0    (1898).     A  it   to  a 

ollows:  "Cap- 
ital stock  paid  in,  $500,000,"  is  false 
ps  to  a  i  n  ditor  relying  on  such  a 
statement  where  a  large  part  was  paid 
in  by  supposed  profits,  consisting  of 
second  mortgages  which  turned  out 
to  be  worthless.     Bradley  v.  Seaboard 

.  Bank,  1G7  N.  Y.  427  (1901).  If 
the  vendor  falsely  represents  that  the 

Hints  receivable  are  equal  to  the 
debts,  it  is  no  defense  that  the  stock 
was  worth  all  that  was  paid  for  it. 
Drake  r.  Holbrook,  78  S.  W.  Rep.  158 
(Ky.  1904).  In  the  case  of  Burnham 
v.  Lutz,  8  Kan.  App.  361  (1898),  where 
a  mercantile  corporation  had  been  or- 
ganized and  twenty-six  shares  of  stock 
only  were  issued  to  supply  a  board  of 
directors,  but  not  paid  for,  the  court 
held  that  a  vendor  of  goods  to  the 
corporation  might  show  that  such  an 
organization  of  the  corporation  was 
fraudulent,  and  hence  that  the  parties 
interested  were  liable  as  partners. 


1002 


CH.  xx. J 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  350. 


at  as  low  a  figure  as  possible,  and  misstates  to  such  persons  tbo 
price  which  he  obtained  for  his  own  stock,  he  is  liable  in  an  action 
for  deceit  to  parties  who  sell  their  stock  relying  on  such  state- 
ments.1 In  a  suit  for  damages  for  misrepresentations  inducing  the 
purchase  of  bonds,  the  fact  that  the  interest  has  been  paid  on  the 
bonds  does  not  prevent  the  recovery  of  damages,  inasmuch  as  the 
bonds  may  not  be  marketable  or  adequately  secured.2  It  is  fraud, 
in  the  sale  of  bonds,  to  represenl  falsely  that  they  had  been  pledged 
to  a  bank  for  a  certain  price,  and  thai  they  were  a  good  and  safe 
investment,  and  a  broker  as  well  as  the  principal  may  be  held  lia- 
ble.'1 It  is  net  fraud,  however,  for  a  director  or  other  corporate 
officer  t<>  buy  or  sell  stock  at  a  profit,  due  to  his  official  knowledge 
of  tin-  condition  of  the  corporation;  l  not  to  obtain  the  stock  by  a 
threat  of  a  call.6  The  fact  thai  a  check  given  in  payment  for  -lock 
is  not  honored,  although  the  money  is  in  bank,  is  not  fraud 
where  payment  was  r*  fused  because  of  other  frauds  of  the  vendor;6 
nor  is  it  fraud  to  issue  certificates  before  anything  lias  been  paid 
thereon,  there  being  no  participation  by  the  vendor.7     It  is  fraud, 


i  Weaver    v.   Cone,    174    Pa.    St.    104 
(1896).     Where  the  |  at  induces 

a  stockholder  to  give  up  hi  on 

repayment  of  the  amount  paid  there- 
on, on  the  representation  that  another 
party  will  take  all  the  stock  and  com- 
plete the  enterprise,  and  the  fact  is 
that  the  president  himself  gets  some 
of  the  stock  so  surrendered,  a  stock- 
holder may  have  the  agreement  can- 
celed. Simrall  r.  Williamson,  35  S. 
\V.  Rep.  632   I  Ky.   L896). 

2  Currier    v.    Poor,    155    N.    V.    ::tl 
(1898). 

3  Adams  v.   Collins,   82    N.    E.    Rep. 
498    (Mass.  1907  e 

i  Tippecanoe  County  v.  Reynold 
Ind.  509  (1873).  Where  oAe  of  the 
partners  in  the  building  of  railroads, 
and  in  owning  stocks,  bonds,  etc.,  dies, 
and  his  executor,  after  an  examination 
of  all  the  assets  by  means  of  experts, 
etc.,  makes  a  settlement  with  the 
other  partner,  such  settlement  is  bind- 
ing although  the  other  partner  did 
not  impart  all  the  knowledge  or  in- 
formation he  might  have  given.  The 
subsequent  rise  in  value  of  some  of 
the  securities  is  immaterial.  Colton 
v.  Stanford,  82  Cal.  351    (1890).    The 


purchaser  of  stock  from  the  secretary 
of  the  company  cannot  rescind  on  the 
ground  of  fraud,  the  secretary  having 
given  at  the  time  of  the  sale  all  the 
information  which  he  had  concerning 
the     cod  Xo     confidential     or 

fiduciary  relation  exists.  Krumbhaar 
r.  Griffiths,  151  Pa.  St.  223  (1892). 
Re;  as  made  by  the  manager 

of  the  company  in  purchasing  the 
stock  i  ockholder  do  not  entitle 

the  latter  to  a  remission  on  the 
ground  of  fraud,  where  there  were 
no   personal    relations    between   them 

1  the  vendor  did  not  rely  upon  any 

,    but    on    his    own 

judgment,  and  received  a  price  nearly 

tal  to  the  actual  value  of  the  stock. 
Sullivan  v.  Pierce,  125  Fed.  Rep.  104 
(1903).  See  §  320,  and  126  N.  Y.  App. 
Div.  257. 

5  Grant  r.  Attrill,  11    Fed.  Rep.  469 

<2).  As  to  other  cases  of  fraud  by 
the  vendee,  see  Johnson  v.  Kirby,  65 
Cal.  482  (1884);  Hempfling  v.  Burr, 
59  M  I    (1886). 

6  Comins     v.     Coe,     117     Mass.     45 
(1S75). 

7  Woodruff  v.  McDonald,  33  Ark.  97 
i L878). 


1003 


350.] 


CONTU\<   l  I.I.      (iA.Mi  i:tc. 


'.II.   XX. 


however,  to  represent  the  company  as  having  a  full-paid  capital  Btock 
when  in  fad  the  Btock  was  wholly  I  in  paymenl  of  a  worth) 

mine.     The  person  making  such  representation  is  Liable  to  the  * 
dee.1     It  is  fraudulenl   for  a  vendor  to  represenl  thai  he  is  sell 
the  stock  of  others,  when  in  fact  he  is  gelling  his  own  stock.2     S 
incuts  that  the  stock  sold  is  treasury  stock,  and  thai  others  paid  the 
same  price  to  the  treasury,  are  material.8     A  representation  as  to 
the  cos1  of  the  stock,  with  an  agreemenl  to  sell  at  cost,  is  differenl 
from  an  agreemenl  to  -■  11  at  a  fixed  figure  which  is  repn  I  to 

he  cost     A    misrepresentation   as   to  the   cosl   of   the  stock   to   the 

vendor  is  no1  actionable.4     Although  a  itracti  r,  takii  k  and 

bonds  in  paymenl  for  work,  subcontracts  the  work  for  the  stock  and 
then  foreclosi  -  the  mortgage  and  buys  in  the  property,  the  sub- 
contractor cannol  hold  him  liable  for  the  stock.6  The  fact  thai  the 
stock  is  worthless  or  thai  the  only  property  that  the  company  owns 

consists  of  worthless  patents,  being  infringements  i ther  patent-, 

is  no  defense  to  notes  given  for  stock,  there  being  n<>  warranty  or 
fraud.    The  value  is  immaterial.6    A  \<    dor  of  atock  is  not  bound  t<» 


i  Cross    r.    Sackett,    2    Bosw. 
(1858).      See    also    §S  40,    48,    8upra; 
Colt    v.    Woolaston,    -J.    I'.    Wms.     L54 
(1723).     When   a   promoter  mi 
sents  to  a  subscriber  the  price   paid 
by    the    promoter    for    property    con- 
veyed by  him  to  the  company,  the  Bub- 
scriber    may    sue    him    lor    damag 
Teachout  V.  Van  Hoesen,  76  Iowa,  113 
(1888).     A   sale   or    pledge   of   st<> 
stamped     "non-assessable,"     when     in 
fact  it  was  not  legally   paid  up.  ren- 
ders  liable   for    false    representations 
the  president  and  secretary  who  made 
such   sale    or   pledge   and    who   knew 
that  it  was  not  paid-up  stock.    Wind- 
ram  v.  French,  151  Mass.  547    (1890). 
A  suit  by  the  purchaser  of  stock  for 
damages  for  fraud,  in  that  the  stock 
had    been    fraudulently    paid    up    by 
property  conveyed  to  the  corporation 
at  an  overvaluation,  is  barred  by  the 
statute    of    limitations    applicable    to 
frauds.     Smith  v.  Martin,  135  Cal.  247 
(1901).     A   statement  filed   with  the 
state    commissioner    as    required    by 
statute,   in  regard   to   the  amount   of 
the  paid-up  stock,  is  not  such  a  repre- 
sentation   as   will    sustain   an    action 
for  damages  for  fraudulent  represen- 


ts ions  Inducing  a  person  to  take  the 
notes  of  the  company.  Hunnewell  v. 
DuxbuVy,    154    Mass.    286    (  1901).     Hut 

see  Heard  v.  Pictorial  Press,  182  Mass. 
E30    (190:: ). 

2  Mayo  p.  Knowlton,  i::i  N.  Y.  250 
(1892);  Maturin  v.  Tredinnick,  2  New 

Rep.  .~>ll  i  ixr.3).  Where  a  person,  upon 

itemenl    of  the   president  that 

the  company   has  no  stock  for  sale, 

but    will     get    some,    authorizes    the 

president    to    buy    for    him,    and    the 

president     turns     out     stock     which 

the    company    already    has,    the    con- 

t    is    voidable    by    such    vendee. 

!  »oel  v.  Ohio,  etc.  Co.,  36  S.  W.  Rep. 

175  (Ky.  1896). 

3  Caswell  v.  Hunton,  87  Me.  277 
(1895). 

4  Gassctt  v.  Glazier,  165  Mass.  473 
(1896). 

5McLane  v.  King,  144  U.  S.  260 
(1892).  A  contractor  taking  payment 
in  stock  cannot  complain  that  the 
property  was  foreclosed  under  a  mort- 
gage wrhich  he  assented  to.  Kelley  v. 
Collier,  11  Tex.  Civ.  App.  353   (1895). 

6  Watts  v.  Stevenson,  165  Mass.  518 
(1896).  Where  a  note  is  given  for 
entirely  worthless  stock,  the  defense 


1004 


CH.  XX.  j 


ITRACTS  TO  SELL      GAMBLING  SALES,  ETC. 


[§    350. 


tell  the  vendee  the  company  is  insolvent,  even  though  the  former 
knew  that  fact  at  that  time ;  *  nor  is  the  vendee  bound  to  tell  what  he 
knows2  A  misstatement  as  to  what  the  corporation  received  for 
the  stock  issued  by  it  is  material.3  A  statement  that  the  vendor  is 
selling  at  the  same  price  to  others  is  fraudulent  if  such  is  not  the 
case.4^  Where  several  subscribers  refused  to  take  their  stock,  and 
finally,  to  induce  them  to  do  so,  a  party  i  secretly  with  one 

of  them  to  purchase  his  holdings,  such  an  agreement  may  be  en- 


of  total  failure  of  consideration  may 
be  set  up  against  the  note,  even 
though  no  offer  to  return  stock  has 
been  made.  Taft  v.  Myerscough,  197 
111.  600  (1902). 

i  Rothmiller  V.  Stein,  143  N.  Y.  581 
(1894);   Jones  v.  Garlington,  44  S.  C. 
533  (1895).     See  also  8  335,  s«pi 
vendor  of  stock  may  collect  the  pj 
although  the  stock  was  worthless  and 
known  so  to  be  by  the  vendor.    Hunt- 
ing v.  Downer,  151  Mass.  275    I  1890). 
Where  worthless  stock  is  sold  by  an 
agent    on    false    representations,    the 
principal   may   be  held  liable  for  de- 
..  it   and   the   stock   need    not   be   re- 
turned.    Campbell  v.  Park,  128  Iowa 
181     (1904).      A     person    who    sells 
worthless  stock  to  a  married  woman 
who   is   represented  by  her   husband, 
is   bound   to  know   that  the  husband 
misrepresented  the  matter  to  his  wife 
or  that  she  was  incompetent  in  a  busi- 
ness way  to  protect  herself,  and  hence 
cannot  enforce  a  note  given  in  pay- 
ment therefor.     Ditto  v.  Slaughter,  92 
S.  W.  Rep.  2   (Ky.  1906).     A  contract 
is  binding,  the  consideration  of  which 
is  the  issue  of  stock  which  is  valuable 
at   the   time,    even   though    it    subse- 
quently declines  in  value.     Pittsburg, 
etc.  Co.  v.  Pennsylvania,  etc.  Co.,  208 


19  W.  R.  419  (1871),  where,  by  reason 
of  a   winding  up,   a  transfer   on  the 
corporate  books  was  no  longer  possi- 
ble;  Kerchner  v.  Gettys,  18  S.  C.  521 
(1882),    holding   that   a   loss   by   the 
corporation  of  its  property  is  no  de- 
fense.    Damages  cannot  be  recovered 
for   the   breach  of  an  executory  con- 
tract to  purchase  stock,  if  at  the  time 
of  making  the  contract  the  corpora- 
tion had  been  dissolved  and  the  pur- 
chaser  was   not   aware  of   that   fact. 
Kip   V.   Monroe,  29  Barb.  579    (1859). 
The  fact  that  stock  was  worthless  at 
the  time  of  the  sale  thereof  is  no  de- 
fense to  an  action   for  the  purchase 
price,    unless   there   was   fraud    or    a 
specific   warranty.     Peck,   etc.   Co.   v. 
Stratton,  95  Fed.  Rep.  741   (1899).     A 
person  who   pays  for  land  by  trans- 
ferring worthless  mining  stock  is  not 
a  bona  fide  purchaser.    Sewell  v.  Nel- 
son, 113  Ky.  171   (1902).     The  vendor 
is  not  liable  in  an  action  for  deceit, 
even  though  the  stock  was  worthless, 
it  having  a  market  value  and  he  hav- 
ing   no    knowledge    of    its    intrinsic 
value.    Kirtley's  Adm'x  r.  Shinkle,  69 
S.  W.  Rep.  723    (Ky.  1902). 

2  A  sale  of  stock  July  6th,  "includ- 
ing all  dividends  due  or  to  become  due 
thereon,"  carries  a  stock  dividend  de- 


Pa  37  (1904)  A  person  who  is  clared  June  5th  and  payable  to  stock- 
under  contract  to  purchase  stock  can-  holders  of  record  July  1st,  and  the 
not  defeat  that  contract  by  the  fact  sale  is  not  fraudulent  although  the 
that  the  corporation  was  insolvent  at  seller  did  not  know  of  such  stock- 
the    time    the    contract    was    entered  dividend    and    the    buyer    did    know. 


into.  Rudge  v.  Bowman,  L.  R.  3  Q.  B. 
689  (1868);  Gordon  r.  Parker,  10  La. 
56  (1836),  where  the  question  of 
whether  fraud  was  involved  was  sub- 
mitted to  the  jury.     Crabb  v.  Miller. 


Rose    v.    Barclay,    191    Pa.     St.    594 

( 1899) 

3Hoxie  v.  Small,  86  Me.  23   (1893). 

4  Kilgore    v.   Bruce,    166    Mass.   136 
(1896). 


1005 


§  3/iO.] 


CONTRACTS  TO  BELL— GAMBLING  SAU 


I'll.   XX. 


forced.3      A    person   who  contracts    I"   purchase   Btock  may  defend 
againsl  an  action  for  the  price  by  Betting  up  thai  the  vendor  falsely 
represented  thai  the  vendee  was  aboul  to  be  deprived  of  the  presi- 
dency of  the  company,  and   that  thereby  the  vendee  was  Lndu 
to  make  the  contract  of  purchase  al  an  unconscionable  pri< 

There  are  various  facts  which  constitute  fraud  herein,  and  vari- 
ous principles  of  law  applicable  to  the  remedy  to  be  pursued.  Such 
cases  are  arising  constantly,  and  various  decisions  on  this  subject 
arc  given  in  the  n  •'  -3 


i  Traphagen  V.  Sagar,  63  Minn.  317 
(1895). 

2  Delano  v.  Rice,  23  N.  Y.  App.  Div. 
327  (1897). 

3  "Where  a  debtor  turned  over  to  his 
creditor,  as  trustee,  the  controlling 
stock  of  a  corporation,  for  the  latter 
to  manage,  and  the  latter  afterwards, 
by  threats  of  abandoning  the  enter- 
prise, forced  the  debtor  to  sell  him 
the  stock  outright,  a  court  of  equity 
will  set  aside  such  sale  and  hold  the 
creditor  liable  as  a  trustee.  Ryle  v. 
Ryle,  41  N.  J.  Eq.  582  (1S86).  A  fail- 
ure of  the  vendor  to  state  that  the 
company  is  a  joint-stock  association 
and  not  a  corporation  is  not  fraud 
avoiding  the  sale  of  the  stock.  Curtiss 
v.  Hurd,  30  Fed.  Rep.  729   (1887).     It 


of  the  stock    may   have   the   land   re- 
turned.     Harris  v.  Piatt,  64  Mich.  105 

(1887).     Cases   of   fraud   on   the   part 
of  the  ;nes  occur,  where 

the  vendee  is  given  a  majority  of 
the  stock,  and  then  uses  his  control 
of  the  corporation  to  defraud  the 
vendor  In  the  execution  of  his  con- 
tract to  pay  for  the  stock.  Harden- 
bergh  v.  Baron.  33  Cal.  356  (1867); 
Johnson  v.  Kirby,  65  Cal.  482  (1884). 
Whore  a  stockholder  sells  a  control- 
ling Interest  to  a  person  who  is  to  pay 
therefor  by  improving  the  corporate 
property,  bul  who  elects  a  board  of 
directors  and  defrauds  the  vendor,  the 
ter's  remedy  is  a  difficult  one. 
i  os  v.  Sparkman,  etc.  Co.,  73  Tex. 
619    (1SS9).     The  vendor   cannot   re- 


is  a  question  for  the  jury  whether  it    scind  on  the  ground  that  the  vendee 
was   fraud    in    representing   that    the    said  that  he  was  buying  for  himself 


stock  was  paid  up,  when  in  fact  the 
first  payment  only  had  been  made, 
and  the  balance  had  been  paid  by 
dividends.  Kryger  v.  Andrews,  65 
Mich.  405  (1887).  Fraud  may  be  by 
directors  in  fraudulently  making  div- 
idends.   See  ch.  XXXII,  infra.  Where 


alone  and  such  was  not  the  case. 
Downs  V.  Self,  28  Tex.  Civ.  App.  356 
(1902).  The  fraud  or  mistake  must 
have  been  such  that  the  agreement 
would  not  have  been  made  in  its  ab- 
sence, where  a  rescission  of  the  con- 
tract is  sought  by  decree.     Means  r. 


a  person  owning  all  the  stock  of  a  cor-  Rees,    26   Fed.   Rep.   210,   216    (1886). 

poration  sells  it  under  circumstances  Even  though  an  inventor  is  persuaded 

which  induce  the  purchaser  to  believe  to  turn  in  his  inventions  to  a  corpora- 

that  the  former  has  no  claim  against  tion  for  stock  on  an  oral  assurance 

the  corporation,  he  may  be  enjoined  that  plenty  of  money  would  be  forth- 

f rom  enforcing  any  such  claim.  Given  coming  to  take  the  stock  of  the  com- 


r.  Times-Republican,  etc.  Co.,  114  Fed. 
Rep.  92  (1902).  Where,  after  an 
agreement  to  sell  land  for  stock,  the 
owner  of  the  stock  attends  a  corpo- 
rate meeting  and  votes  to  sell  all  cor- 


pany  and  make  the  business  success- 
ful, and  even  though  the  parties  mak- 
ing such  representations  do  not  ad- 
vance the  money,  but  allow  the  com- 
pany to  become  insolvent  and  buy  in 


porate  property  at  sixty  cents  on  the    the     assets,     including     the     patents, 
dollar,  which  is  done,  the  purchaser    yet  the  inventor  cannot  maintain  an 

1006 


CH.  XX.] 


CONTRACTS  TO  SELL GAMBLING   SALES,  ETC. 


[§  350. 


Fraud  in  the  sale  of  stock  frequently  arises  in  the  organization  of 
the  company.      The  parties   who  cause   (lie  company   to  be  organ- 


action     for     fraud     in     failing     to 
furnish    money    according    to    prom- 
ise.       Smith     v.     Parker,     148     Ind. 
127       (1897).        Where      a    promoter 
induces    an    owner    of    timber    land 
to    convey    it    to    a    corporation    for 
stock,  one-quarter  to  go  to  the  owner 
and    three-quarters    to    the    promoter, 
for  which  the  promoter  pays  nothing, 
the  owner  may  cause  the  whole  trans- 
ion  to  be  set  aside.     Cranor  Co.  v. 
.Miller,   147   Ala.   2GS    (1906).     Where 
a    corporation    has    issued    stock    for 
services  which   have  never  been  per- 
formed   it    may    maintain    a    bill    in 
equity  to  cancel  such  stock.     Hillside, 
etc.    Ass'n    r.    Holmes,    97    Minn.    261 
(1906).     An  older  brother  who  bays 
for    $70,000   stock    from    his    younger 
brother,   which   is  worth   $95,000,  the 
latter  being  a  drunkard,  may  be  com- 
pelled    to     rescind     the     transaction. 
Shevlin     v.     Shevlin,     96     Minn. 
(1905).     A   purchaser   of  stock   in   a 
company  which  both  the  vendor  and 
the  vendee  believe  to  be  incorporated, 
and  which  has  not  been  incorporated, 
may  rescind,  where  the  vendor  stated 
that  the   company   was   incorporated, 
and  it  is  no  defense  that  the  property 
of  the  company  has  since  depreciated 
in   value.     In  this  case  the  attorney 
was  instructed  to  procure  a  char' 
but  made  no  attempt  to  do  so.    Bolton 
v.    Piiather,    35    Tex.    Civ.    App.    295 
(1904).    In  the  case  Donnelly  v.  Balti- 
more, etc.  Co.,  102  Md.  1  (1905)  a  suit 
by   a    purchaser    of   bonds   against   a 
trust  company  that  has  offered  them 
for   sale  and  made  various  represen- 
tations,   failed,    the   deceit   not   being 
clearly    proven,    and    the    representa- 
tions having  been  practically  correct. 
A  fraud  upon  a  vendee  of  stock  may 
consist  in  the  defendant  saying  to  the 
former    that    the    latter    had    investi- 
gated the  stock  enough  to  know  that 
he  wanted  some  of  it.     The  fact  that 
the  vendee  already  owned  some  of  the 


stock  was  not  material.  McDonald  v. 
Smith,  139  Mich.  211  (1905);  hold- 
ing also  that  it  may  be  shown  that 
the  vendor  promised  that  the  corpora- 
tion would  employ  the  vendee  as 
secretary  and  treasurer  at  a  specified 
salary,  and  that  this  promise  was  not 
carried  out,  such  promise  not  being 
the  main  fraud  complained  of.  A 
promise  of  employment  is  not  fraud, 
even  though  not  performed.  Hubbard 
r.  Long,  105  Mich.  442  (1894).  Fraud 
may  be  by  the  agent's  representations 
as  to  the  cost  of  mining  the  coal,  of 

asportation,  and  of  the  market 
price.  Booth  v.  Smith,  117  111.  370 
(18S6).  On  a  question  of  testimony 
by   the  defendant,  see  Reeve  v.   Den- 

i.  Ill  Mass.  207  (1886);  s.  c,  145 
Mass.  23.  It  has  been  held  that  one  who 
Induced  by  fraud  to  purchase- 
stock  in  an  insolvent  corporation  may 
bring  suit  to  have  his  part  of  the  cor- 
porate assets  ascertained,  to  the  ex- 
clusion of  a  debt  due  from  the  cor- 
poration to  the  person  inducing  him 
to  purchase.  Poole  v.  West  Point,  etc. 
Assoc,  30  Fed.  Rep.  513  (1887).  A 
lawyer  who  sells  to  his  client  mining 
stock  at  a  dollar  a  share  when  the 
company  is  selling  it  at  fifty  cents  a 
share,  and  does  not  tell  the  client 
that  he  is  selling  his  own  stock,  may 
be  compelled  to  rescind  the  sale,  even 
though  the  client  attended  a  stock- 
holders' meeting  after  the  suit  was 
commenced.  Landis  v.  Wintermute, 
40  Wash.  673  (1905).  The  mere  fact 
that  a  man  purchases  stock  through 
his  brother,  as  his  agent,  and  allows 
the  stock  to  stand  in  his  brother's 
name  and  thereby  gives  him  credit, 
is  not  fraud  on  the  part  of  the  former. 
Shields  v.  City  Nat.  Bank,  138  N.  C. 
185  (1905).  A  corporation  itself  can- 
not claim  that  a  sale  of  stock  was  for 
its  benefit,  even  though  the  vendor 
fraudulently  misrepresented  to  the 
vendee   that  he  was  selling  treasury 


1007 


§  350.] 


CONTRACTS  TO  SELL — GAMBLING  BALES,  ETC. 


[CH.  XX. 


izcd  are  called  the  "promoters"  of  it.     As  such  they  arc  disquali- 
fied from  making  a  profit  by  Belling  property  to  the  company  a1  a 


stock    belonging    to    and    for    the   cor-     sion  of  ;i   transfer  of  land   for  .^tock. 


poration.  Chilkat,  etc.  Co.  v.  Fos,  12 
Wash.  201  (1906).  False  statements 
as  to  the  character  of  the  officers  and 
the  financial  basis  of  the  company  and 
its  ownership  of  land  are  material. 
Gurney  v.  Tenney,  81  NT.  E.  Rep. 
(Mass.  1908).  If  both  the  vendor  and 
vendee  of  stuck  are  Ignorant  that  the 
charter  has  expired,  this  does  not  in- 
validate the  sale.  Brooks  v.  Camak, 
60  S.  E.  Rep.  456  (Ga.  1908).  A  per- 
son making  Bales  of  stock  by  false 
representations  may  be  Indicted  tor 
obtaining  money  by  false  representa- 
tions. Commonwealth  r.  Wood,  1  12 
Mass.  459  (188G).  The  statute  of 
frauds  as  to  the  answering  to  the  debt, 
defaults,  etc.,  of  another  person  has 
no  application  to  a  sale  of  stock  here- 
in. The  fact  that  the  corporate  prop- 
erty sold  several  years  later  for  a 
small  amount  is  Immaterial  and  not 
admissible.  French  v.  Pitch,  67  Mich. 
492  (1887).  A  misstatement  as  to  the 
reason  why  the  vendee  purchases  is 
not  material.  Byrd  v.  Rautman,  85 
Md.  414  (1897).  Where  an  insolv. 
pledgor  sells  the  pledge  to  the  pledgee 
for  the  debt  itself,  $7,000,  the  transac- 
tion is  legal,  even  though  a  jury  find 
that  the  stock  was  worth  $1,500  more. 
Wachovia  L.  &  T.  Co.  v.  Forbes,  120 
N.  C.  355  (1897).  See  §479,  infra. 
Where  an  agent  to  sell  a  mine  induces 
his  principals  to  place  in  his  name  all 
their  stock,  and  he  sells  the  property 
and  accounts  to  them  for  part  only 
of  the  price,  and  l-efuses  to  return  the 
stock,  they  may  sue  him  for  an  ac- 
counting without  previously  tender- 
ing back  the  amount  they  received  or 
demanding  the  stock.  Wooster  v.  Ne- 
vills,  73  Cal.  58  (1887). 

False  representations  as  to  the  cor- 
porate property,  business,  and  pro- 
spects, and  the  use  of  a  corporate  pro- 
spectus which  the  vendee  knows  con- 
tains false  statements,  sustain  rescis- 


A  person  purchasing  the  land  with 
full  knowledge  of  the  fraud  is  not  pro- 
ted.  The  certificates  may  be  filed 
with  the  clerk  of  the  court,  awaiting 
the  retransfer  of  the  land.  Ormsby  p. 
Budd,  72  low.!,  .so  (1SS7).  The  sendee 
of  stock  cannot  rescind  or  colli  el  dam- 
s  on  the  ground  that  the  corpora- 
tion was  not  legally  Incorporated.  If 
it  is  a  de  facto  corporation  the  vendor 
is  not  liable.  Harter  v.  Eltzroth,  1 1 1 
Ind.  159  (1887).  The  vendee  of  stock 
for  which  he  gave  real  estate  may 
have  a  reconveyance  of  the  real  estate 
decreed,  where  the  sale  of  stock  was 
Induced  by  fraudulent  representation  . 
v  v.  Robbins,  11  Atl.  Rep.  860  (N. 
J.  1SS7).  A  managing  director  who 
buys  stock  on  credit,  and  then  aids  in 
levying  an  attachment  on  the  stock 
against  the  vendor,  and  conceals  the 
ae  from  the  vendor,  and  buys  in 
the  stock  at  a  low  price,  and  then  re- 
pudiates his  debt  to  the  vendor,  is 
guilty  of  fraud.  Young  V.  Fox,  37 
Fed.  Rv\).  385  (1888).  Where  the 
pr<  sident  in  selling  stock  makes  false 
representations,  the  vendee  is  not 
bound  to  investigate  them.  He  may 
at  a  note  given  in  payment.  Wan- 
noil  r.  Kern,  57  Mo.  478  (1874).  A 
representation  that  a  bond  is  an  "A 
No.  1"  bond  is  not  a  material  represen- 
tation. Deming  v.  Darling,  148  Mass. 
504  (1889).  See  also  instances  in 
§  334,  supra.  The  vendee  fails  in  his 
suit  for  damages  if  he  does  not  con- 
tradict the  defendant's  testimony  that 
the  plaintiff  vendee  knew  all  the  facts 
at  the  time  of  the  sale.  Nelson  v.  Lul- 
ing,  62  N.  Y.  645  (1875),  affg  36  N. 
Y.  Super.  Ct.  544. 

A  statement  on  April  10  that  the 
last  semi-annual  dividend  was  seven 
per  cent.,  and  that  the  fiscal  year 
ended  on  June  1,  is  a  fraudulent  sup- 
pression of  the  truth  where  but  one 
dividend  had  been  declared,  and  that 


100S 


CH.  XX.] 


CONTRACTS  TO  SELL— GAMBLING  SALES,  ETC. 


[§  350. 


much  larger  price  than  they  gave  for  the  property.     The  promoters 
act  in  a  fiduciary  capacity.     Hence,  when  they  have  made  a  profit 


twenty-two  months  before  the  date  of 
the  statement.  Tyler  v.  Savage,  143 
U.  S.  79  (1892).  Where  the  contract 
of  sale  contains  express  warranties, 
parol  representations  as  warranties 
are  not  admitted  to  prove  false  repre- 
sentations. Humphrey  v.  Merriam,  4*J 
Minn.  413  (1891).  The  fact  I 
statements  as  to  the  affairs  of  the 
company  are  not  filed  as  required  by 
statute  does  not  amount  to  fraud  in 
the  sale  of  stock;  nor  do  representa- 
tions that  the  stock  will  pay  twenty 
per  cent,  dividends  amount  to  fraud. 
The  question  as  to  the  validity  of 
stock  having  once  been  litigated  can- 
#not  be  again  raised  in  an  action  for 
deceit  in  the  sale  of  the  stock.  The 
mere   act   of   conspiracy    is    not    suffi- 

nt  to  sustain  the  action  unless  dam- 
age is  shown.  Robertson  v.  Parks,  7C 
Md.  118  (1892).  A  representation  in 
a  transaction  involving  wat»  r-com- 
pany  stock,  as  to  the  amount  cf  v. at.  r 
that  can  be  obtained,  is  material.  A 
t.  nder  of  the  certificate  is  sufficient 
where  there  has  been  no  transfer  on 
the  books.  Hill  v.  Wilson,  88  Cal.  92 
(1891).  Expressions  of  opinion  as  to 
the  future,  although  exaggerated,  are 
not  representations.  Columbia  Elec- 
tric Co.  v.  Dixon,  46  Minn.  4G3  (1891). 
Notes  given  in  the  purchase  of  stock 
in  a  corporation  whose  sole  business 
is  to  carry  on  an  infringing  telephone 
business  are  without  consideration 
and  void.  Clemshire  v.  Boone  County 
Bank,  53  Ark.  512  (1890).  Under  the 
New  York  statute  it  may  be  legal  for 
an  insurance  company  to  transfer  its 
business  and   liquidate  its  affairs  by 

.solution  proceedings,  in  accordance 
with  the  statute,  and  hence  a  pur- 
chaser of  the  business  may  maintain 
a  suit  for  false  representations  as  to 

■  condition  of  the  company.  L.  D. 
Garrett  Co.  v.  Morton,  Go  N.  Y.  App. 
Div.  366  (1901). 

Where    stock    is    issued    to    several 


persons  for  a  patent,  and  they  return 
part  of  it  to  a  trustee  for  the  com- 
pany to  sell  for  working  capital,  and 
a  subscriber  to  the  company's  stock 
gives  his  note  to  the  company,  and  the 
company  indorses  the  note  to  one  of 
the  first-named  parties,  who  turns  out 
his  own  stock  to  fill  the  subscription, 
the  latter  may  recover  on  the  note, 
and  is  not  liable  for  false  representa- 
tions of  one  of  his  associates  and  an 
agent  of  the  company.  King  v.  Doane, 
139  U.  S.  166  (1891).  A  sale  of  stock 
will  not  be  set  aside  on  the  ground  of 
inadequacy  of  price  unless  so  gross  as 
to  shock  the  conscience  and  give  de- 
<  i  ive  evidence  of  fraud.  Perry  v. 
Pearson,  135  111.  218  (1890).  It  is  not 
sufficient  to  prove  that  defendants 
managed  the  manufacturing  business 
of  the  company,  to  sustain  an  action 
for  fraud  in  stating  that  the  company 
was  doing  a  good  business  and  mak- 
ing ten  per  cent.,  it  appearing  that 
the  business  was  new,  and  defendants 
did  not  state  that  they  knew  of  the 
financial  condition.  Hatch  v.  Spooner, 
13  N.  Y.  Supp.  642  (1891);  s.  c,  on 
second  appeal,  1  N.  Y.  App.  Div.  408. 
A  statement  that  drill-holes  in  coal- 
fields showed  certain  results  are  ma- 
terial, and  not  matters  of  opinion. 
Martin  v.  Hill,  41  Minn.  337  (1889). 
Where  a  banker  sells  stock  to  a  law- 
yer and  informs  the  latter  that  the 
company,  the  owner  of  land  in  Mex- 
ico, had  a  right,  though  an  alien  to 
Mexico,  to  own  land  therein,  as  the 
banker  had  been  informed  by  his  at- 
torney, a  note  of  the  vendee  in  pay- 
ment of  the  stock  cannot  be  defeated 
on  the  ground  that  such  corporation 
could  not  legally  hold  the  land.  Daly 
r.  Brcnnan,  87  Wis.  36  (1894).  It 
is  not  fraud  on  the  vendee  that  his 
i  lor  took  the  stock  from  the  cor- 
poration and  paid  for  it  with  funds 
embezzled  from  another  party.  The 
corporation  is  not  liable  for  the  fraud 


(64) 


1009 


§  350.] 


CONTRACTS  TO  SELL — CAM  HI. IXC  BALES,  ETC. 


[CH.  XX. 


at  the  expense  of  the  company,   they   may   be  compelled    bo  turn 
ov<  r  that  profil  to  the  compan        .  if  they  have  sold  Btock  of  the 


of  the  presidenl    in  selling  his  own 
stock.      Dunn   V.  Slate  Bank,  59  Minn. 
221    (1894).     A   sale   of  bonds   is  not 
revocable  even   though  bonds  are  in- 
ld     and     the     vendor     Innocently 
ted   that  they  were  valid.     Kuohs 
v.    Third     Nat.     Bank,    94     Tenn.     57 
(1894).    Cf.  §296,  supra.  False. state- 
ments as  to  the  condition  of  the  com- 
pany constitute  fraud.  Carruth  p.  Har- 
ris,  41   Neb.   789    (1894).      In    Ritchie 
r.  McMullen,  79  Fed.  Rep.  522  (1897), 
the  court  held  that  if  a  pledgee,  being 
in  control  of  the  corporation,  refuses 
to  develop  the  property  and  to  accept 
subsidies  which  are  offered,  and  to  ac- 
cept  profits   under   a   contract   which 
are  possible,  and  to  sell  the  property 
at  a  large  price,  all  for  the  purpose  of 
depreciating    the    pledged   stock    and 
thus    obtain    the    stock    himself,    the 
pledgor   may   call   the   pledgee   to  ac- 
count for  the  loss  suffered  from  this 
conspiracy     and     wrong.     The    court 
held   also   that  although   the   damage 
was  directly   to  the   corporation,   yet 
that  indirectly  it  was  a  damage  to  the 
pledgor,  and   that  hence  the  pledgor 
could  sue  in  his  own  behalf  alone,  and 
that   the   measure   of   damage   is   the 
difference  between   the  market  value 
at  the  time  of  suit  and  what  it  would 
have  been   if  the  conspiracy  had  not 
been  set  on  foot.    The  court  held,  how- 
ever, in  the  case  before  it,  that  the 
proofs    did    not    sustain    the    allega- 
tions.   The  purchasers  of  stock  which 
they  suppose  is  the  original  stock,  but 
which     is     really     increased     capital 
stock,  cannot  sustain  a  bill  to  cancel 
the  original  capital  stock,  even  though 
the  latter  is  held  by  the  parties  who 
issued    the    increased    stock    without 
amending  the  charter  as  required  by 
statute.     Byers  v.  Rollins,  13  Colo.  22 
(1889).     The  fact  that  the  company 
has  not  paid  dividends  does  not  prove 
that  a  representation  that  it  was  mak- 
ing  ten    per    cent,    profit    was    false. 


Hatch  r.  Spooner,  1  N.  Y.  App.  Div. 
408   i  L896).     In  k  onedy, 

1 17   X.  Y.  124  l,  an  action   was 

brought  by  a  vendee  of  Stock  and 
bonds  a  linst  an  officer  of  the  com- 
pany, who  upon  the  application  of 
the  vendee,  before  the  purchase  was 
made,  made  a  false  nt  of  the 

liabilities  of  the  company.    The  suit, 
i  law,  failed,  because  no  fraud- 
ul(  ut  Intent  was  proved.    Where  two 

.  irious 

kinds,  and  In  the  contract  to  that  ef- 

place   a    value   upon    the   Bame, 

there   is   no   fraud    arising    from    the 

•  that  the  value  given  to  particular 
stocks  is  greater  than  their  actual, 
value,  the  transaction  really  being  one 
of  barter.  Rockefeller  Merritt,  76 
Fed.  Rep.  909  (1896).  Where  an  agent 
or  broker  is  employed  to  buy  stock 
for  a  "pool,"  and  agrees  to  do  so  for 
a  compensation  consisting  of  a  part 
of  the  profits,  he  is  liable  in  damages 
for  fraud  if  he  charges  the  "pool" 
more  than  the  stock  cost  him.  Man- 
Ville  V.  Lawton,  19  N.  Y.  Supp.  587 
(1892).  The  purchaser  of  bank  stock 
may   rely   upon   the  statement   of  its 

-ident  as  to  the  bank's  condition, 
and,  the  purchase  having  been  from 
the  bank  itself,  it  may  be  rescinded. 
Merrill  r.  Florida,  etc.  Co.,  60  Fed. 
Rep.  17  (1893).  An  action  for  fraud 
in  inducing  plaintiff  to  buy  stock  of 
defendant  is  defeated  by  proof  that 
the  stock  was  sold  by  the  corporation 
itself.  Hubbard  v.  Long,  105  Mich. 
442  (1895).  Misrepresentations  as  to 
the  value  of  stock  as  investment  and 
relating  chiefly  to  the  future  will  not 
sustain  an  action  of  deceit.  Lynch  v. 
Murphy,  171  Mass.  307  (1898).  No 
fraud  is  proved  by  showing  that  the 
certificate  of  stock  recited  the  capital 
stock  as  being  $25,000  when  it  was 
claimed  to  be  $50,000,  nor  by  a  general 
statement  that  the  company's  affairs 
were  in  good  shape  and  that  it  was 


1010 


CH.  XX.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§   8G0. 


company,  the  purchasers  of  the  stock  from  them  may  rescind  the 
purchase  and  hold  them  personally  liable  therefor.1  The  vendors  of 
a  mining  property  of  a  corporation  are  not  liable  for  the  misstate- 
ments of  such  corporation  in  selling  its  stock,  in  order  to  pay  for 
the  mine,  even  though  they  knew  that  a  prospectus  had  been  issued 
and  they  accepted  payment  from  the  corporation.2  Where  brok 
and  promoters  issue  bonds  greatly  in  excess  of  the  value  of  the  cor- 
porate property  and  by  fictitious  sales  give  a  high  market  quotati 
of  the  bonds  and  borrow  money  thereon,  the  lender  may  hold  them 
liable  in  a  suit  for  loss  due  to  a  conspiracy.3 

It  may  be  fraudulent  for  the    directors   to  issue  to    themselves 


making  money,  such  statement  being 
practically  correct.  Hoeft  v.  Koch,  119 
Mich.  458  (1899);  s.  c,  123  Mich.  171. 
It  is  no  defense  to  notes  given  in  pay- 
ment for  stock  that,  the  agent  of  the 
vendor  stated  that  he  would  not  sell 
the  notes  and  that  they  could  be  paid 
out  of  future  dividends.     State  Bank 
v.    Gates,    114    Iowa,    323    (1901).     A 
stockholder     cannot     prevent     other 
stockholders  from  selling  their  stock 
on  the  ground  that  the  purchaser  may 
manage  the  company  to  the  detriment 
of  minority  stockholders,  and  the  fact 
that  the   plaintiff's  stock  was  on  de- 
posit with  the  trust  company  and  that 
he  cannot  get  the  stock  and  thus  ac- 
cept the  order  to  purchase  his  stock 
also  is  no  ground  for  an  injunction. 
Ingraham  r.  National  Salt  Co.,  72  N. 
Y.  App.  Div.  582    (1902);   appeal  dis- 
missed,  172   N.  Y.   642.     A  purchaser 
of  stock  who  makes  a  partial  payment 
and  gives  back  the  stock  as  collateral 
security  cannot  abandon  the  contract 
and  claim  such  part  of  the  stock  as 
the  payment  already  made  would  pay 
for,  on  the  ground  that  the  seller  has 
again  obtained  control  of  the  corpora- 
tion and  is  guilty  of  a  breach  of  trust. 
The   fact   that   the   seller   as   pledgee 
has  sold  the  stock  and  bought  it  in 
himself    is   immaterial,    inasmuch   as 
such  a  sale  is  illegal.     Reid  v.  Cald- 
well, 110  Ga.  481  (1900);  114  Ga.  676. 
i  See    §  651,    infra.      Thus    where   a 
person  purchases  property  for  the  sole 


purpose  of  creating  a  corporation  to 
take  it  over  from  him  and  to  pay  him 
therefor   an   excessive    price   in   cash 
and    stock,    inning   a   large    profit   to 
him,   the   stock   being   offered   to   the 
public,  and   he  causes  the  incorpora- 
tion to  be  made  and  directors  to  be 
named,  who  are  his  dummies,  he  is  a 
promoter  and   can   be  held    liable   by 
U  corporation  for  the  profit  he  has 
made,  unless  he  fully  disclosed  in  a 
spectus     the     fact     that     he     had 
formed    the   corporation   and   that  he 
had  made  such  profit.     Especially   is 
this    the    rule    where   the    prospectus 
gave  a  false  impression.     He  occupies 
a  fiduciary  relation  towards  the  pur- 
chasers of  the  stock.    It  is  immaterial 
that    the    directors    approved    of    the 
transaction  with  full  knowledge.  Non- 
disclosure in  such  a  case  is  a  misfeas- 
ance   in    the    nature   of   a   breach    of 
trust.    Re  Leeds,  etc.  Co.,  [1902]  2  Ch. 
809.     In  the   case   Home,   etc.   Co.   v. 
Barber,  67  Neb.  644  (1903),  where  the 
purchaser  of  stock  sued  to  hold  for- 
mer stockholders  liable  for  corporate 
assets  appropriated  by  them,  the  court 
found  that  such  use  of  assets  had  been 
taken  into  consideration  in  fixing  the 
price   at    which    the   stock   had   been 
sold,   and  hence   refused  to  hold   the 
parties  liable. 

2  Wiser    v.    Lawler,    189    U.    S.    260 
(1903). 

3  McElroy  v.  Harnack,   213   Pa.   St. 
444    (1906). 


1011 


.!,_]  com  BLL      QAMBUNO  BALES,  ETC.  [('II.  XX. 

Bhai  the  company's  unissued  stock  in  order  to  control  elect* 

i  r  i"  make  a   profit.1 

An  agenl  is  nol  liable  for  misrepresentations  made  by  his  prin- 
cipal, but  it  may  be  a  question  of  fact  whether  the  vendor  is  a 
principal  or  agent2     A  contracl   in  regard  to  may  be  illegal 

in  itself,  as,  for  instance,  a  contract  to  use  Btock  to  rob  a  railroad 
and  bribe  a  judge.8  Where  a  stockholder  receives  an  offer  for  his 
lM  and  is  persuaded  not  to  sell  by  fraudulenl  representations  of 
a  director,  he  may  hold  the  latter  liable  in  damages.4  False  repre- 
sentations made  by  a  committi  the  di  -  inducing  parties 
to  purchase  a  majority  of  the  stock  arc  no1  binding  on  stockhold- 
ers and  din  who  knew  nothing  aboul  such  representations. 
Representations  of  an  agenl  do  uol  bind  the  seller  unless  the  agent 
was  authorized  to  make  representations.6  A  misrepresentation  by 
;,ii  agent  "1"  a  corporation  a-  to  the  property  held  by  it,  made  to  a 
purchaser  of  stock,  not  from  the  corporation  but  from  a  stock- 
holder, does  nnt  render  the  vendor  of  the  Btock  personally  Hal 
A  director  selling  stock  cannol  be  defeated  in  hi-  action  for  the 
price  by  reason  of  fraudulent  representations  of  tin-  corporate  treas- 
urer inducing  defendant  t<>  purchase.7  Where  the  president  of  a 
bank  is  acting  as  the  agenl  of  a  person  and  sells  to  the  latter 
curities  of  the  bank  by  means  of  false  representations,  the  bank  is 
liable,  even  though  the  purchaser  «li<l  not  know  that  the  sale  was 
in  behalf  of  the  bank.8     A  broker  i-  liable  for  fraudulently  inducing 

i  See  §  70,  supra.  agreement.     Scott  v.  Scott,   68  N.   H. 

2  See  §  334,  supra.  7    (1S94). 

3Tobey  r.  Robinson,  99  111.  222  I  Rothmiller  v.  Stein,  143  N.  Y.  581 
(1881).  Although  a  stockholder  has  (  L894).  See  also  §  33.',.  infra.  A  party 
transferred  certain  stock  to  the  presi-  making  a  false  representation  may  In- 
dent to  be  used  to  bribe  governmental  liable  even  though  the  stock  was  pur- 
officials  in  obtaining  a  renewal  of  chased  from  another.  Hindman  v. 
governmental  contracts  with  the  cor-  First  Nat.  Bank,  112  Fed.  Rep.  931 
poration,    yet    the    stockholder    may  (1902). 

recover  back  the  stock,  it  not  having  5  Garrett  Co.  r.  McComb,  58  N.  Y. 

been    used    for    that    purpose.      Mul-  App.  Div.  419  (1901). 

vane  v.  O'Brien,  58  Kan.  463    (1897).  c  Boddy    v.    Henry,    113    Iowa,    462 

See    also    §39,    supra.      Although    a  (1901). 

person     transfers    stock     to    another  7  Doane  v.  King,  30  Fed.   Rep.   106 

in    order    to    evade   a    statute    which  (1887). 

prohibits  any  one  stockholder  from  8  Carr  v.  National  Bank  &  L.  Co., 
voting  on  any  more  than  one-eighth  167  N.  Y.  375  (1901).  A  bank  may  be 
of  the  capital  stock,  yet  the  person  liable  for  falsely  representing  the  con- 
to  whom  it  is  transferred  may  make  dition  of  a  company,  thereby  induc- 
a  valid  agreement  to  retransfer  the  ing  a  party  to  purchase  stock  in  the 
same,  and  the  court  will  enforce  this  latter.     Hindman  r.  First  Nat.  Bank, 

112  Fed.  Rep.  931  (1902). 
1012 


CH.  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC.  [§   350. 

a  customer  to  cancel  an  order  to  sell  stock,  even  though  the  decline 
in  value  is  due  to  causes  not  contemplated  at  the  time.1  Misrepre- 
sentations made  to  others  to  induce  them  to  buy  the  stock  are 
immaterial  where  no  sale  had  resulted  therefrom  and  no  fraud  actu-  ■ 
ally  perpetrated.2  Where  the  vendor  making  fraudulent  representa- 
tions as  to  the  financial  condition  of  the  company  is  secretary  and 
treasurer,  he  cannot  claim  that  he  was  ignorant  of  the  facts.3  A 
statute  to  the  effect  that  a  person  making  a  representation  as  to  the 
trade  or  dealings  of  another  person  shall  not  be  liable  therefor,  unless 
they  are  made  in  writing  signed  by  him  or  by  his  agent,  does  not 
apply  to  representations  as  to  a  corporation,  in  selling  stock  in  such 
corporation.4  But  a  Btatute  that  a  person  shall  not  be  liable  for 
representations  as  to  the  credit  of  another  person,  unless  the  repre- 
sentations aiv  written,  applies  to  representations  by  a  director  in 
regard  to  the  corporation,  which  lead  to  a  person  subscribing  to  its 
stock.-'  A  vendee  who  is  in  the  employ  of  the  company  and  has 
opportunity  to  know  all  about  it  cannol  claim  thai  he  was  deceived 
as  to  the  value  of  the  stock.0  Misrepresentations  as  to  matters 
which  did  not  affect  the  purchaser's  judgment  are  immaterial 
especially  where  the  purchaser  is  invited  to  look  at  all  the  books 
and  papers.7  Although  a  statement  is  made  thai  a  certain  amount 
of  money  had  been  paid  in,  yet  where  other  arly 

that,  this  was  not  so,  no  cause  for  complaint   exists.8 

Misrepresentations  as  to  the  amount  of  ore  in  sight,  ami  its  value, 
where  the  party  has  full  opportunity  afterwards  to  inspect  the 
mine  and  visits  the  mine  and  buys  more  stock,  ami,  iifler  knowing 
all  the  facts,  negotiates  for  machinery  for  the  company,  are  no  de- 

1  Fottler  v.  Moseley,  185  Mass.  563  6  Getchell   v.   Dusenbury,   145  Mich. 

(1904).  197,  (1906).  A  misrepresentation  by  a 

-  Darling   v.  Klock,   33   N.   Y.   App.  director  as  to  the  value  of  the  corpo- 

Div.  270  {1898);  aff'd,  165  N.  Y.  623.  ration  and  its  stock,  with  a  view  to 

3  Drake  v.  Holbrook,  66  S.  W.  Rep.  selling  the  stock,  is  not  affected  by  a 
512  (Ky.  1902).  A  purchaser  of  stock  statute  that  a  person  is  not  liable  for 
from  the  president  cannot  hold  him  making  representations  as  to  the  char- 
liable  for  misrepresentation  that  the  acter,  etc.  of  another  person,  unless 
company's  last  dividend  was  six  per  they  are  in  writing.  Grover  v.  Cava- 
cent,  it  appearing  that  the  dividend  naugh,  82  N.  E.  Rep.  104  (Ind.  1907). 
was  actually  paid,  even  though  it  is  c  "Weaver  v.  Shriver,  79  Md.  530 
proved   that   it  was  not   paid   out  of  (1894). 

profits,  the  president,  however,  having  7  Garrison  v.  Technic,  etc.  Works,  59 

acted  in  good  faith,  and  supposed  that  N.  J.  Eq.   440    (1900). 

the  profits  existed.    Nash  v.  Rosesteel,  8  McEacheran   v.   Western    Transp., 

94  Pac.  Rep.  850   (Cal.  1908).  etc.  Co.,  97  Mich.  479   (1893). 

4  Walker   v.   Russell,    186   Mass.    60 
(1904). 

1013 


151.] 


HTRACT8  TO  SELL  -GAMBLING  BALI 


,'   II.   XX. 


fense.1    A  purchaser  cannol  rescind  for  fraud  where  he  has  inv< 

!,,!,,-.  If  or  had  the  means  at  hand  to  ascertain  the  truth  or 
hood  of  any  representation.2    A  purchaa  r  Ie  u<  I  bound  to  in. 
tigate  the  truth  of  a  representation  where  il  ia  Bhown  thai  even  it 

had  investigated  he  would  aol  ha  some  aware  of  the  fact 

A  provision  in  a  contracl  of  subscription  to  the  '.  of  the  company, 
whereby  the  subscriber  waives  notice  of  all  contracts  between  the 
promoters  and  the  company,  is  nol  binding  on  the  stockholder,  it 
such   waiver  is  tricky  and   fraudulent4      Where  the  vari  >ck- 

holders  of  a  corporation  join  in  a  contract  for  the  sale  of  t1 
I,,;  tly  one  of  them  receives  a  bonus  from  the  purchaser,  the 

others  may  compel  him  to  accounl  therefor  proportionately.8 

§351.  Fravdvlenb  saleby  agent,  etc.,  in  breach  of trust. — A  bona 
fide  purchaser  for  value  and  without  notice  of  atock  from  a  vendor 
who  deliver-  the  certificates  therefor  indorsed  in  blank  by  another, 
,,,-  indorsed  by  the  vendor  himself,  ia  protected  and  entitled  to  the 
sleek,  although  it  afterwards  transpires  thai   th<  I   waa  selling 

as  agent  of  another  and  had  been  guilty  of  a  breach  of  trust8     But 


i  Eldridge   v.   Young   America,   etc. 
<\>..  27  Wash.  297  i  L90 

2Grindrod  v.  Anglo-American,  etc. 
Co.,  34  Mont.  L69  (1906).  A  stock- 
holder in  one  company  which  is  con- 
solidated with  another  cannot  hold 
a  stockholdi  r  in  the  latter  liable  for 
misrepresentations  that  the  latter 
was  in  a  prosperous  condition  where 
there  was  no  concealment  and  I 
stockholder  could  have  examined  into 
the  condition  of  the  latter  and  per- 
haps did  so.  Pigott  v.  Graham,  93 
Pac.  Rep.  435   (Wash.  1908). 

3  Dow  v.  Swain,  125  Cal.  674  (1S99). 

i  Greenwood  t?.  Leather,  etc.  Co., 
Ltd.,  [1900]  1  Ch.  421. 

5  See  §  320,  supra,  and  §  351,  infra. 
Where  a  party  desires  to  purchase  a 
majority  of  the  stock  of  a  corpora- 
tion and  makes  an  offer  to  all  the 
stockholders  to  purchase  their  stock, 
provided  a  majority  in  interest  will 
sell,  and  agrees  to  pay  for  the  amount 
so  offered  a  specified  sum  per  share, 
he  may  legally  pay  more  than  that 
price  for  a  portion  of  the  stock,  and 
need  not  divulge  that  fact  to  the  oth- 
ers who  sell   at  the  price  first  men- 


tioned.   Newman  v.  Mercantile  T.  Co., 
189  Mo.    123   (  L90B). 
e  McNeil  r.  Tenth  Nat  Bank,   16  N. 

Y.  325  (1871).  This  is  not  only  the 
leading  case  on  the  estoppel  of  a  prin- 
cipal from  repudiating  the  sale  or 
pledge  of  his  stock  by  his  agent,  whom 
he  intrusted  with  the  certificates  in- 
dorsed in  blank,  but  it  is  one  of  the 
ding  cases  on  the  law  of  the  quasi- 
negotiahillty  of  stock.  See  also  Hon- 
old  r.  Meyer,  36  La.  Ann.  585  (1S84); 
Strange  v.  Houston,  etc.  R.  R  ,  53  Tex. 
162  (1SS0);  Dovey's  Appeal,  97  Pa. 
St.  153  (1881).  A  bona  fide  pledgee 
of  fraudulently  issued  warehouse  re- 
ceipts can  enforce  them  only  to  the 
extent  of  the  loan  and  interest.  Corn, 
etc.  Bank  v.  American,  etc.  Co.,  163 
N.  Y.  332  (1900).  A  bill  in  equity 
filed  by  a  partner  to  hold  his  copart- 
ners and  third  persons  liable  for  a 
misappropriation  of  stock  owned  by 
the  firm  cannot  be  sustained  where  it 
is  not  alleged  that  the  third  persons 
knew  of  such  misappropriation  at  the 
time  of  such  misappropriation.  Wall 
v.  Old  Colony,  etc.  Trust  Co.,  174  Mass. 
340   (1899).     Even  though  the  agent 


1014 


Cn.  XX.]  COX'TRACTS  TO  SELL— GAMBLING  SALES,  ETC.  [§   351. 

the   tr,  o  is   not  protected   where  he   is  not  a  bona  fide   pur- 

of  a  corporation  represents  to  it  that    dorsed  in  blank  to  a  supposed  bank  by 
a   party    owns    certain    property    and    mail,  and  the  vendee,  who  has  organ- 
will    sell    it    to    the    corporation    for    ized  the  bank  for  fraudulent  purposes, 
$7  500  in  bonds  and  $30,000  in  stock,    thereby  obtains  possession  of  the  cer- 
an'd   the   purchase   is   made   on   those    tificates   and   sells  them   without   the 
terms  and  the  vendor  keeps  the  bonds    draft  attached  to  the  stock  being  paid, 
and  gives  the  stock  to  such  agent,  and    a   bona  fide  purchaser  of  the  certifi- 
the  agent  sells  a  portion  of  the  stock    cates   is  protected.     Beckwith  v.    Ga- 
to    a    bona    fide    purchaser,    yet    the    lice,  etc.  Co.,  93  Pac.  Rep.  453    (Ore. 
latter  cannot  rescind  the  sale  on  the    1908).     Where  the  owner  of  a  certifi- 
ground  of  fraud.     Foushee  v.  Snyder,    cate  of  stock  endorsed  in  blank  puts  it 
54  S   W   Rep.  730  (Ky.  1900).    Where    in  his   safe-deposit  box  and  allows  a 
four  shares  of  stock   are   transferred    clerk  to  have  a  key  of  the  box  and  the 
to  a  person  by  the  corporation  to  qual-    clerk  abstracts  the  certificate  and  sells 
ify  him  as  a  director,  and  he  agrees  to    it    to    a    bona    fide    purchaser,    it    is 
return   the   same    to   the    corporation    a    question    for    the   jury    as   to   who 
when    ceasing   to    be   a  director,   but    stands  the  loss.    Aull  v.  Colket,  2  W. 
thereafter  and  l -fore  he  ceases  to  be    N.   Cas,   :*2    (1875).     And  see  many 
a  director  he  agrees  with  the  indors-    cases  in   chapter  XXV,   infra,   where 
ers  of  his  note  that  they  shall  have    this  principle  of  law  is  often  involved, 
the  stock  as  collateral  security,   they    The  books  are  full  of  cases  wherein 
are  protected,  even  though  the  stock    an  agent  has  committed  a  breach  of 
actually  delivered  to  them  after    trust  in  the  sale  of  stock.    For  many 
they  had  notice  of  the  first  agreement,    instances  of   this  kind   of   fraud   and 
it   being   shown,    however,    that    they    the  various  principles  of  law  applica- 
had   no  notice  of  such  agreement  at    ble  thereto,  see  ch.  XIX,  supra,  and 
the  time  they  became  sureties.  Dueber,    chs.  XXII  and  XXIV,  infra.     An  as- 
etc.  Co.  i\  Daugherty,  G2  Ohio  St.  589    signee  in  insolvency  of  the  agent  does 
(1900).   Where  a  stockholder  indorses    not  take  the  stock.     See  §320,  supra. 
a   certificate    of   stock    in    blank    and    Moodie  v.  Seventh  Nat.  Bank,  3  W.  N. 
delivers  it  to  an  agent,  and  the  agent    Cas.    118     (1876),    holds    that    if    the 
pledges  it  for  his  own   purposes,  the    purchaser  rtly  for  an  antece- 

pled-ee    if  he  took  without  notice  of    dent  debt  he  is  not  a  bona  fide  holder 
the  breach  of  trust,  is  protected.    The    to  that  extent.     See  also  Dovey's  Ap- 
court    held   also   that   the    statute   of    peal,  97  Pa.  St.  153   (1881).    An  agent 
18S4  applied  to  such  a  case.  Russell  r,    to    collect    dividends    who    loans    the 
American,    etc.    Co.,    ISO    Mass.    467    stock  at  a  profit  is  liable  for  its  loss, 
(1902).    The   bona  fide   purchaser   of    even  though  he  informed   the   owner 
stock  from  an   agent  without  knowl-    of  the  loan   and   she  did   not  object, 
ed-e  of  the  agency  is  protected.  Garvin    Persch    v.    Quiggle,    57    Pa.    St.    247 
v     Pettee     15    So.    Dak.    266    (1901).     (1868).     A  bona  fide  purchaser  from 
Where  certificates  of  stock  are  depos-    the  agent  is  protected.     State   Bank 
ited  with  the  broker,  duly  transferred    v.    Cox,    11    Rich.    Eq.     (S.    C), 
in  blank    a  bona  fide  holder  of  such     (1860);    West  Branch,   etc.   Co.'s   Ap- 
certificates  from  the  broker  is  not  pro-    peal,   *81   Pa.   St.  19    (1870);    Otis   v. 
tected    as    against    the    real    owner,    Gardner,  105  111.  436    (1883);    Zulick 
where  the  facts  were  sufficient  to  give    v.  Markham,  6  Daly,  129  (1875) ;  Mar- 
him   notice.     Ryman    v.   Gerlach,   153    tin  v.  Sedgwick,  9  Beav.  333    (1846); 
Pa    St     197    (1893)      Where  the  ven-    Linnard's    Appeal,    6    East.    Rep.    877 
dor  of'stock  sends  the  certificates  en-    (Pa.  1886).    In  England  certificates  of 

1015 


§  351.] 


.TRACT  ILL — GAMBLING  SAU 


XX. 


chaser.1     Where  forgery  is  involved  the  purchaser  takes  aothi] 
A    pi  psoD   buying  from   an   agent,   with   knowledge   thai    the 

latter  is  acting  as  agent,  is  bound  to  inquire  into  the  scope  of  his 
authority,  and  it'  the  agenl  is  authorized  only  to  sell  for  cash  his 
agreemenl  to  sell  on  time  cannol  be  enforced  by  the  purchaser.8 
Where  the  same  person  both  the  transferrer  and 

the  transferee,  and  absconds  with  the  purchase  pri<  tifi- 

cates  have  been  delivered,  bul  before  registry  on  the  corporate  books, 
the  transferee  is  protected.4  Where  the  corporation  knows  thai  the 
vendor  is  selling  as  the  agent  of  the  stockholder,  who  bas  given  to 


stock  are  not  negotiable  in  any  sense, 
and  hence  the  English  decisions  on  I 
point   now    under   consideration    ha 
no  weight  in  America.  See  I  1 1  2, 

infra,  and  mpra.  \\  stork- 

holder  delivers  his  stock  to  the  pi 
dent  to  be  used  to  induce  a  person  to 
loan  money  to  the  corporation,  and 
the  president  Instead  of  so  using  it 
converts  it  to  his  own  use,  the  stock- 
holder may  maintain  a  suit  in  equity 
to  recover  back  the  stock,  and  the 
statute  of  limitations  does  not 
to  run  until  he  has  discovered  or 
should  have  discovered  the 
Slayback  v.  Raymond,  93  X.  V.  App. 
Div.,  326  (1904).  i:  □  though  b; 
ers  in  sending  stock  to  a  customer  en- 
dorse it  in  blank  and  entrust  it  to  a 
messenger,  and  the  messenger  con- 
verts it  to  his  use  by  having  other 
brokers  sell  it  in  good  faith,  yet  such 
latter  brokers  are  liable  to  the  custo- 
mer for  the  value  of  the  stock.  Hall 
v.  Wagner,  111  N.  Y.  App.  Div.  70 
(1906). 

l  Talmage  r.  Third  Nat.  Bank,  91 
N.  Y.  531  (1883);  Crocker  r.  Crocker, 
31  N.  Y.  507  (1865);  Weaver  v.  Bar- 
den,  49  N.  Y.  286  (1872),  where  the 
agent  fraudulently  bought  in  his  own 
name  and  then  fraudulently  sold;  Wil- 
liamson v.  Mason,  12  Hun,  97  (1877). 
A  purchaser  from  an  agent  with  no- 
tice of  the  fact  that  he  held  as  agent, 
and  that  he  had  sold  to  himself,  is 
not  protected.  Bank  of  Louisville  v. 
Gray,  84  Ky.  565  (1886).  Where  a 
person  holds  stock  under  an  agree- 
ment with  another  that  after  the  prof- 


have  repaid  the  cost  of  the  stock 

the  further  pi  hould  be  divide. l 

a  them,  such  agreement 

is   binding  upon   a   person  who  buys 

Ith  notice  of  the  agree- 

t.   .Morris  r.  Shepard,  ijo  Atl.  R<  p, 

172  i  X.  .1.  1902).  Where  a  street  rail- 

iny  employs  a  person  as  its 

al    to  purchase  a  majority  of  the 

..  of  another  street  railway  com- 
pany, and  he  does  so,  and  the  former 

s    him   for   the   stock  and   for  his 

.   he  cannot  refuse  to  deliver 

the  stock  on  the  ground  that  the  com- 

y  had  no  power  to  purchase,  or  on 
the  ground  that  it  had  passed  no  reso- 
lutions authorizing  him  to  purchase, 
and  the  former  may  recover  the  stock 
from  a  transferee  with  notice  from 
the  agent.  Manchester  St.  Ry.  v.  Wil- 
liams, 71   X.  H.  312  (1902). 

2  See  §§365-370,  infra.  Where  an 
agent  of  a  stockholder  forges  his 
name  to  the  certificates  of  stock  and 
pledges  them  with  a  party  to  secure  a 
loan  to  the  agent's  principal,  such 
loan  cannot  be  collected,  even  though 
the  proceeds  went  to  the  credit  of 
the  principal  and  were  afterwards  em- 
bezzled by  the  agent  under  a  power 
of  attorney  to  check  out  the  princi- 
pal's money,  the  party  loaning  the 
money  on  the  certificates  of  stock  not 
having  any  knowledge  of  such  power 
of  attorney  at  the  time.  Fay  v. 
Slaughter,  194  111.  157  (1901). 

3  Xorton    v.   Xevills,   174  Mass.    243 
(1899). 

4  Ex  parte  Shaw,  L.  R.  2  Q.  B.  D. 
463   (1877). 


1016 


CH.  XX.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  351. 


the  agent  the  certificates  indorsed  in  blank,  it  must  see  to  it  that  the 
agent  has  full  power  to  sell  the  stock,  and  is  liable  for  allowing  a 
registry  where  the  agent  has  not  such  power.1     A  stockholder  whose 
stock  has  been  wrongfully  pledged  may  enjoin  the  corporation  from 
allowing  a  transfer  by  the  pledgee  who  has  applied  for  the  same.2 
If  the  principal  authorized  the  sale  or  ratified  it,  he  of  course  can- 
not afterwards  complain.3     Where  an  agent  to  sell  is  able  to  sell  for 
more  than  lie  accounts  for  to  his  principal,  the  latter  cannot  recover 
the  difference  unless  the  sale  was  actually  made.4     Even  though  the 
seller'<  broker  divides  a  secret  profit  with  the  purchaser's  broker  with- 
out the  purchaser  knowing  thereof,  yet  the  purchaser  cannot  hold 
the  seller's  broker  liable  for  his  profits.     The  remedy  is  rescission.5 
Where  a  stockholder  in  an  insolvent  corporation  turns  over  his  stock 
to  another  person  to  deposit  under  a  reorganization  agreement,  the 
latter  agreeing  to  pay  the  assessment  on  the  stock  and  to  deliver 
to  the  stockholder  the  new  securities  upon  repayment  of  such  assess- 
ment, and  he  refuses  so  to  do  thereafter,  he  i-  guilty  of  a  conversion 
and  of  a  fraud  upon  the  stockholder.8     Where  a  customer  may  re- 
scind a   purchase  of  stock  made  for  him  by  his  broker,  upon  dis- 
covering that  the  broker  sold  him  stock  owned  by  such  broker    the 


defendant.     St. 
Co.,   127   U.   S. 


i  Woodhonse  v.  Crescent  Mut.  Ins. 
Co.,  35  La.  Ann.  238  (1883),  holding 
that  the  transferee  who  is  charged 
with  receiving  with  notice  may  be 
joined  as  a  party 
Romes  v.  Levee,  etc 
614  (1888). 

-  The  pledgor  need  not  allege  that 
the  pledgee  took  with  notice.  It  is 
for  the  pledgee  to  intervene  and  prove 
that  the  pledge  was  bona  fide.  Rey- 
nolds v.  Touzalin  Imp.  Co.,  G2  Neb. 
236  (1901). 

3  As  to  the  admissibility  in  evidence 
of  a  receipt  showing  that  the  agent 
was  authorized  to  sell  by  order  of  the 
principal's  brother,  see  Dwyer  v. 
Fuller,  144  Mass.  420  (1887).  A  pledge 
of  stock  by  an  agent  is  not  a  conver- 
sion, where  the  principal  received 
without  objection  and  retains  a  re- 
ceipt from  the  agent  setting  forth 
such  pledge.  Metcalf  v.  Williams,  144 
Mass.  452   (1887). 

4  Edison  v.  Gilliland,  42  Fed.  Rep. 
205  (1890).  An  agent  may  of  course 
be  held  liable  for  misrepresenting  the 
price  which  he  received  on  the  sale  of 

1017 


stock  and  for  retaining  the  differ- 
ence. Horner  v.  Perry,  112  Fed.  Rep. 
906  (1901). 

B  Illingworth  v.  De  Mott,  59  N.  J. 
Eq.  8  (1900).  See  also  §320,  supra. 
An  agent  who  secretly  takes  a  com- 
mission from  a  party  dealing  with  his 
principal  cannot  enforce  a  contract  by 
which  he  was  to  share  in  the  stock 
purchased  by  the  principal.  York  v. 
Searles,  97  N.  Y.  App.  Div.  331  (1904). 
Where  the  general  manager  acts  as 
an  intermediary  in  selling  all  the 
stock  of  the  company  and  he  makes 
a  secret  profit,  the  stockholders  may 
compel  him  to  pay  it  over.  Ba*bar  v. 
Martin,  67  Neb.  445  (1903).  Where 
three  persons  own  all  the  stock  of  a 
corporation  and  one  of  them  repre- 
sents all  three  in  selling  the  stock,  but 
secretly  takes  an  additional  price  for 
his  sole  benefit,  the  others  may  hold 
him  liable  for  their  portion  thereof 
in  an  action  at  law.  Graham  v.  Cum- 
mings,  208  Pa.  St.  516    (1904). 

6  Miller  v.  Miles,  58  N.  Y.  App.  Div. 
103   (1901);  aff'd,  171  N.  Y.  676. 


§  352.] 

in  tomer,  if  he  ha  I  such  stock   (  \-  reorganization 

may  tender  back  old  stock  which  ho  borrows  for  that  purpose.1  In 
England  the  courts  do  doI  protecl  a  purchaser  of  certific  »ck 

unless  the  latter  has  not  only  purchased,  but  has  obtained  a  registry 
on  the  corporate  I ks.a 

An  agent's  p       r  to  sell  stock  does  not  authorize  him  to  pli 
it.3     A  person  who  knov  the  means  "1"  knowing,  thai   an- 

other person  holds  stock  as  an  agenl  to  sell  only,  cannol  ach 

stock  in  pledge  from  the  agent,  although  the  latter  represents  that 
the  money  is  to  be  used  for  his  principal.     The  principal  may  re- 
cover the  stock  it'  he  has  qoI  authorized  the  pledge.4     A  bona 
purohasi  r   of   c<  rtifical  m    a    pled  i    protected.5 

Where  no  certil  i         >ck  ha  ted,  a  purchaser  of  a 

subscril  ei '-  ;'>  the  ao\  pr  '         i  purchaser  of  a 

certificate  of  ti  d.fl     When  an  option  on 

stock  ami  -I  II-  ii  to  his  principal,  who  think-  he  is  purchasing  from 
an  outsider,  the  prim  ipal  may  .  L7     Ai  I  who  makes  repre- 

sentations in  good  faith  is  no1  p<  rsonally  liable  if  made  on  behalf 
of  his  principal.8 

§352.    Fraud  may  be  by  corporate  reports  or  pro  . — A  re- 

porl  of  corporate  i  to  the  stockholders,   setting   forth  the  c 

dition  of  the  affairs  of  the  corporation,  is  deemed  to  be  a  statement 
to  the  public  also,  and  it  may  be  relied  upon  by  any  one  in  pure]  - 
ing  shares.  This  principle  of  law  was  firsl  clearly  established  in 
England  in  L860,  in  the  case  of  Davidson  v.  Tulloch.9     [twas  there 

i  Mayo  r.  Knowlton,  134  N.  Y.  250  out    that    the    pledger    was    not    the 

(1892).  owner  of  them,  but  held  them  as  se- 

2  See  §  412,  infra.  curity  that  a  mortgage  would  be  can- 

3  Merchants'  Bank  v.  Livingston,  74  celed.  Saloy  r.  Hibernia  Nat.  Bank, 
N.  Y.  223  (1878).  See  §§321,  326,  39  La.  Ann.  90  (1887).  Where  the 
supra.  pledgee  of  stock  transfers  it  into  his 

4  Fisher  v.  Brown,  104  Mass.  259  own  name  on  the  books  of  the  com- 
(1870).  A  bona  fide  pledgee  of  a  cer-  pany  and  takes  out  new  certificates,  a 
tificate  of  stock  from  an  agent  hav-  bona  fide  purchaser  or  pledgee  from 
ing  power  to  pledge,  but  who  had  so  him  is  protected.  Westinghouse  v. 
pledged  the  stock  for  purposes  not  German,  etc.  Bank,  196  Pa.  St.  249 
authorized  by  the  owner,  is  neverthe-  (1900).  As  to  sales  by  trustees,  etc., 
less  protected,  and  even  though  such  see  ch.  XIX,  supra. 

pledgee    sells    the    stock    at    private  g  Manchester  St.  Ry.  v.  Williams,  71 

sale  without  notice  he  cannot  be  held  N.  H.  312   (1902).     Cf.  §  373,  infra. 

liable    if    the    stock    was    not    worth  7  Montgomery    v.    Hundley,    103    S. 

mere  than  the  debt  secured.     Brittan  W.  Rep.  527  (Mo.  1907). 

v.  Oakdale,  etc.,  124  Cal.  282    (1899).  8  Englesfield  v.  Londonderry,  H.  L. 

5  See   §473,  infra.     A  bank  taking  26  W.  R.  540   (1878). 

a  pledge  of  negotiable  bonds  in  good  0  6  Jur.  (N.  S.)  543;  s.  c,  3  Macq. 
faith  may  hold  them,  though  it  turn     (H.  L.)   783. 

1018 


CH.  XX.  j 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§   352. 


held  that  there  need  lie  no  privity  between  the  offic<  rs  issuing  the 
report  and  the  person  purchasing  shares  of  stock  from  third  persons. 
If  such  purchaser  made  his  purchase  relying  upon  material  state- 
ments  in  corporate  reports  which  were  false,  he  has  his  remedy 
against  all  persons  who  knowingdy  made  or  issued  the  report.1  The 
Leading  ease  in  this  country  on  the  liability  of  corporate  directors 
for  fraudulent  representation  as  to  the  condition  of  the  company, 
lmt  made  to  a  purchaser  of  stock  personally,  but  to  the  public 
generally,  is  Cross   v.   Sackett,2  decided  in  1858,  where  fraudulent 


i  Scott  v.  Dixon,  29  L.  J.  (Exch.) 
C2,  n.  (1859),  explained  in  Peek  v. 
Carney,  L.  R.  6  H.  L.  398  (1873),  as 
follows:  "The  report,  though  origi- 
nally made  to  the  shareholders,  was 
intended  for  the  information  of  all 
persons  who  were  disposed  to  deal  in 

ires;    and   tl  ation  must 

be  regarded  as  having  been  made  not 
indirectly,  but  directly  to  each  person 
who  obtained  the  report  from  the 
bank  where  it  was  publicly  announced 
it  was  to  be  bought,  in  the  same  man- 
ner as  if  it  had  been  personally  deliv- 
ered to  him  by  the  director;"  Ger- 
hard v.  Bates,  2  El.  &  Bl.  170  (IS'. 
Cullen  v.  Thomson,  6  L.  T.  Rep.  870 
(1862),  holding  that,  where  directors 
of  a  joint-stock  company  issue  false 
and  fraudulent  reports  to  the  public, 
and  the  manager,  secretary,  and  other 
officers  of  the  bank  supply  the  detailed 
statements  for  such  report,  knowing 
them  to  be  false  and  that  they  are 
to  be  used  for  purposes  of  deceit,  and 
a  third  party,  acting  on  such  reports, 
purchases  shares  in  the  company  and 
suffers  loss  thereby,  each  of  the  offi- 
cers of  the  company  who  knowingly 
assisted  in  the  fraud  is  personally  lia- 
ble to  such  third  party  for  the  loss 
caused  by  such  misrepresentation  in 
the  report,  though  the  report  was 
signed  only  by  the  directors  and  not 
by  the  subordinate  officers. 

2  2  Bosw.  617;  6  Abb.  Pr.  217;  16 
How.  Pr.  62,  the  court  saying:  "When 
an  instrument  is  made  to  deceive  the 
public  generally,  and  is  adapted,  as 
well  as  intended,  to  deceive  some 
portion  of  the  public,  and  as  well  one 


person  as  another,  and  is  used  as  it 
was  designed  it  should  be,  and  fraudu- 
lently induces  some  one  to  act  to  his 
prejudice  by  acting  in  the  mode  it 
was  intended  to  influence  them  to  act 
who  might  be  deecived  by  it,  the  per- 
son who  made  the  instrument  and 
caused  it  to  be  thus  fradulently  used 
is  liable  to  the  person  who  has  been 
defrauded  by  it.  In  such  a  case  the 
person  injured  lias  been  subjected  to 
damage  by  his  fraudulent  acts,  and 
the  fraudulent  wrong-doer  is  liable  for 
the  consequences."  In  Cazeaux  v. 
Mali.  25  Barb.  578  (1857),  the  court 
said:  "It  is  not  essential  that  the  rep- 
resentation should  be  addressed  di- 
rectly  to  the  plaintiff;  if  it  were  made 
with  the  intent  of  its  influencing 
every  one  to  whom  it  might  be  com- 
municated, or  who  might  read  or  hear 
of  it,  the  latter  class  of  persons  would 
be  in  the  same  position  as  those  to 
whom  it  was  directly  communicated, 
but  they  must  have  come  to  a  knowl- 
edge of  it  before  their  purchase."  In 
Morse  v.  Swits,  19  How.  Pr.  275 
(1859),  a  bank  officer  was  held  liable 
for  false  statements  in  a  report  pub- 
lished in  accordance  with  the  require- 
ments of  a  statute,  the  court  saying: 
"Being  published,  the  public,  or  any 
individual  of  the  public,  has  a  right 
to  believe  it.  .  .  .  And  if,  believing 
it,  any  one  of  the  public  acts  on  that 
belief,  the  makers  and  publishers  of 
this  falsehood  are  to  be  held  liable 
for  the  consequences  they  have 
caused."  (See  cases  cited  in  Report- 
er's note  to  the  foregoing.)  See  also 
Salmon  v.  Richardson,  30  Conn.   360 


1019 


§  352.] 


CONTRACTS  TO  SELL — GAMBLING  BALES,  ETC. 


[OH.  XX'. 


dividends  and  representations  based   thereon   were  made.     A   i 
jm, ration  may  be  beld  liable  for  false  representations  in  a  prosj 


(1862);    Fenn  v.  Curtis,  23  Hun,  384 
(1881),  holding  the  secretary  liable  to 
a  purchaser  of  shares  from  an   indi- 
vidual,   the   secretary   hai  Ing   signed 
the  certificate  of  stock  and  also  a  cir- 
cular stating  that  the  corporation 
a   corporation,    when    in    fact    it    was 
not.     And  see   SS  40,    is.  supra.     The 
treasurer  may  be  liable  in  an  action 
Cor  fraud  and  deceit  to  a  purchaser  of 
stock    who    bought    relying    on    I. 
statements  made  by  him  to  the  public 
as  to  profits.     Keeb  r  r.  Seaman,    17 
N.  Y.  Misc.  Rep.  292   (  L905).     A  i 
mon-law  action  for  damages  due  to  a 
purchase  of  stock  induced  by  a  false 
report  made  by  the  def<  ndant  as  treas- 
urer may  be  joined  with  the  remedy 
given     by     the     New     York     statutes. 
Hutchinson  v.  Young,  93  N.  Y.  App. 
Div.  407    (1904).     A  claim  by  a  pur- 
chaser of  stock  against  the  directors 
for  falsely  representing  that  the  stock 
was  earning  dividends,  when  in  fact 
the  stock  was  sold  to  raise  money  to 
pay    illegal    dividends,    is   assignable. 
Keeler   v.   Dunham,    114    N.    Y.   App. 
Div.  94  (1906).   A  person  buying  stock 
in   what   was   supposed   to   be   a  cor- 
poration, but  is  a  partnership,  cannot 
recover  back  his   money  from  all  of 
the  participants.     Perry  v.  Hale,  143 
Mass.   540    (18S7).     A  corporation   is 
not   liable    for   misrepresentations    of 
the  president  in  selling  stock  belong- 
ing to  himself.     Prosser  v.  First  Nat. 
Bank,  106  N.  Y.  677   (18S7).     Where 
stockholders    in    an    apartment-house 
corporation  are  entitled  to  rent  apart- 
ments at  a  rental  to  be  fixed  by  a  ma- 
jority vote  of  the  stockholders,  an  in- 
creased rental  so  voted  is  legal.     The 
by-laws    providing    for    such    a    vote 
override  a  general  statement  in  a  pro- 
spectus to  the  contrary,  the  stockhold- 
ers knowing  of  the  by-law.     Compton 
r.  Chelsea,  128  N.  Y.  537  (1891).    The 
fact  that  the  false   statements  as  to 
the  condition  of  the  corporation  are 


made  to  a  director,  who  is  acting 
ag'  the  vendee,  i.~  aof  ratal  to 

the  suit  for  fraud.  Trimble  ;.  Waul. 
97  Ky.  7is  (1895).  a  pi  rson  loaning 
money  to  an  individual  and  taking 
bank  slock  as  collateral  security  i 

I  hold  the  bank  liable  in  an  action 
for  damages  for  deceit,  od  the  ground 
that    its    publish    .         •.  ments    were 
le  and   fraudulent,  and   that  he  re- 
lied on  those  .     Merchants' 
Nat.  Bank  r.  Armstrong,  65  Fed.  Rep. 
I.    A  vendor  who  Bells  know- 
ing   that    the   corporation    has    Issued 
a  false  report  that  it  was  earning  two 
I"  r  cent,  a  month,  and  that  the  vendee 
relied    on    this    report,    is    guilty    of 
fraud,  and  the  sale  may  be  rescinded. 
Foley   v.   Holtry,   43   Neb.   133    (1894). 
A   person   who   purchases   bank   stock 
from    the   bank    itself    may    hold    the 
bank    liable   for   damages   where   the 
public  statement  of  the  bank  which  he 
relied    on    in    purchasing    was    false. 
The  measure  of  damages  is  the  differ- 
ence between  the  value  of  the  stock  if 
the  statement  had  been  true  and  its 
actual  value.     Exchange  Bank  v.  Gait- 
skill,   37   S.  W.  Rep.  160    (Ky.   1896). 
A  stockholder  sued  by  a  corporation 
on   an   ordinary   debt,    and    who   sets 
up   in   defense   that   he   was   induced 
to  buy  stock  from  outside  parties  by 
fraudulent    statements    made    by    the 
company,  cannot  have  a  mandamus  to 
compel  the  company  to  allow  him  to 
examine   its    books.     His    application 
in  such  a  case  is  as  a  creditor  and  not 
as  a  stockholder.     Investment  Co.   r. 
Eldridge,  2  Pa.  Dist.  394  (1903);  aff'd, 
175  Pa.  St.  287.     Plaintiff  need  not  al- 
lege that  he  relied  solely  on  the  mis- 
representations.    A     false     statement 
that  the  company  is  perfectly  solvent 
is   a   material   misrepresentation   and 
the  fact  that  two  or  three  years  there- 
after   all    the    corporate    assets    have 
disappeared  and  it  went  into  liquida- 
tion, is  proof  of  such  misrepresenta- 


1020 


CH.  XX.]  CONTRACTS  TO  SELIx— GAMBLING  SALES,  ETC.  [§   352. 

tai  issued  by  it  to  sell  stock  of  another  corporation.1     A  purchaser 
of  stock  in   an  insurance  company,  however,   cannot  hold   a   bank 
liable  on  a  misstatement  by  the  bank  to  the  insurance  commissioner 
as  to  the  cash  which  the  insurance  company   has  on   deposit  with 
it 2      \n  officer  of  a  bank  is  personally  liable  to  a  purchaser  of  its 
8tock  who  relied  on  the  published  statement  signed  by  the  officers  m 
which  overdrafts  are  described  a,  loans  and  discounts.3     Although  a 
corporate   creditor  may   hold   the   incorporators    Liable  for  a   fa 
stat,  men1  in  their  sworn  statement  obtaining  incorporation  m  regard 
to  the-  amount  of  capital  stock  that  has  been  paid  in,  yet  the  action 
Hon       It    may  be   shown   that  at  the    false    or   by    ordinary   care    and   pru- 
,        ,      misrepresentation    the    dence  would  have  so  known.     Mason 
time     of     the '    mls; Tfflc^re    and    em-     v.  Moore,  73  Ohio  St.  275    (1906).     A 

TyeTa  l4e  s   m  ofmoney It  may     person  who  buys  stock  in  a  national 
ployees  a  large  sum  k      m       on  a  report  of  the  con- 

nd    tTments  ove^v  lue'd  tt  assets,     dition  of  the  bank  signed  by  directors, 
The  t  eas^er-secretary-bookkeeper     in   accordance   with   the   acts  of  con- 

DSrss.  sn.toJK  swr  ssnar: 

-*"     7"^;;,r  '  ,  *  Sir.,  57  ».».  563 

pTVs    w'"k        «   r.v  -'.  :  ».    Directors  of  a  banK  are  not 

P>,es ^h  a  closet,  i  is  ass.gna-  lUb.e  in  an  action  ,., |  dece.t  to  a 

h,e  under  toe  No- tV.,.  *    Ben-  jjr*--  ^^^SeJS 

Dv'^"         "      A  «r  st  eon,  a'n'y  -Km   was  fa.se.  there  being  proof 

w  ,ch3is"su'es  a  prospectus  ottering  for  that  they  believed  U  to  be  tru  .  Fo 

sab-   stocX   in    a  mining  corporation,  ter •  »   *%££*■*■  ^Q™  bank 

and   makmg   *£*£?£*£  ^  oonunon  law  iiabie  for  false  re- 

statements  as  to  the  e^nmg^s    able  fl   ^^ 

to  purchasers  of  stock  tor  tne  uinei  •>    *-  t,qt,v    i  o^  n    W 

ence    between    its    aetoal    value    and  Yates  £  Jon-  ^  »*££  W. 

,„at   its   value  would   have   been    f  Re  p.    87    Neb  1905 )  ^ 

the    represents ,ons    had    been    true  U«*  the  directors  liable  for  his 

rfr-sjss  Nat  Bank- 86  ^hTe^'itei  .rcrs 

Fed^Rep.  1013  (1898).  dlscounts"  by  including  the  par  value 

„;  r"A    -'base;  of  ^  in  a  of  paper  which  was  worth  much  .ess 

iSL  ban*  cannot  hold  the  dire.  «.£«•  ^  t"  Rep.     ~     Mfch. 

tors   liable   for  a   false   statement   in  Graw,    ill 

their  report  to  the  comptroller  of  the  1907). 
currency  unless  they  knew  it  to  be 

1021 


§  3o;;.J 


CONTRACTS  TO  BELL   GAMBLING  BALES,  ETC. 


|t'||.  XX. 


is  in  tori  and  an  assignee  of  the  claim  cannot  maintain  it.'  'I  la; 
president  is  liable  in  an  action  of  deceil  where  he  sells  stock  after 
referring  the  purchaser  to  a  publi  tatement  of  the  corporation 

signed  by  him,  which  statement  was  false.  Where,  however,  the 
sale  is  i"  a  director,  such  a  director  is  bound  to  show  thai  he  did 
not  kn<»\v  the  statement  was  untrue,  and  he  may  show  that  fact 
although  he  also  igned  the  statement.2  In  a  suit  by  a  purchaser  of 
national  bank  stock  against  the  directors  for  fraudulenl  inil.li.~hcl 
reports,  the  recovery  rests  entirely  on  the  national  bank  law,  if  that 
is  the  same  as  the  New  Fork  common  law.  The  measure  of  damagi  9 
is  the  price  paid  for  the  s1  ck  less  its  act-nil  vain  . 

§353.  A  somewhat  differenl  rule  prevail-  in  England  as  to  false 
statements  contained  in  a  in-.-pr.Mn~  of  a  corporation.  A  prospec- 
tus is  issued  for  the  purpose  "I'  inducing  persons  n>  subscribe  for 
stock.  I'-  objecl  ia  not  to  promote  tin-  Bale  of  thai  Btock.  Accord- 
ingly ii  was  decided  in  Peek  v.  G-urney,4  in  1^7."..  that  "the  pnr- 
chaser  of  shares  in  tin-  market,  ujm.ii  tin-  faith  of  a  prospectus 
which  he  has  ii"'  received  from  those  who  are  answerable  for  it, 
cannot,  by  action  upon  it,  .-<-  conned  himself  with  them  as  t<>  ren- 
der thrm  liable  to  him  for  the  misrepresentation  contained  in  it, 
as  if  it  had  been  addressed  personally  to  himself."     In  New  York 

i  Haines  v.  Franklin,  87  Fed.  Rep.    president,    and    which   has   published 


139    (1898). 

•J  Ward  r.  Trimble.  103  Ky.  153 
(1898).  Where  one  director  sells  his 
stock  to  another  relying  on  a  corpo- 
rate statement  prepared  by  a  clerk  of 
the  company,  he  cannot  hold  the  ven- 
dee liable  in  damages,  even  though 
the  statement  was  false.  Goodwin  v. 
Daniel,  93  S.  W.  Rep.  534  (Tex.  1906). 
A  purchaser  of  stock  relying  on  a 
prospectus  cannot  hold  liable  for  de- 
ceit the  persons  whose  names  are 
signed  to  the  prospectus  unless  he 
proves  that  the  prospectus  did  not 
state  the  information  which  they  had, 
even  though  such  information  was 
false.  Proof  must  be  given  of  intent 
to  deceive,  and  if  the  defendants  be- 
lieved the  information  given  to  them 
or  had  reasonable  cause  to  believe  it, 
they  are  not  liable.  Duryea  v.  Zim- 
merman, 121  N.  Y.  App.  Div.  5G0 
(1907).  The  president  is  liable  in 
an  action  for  deceit  where  he  sells 
stock   of   the   bank    of   which   he    is 


ilse  statement  of  its  condition  by 
order  of  the  president  and  others. 
Trimble  v.  Reid,  41  S.  W.  Rep.  319 
(Ky.  1S97).  In  an  action  at  law  the 
directors  are  not  liable  to  a  person 
who  purchases  stock,  relying  on  the 
directors'  report,  unless  fraudulent  in- 
tent is  proved.  Parker  r.  McQuesten, 
32  Q.  B.  Rep.  (Can.)  273   (1872). 

.-:  Taylor  v.  Thomas,  124  N.  Y.  App. 
Div.  53    (1908). 

4  L.  R.  6  H.  L.  377,  overruling  Bag- 
shaw  v.  Seymour,  IS  C.  B.  903  (1856), 
and  Bedford  v.  Bagshaw,  4  H.  &  N. 
538  (1859);  explaining  Scott  v.  Dixon, 
29  L.  J.  (Exch.)  62,  n.  (1859),  and 
Gerhard  v.  Bates,  2  El.  &  Bl.  476 
(1853),  and  itself  explained  in  Car- 
gill  v.  Bower,  L.  R.  10  Ch.  D.  502 
(1878).  In  Bellairs  v.  Tucker,  L.  R. 
13  Q.  B.  D.  563  (1884),  the  court 
seems  to  have  assumed  a  different 
position,  and  to  have  treated  the  pro- 
spectus the  same  as  any  other  method 
of  misrepresentation. 


1022 


CH.   XX.  J 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  354. 


a  directly  opposite  rule  prevails.  In  the  case  of  Morgan  v.  Skiddy,1 
in  1875,  the  court  of  appeals  held  that,  "if  the  plaintiff  purchased 
his  stock  relying  upon  the  truth  of  the  prospectus,  he  has  a  right 
of  action  for  deceit  against  the  persons  who,  with  knowledge  of 
the  fraud  and  with  intent  to  deceive,  put  it  in  circulation.  The 
representation  was  made  to  each  person  comprehended  within  the 
class  of  persons  who  were  designed  to  be  influenced  by  the  pro- 
-,  'ctus;  an<l  when  a  prospectus  of  this  character  has  been  issued, 
no  ether  relation  or  privity  between  the  parties  need  be  shown  ex- 
cept that  created  by  the  wrongful  and  fraudulent  act  of  the  de- 
fendants in  issuing  or  circulating  the  prospectus,  and  Hie  resulting 
injury  to  tin-  plaintiff."  It  has  recently  been  held  in  England  that 
where  a  person  purch  :  in  the  open   market,  being  induced 

to  do  so  by  a  prospectus  and  published  telegram,  both  of  which  are 
fraudulent,  he  may  lml. I  tin-  pn  m  iters  pers  nally  responsible,  al- 
though tin-  -lock  was  not  purchased  from  them  nor  from  the  cor- 
poration.2 

§354.  Remedies  for  the  fraud. — There  are  three  methods  by 
which  a  person  \vh<>  has  been  fraudulently  induced  t<>  buy  or  sell 
stock   may   remedy   the   wrong.8      lie   may  bring  an  action   at  law 


1  62  X.  Y.  319.  In  Kountze  v.  Ken- 
nedy, 117  X.  V.  1L"4  (1895),  it  was 
held  that  the  fact  that  an  officer,  in 
a  statement  of  the  liabilities  of  the 
company  omitted  a  claim  which  was 
afterwards  established,  was  not  guilty 
of  such  fraud  as  would  sustain  a  sui£ 
at  law  for  damages  for  deceit. 

2  Andrews  v.  Mockford,  [18961  1  Q. 
B.  372.  Where  a  party  purchases 
stock,  relying  on  a  prospectus  which 
states  that  reports  had  been  "pre- 
p:ired  for  the  directors"  by  the  engi- 
neers and  giving  extracts  therefrom, 
the  directors  are  not  personally  liable 
in  an  action  for  deceit,  even  if  it  is 
shown  that  the  reports  were  prepared 
on  instructions  not  from  the  directors, 
but  from  the  vendors  of  the  property 
to  the  company.  It  is  necessary  to 
prove  that  the  reports  were  untrue. 
Angus  v.  Clifford,  [1891]   2  Ch.  449. 

3  "A  person  who  has  been  induced 
by  fraudulent  representations  to  be- 
come the  purchaser  of  property,  has, 
upon  discovery  of  the  fraud,  three 
remedies  open  to  him,  either  of  which 


he  may  elect.  He  may  rescind  the 
contract  absolutely  and  sue  in  an  ac- 
tion at  law  to  recover  the  considera- 
'i  parted  with  upon  the  fraudulent 
contract.  To  maintain  such  action 
he  must  first  restore,  or  offer  to  re- 
store, to  the  other  party,  whatever 
may  have  been  received  by  him  by 
virtue  of  the  contract.  He  may  bring 
an  action  in  equity  to  rescind  the  con- 
tract, and  in  that  action  have  full  re- 
lief. Such  an  action  is  not  founded 
upon  a  rescission,  but  is  maintained 
for  a  rescission,  and  it  is  sufficient, 
therefore,  for  the  plaintiff  to  offer  in 
his  complaint  to  return  what  he  has 
received  and  make  tender  of  it  on 
the  trial.  Lastly,  he  may  retain  what 
he  has  received  and  bring  an  action 
at  law  to  recover  the  damages  sus- 
tained. This  action  proceeds  upon 
an  affirmance  of  the  contract,  and  the 
measure  of  the  plaintiff's  recovery  is 
the  difference  between  the  article  sold 
and  what  it  should  be  according  to 
the  representations."  Vail  v.  Rey- 
nolds, 118  N.  Y.  297   (1890).     Where 


1023 


§  354.] 


CONTR  •  -l  l.I.      GAMBLING  SALES,  ETC. 


XX 


for  the  consideration,  or  &  action  at  law  for  danu         for  the  de- 
ceit, or  he  may   file  a   bill  in  equity  to  have  tin.-  transaction 
aside.     The  second   remedy   is  the  i  lifficult  and  the  last  the 

most,  easy  to  maintain.  At  common  law  an  action  to  recover  back 
the   whole  of  the  purchase-money   upon   a   r<  >n  for   fraud   is 

virtually  a  suit  for  money  had  and  I.1 

In  special  cases  other  remedies  are  "pin  to  the  purchaser.     TTc 
may  compel  the  defrauding  party  t<.  abide  by  the  hat 

were,  made.  Thus,  where  the  vendor  represented  that  the  corpo- 
rate  property  was  unincumbered,  equity  may,  at  the  in  of  the 

purchaser  of  stock,  enjoin  the  vendor  from  enforcing  a  lien  which 
he  has  on  such  property.2  If  the  contract  is  executory  it  may  be 
canceled  by  mutual  agreement.8     Where  a  consolidation  is  brought 


the  sale  of  stock  has  been  induced 
by  fraud,  the  vendee  may  follow  the 
money  paid  by  hi  in  and  recover  it 
back  if  the  identity  of  the  fund  can 
be  shown.  Moore  V.  Williams,  62 
Ilun,  55    (1891). 

i  Cassett  v.  Glazier,  165   Mass.    17;; 
(1896). 

a  Jones  v.  Bolles,  9  Wall. 
(1869).  See  also  §§334,  354  and  771. 
"Where  a  person  organizes  a  rallri 
corporation  and  takes  a  contract  for 
its  construction,  and  causes  all  the 
stock  and  a  large  quantity  of  bonds  to 
be  issued  to  himself,  and  then  sells 
these  stocks  and  bonds  and  has  knowl- 
edge of  representations  made  by  cor- 
porate officers  to  his  vendee  that  the 
company  owes  nothing  except  the 
bonds,  he  cannot  afterwards  enforce  a 
claim  for  doing  extra  work  under  a 
contract,  where  such  contract  did  not 
appear  on  the  books  of  the  company. 
The  transaction  is  a  fraud  on  his  part. 
Chicago,  etc.  Ry.  v.  Miller,  91  Mich. 
166  (1892).  Where  the  vendor  of  a 
majority  of  the  stock  of  a  corporation 
agrees  that  the  company  owes  no 
debts  except  certain  specific  ones,  the 
vendee  may  recover  back  any  excess 
of  debts  over  those  specified.  Where 
the  debts  of  one  class  were  not  to 
exceed  a  certain  sum,  but  did  exceed 
that  sum,  the  vendee  may  recover  the 
difference,  even  though  the  debts  of 
another  class  were  less  than   a  sum 


cified  in  the  contract  of  sale.    Chi- 
o,    etc.    Ry.    r.    lloyt,    89    Wis.    314 
(1895).     See   German   State   Bank    v. 
Northwestern,  etc.  Co.,  104  Iowa,  717 
(  1^98).  Although  a  pun  baser  of  stock 
cannot  rescind,  he  having  ho  n  guilty 
of  delay,   ye1    he  may  sue  the  vendor 
upon   a    warranty   that  the  stock   will 
be  worth  more  than  what  it  was  sold 
Maxted    V.   Fowler,    94    Mich.   106 
(1892).     Stockholders  cannot  defeat  a 
vendor*s  lien  on  the  ground  that  the 
vendor,     before     they     bought     their 
stock,  represented  that  he  had  no  lien, 
where  they  do  not  set  up  that  defense 
in  a  suit  by  him  to  establish  his  lien. 
Wilson  r.  Seymour,  76  Fed.  Rep.  678 
(1896).     Where  a  person  owning  all 
the    stock    of    a    corporation    sells    it 
under    circumstances    which    induces 
the  purchaser  to  believe  that  the  form- 
er has  no  claim  against  the  corpora- 
tion, he  may  be  enjoined  from  enforc- 
ing any  such  claim.    Given  v.  Times- 
Republican,  etc.  Co.,  114  Fed.  Rep.  92 
(1902).     Where  the  stockholders  in  a 
power  company   sell   their  stock  and 
then    obtain   control    of   water   rights 
on    which   the    company   had   an    op- 
tion,  which   option   has   expired,    the 
party   purchasing   the   stock   may   by 
a  suit  in  equity  compel  them  to  turn 
over  such  water  rights.     Valentine  r. 
Berrien,     etc.     Co.,     12S     Mich.     280 
(1901). 
3  A   subscription   may   be   canceled 


1024 


CH.  XX.  J  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC.  [§    354. 

about  by  the  fraudulent  representations  of  a  stockholder  in  one  of 
the  corporations,  the  remedy  of  the  consolidated  company  against 
him  is  not  a  suit  for  money  received  by  him  as  a  stockholder,  but  is 
an  action  for  damages  for  fraud  or  a  suit  to  rescind.1  Trover  can- 
not be  maintained  by  a  vendor  of  stock,  even  though  he  claims  that 
he  was  fraudulently  induced  to  sell,  inasmuch  as  he  is  no  longer  the 
owner  of  the  stock  and  is  not  entitled  to  possession  thereof.2  Mis- 
representations may  sustain  an  action  for  breach  of  warranty  in  the 
sale  of  stock,  even  though  not  sufficient  to  sustain  an  action  for 
deceit  or  for  the  recovery  of  money  had  and  received.  In  an  action 
for  breach  of  warranty  the  stock  need  not  be  tendered  back.3  A  per- 
son induced  by  fraudulent  representations  to  sell  his  stock  may 
over  damages  for  the  fraudulent  conversion  thereof  and  for  fraud- 
ulent conspiracy,  the  fraud  consisting  in  representations  that  the 
purchaser  was  responsible  and  that  security  given  by  him  was  good.4 
Where  the  secretary  and  treasurer  of  the  corporation  by  fraudu- 
lently misrepresenting  the  condition  induces  a  stockholder  to  sell 
his  stock  to  the  former,  the  latter  may  maintain  a  suit  in  equity  to  set 
aside  the  sale  and  may  have  an  injunction  restraining  any  transfer 
and  may  join  the  corporation  in  order  to  obtain  a  retransfer.5  The 
pleadings  in  enforcing  the  remedies  which  the  vendee  has,  vary,  of 
course,  according  to  the  remedy  which  is  pursued.8 

1  y  ;iiul  with  the  consent  of  the  direc-  alleging  that  the  vendor's  agent  made 
tors  when  fraud  is  involved.  Four  certain  representations  as  to  the  con- 
years  afterwards  corporate  creditors  dition  of  the  corporation.  The  action 
cannot  attack  it.  MrDermott  v.  Harri-  failed  on  the  ground  that  the  vendor 
son,  9  N.  Y.  Supp.  1S4  (1890).  See  did  not  authorize  the  agent  to  make 
ch.  X,  supra.  If  there  has  been  a  mu-  a  warranty.  In  Ayres  v.  French,  41 
tual  mistake  in  regard  to  what  the  Conn.  142  (1874),  the  court  held  that 
stock  really  represented  in  property,  fraud,  inducing  the  owner  of  stock  to 
an  action  for  money  had  and  received  part  with  it,  may  be  remedied  by  the 
or  a  suit  to  cancel  the  sale  will  lie.  action  of  trover,  with  a  count  in  case 
Norton  r.  Bohart,  105  Mo.  615  (1891).  for  a  fraudulent  procurement  and  con- 
i  AndeTson,  etc.  Co.  v.  Pungs,  134  version  of  the  stock.  In  National 
Mich.  79  (1903).  See  s.  c,  134  Mich.  Exch.  Co.  v.  Drew,  2  Macq.  (H.  L.) 
475.  103    (1855),   it   was  held  that  where 

2  Newman  v.  Mercantile  T.  Co.,  189  a  person  is  induced  by  the  fraudulent 
Mo.  423   (1905).  reports  and  representations  of  corpo- 

3  Phillips  v.  Crosby,  69  N.  J.  L.  612  rate  officers  to  purchase  stock,  and 
(1903).  the  corporation  loans  him  money  to 

■i  McXaughton  v.   Smith,  136   Mich,  do    so,    it    cannot    recover    back    the 

368   (1904).  money   so   loaned.     See   Lightfoot   v. 

5  Morrison  v.  Snow,  26  Utah,  247  Creed,  8  Taunt.  268  (1818),  holding 
(1903).  that   the  vendee   should   declare,   not 

6  In  the  case  of  Smith  v.  Tracy,  36  for  money  paid,  but  specially  on  the 
N.  Y.  79  (1867),  the  vendee  sued  contract.  Fraud  in  the  purchase  of 
the  vendor  for  a  breach  of  warranty,  stock  is  not  a  good  defense  to  a  note 

(65)  1025 


§  355.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  I 


[CH.  XX. 


§355.  Action  for  deceit. — In  order  to  sustain  an  action  for  dam- 
ages for  deceit,  whereby  plaint  ill'  was  induced  to  buy  or  Bell  Bha 
of  stock,  it  is  necessary  for  the  plaintiff  to  prove  thai 
were  made  or  acts  done  which  were  fraudulent,  that  the  p<  cson 
guilty  of  tin  in  knew  that  they  were  fraudulent,  and  that  the  plain- 
tiff acted  on  such  statements  or  acts  in  buying  or  s<  lling  the  stock.1 
"Fraud  without  damage  or  damage  without  fraud  gives  no  cause  of 
action."2  In  England  a  statement  made  recklessly,  or  without  re- 
gard as  to  whether  it  is  true  or  untrue,  may  constitute  a  fraudulent 
intent.3    In  New  York  the  rule  is  more  stringent.    The  caseof  Wake- 


given  for  such  stock  for  the  purchase 
price,  unless  it  is  averred  that  the 
purchase  was  induced  by  the  fraud 
and  that  the  purchaser  was  ignorant 
of  the  truth  of  the  misrepresentations 
made.  Spencer  v.  Johnston,  58  Neb. 
44   (1899). 

1  Quoted  and  approved  In  Trimble 
v.  Reid,  07  Ky.  713  (1895) :  aff'd,  H 
S.  W.  Ri  i).  319  (1897),  where  a  vendee 
sued  the  president  for  publishing  a 
false  statement  as  to  the  condition  of 
a  bank. 

2  Stratton's  Independence  r.  Dines, 
135  Fed.  Rep.  449,  458   (1905). 

3  In  the  important  case  of  Derry  v. 
Peek,  L.  R.  14  App.  Cas.  337  (18S9), 
the  House  of  Lords  decided  that  in 
order  to  sustain  an  action  of  deceit 
there  must  be  proof  of  fraud,  and 
nothing  short  of  that  will  suffice. 
Fraud  is  proved  when  it  is  shown  that 
a  false  statement  has  been  made  (1) 
knowingly;  (2)  without  belief  in  its 
truth;  (3)  recklessly.  But  if  a  man 
make  a  false  statement  honestly  be- 
lieving it  to  be  true  it  is  not  sufficient, 
to  support  an  action  of  deceit,  to  show 
that  he  had  no  reasonable  grounds  for 
his  belief.  The  directors  of  a  tram- 
way company  issued  a  prospectus  in 
which  they  stated  that  they  were  au- 
thorized to  use  steam  power,  and  that 
by  this  means  a  great  saving  in  work- 
ing would  be  effected.  The  special 
act  incorporating  the  company  con- 
ferred this  authority  subject  to  the 
consent  of  the  board  cf  trade,  but 
at  the  time  of  making  the  statement 

10 


tiny  had  not  in  fact  obtain*  d  consent 
to  use  steam  power  although  they  hon- 
estly believed  that  they  would  obtain 
it  as  a   matter  of  E    Id    ( re- 

Ing  the  Judgment  of  the  court  be- 
low), that  they  were  not  liable  in  an 
action  of  deceit  brought  by  a  share- 
holder who  had  been  induced  to  ap- 
ply for  shares  by  the  statement  in  the 
prospectus.  In  an  action  for  dec<  it  by 
a  misrepresentation  in  a  pre  as 

to  the  net  profit  on  the  capital  em- 
ployed, the  action  bi  jainst  one 
who  was  a  promoter  and  also  one  of 
the  vendors,  and  whose  name  ap- 
peared in  the  prospectus  and  who  be- 
came a  director,  the  plaintiff  must 
prove  (1)  that  the  defendant's  state- 
ment was  untrue;  (2)  that  it  was  dis- 
honest; (3)  that  he  believed  it  to  be 
untrue.  See  also  Glasier  v.  Rolls,  L. 
R.  12  Ch.  D.  436  (1889),  following  the 
House  of  Lords  in  Derry  v.  Peek,  L. 
R.  14  App.  Cas.  337.  In  Peek  v.  Gur- 
ney,  L.  R.  6  H.  L.  377,  391  (1873), 
the  court  said:  "It  is  said  that  the 
prospectus  is  true  as  far  as  it 
goes,  but  half  a  truth  will  sometimes 
amount  to  a  real  falsehood. "  See  also 
ch.  IX,  §  148,  supra.  In  Bellairs  v. 
Tucker,  L.  R.  13  Q.  B.  D.  562,  579 
(18S4),  however,  the  court  said:  "The 
action  is  one  for  deceit.  It  is  neces- 
sary .  .  .  not  only  to  prove  that  the 
statements  in  a  prospectus  or  any 
other  document  are  not  true,  but  it 
must  be  proved  that  they  are  fraudu- 
lently put  forward  with  intent  to  de- 
ceive." 
26 


CU.  XX.] 


CONTRACTS  TO  SELL— GAMBLING  SALES,  ETC. 


[§    •' 


man  v.  Dalley  *  applies  to  tins  class  of  cases  the  rule  that  "an  action 
founded  upon  the  deceit  and  fraud  of  the  defendant  cannot  be 
maintained  in  the  absence  of  proof  that  he  believed,  or  had  reason 
to  believe,  at  the  time  he  made  them,  that  the  representations 
made  by  him  were  false,  and  that  they  were  for  that  reason  fraud- 
ulently made,  or  that  he  assumed  or  intended  to  convey  the  im- 
pression that  he  had  actual  knowledge  of  their  truth,  though  con- 
scious that  ho  had  no  such  knowledge."  This  case  held  that  a  di- 
rector is  not  liable  for  false  representations  on  the  company's  printed 
business  cards,  of  which  he  was  ignorant,  even  though  his  name 
was  attached  thereto.  The  same  rule  has  been  applied  in  other 
jurisdictions.2     In  New  York  a  vendee  of  stock  and  bonds  who  sues 


i  51  N.  Y.  27,  35  (1S72) ;  Nelson  v. 
Luting,  3G  N.  Y.  Super  Ct.  544  (1S73); 
aff'd,  62  N.  Y.  645;  Schwenck  v.  Nay- 
lor,  102  N.  Y.  683  (1SS6).  The  ease  of 
Holmes  v.  Moffat,  120  N.  Y.  159 
(1890),  was  an  action  for  false  repre- 
sentations and  deceit  in  the  sale  of 
stock,  hut  the  decision  turned  upon 
technical  rules  relative  to  the  trial. 
The  action  for  deceit  does  not  lie 
against  the  corporation,  at  1< 
where  no  fraudulent  intent  is  proved. 
Pinedo  r.  German ia,  etc.  Co.,  N.  Y. 
D.  Reg.,  July  29,  1885  (Supreme  Ct.). 
See  also  §  157,  supra. 

2  In  an  action  of  tort  for  deceit 
against  a  director  for  inducing  a  per- 
son to  purchase  stock,  "the  plaintiff 
must  prove  representations  of  mate- 
rial facts  which  are  false,  and  v.!. 
induce  him  to  act;  and  either  that  the 
defendant  knew  them  to  be  false,  or 
that,  the  facts  being  facts  susceptible 
of  knowledge,  he  represented  as  of  his 
own  knowledge  that  they  were  true, 
when  in  fact  he  had  no  such  knowl- 
edge." Cole  v.  Cassidy,  138  Mass.  437 
(1S85).  In  an  action  for  deceit  intent 
must  be  alleged  and  evidence  of  fraud 
not  alleged  is  inadmissible.  McComb 
v.  Brewer,  etc.  Co.,  184  Mass.  276 
(1903).  A  misrepresentation  is  not 
alone  sufficient  to  sustain  an  action 
for  deceit.  Boulden  r.  Stilwell,  100 
Md.  543  (1905).  In  an  action  of  de- 
ceit, fraud,  and  not  negligence,  must 
be   proved,   and   hence    it   cannot   be 

10 


shown  that   a  party  by  the   exercise 
of   ordinary  care  would  have   known 
that   his    statements   were    false.    Ca- 
hill  v.  Applegarth,  98  Md.  493   (1904). 
An  allegation  that  the  vendee  relied 
on    or    was   induced    to    purchase    by 
son     of     false    representations     is 
essary.    Dahlman  v.  Antes,  109  N. 
W.  Rep.  7S4   (Iowa  1906).     A  vendor 
is  not  liable,   even  though  his  state- 
ments are  not  true,  if  he  acted  in  good 
faith  and  stated  that  he  had  received 
the    statements    from    somebody    else 
and   that   he   did  not   know   whether 
they  were  true.     Krause  v.  Cook,  144 
Mich.   3 « ; 3    (1906).     In  an  action  for 
fraud  inducing  the  purchase  of  stock 
scienter  must  be  proved.     It  is  suffi- 
cient that  the  defendant  has  no  good 
reason  to  believe  that  material  repre- 
sentations  made   by  him   were  true. 
A  statement  that  $1,500,000  worth  of 
ore  was  lying  on  the  ground  around 
the  mine  is  a  material  representation. 
Barndt  v.  Frederick,  78  Wis.  1  (1890). 
In  Wisconsin,  in  a  suit  by  a  vendee 
of  stock  against  the  vendor  for  dam- 
ages for  obtaining  money  and  prop- 
erty by  false  and  fraudulent  represen- 
tations,   the    defendant    may    be    ar- 
rested.   Warner  v.  Bates,  75  Wis.  278 
(18S9),  giving  the  complaint  and  affi- 
davit.    See   also   Clark    v.   Edgar,   84 
Mo.  106  (1884);  Gee  v.  Moss,  68  Iowa, 
31S  (1886). 

An  allegation  that  the  plaintiff  was 
induced  by  the  false  and  fraudulent 
27 


CONTBACTS  TO  SELL — GAMBLINQ  BALES,  I 


I  I'll.  XX. 


law  to  recover  dan  for  fraud  and  deceit  inducing  the  pur- 

chase of  the  stock,  the  fraud  and  d<  ceit  consisting  of  a  misstatement 
by  an  officer  of  the  liabilities  of  the  company,  must  prove  that 
the  did  qo1  h  lieve  the  Btatemenl  to  be  a  true  exhibit  of  the 

ffairs  and  was  guilty  of  dishonesty.  It  is  insufficient 
to  prove  that  the  statement  was  grossly  inaccurate,  and  largely  under- 
stated the  actual  liabilities  of  the  company.  Actual  fraud  must 
!.  It.  musl  ho  shown  that  the  representation  was  aot  only 
false  and  material,  hut  was  known  by  the  defendant  when  ho  made 
it  |,(  be  false,  or,  not.  knowing  whether  it  was  true  >>r  false,  and  not 
carj  bat  the   fad    mighl    he,   that    the   defendant  made   it    reck- 

lesslvj  paying  n<<  heed  to  the  injury  which  might  ensue,  "Mis- 
judgment  however  gross,  or  want  of  caution  however  marked,  is  not 
fraud.  Intentional  fraud,  as  distinguished  from  a  mere  breach  of 
duty  or  the  omission  to  use  due  care,  is  an  essential  factor  in  an 
misrepresentations   of   the    defendant    had  means  of  knowledge,  but  actually 


to  buy  from  the  latter  certain  stock 
which  was  valueless,  and  that  the  de- 
fendant knew  thai  the  statements 
were  untrue,  and  that  the  plaintiff  re- 
lied on  the  statements  and  bought  the 
stock,  constitutes  a  cause  of  action  in 
tort.  Freeman  v.  Trickett,  6  Kan. 
App.  S3  (1897).  A  person  who  makes 
false  statements  in  regard  to  a  corpo- 
ration, and  then  advises  the  party  to 
whom  the  statements  are  made  to  buy 
the  stock,  is  liable,  in  an  action  for 
deceit  to  such  party.  Heintz  v.  Muel- 
ler, 19  Ind.  App.  240  (1898);  s.  c.,  59 
N.  E.  Rep.  414  (1901);  Arkwright  v. 
Newbold,  L.  R.  17  Ch.  D.  301  (18S1); 
Arthur  V.  Griswold,  55  N.  Y.  400,  410 
(1874),  the  court  saying:   '  The  rules 


had  no  knowledge,  this  is  sufficient  to 
hold  him  liable.  Hindman  v.  First 
Nat.  Bank,  112  Fed.  Rep.  931  (1902). 

A  bank  which,  as  pledgee,  causes  by- 
its  statements  a  party  to  purchase  the 
stock  held  in  pledge,  may  be  held  lia- 
ble in  damages  if  such  statements 
were  false.  Hindman  v.  First  Nat. 
Bank,  etc.,  98  Fed.  Rep.  562  (1899). 
Where  a  purchaser  of  goods  misrepre- 
sents the  value  of  stock  which  is  to  be 
given  as  a  pledge  for  the  purchase 
price  and  refers  the  vendor  to  a  bank, 
which  bank  repeats  the  misrepresenta- 
tions, the  pledgee  may  sue  the  bank 
for  damages  and  may  show  that  the 
bank  at  that  time  held  such  stock  in 
pledge   and    that   the   goods   so    pur- 


of  law  require  a  reasonable  degree  of    chased  were  substituted  for  the  stock 


certainty  as  to  each  requisite  neces- 
sary to  constitute  the  cause  of  ac- 
tion, viz.,  representations,  falsity,  sci- 
enter, deception,  and  injury." 

In  a  sale  of  stock  by  a  director,  a 
misstatement  made  by  him  in  good 
faith,  as  to  the  property  owned  by  the 
corporation,  does  not  render  him  lia- 
ble in  an  action  for  deceit.  Boddy  v. 
Henry,  113  Iowa.  462  (1901).  To  sus- 
tain an  action  for  deceit  it  must  be 


of  the  bank  upon  the  transaction  be- 
ing closed.  Am.  Nat.  Bank,  etc.  v. 
Hammond,  25  Colo.  367  (1898).  In  an 
action  for  deceit  it  is  not  necessary 
to  allege  that  the  plaintiffs  would  not 
have  purchased  but  for  the  false  rep- 
resentations. Drake  v.  Holbrook,  66 
S.  W.  Rep.  512  (Ky.  1902).  In  a  suit 
by  a  subscriber  against  persons  in- 
ducing him  to  subscribe  by  fraudulent 
misrepresentations,  the  corporation  is 


proved  that  the  representation  was  not  a  necessary  party  defendant.  Aus- 
false  and  that  the  party  making  it  tin  v.  Murdock,  127  N.  C.  454  (1900). 
knew  it  to  be  false,  but  if  such  party 

1028 


CH.  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC.  [§   355. 

action  for  deceit."  1     When  a  stockholder  receives  an  offer  for  his 
stock,  and  is  persuaded  not  to  sell  by  fraudulent  representations  of 
a  director,  he  may  hold  the  latter  liable  in  damages.2     So  also  where 
the  principal  gives  an  order  to  the  broker  to  sell  certain  stock,  which 
the  principal  owns,  and  the  broker,  by  fraudulent  representations, 
dissuades  him  from  selling,  the  principal  may  hold  the  broker  lia 
in  damages.3     The  vendee  of  stock  may  sue  for  damages  for  deceit 
where  the  vendor  fraudulently   misrepresented   the   dividends   I 
had  been  paid  on  the  stock.4     Where  a  person  owns  a  majority  of  the 
stock  of  a  corporation,  and  sells  it,  and  agrees  with  the  purchi 
to  obtain  the  stock  held  by  others  at  as  low  a  figure  as  possible,  and 
misstates  to  such  persons  the  price  which  he  obtained  for  his  own 
stock,  he  is  liable  in  an  action  for  deceit  to  parties  who  sell  their 
stock  relying  on  such  statements.8 

The  purchaser  of  stock  who  has  given  a  note  in  payment  cannot 
defeat  an  action  on  the  note  by  setting  up  that  the  purchase  was 
induced  by  fraud.     He  must  first  disaffirm  il  and  return 

the  certificate,  and  such  return  must  i  e  made  before  the  trial.6  But 
where  the  purchaser  brings  an  action  for  deceit  he  need  not  return 
the  consideration  nor  rescind  the  contract.7  His  injury  is  to  be 
duly  measured,  and  credit  may  be  given  for  the  real  value  of  the 
stock.8  A  director  is  not  liable  for  the  misrepr<  sentations  and  frauds 
of  his  co-directors,  unless  he  has  expressly  authori  r  tacitly  per- 

mitted commissiou  thereof.8  The  mere  fact  of  being  a  director  "is 
not  per  se  sufficient  to  hold  a  party  liable  for  the  frauds  and  misrep- 

i  Kountze  v.  Kennedy,  147  N.  Y.  124  Barb.     121     (18G0).     See    Parsons    v. 

(1895).  Johnson,  28  N.  Y.  App.  Div.  1. 

2  Rothmilier  V.  Stein,  143  N.  Y.  5S1  8  See  §  586,  infra.     In  an  action  for 
(1891).  false     representations     inducing     the 

3  Fottler  v.  Moseley,  179  Mass.  295  purchase  of  stock,  the  defendant  may 
(1901).  show   that    the    stock   was    worth   as 

■*  Handy  v.  Waldron,   18  R.   I.   567  much  as  it  would  have  been  had  the 

(1894).  representations  been  true.     Doran  v. 

5  Weaver  v.  Cone,   174   Pa.   St.   104  Eaton,  40  Minn.  35   (1889). 
(1896).  » Weir  v.  Barnett,  L.  R.  3  Exch.  D. 

«  Gifford    v.    Carvill,    29    Cal.    589  32   (1877).     Where  a  person,  induced 

(1866).      A    transferee    claiming    to  to  purchase  stock,  claims  that  it  was 

be    defrauded    is    nevertheless    liable  on  account  of  fraudulent  representa- 

on    the   statutory   liability   where   he  tions   of   some  of   the   directors,   and 

brought  a  suit   for  damages  for  the  sues  to  hold  all  the  directors  liable, 

fraud  and  recovered  judgment.  Such  she  may  be  compelled  to  state  in  her 

a  suit  is  a  ratification  of  the  transfer,  complaint    which    of    the    defendants 

Stuart  v.   Hayden,   72  Fed.   Rep.  402  were  directors  at  the  time  of  the  state- 

(1895) ;  aff'd,  169  U.  S.  1.  ments.    Viner  v.  James,  92  N.  Y.  App. 

7  Miller    v.    Barber,    66    N.    Y.    558,  Div.  542  (1904). 
564    (1876);   Newbery  v.  Garland,   31 

1029 


55.]  CONTRACTS  TO  SELL— GAMBLING  SA]  PC.  H.  XX. 

illations  of  the  active  managers  of  a  corporation.     Some  knowl- 
edge of  and  participation  in  the  act  claimed  to  be  fraudulent  m 

brought  home  to  the  person  charged."  '  The  secretary  of  a  com- 
pany cannot  sustain  an  action  for  deceit  againsl  the  presidenl  and 
vin  -presidenl  on  t]  and  of  fraud  inducing  him  to  Bell  them  his 

□  though  they  misrepr  I  the  condition  of  the  busin<     , 

especially  where  he  waited  five  months  bi  fore  selling  and  where  the 
only  damage  was  future  contingent  p]  .a  Where,  however,  pr 
is  given  tending  to  show  thai  defendants  w<  re  jointly  engaged  in 
a  common  scheme  to  defraud  the  plaintiff,  the  acts  and  declarations 
of  one  are  admissible  in  proof  against  all;8  and  fraud  of  a  similar 
nature,  at  or  near  the  same  time  as  the  one  complained  of,  may  be 
shown.4  The  fraud  practiced  need  nol  have  been  the  solo  Induce- 
ment to  the  purchase.6  A  party  may  be  liable  herein  although  he 
was  neither  a  corporate  officer  nor  the  vendor  of  the  Btock.  [f,  with 
intent,  to  cheat,  and  defraud  the  vendee,  he  induces  him,  by  fraudu- 
lent mean-,  to  purchase  for  value  sU  ck  which  he  knows  to  he  worth- 
he  is  liable  for  the  damage  sustained,  although  the  purchase  is 
actually  made  from  another.6  A  person  who  purchases  stock 
induced  by  misrepresentations  may  recover  full  damages  in  an 
action  for  deceit,        o  though  he  causes  a  portion  of  th<  k  to  be 

transferred  to  members  of  bis  family.7  A  sale  of  stork  does  not 
transfer  a  right  of  action  for  damages  caused  by  false  representa- 
tions made  to  the  vendor  by  the  party  from  whom  the  vendor  pur- 
chased.8     In    an    action    by    a    purchaser    of    stock    against    tho 

i  Arthur  v.  Griswold,  55  N.  Y.  400,  that  he  relied  solely  upon  the  misrep- 

406   (1874);   Morgan  v.  Skiddy,  62  N.  resentations.      Hatch    v.   Spooner,    13 

Y   319  (1875).  N.  Y.  Supp.  642   (1891);   s.  c,  on  sec- 

2Boulden  r.   Stilwell,   100  Md.   543  ond   appeal,   14  N.  Y.  App.  Div.  408; 

(1905).  Hindman  v.  First  Nat.  Bank,  112  Fed. 

s  Miller   v.    Barber,    66    N.    Y.    558,  Rep.  931  (1902). 

567  (1876).  |;  Hubbell    v.    Meigs,    50    N.    Y.    480, 

4  Miller    V.    Barber,    66    N.    Y.    558,     490    (1872).     Concerning  the  effect  of 

568  (1876).  See  also  note  6,  p.  440,  false  and  fraudulent  representations 
and  note  1   p.  1035.  on  an  action  for  damages,  see  Tocker- 

5  Morgan  v.  Skiddy,  62  N.  Y.  319,  son  v.  Chapin,  52  N.  Y.  Super.  Ct.  16 
328  (1875);  Ex  parte  Carling,  56  L.  T.  (1885).  It  is  no  defense  to  such  an 
Rep.  115  (1887).  In  an  action  for  action  that  the  original  conversion 
false  representations  in  the  sale  of  was  by  some  one  else.  Kuhn  v.  Mc- 
stock  the  vendee  need  not  prove  that  Allister,  1  Utah,  273  (1875);  s.  c, 
he  relied  solely  on  the  representa-  sub  nom.  McAllister  v.  Kuhn,  96  U.  S. 
tions  of  the  vendo^provided  he  shows  87  (1877).  See  also  §350,  supra. 
he  would  not  have  made  the  pur-  i  Boddy  v.  Henry,  113  Iowa,  462 
chase  except  for  those  representations.  (1901). 

Baker  r.  Mathew,  115  N.  W.  Rep.  15        8  Kennedy  v.  Benson,  54  Fed.  Rep. 
(Iowa  1908).  Plaintiff  need  not  prove     836   (1893).     Where  fraudulent  repre- 

1030 


CH.  XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC.  [§    355. 

company  and  two  directors  for  deceit,  the  verdict  may  be  against 
one  or  more  of  the  defendants,  and  may  be  sustained  by  one  or  more 
of  the  misrepresentations  alleged.1  Even  though  in  an  action  for 
deceit  against  several  a  conspiracy  is  charged,  yet  a  recovery  may 
be  had  against  one,  the  basis  of  the  suit  being  false  and  fraudulent 
representations.2  A  suit  to  hold  the  directors  liable  for  declaring 
a  dividend  out  of  the  capital  stock,  and  thereby  inducing  the  plaintiff 
to  purchase  the  stock,  cannot  at  the  same  time  seek  to  hold  the 
directors  liable  to  the  corporation  for  the  dividend  so  declared.3 
Several  persons  defrauded  of  their  contract  whereby  they  were  to 
receive  stock  cannot  sue  jointly.  Each  must  sue  separately.4  In 
a  suit  for  damages  for  fraud  inducing  the  sale  of  stock  the  court 
will  bo  liberal  in  admitting  evidence  showing  the  full  nature  of  the 
transaction,  and  it  is  for  the  jury  to  decide  whether  the  fraud  was 
intentional  and  whether  there  was  any  fraud.5  The  corporation  it- 
self, all  of  whose  stock  lias  been  issued  in  payment  for  a  mine, 
cannot  hold  a  vendor  Liable  for  misrepresentations  as  to  the  value  of 
the  property.8  In  a  suit  by  a  vendor  of  stock  for  fraud  inducing 
the  sale,  the  value  of  the  stuck  should  include  a  proportionate  part  of 
the  good  will,  and  the  good  will  may  be  valued  by  multiplying  the 
average  profits  by  a  number  of  years  depending  upon  the  nature 
and  character  of  the  business,  all  of  which  is  a  question  for  the  jury.7 
The  measure  of  damages  for  fraud  inducing  the  purchase  of  stock 
"is  the  difference  between  the  value  of  the  stock  at  the  time  it  was 
purchased  and  the  price  paid  for  it."8  An  agreement  by  which  a 
suit  for  damages  for  fraud  inducing  the  purchase  of  stock  is  dis- 
continued does  not  prevenl  a  Bubsequ<  at  suit  on  the  same  cause  of 
action.0  A  vendor  of  stock  who  completes  the  transaction  after  he 
lias  knowledge  of  the  facts,  which  he  claims  were  misrepresented 

scntations  are  made  inducing  a  party  2  Gurney  v.  Tenney,  84  N.  E.  Rep. 

to  sell  his  stock,   and  then  the   pur-  428   (Mass.  1908).                             . 

chaser    wrecks    the    corporation,    the  3  Stroud  v.  Lawson,  [1898]  2  Q.  B.  44. 

vendor  may  hold  the  latter  liable  for  4  Summerlin  r.  Fronteriza,  etc.  Co., 

damages.     The  assignee  of  the  cause  41  Fed.  Rep.  249  (1890). 

of  action  may  sue  in  trover  for  con-  5  Townsend    r.    Felthousen,    156    N. 

version,  but  cannot  sue  for  damages  Y.  618  (1898). 

for    fraudulent   representations,    inas-  <:  Stratton's,  etc.  v.  Dines,  126  Fed. 

much  as  the  latter  cause  of  action  is  Rep.  968   (1904);   aff'd,  135  Fed.  Rep. 

not  assignable.     Smith  v.  Thompson,  449. 

91  Mich.  381   (1892).  7  Von  Au  v.  Magenheimer,  115  N.  Y. 

1  Lare    v.    Westmoreland    Specialty  App.  Div.  84   (1906). 

Co.,  155  Pa.  St.  33  (1893),  holding  also  8  See    §586,    infra,   and    116    N.   W. 

that  the  party  purchasing  the  stock  Rep.  410. 

may  rescind  or  may  retain  the  stock  9  Jacobs    v.   Marks,    182    U.    S.    583 

and  sue  for  damages.  (1901). 

1031 


cannol  then  maintain 

tioB  as  to  run 

the  plaintiff  to  buj  '•''  T' 

upon  inquiry,  such  as  th< 

cut.- 

§356.    Remedy  in  equity.  —  A  'it  ju- 

risdiction with  a  courl  of  lav.   iu  i 
r>  cover  hack  in*  aid,  where  the  pur<  ind 


chargeable  to  I 

i  McDonOUgb    V.    William-,    77 
261    (1905). 

Bttn   r.   Barber,   LIE   N.   Y. 
Div.  713    (  to  II- 

pleading    the    Btatute    of    limit 
of  another    I   I 

fraud  in  Inducing  the  purchase  of 
stock,  see  Tudor  p.  Ebn<  r,  104  N.  V. 
App.  Dlv.  562  (  L905);  affd,  182  N.  Y. 
502. 

e  g  L55,  supra.   ^ 
is  Induced  to  subscribe  for  on 

the  fraudulent  representations  of  I 
president  that  the  company   Is   In   a 
prosperous  condition,  the  i" 
file  a  bill  in  equity  to   I 
the  money,  and  equity  h 
on  the  grounds  of  discovery,  account, 
fraud,  misrepresentation,  and  com 
ment.      Both    the    company    and    the 
president  individually  were  made 
fendants   and   held   liable.     Tyler    v. 
Savage,  143  U.  S.  79  (1892).    See  also 
Hill  v.  Lane,  L.  R.  11  Eq.  215  (1870), 
where  the  court  said:   "It  is  so  well 
settled  that  this  court  will  entertain 
jurisdiction    in    such    cases    that    it 
would  be  a  misfortune  indeed  to  the 
public    if    there    were    any    sufficient 
ground  for  considering  that  the  juris- 
diction is  doubtful.    .    .    .    Although 
courts  of  common  law  may  have  juris- 
diction in  some  such  cases,  there  is 
clearly  concurrent  jurisdiction  in  this 
court,"  doubting  Ogilvie  v.  Currie,  37 
L.  J.    (Ch.)    541    (1868);   Campbell  v. 
Fleming,  1  Ad.   &  El.  40    (1834).     A 
bill  in  equity  is  a  proper  remedy  for 
fraud  inducing  a  sale  of  stock.     An- 
driessen's    Appeal,    123    Pa.    St.    303 
(1889).        A  person   induced   to  pur- 


o,  by  fi  Lb  in 

.'  prop- 

i  ill  in  equity 

■ 

D      'l'  h 

r  with 
equity  d 

parch 

h  a  oil  rioui 

fur  a  1': 

Wl  to  do  a 

■  n  an  i  ad  fraudulent  in- 

•ment  l  a  defrav 

may  file  a  bill  in  equity  to  hold  the 

:i  and   It  ■•  k- 

hol  inally    liable   and   enjoin 

■  of  the  assets  and 
for  discovery.  Edwards  p.  Michigan, 
etc.  Co.,  132  Mich.  1  (1902).  Where 
the  president  of  a  national  bank  in- 
duces a  person  who  lives  several  hun- 
dred miles  away  from  the  bank  to  pur- 
chase stock  in  the  bank  by  fraudulent 
representations,  and  within  thirty-six 
days  the  bank  is  closed,  the  pur- 
chaser may  have  the  sale  rescinded. 
Stufflebeani  r.  De  Lashmutt,  101  Fed. 
Rep.  367   (1900). 

Where  the  president  sells  stock  for 
$120  per  share  after  he  has  indorsed 
a   false   statement  of   the   company's 


1032 


cir.  xx.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  356. 


purchase  of  stock  induced  by  fraud,  is  by  a  bill  to  sot  aside  the 
whole  transaction.  This  remedy  follows  the  rules  usually  pre- 
scribed in  such  suits.  It  is  not  necessary  for  the  complainant  to 
prove   a   fraudulent   int.-ut.      Innocent   arts   or   misrepresentations 


affairs,  the  stock  being  really  worth 

but   170   per  share,   the    vendee   may 

have  the  Bale  rescinded.     Prewitt  o. 

mble,  92  Ky.  L76  I  1891  I.    a  low<  r 

irt    in    N»  w    York    held    that    in    a 


manager.  Benton  v.  Wind,  47  Fed. 
Rep,  253  (1S91).  To  same  effect, 
Inbank  v.  Pernley,  9  Sim.  556 
(1839),  where  a  sale  by  a  director 
who  has  Issued  false  reports  and  de- 


SI|U  t0  |  for  fran,i  the  plaintiff    clared  Illegal  dividends  was  set  aside 

was   not     The  corporation  is  a  proper  party  to 
Id  for  it  or  could  not    such  actions,  if  a  regli  try  has  been  ob 


be  sold   for   that   sum.     Aron    o.    De 
Castro,    13    N.    Y.    S  •"-    '  1891); 

18,  but  a  contr 
rule    is    laid    down    in    Harlow    r.    La 
i   X.  Y.  278   (1897).     In 
[on    in   equity   to   rescind   a  -ale   of 
stock  for  fraud  t  D  is  not 

;i   i.  :y   party.     '.  due  of  tie- 

stock    Deed    i    •  ■■    and 

with  Inter 
. 

fraud   is  a  bar.      1 

gin         <  .;:;  Hun.  134 

in  an  action  to  rescind  for  fraud 

l   not  join 


tained  by  the  person  who  has  obtained 

stock  by  fraud,  since  a  retransfer 

on  the  cor  books  is  asked   for. 

See  also  Bradley  r.  Luce,  99  ill.  234 

(lsSl).      A    Judgment    creditor    of    a 

tlon  enjoin    it 

[8    and    bonds 

owi  It  Tie-  remedy  sought  must 

In  addition  to  the  injunc- 

R.   R., 

I,     An   equitable 

Bull  not  lie  to  rescind  a  sale  of 

worthli  'ids.      A    suit    at    law    is 

the  •'.  U.  S.  Rank  r.  Lyon 

Count;.  2    i  L892).     A 


all   pur-    purchaser  of  stock  who  was  Induced 


;   at  tin  time  ami   on  the 

same  terms.     Moore  p.  1  .  1 1 

N.    V.    Bnpp.   798    (1S90).     Wb.-n..   the 

vend<  i  Bent  that  the  money  will 

1  to  buy  a  secret  process, 

purchasers  pay  over  the  mom 

•  company  for  that  purpose,  and  it 


to  pur.  I  •  QOl   maintain 

lit  in  equity  when  he  fails  to  show 

more  than  a  right  to  pecuniary  dam- 

-  for  misrepresentations.    Whitney 

b,  :.  i  Fed.  R  p.  985  (1893). 

a  i  ontract  between  the  owner  of  prop- 
.-    and    a   promoter    by   which    the 


.    with   other   funds   and    is  form,  r  agrees  to  sell  his  property  to  a 
not  used  to  purchase  the  process  be-  corporation  to  be  formed  by  the  lat- 
l        e  the  process  is  a  fraud,  the  ven-  ter,  with  a  specified  capital  stock,  can- 
to the  vendors,  not,  a  year  after  the  transaction  has 
but  cannot  make  the  receiver  of  the  to  -  n  carried  out,  be  made  the  basis  of 
companv  p                the  money.    Moore  a  suit  in  equity  to  compel  the  promo- 
Robertson,    11    M.    Y.    Bupp.    798  ter   to   cancel    excessive   stock    which 
The  vendor  may  tender  back  was  issued  to  the  promoter,  there  be- 
and  file  a  bill  in  equity  to  ing  no  allegation   that  the   promoter 
cancel   the   sale   on   the  ground   that  still  had  the  stock.     The  remedy  of 
he  was  induced  to  purchase  by  false  the  vendor  is  at   law.     Even  though 
statements  that  the  corporation  owned  several  vendors  to  the  corporation  had 
the  secret  process;  that  a  patent  had  a  similar  claim,  yet  one  of  them  can- 
been  applied  for;    that   it  was  ready  not  file  such  a  bill  in  equity  in  behalf 
to  commence  business,  and  that  com-  of    himself    and    others.      Brehm    r. 
plainant  would  be  made  president  and  Sperry,   92   Md.   378    (1901).     Where 

1033 


I 


•: 


if 


Buffice  for  this  pui 

tain  an  action  for  deceit     A  '•■  nd 


both  the  purchaser  ai 
in   ;i   mining  company    know   at   : 
liin  there  I  I    that  I 

mine  hi  I,"  the  in- 

not  be  re  iclnd 

Jones,  is  S.  W.  R<  p. 
A  creditor  holding  an  unpa 
sory    ii  bill    in    • 

bring  in  ii  hold  them  li- 

able i"1  r  I  ntation  3  and   i 

claim  thai  i  he  i  ompany  »1  duly 

Incorporated;   and  further  bring  In  a 
equenl   corporation   I  ill 

the  ' .  and  also  bring 

in  those  i"  n  ons  who  On 
such  a    i  I  s,— -all  in  one  bill  I 
collect  the  di  bt.    Ji  ffi  n  on  Nal    Bank 
v.  Texas  inv.  Co.,  74 
See  to  the  eflecl  thai  a  coui  i  of  equl 
lias   jurisdiction,    City,    i  ti .    Corp.    v. 
Centra]  Trusl  Co.   (  X.  X".  L.  J.,  June 
12,  1801 ).     Where  bank  old 

by    fraudulent     and    false    i  Qt8r 

tlons,   the  bank   being  await-   then 
and    receiving   Indirectly    the    mon 
paid  for  the  Stock,  the  sale  ma;. 
scindetl  and  the  money  recovered  back 
from   it,  even  though   it   is   Insolvi 
Florida,   etc.   Co.   v.    Merrill,   52    Fed. 
Rep.   77    (1S92).     Several   subscribi 
who  have  been  Induced  by  th< 
misrepresentations     contained     In     a 
prospectus  to  subscribe  for  stock  may 
join  in  a  suit  in  equity  for  the  benefit 
of  themselves  and  others  similarly  de- 
ceived to  set  aside  their  subscriptions. 
Bosher  v.  Richmond,  etc.  Co.,  89  Va. 
455    (1892).      See    also    §156,    supra. 
A    bill    in    equity    lies    to    rescind    a 
fraudulent   sale   of  stock.     Merrill    v. 
Florida,    etc.    Co.,    60    Fed.    Rep.    17 
(1893).     /      tockholder  in  a  national 
bank  who  ; .  ..usf  ers  his  stock  in  order 
to   avoid   the   statutory  liability   may 
be  held  liable,  and  this  liability  may 
be   enforced   by   the   receiver    of    the 
bank.    In  such  a  suit  a  transferee  can- 
not be  held  liable  also,  nor  can  the 


/ .   I  ■  .  .     I 

B.  1,      I: 

N     V. 

! 

!■  it     i. 

profits  which  ide  if 

his  plai 
r     P.      Ii 

Where  a  person  turn 

in    01 
that  Hi  mer 

in   i 

former  ma  lat- 

t<  r  for  an 

Bort  to  an 

Moore,  76  \'<  d.  Rep.   172  I  1896).     E 

121,  supra.    The  vendee  may  rt  - 
Bcind  where  false  and  material 

re  made  and  the  plain- 
tiff relied  upon  tl.  I  was  inju 
a  though  he  might  have  made  in- 
i  ions  which  would  have 
th.ir  falsity.    Olcott  v.  Bolton.  50  Neb. 
779    i  1897).      Sev<  ral    purchasers    of 
stock  may  contribute  to  the  bringing 
of  a  test  case  to  decide  whether  rep- 
resentations   inducing    the    purch 
were   fraudulent.     Davies  r.   Stowell, 
78  Wis.  334    (1890). 

Where  negotiable  bonds  are  stolen 
from  the  owners  and  they  pass  into 
bona  fide  hands,  and  then  the  thief  ob- 
tains them  by  fraud  from  such  bona 
fide  hands  and  returns  them  to  the 
first  owners,  the  latter  are  entitled  to 


1034 


en.  xx.] 


vMBUNG  SALES,  ETC. 


[§  356. 


by  reason  of  misrepresentation  based  upon  mistake  or  innocent 
misstatements,  where  the  common-law  action  of  deceit  would  re- 
quire much  more  stringent  proof.3  Actual  fraud  need  not  be  prov<  <1 
in  an  action  for  r<  -  a  where  the  falsity  i>t'  material  representa- 

tions is  clearly  proved.2  Moreover,  the  contract  of  Bale  may  be 
canceled  by  :i  court  of  equity  on  the  ground  of  a  mutual  mistake 
when-  the  misrepresentations  were  innocently  made.8  A  person  who 
has  been  induced  by  fraudulent  misn  presentations  to  exchange  stork 

keep  them.     London,  etc.  Co.  r.  Lon-    fact  which  did  not  exist  or  of  a  fact 


don  ■  ink,  L  R.  21  Q.  B.  D.  " 

(1888).     In   i:  I  this   n  medy  by 

bill  in  equity 
analogous  to  the  common-la  ion 

in  tii.it  dan 
awarded. 
I.     i:     6    H.    I-   877,   890    I  1878),    I 

tying:  "T!  ii"  doubt 

that    equil  ■    •    urrent 

jurisdiction   i:  of  thl  i  lp» 

:.  and   I 
lilr  t.i  tli- ni  I-  :   both  at  law 

and  in  eqult 

i  Kountce    p.    Kennedy,    l  IT    N.    Y. 
.L't    i  1895  | ;    ArKw! ;  Newbold, 

L.  R    17  <  b    D.  301    (1881). 
l:  r.     Wann,     58     1 

l  1-  \      tie  Of 

.it  in  eqo  fraud, 

without    proving    fraudulent    Inl 
Tucker    v.    Oebourn,     101     Md.    618 
i  l :•!.:,  i.     .\     nit  in  <  quit 
Bcind  a  ch  Induced  by  fraud- 

ii i«  ii t    :  3.     Intent  to 

l  doI  be  pror  i  d.  Martin 
r.  Hill.  11  Minn.  887  I  L889)  :  Freer 
r.  Dent  n,  61  N.  Y.  192  i  L875). 
tual  intent  t<>  defraud  need  not  be 
Bhown  in  a  suit  in  equity  to  rescind. 
In  such  a  suit  similar  frauds  prac- 
ticed  on   i  cannot  be  shown  in 

lence.  Johnson  o.  Gulick,  46  Neb. 
817  (1896).  The  rule  in  New  York 
is  otherwise.  Chisholm  v.  Eisenhuth, 
€9  N.  Y.  App.  Div.  134  (1902).  Cf. 
§165,  note.  In  an  action  to  rescind 
on  the  ground  of  fraud  scienter  must 
be  alleged  and  proved,  but  this  may 
.•'.rise  by  a  false  statement  mode  know- 
ingly with  intent  to  deceive,  or  by 
representing   actual    knowledge    of    a 


which   the  seller  did   not  know,   and 
which    was   not   true.     Garrett    Co.    r. 
in,    101    N.    V.    App.     DiV.    507 
I  1905)  :   affd,  M  N.  Y.  557.     A  court 
quity   will   not   entertain  a  suit  to 
.    liability  of  di- 
:•  paying  dividends  In   vio- 
lation   of    the    statu  d    though 
tin  •                     medy  In  any  other  court, 
whi  ■                                      ded  to  pay 
mpany's  debts  and  a  Judgment 
promote  j            but  would 
produce  Inequitable  results.    A  stock- 
holder               maintain  such  a  suit 
in  behalf  of  him              other  Btock- 
hol< 
to   pur                     tock    by   r<  ason   of 

!:  di\  Id  I  n  this  ease  the  court 

carefully    i  precedents. 

n  v.  Maloi  x.  .i.  i:  i.  il'2 

J  i  ;    affd,   54    Ail.   Rep.    I 
:rr  v.  Nat.  Bank,  •  L67  X. 

Y.  ion  is  .-ought 

not  on  the  ground  of  mistake,  hut  of 
fraudulent  representations,  it  must 
he  Bhown  thai  such  representations 
were  made  with  knowledge  of  their 
:  with  i nt nt  to  deceive,  and 
that  they  hud  that  effect;  in  other 
wor  liter  must  be  proved.  Jones 

p.   Allan,   35  N.  Y.   Supp.   ."27    (189.",); 
Mason  r.  Wheeler,  L'l  N.  Y.  Supp.  879 
i  1893).     In  a  suit  by  a  vendee  to  re- 
scind a  sale  of  stock  on  the  ground  of 
fraud,  it  must  be  alleged  that  the  mis- 
resentations    were    known    to    the 
dor   to   be    false.     Garrett   Co.,   p. 
Astor,  67  N.  Y.  App.  Div.  595   (1902). 
ett    Co.    v.    Halsey,    38    N.    Y. 
.  Rep.  438  (1902). 


1035 


§  3       | 


l 


[OB 


for  other  stock  may  hi  a  without  proving  dan  rait 

being  imilar  to  one  for  being 

alleged  that  the  actual  value  of  th<  shown.1      In 

England  it.  i-  held  thai  to  rescind  a  purcha  a  the  ground 

of  misrepresentations,  fraud  must  be  alleged  where  the  transaction 
has  been  completed.3 

Although   the  buyer  of  Btock  purchased   it   al   a   small  nominal 
price  by  reason  of  fraudulent  misrej  i  itions,  yet  the  Beller  can- 

not maintain  a  bill  in  equity  to  rescind,  where  the  Btock  has  no 
special  value  other  than  its  money  value,  and  the  latter  can  readily 
l>e  shown.3     The  fraud  may  be  waived  by  the  acts  "t"  th<  I  •  ■.' 

The  right  to  rescind  the  contracl  for  fraud  is  waived  by  taking  a 
bond  of  indemnity  against  liability  on  the  Btock,  such  l«.n<l  being 
taken  upon  discovery  of  the  fraud.8  A  party  cannot  rescind  a  pur- 
chase of  Btock  "u  the  ground  of  false  n  presentations  as  to  the  com- 
pany's having  a  Becrel  process,  when-  he  learned  about  the  proc 
ln-fore  completing  his  purchase,  and  had  held  thi  a  year,  and 

endeavored  to  sell  the  proc<  A  pi  rs  u  cannot  rescind  for  fraud 

a  purchase  of  st<*-k  fruin  the  corporation  itself,  where,  subsequently 


1  Jahn  r.  Reynolds,  115  X.  V.  A  pp. 
Div.  G47  (1906).  A  person  Induced 
by  fraud  to  subscribe  for  stock  may 
have  tbe  subscription  canceled,  even 
though  he  does  not  show  that  lie  has 
been  damaged.  Stern  v.  Kirl>y,  i 
Co.,  134  Fed.  Rep.  509  (1904).  Equity 
has  jurisdiction  to  rescind  a  sale  of 
stock  at  the  instance  of  the  vendee, 
but  the  misrepresentations  must  be 
material,  inducing,  damaging,  and  cal- 
culated to  deceive.  Farwell  v.  Colo- 
nial T.  Co.,  147  Fed.  Rep.  480   (1906). 

2  Seddon  r.  North-Eastern,  etc.  Co. 
[1905]   1  Ch.  326. 

3  Edelman  v.  Latshaw,  159  Pa.  St. 
644  (1894),  holding  also  that  the  bill 
will  not  lie  where  the  defendant  pur- 
chaser has  already  sold  the  stock  to 
a  oona  fide  purchaser.  An  action  for 
deceit  was  afterwards  sustained.  See 
s.  c,  180  Pa.  St.  419  (1897). 

4  Kingman  &  Co.,  v.  Stoddard,  85 
Fed.  Rep.  740  (1898).  Where  a  pur- 
chaser of  a  majority  of  the  stock  of 
a  manufacturing  corporation  becomes 
general  manager  and  ascertains  that 
he   was  defrauded   by   misrepresenta- 


tions  as   to    the   company's   condition, 
but  concludes  to  n  ith  the  b« 

ring  he  can  make  it  suc- 
ceed, hut  finally  makes  a  failure  of  it, 
he  cannot  then  complain.  Spelcher 
v.  Thompson.  1 11  Mich.  664  i  1906). 
A  person  who  has  bought  mining 
stock  and  afterwards  examines  the 
mine  and  deals  in  the  stock  and  sells 
it  on  commission  cannot  then  claim 
that  his  original  purchase  was  in- 
duced by  fraudulent  representations. 
Irby  i\  Tilsley,  41  Wash.  211  (1905). 
A  purchaser  of  bonds  may  rescind  for 
fraud,  even  though  he  has  sold  the 
bonds,  where  he  sold  on  the  advice  of 
his  vendor.  Findlay  r.  Baltimore, 
etc.  Co.,  97  Md.  716  (1903).  Where 
the  vendee  files  a  bill  for  fraud  and 
yet  asks  that  the  vendor  be  required 
to  deliver  the  stock,  he  thereby  af- 
firms the  transaction.  Chicago,  etc. 
Bank  v.  Ball,  208  111.  256  (1904). 

5  Bridge    r.    Penniman,    51    N.    Y. 
Super.  Ct.  183   (1885). 

6  Benton  v.  Ward,  59  Fed.  Rep.  411 
(1894). 


1036 


(II.   XX.]  CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC.  [§    356. 

to  discovering  the  fraud,  he  attended  a  stockholders'  meeting,  and 
voted  to  assess  the  stock,  and  afterwards  attended  another  stock- 
holders' meeting  and  paid  the  assessment.1 

"Where  a  party  has  a  right  to  return  the  stock  and  receive  back 
his  money,  he  may,  after  making  a  tender,  do  any  acts  in  regard 
i"  the  stock  reasonably  necessary  to  protect  his  interest,  and  yet 
not  lose  his  righl  to  rescind.  But  when-  he  directs  a  sale  of  the 
k  and  gives  a  prosy  thereon  and  attends  meetings,  he  waives 
righl  to  rescind.2  Where  the  vendee  sues  to  obtain  the  stock 
after  he  knows  of  the  fraud,  he  ratifies  the  sale.3 

bea  is  a  bar.     And  yel  where  a  person  buys  Btock  in  1SG5  on 

tin-  faith  of  false  representations,  and  dii  -   in   1873   that  the 

worthless,  and   i  ae  of  the  pirators  in  1S89 

,that  the  re]  ay   file  a  bill  in  equity 

for   rescission    oi    the   Bale  and  for  recovery   of   the  money   paid.4 

i  Marten    r.    Paul.   etc.   Co.,   99   Cal.  Induced      fraudulently      to      purchase 

355   (1S93).     Acting  as  a  shareholder  from  the  corporation,  even  though  he 

r  of  the  right  to  r  :id  remained  cashier  for  the 

promoter's  mlfi            "ntatio:            I  rie  corporation  for  over  a  year  after  the 

V.    Cuelph.    etc.    Co.,    11    S.    C.    Rep.  sale  and  before  he  set  up  the  defense, 

(Can.)   450  (1885).     Where  a  corpora-  and    was    a    director    and    voted    the 

tion   issues   stock  and   thereafter   per-  Btock.     He  did   not  necessarily   learn 

mits  a  transfer  of  the  el                    lie  the  facts  from  occupying  these  posi- 

:eof  to   another   person,   it  cannot  tions.  nor  from  the  fact  that  he  made 

get  the  stock  back  on  the  ground  of  official  reports  of  the  condition  of  the 

fraud    on    the    part    of    the    party    to  company.    He  was  not  bound  to  inves- 

whom    it  first   issued   the  stock.     Te-  tigate.    He  tendered  the  stock  back  as 

cumseh,  etc.  Bank  p.  Russell.  50  Neb.  soon  as  he  discovered  the  facts.   Espe- 

Delay  in   rescinding,  in  daily  do  these  rules  apply  where  no 

hopes    that    the    stock    will    be    more  creditors'      or      other      stockholders' 

valuable,  is  fatal.     Weisiger  c.  Rich-  rights  have  intervened.     Nat.  Bank  r. 

mond     Ice    Mach.     Co..     90    Va.     795  Taylor,  5  S.  D.  99   (1894). 

(1891).      Where  the   vendee  of  stock  -  Jessop    v.    Ivory,    158    Pa.    St.    71 

becomes  a  director  and  has  access  to  (1893);   s.  c,  172  Pa.  St.  44.     A  pay- 

the  books,  and  complains  of  fraud  in  ment  after  repudiating  the  subscrip- 

the   sale,    and    then    takes   a    sum   of  tion  for  fraud  is  not  a  waiver  if  made 

money  from  the  vendor  in  settlement,  expressly  to  save  money  already  paid, 

he  cannot   again  complain   upon   the  Fear  v.  Bartlett,  81  Md.  435  (1895). 

failure    of    the    company.      Powell    v.  3  Anderson    r.    Chicago,    etc.    Bank,' 

Adams,  98  Mo.  598  (1889).     A  vendee  195  111.  341    (1902). 

who,  after  the  purchase,  becomes  a  di-  4  Higgins  v.   Crouse,  147  N.   Y.  411 

rector   and    signs   statements   similar  (1S95),    rev'g    71    Hun,    615.      Even 

to  the   representations  made  to  him,  though    by    the    statutes    of    a    state 

and  waits  two  years  before  repudiat-  (Arizona)   a  transfer  of  the  stock  is 

ing  the  stock,  cannot  repudiate.     An-  not  good  until  recorded  except  as  be- 

derson   r.   Black,    32    S.   W.   Rep.   468  tween  the  parties,  yet  where  various 

(Ky.    1895).      A    person    may    defeat  stockholders   have  pooled  their  stock 

notes  given   for   stock   which  he  was  by    turning    in    their    certificates    of 

1037 


[<  " 


< Ordinarily,  how<  e<  r.  del 

a  fraudul  ck  by  a  cor] 


k    to   (Hie    I 

of  the  pai  I  ling  has  sold  I 

pool  certlfi  and   the  m 

the  pool  knowing  thai  i 

mit   the  Btw  i. 
epondlngly  tn 
oi    tii"    company,    and 
lently  obtains  a  Judgmei  I 

"1. 

and   Bella  oul    hi  ■    under  Buch 

Judgmi  nt.  he  i 
court  of  equity  to  ti 
to  the  purchaser  of  the  p 
even  th<  ugh   I 
in   value  and   tw< 

vened.     Brl  Bell   v.   1  i    •  '.  d. 

i;  p<  809  i  L907 ).    Where  a  certlfli 
of  stock  i.  from  a  pi  "i«l 

the  tran  fer  on  the  1  nt 

in  thai   the  pi  •  writ- 

ten not  at  the  end  of  the  transfer  but 
at  the  beginning,  the  pledgor  m  :•  by 
a    bill    In    equity    n  di  •  m 
from  a  person  who  purchased  li  from 
the  thief.     A  suit  in  equity  lies  In 
much  as  an  act  is  Involved 
amount     due    and     the    dlvlden 
ceived.    The  ten-years  Btatute  of  limi- 
tations applies,  there  b<  iul- 
escence  or  unreasonable  delay.  Tn 
well    V.    Clark,    190    N.    Y.    51    I  L907). 
Even  though  the  vendee  of  stock  and 
bonds  had  the  property  and   business 
examined   by  an   expert   and    was   in- 
formed of  the  condition  of  the  prop- 
erty before   he  purchased,   and   even 
though  he  took  control  of  the  corpora- 
tion    and     managed     it     for     twelve 
months    before    complaining    of    mis- 
representations,   yet    unless    the    de- 
fendant proves  that  the  plaintiff  did 
not  act  on  the  representations  or  that 
he    discovered    the    fraud,    or    should 
have   discovered   it  while   he   was   in 
possession  of  the  property,  the  plain- 
tiff may  recover.    Graybill  v.  Drennen, 
43  S.  Rep.  568  (Ala.  1907). 

i  A  year's  delay  by  the  vendor  of 
stock  after  being  advised  by  his  attor- 


i.l 

.  I 

olng  of  a  :  irly 

■ 
i 

ind  In 

il. 

IS   tl  that    tl 

turned  them  to  Lfa 

."   N.  Y 

i  a 

trai  Mid    is    a    I 

•  he  fraud  fa 
in:,'  died  i-  v. 

■ 
be  Bubmitl 
>■.  Knowlton,  134  N. 
Y.    250    i  L892).      . 

raclllation, 
.  or  tl.  tion  and 

of  a  fraudul 

sab'  or  I    are  capable  of  res- 

ell 
of   time    after    the   •  ry    of   the 

fraud,  are  fatal  to  the  right  to  rescind 
the  same.     Stuart  v.  a,  TJ   Fed. 

i.  402  (1895);  aff'd,  169  U.  S.  1. 
Where,  six  months  after  the  fraud, 
the  purchaser  has  every  opportunity 
to  investigate  the  truth  of  the  state- 
ments and  fails  to  do  so,  he  cannot, 
after  seventeen  years'  delay,  complain, 
even  though  he  alleges  concealment, 
no  dividends  having  been  paid  in  the 
meantime.  McEacheran  v.  Western 
Transp.  etc.  Co..  97  Mich.  479  (1893). 
Two  years'  delay  in  disaffirming  is 
fatal.  Zimmele  v.  American,  etc.  Co., 
1  N.  Y.  App.  Div.  327  (1S96).  A  delay 
of  three  years  after  discovery  of  the 
false  statements,  and  one  year  after 


1038 


CH.   XX.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§    336. 


receiver  of  the  corporation.1     Bui  a  purchaser  of  national  bank  stock 
i'i   in  the  bank  itself  cannot,  after  the  bank  has  passed  into  the  hands 


full  knowledge  of  all  the  facts,  is 
fatal.  Byrd  V.  Rautman,  85  Md.  414 
(1897).  In  the  case  of  Krueger  v. 
Armitage,  58  N.  J.  Eq.  31  19),  the 

court  of  chancery  held  that  the  rem- 
of  a  stockholder  for  fraud  induc- 
ing him  to  buy  stock  was  at  law  alt 
whore   th<  ring 

the   fraud    Instituted    i:  y   pro- 

:.: 

stockholdi  r  and  als<>  l  in  Ql 

bill  for  r»  !.     Wh( 

itor    of    an    insolvent    c 
organizes  it.  and  then  by  frauduh 
■ 
11   its  pro] 

•••     in     • 
stock  of  t!  r,  and  a  mortgage 

at    • 

place  and 

parties  so  eellln  In 

■ 
unless    Innoci  at    bond! 

bai  in  whi 

dai 

• 
tlons, 

consist  of  at  will 

be  done  in  the  way  of  improv 
out   of   the   bonds,    ; 
me: 

Old  Colony  Trust  Co.  r.  Dubuq 
Co.,  -89    P(  !.    Rt  :  .    794    I  189J  >.     The 
question  of  whal  prompt- 

ness in  tendering  back  the  stock  for 
fraud  may  be  a  question  of  fact  de- 
eding on  the  circumstances  and  con- 
ditions, especially  where  the  stock 
was  worthless.  Heintz  r.  Mueller,  29 
Ind.  App.  42  (1901).  A  suit  by  one 
-ner  of  a  reorganization  agreement 
to  enforce  it  prevents  laches  being 
charged  against  other  signers  who  do 
not  commence  suit  until  a  long  time 
subsequently.  Cox  v.  Stokes,  15G  X.  Y. 
491  (1898).  In  a  suit  by  a  stockhold- 
er to  hold  a  corporation  liable  for  his 


stock  and  dividends,  by  reason  of  its 
allowing  a  transfer  by  an  unauthor- 
ized   agent    of    the    stockholder,    the 
subsequent   owners   of   the   stock   are 
not    necessary    parties.      The   defense 
of  prescription  may  prevail.  St.  Romes 
0.  Levee,  etc.  Co.,  127  U.  S.  614  (1888). 
i  Merrill  V.  Florida,  etc  Co.,  CO  P(  d. 
Rep.  IT    i  L893).     The  vendee  may  re- 
:.  after  the  corporation  has 
been  foreclosed,   if   he  sues   within   a 
liable    time    after    he    learns    of 
fraud.     Barron  v.  Myers,  146  Mich. 
I.    Under  the  Kentucky  stat- 
r   may   repudiate  for 
Fraud,  even  after  the  corporation  has 
le   an   assignment  for  the  benefit 
of  creditors,   if  due  care  was  used  to 
r  the  fraud.    Kentucky,  etc  r. 
Ky.     22'  i,    the 

con  that  the  decision  in  Dep- 

rlcan,  etc.  Co.,  To 
s.  W.   ;'  to  the  coo  was 

iring  in  T2  S.  W. 
ter  the  corporation 
the    hands   of   a   re- 
criber  for  stock  may  re- 
for  money  paid,  fraudu- 
ms  having  been  made 
as  to  the  condition  of  the  company, 
ription   being  for  increased 
sto'  1    the    increase   not    having 

been  made  until  some  time  after  the 
iption.  Newbegin  r.  Newton 
L  Bank,  CO  Fed.  Rep.  701  (1895); 
aff'd.  Newton  Nat.  Bank  v.  Newbegin, 
74  Fed.  Rep.  135  (1896).  A  stock- 
holder in  a  national  bank  who  was  in- 
duced to  become  such  by  fraud  may 
have  his  name  taken  from  the  list  of 
stockholders,  except  as  against  cred- 
itors of  the  bank  who  became  such 
after  he  became  a  stockholder  and 
without  notice  of  the  fraud.  Stuffle- 
beam  v.  De  Lashmutt,  83  Fed.  Rep. 
449  (1897).  Eleven  months  after  an 
insolvent  bank  issues  new  stock,  con- 
cealing the  facts,  a  subscriber  or  pur- 
chaser cannot  repudiate  for  fraud,  a 
1039 


§  o 


LL     -GAMBLING  Si  VU 


a  reo  iv<  p,  defend  against  thi  ry  liability  on  »'  I  <>f 

fraud  inducing  him  t.»  purchase,  unless  he  pr  of  «li 

which  negative  any  charge  of  m  and  i 

debl  was  created  nor  credil  given  the  bank  he  I"  c 

holder.1     I  a  order  to  rescind  a  fraudu 
also  all  other  property  reci  ived  nm  •  ndered  back.8    In  a  .-nit  in 


receiver  having  gone  in.  even  th< 
the   subscriber   had   just    ascertained 
the   tact  .     Dunn   v. 
Minn.  221    i  L894  I.     Bv<  D  ai 
polntment  of  a  re<  •  Iver  of  a  b 
p<  i  ion   who   was  Induced  to  buj 
of  the  hank  by  fraudulent  statemi 
that  the  stock  was  worth  par  i 
Bcind  by  suit.    Robinson  i>.  ]  .  1 1 

Tex.  Civ.  App.  To  i  L896).  See  I  164, 
supra,  and  Wallace  v.  Bacon,  86  Fed. 
Rep.  553    (1S9S).  and   of.    L60   Id. 

i  Walla. K  v.  Hood,  89  Fed.  Rep.  1 1 
(1898);  aff'd,  182  U.  S.  555.  S 
§  163,  supra.  A  subscriber  to 
stock  of  a  national  hank  cannot,  a 
the  bank  has  become  insolvent,  avoid 
his  statutory  liability  on  the  Btock  by 
the  defense  that  he  was  induced  by 
fraudulent  representations  of  the 
hank  and  its  officers  to  become  a 
holder.  Scott  v.  Deweese,  181  U.  S. 
202  (1901).  In  a  suit  at  law  brought 
by  the  receiver  of  a  national  hank 
against  a  stockholder  on  his  statutory 
liability,  he  cannot  set  up  fraud  on 
the  part  of  the  hank  in  inducing  him 
to  subscribe.  That  defense,  if  good 
at  all,  is  available  only  by  a  suit  in 
equity.  Neither  can  the  defendant  set 
up  a  counterclaim  for  the  money  so 
paid  by  him  for  the  stock.  Lantry  r. 
Wallace,  182  U.  S.  536  (1901). 

2  Wainwright  v.  Weske,  82  Cal.  193 
(1889);  Francis  r.  New  York,  etc.  R. 
R.,  108  N.  Y.  93  (1888) ;  aff'g,  17  Abb. 
N.  Cas.  1,  holding  also  that  where  the 
vendee  has  transferred  said  stock  to 
another  his  action  fails.  An  owner  of 
land  who  has  received  stock  for  a 
deed  of  the  land  cannot  have  the  deed 
canceled  on  the  ground  of  fraud  un- 
less be   returns   the   stock.     Clint  v. 


App. 
i  1906 ).     The  di  frauded  vendee  t: 

sondltlonally. 
it"  Ln  another 

trai  with  t 

:..i  for  fraudulent  r-  ; 
ed.    Bi  Pennl- 

N.    V.    642     (1887)        But 

wh<  i  irt  of  the 

•   maintain  a  suit  in 

lity  to  coi: 

mlsr  •at  ions 

Inducii  purchase      His  rem- 

it  law.      No  cancellation  of  the 
con  Involyi  d.    White  v. 

L'i  r.  d   R( 

of  the  before   repudiating  for 

fraud  is  no  bar  to  repudiation.  1 
R      A  Corp.  L  .1     134.  d  is 

!  although  the  \.  ndee   I 
lost  the  st  forfeiture,  the  ven- 

dor having  knowledge  thereof.  Ma- 
turin  /•.  Tredlnnick,  i  New  Rep.  L6 
(1864)    and    2   .\.w    Rep.    51  f.      If   the 

ty  selling  the  Btock  states  that  he 
is  selling  stock  owned  by  the  corpora- 
tion, when  as  a  matter  of  fact  he  is 
Belling  his  own  stock,  the  vendee,  upon 
discovering  the  fraud,  may  rescind 
the  sale,  and  recover  back  the  pur- 
chase price  paid.  He  need  not  tender 
the  same  stock  which  he  received,  in- 
asmuch as  stock  has  no  "ear-mark." 
If  he  has  exchanged  the  stock  for  the 
stock  of  another  company  into  which 
his  company  has  been  merged,  he  may 
borrow  stock  of  the  first  company  and 
make  a  tender  of  that.  He  must,  how- 
ever, rescind  promptly  upon  the  dis- 
covery of  the  fraud.  Although  he 
does  not  discover  the  fraud  for  four 
years  he  may  then  rescind.  Mayo  v. 
Knowlton,   134  N.   Y.   250    (1892).     A 


1040 


en.  xx.] 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§  356. 


equity  by  a  purchaser  of  stock  to  cancel  a  Bale  for  fraud  and  to  re- 
cover  money  paid  1  ack  on  account,  no  tender  prior  to  the  suit  need  be 
made,  if  the  plaintiff  in  his  complaint  offers  to  return  the  stock, 
;md  the  decree  requires  a  deposil  of  it  with  the  clerk  of  the  court 
for  the  benefit  of  the  defendants.1  Jr  has  been  h<  I  I  in  Indiana  that 
the  vendee  must  allege  that  he  was  damaged  by  the  misrepresenta- 
tions and  was  ignoranl  of  the  falsity  of  the  Bame  when  made,  and  if 
he  wishes  to  rescind  must  offer  to  return  the  Btock,  or  must  allege 
that  it  is  worth  specially  where  he  is  Bued  upon  a  note  given 

in  payment.2     After  the  purchaser  of  stock  ha  Ltuted  an  action 

suit  to  cancel   a   sale  of   stocks  and  a  note  in  purchase  of  stock  in 

bonds,  on  I  and  of  fraud  on  the    two   i  be   cannot    rescind 

part   of   0  will    not   I  rs  bach  the  stork  in 

wn)  paid  at  tii  baa    both.     Rohrbacher   v.   Kleebauer,   119 

Il(ll   i„  ,.„   |  .    ev(  n    Cal.  2  7).    Where,  according  to 

old  to  the  corpora 
.  hl.  li:  id,    is  appraised  by  the  corporation  and 

and  is  unable  to  obtain  the  amount  of 
money  ne  r  a  tender.     Such 

the  rule  even  though  the  an 
be  distributed  will  b<  aln- 

tiff  in   i  lit- 

Walcott,  141  111.  ' 

A    ,-■■  khold    :■    I 


appraised   pri  tally  paid 

to  am!  holder, 

be  •  maintain  a  lull  to  obtain  a 

larger  price,  bul   must   ,  ind 

or  law.     '!  .-.  Batchelder, 

Co.,  170  Mass.  31 

.nth.    69    X.    V. 
'    p.    Div.    l  holding 

•  i(,ns    ;  aining  in    that  even   though   the  misrepresenta- 

lls  0j  ;l    tlona  wen  by  the  husband  in 

bill  in  equity  to  rescind.  The  vendee's  's  Btock,  yet  this  is 

offer   t,,  claim   on   the    sufficient.    R<  n  can  only  be  had 

stock,  together  with  a  demand  for  the  when-  an  offer  to  return  the  property 
return  of  the  money.  Is  sufficient  his  been  made  and  kept  good  and 
Zlmmele  v.  Co.,  21  N.     the  offer  is  repeated  on  the  trial.  Cur- 

Y.   Supp.  846   (1893).     W  art  of     rier  r.  Poor,  S  1  Hun,  45  (1895);  reVd 

the  consideration  in  the  sale  of  stock  on  another  point  in  155  N.  Y.  344. 
is  that  the  vendor  resign  an  office  in     See  also  §  i  i>ra. 


the  company  and  the  vendee  be  ele 
in  his  place  and  this  has  been  carried 
out,    the    vendee    cannot    rescind    for 
fraud  unless  he  resigns  the  position 


j  Long  v.  Johnson,  15  Ind.  App.  498 
(1896).  Where  the  vendee  has  dis- 
posed of  some  of  the  stock  before  he 
discovered  the  fraud,  he  need  not  ten- 


or does   something  towards  restoring  der  back  all  the  stock,  but  he  must 

the    vendor    to    his    former    position,  lege  that  he  sold  it  before  he  discov- 

Gassett    v.    Glazier,     165     Mass.     473  ered  the  fraud,  and  set  forth  the  price 

(1896).     In  rescinding  for  fraud  the  and  other  facts.    Hill  v.  Harriman,  95 

vendee' of  stock  must  return  or  tender  Tenn.  300  (1895).   A  misrepresentation 

the  dividends  back  to  the  vendor,  but  that  large  dividends  and  profits  are  be- 

cannot  demand  repayment  of  assess-  ing  made  by  a  coal  company,  whereas 

ments    paid    after    discovery    of    the  in  fact  they  were  made  by  fraud  prac- 

fraud.     Marten    r.    Paul,   etc.   Co.,   99  ticed    upon    a    railroad    company,    is 

Cal    355   (1893).     Where  a  party  has  good   ground  for  a  rescission  of  the 
(66)                                               1041 


\MIU.1- 


[  CH 


for  dect  it  ]  i'1'1-1      ' 

join  ,,  it  bo  !■•  wind  thi  for  fraud  win  n 

madeto<  em  with  t] 

bill  i  !l  il  ■ 

,  and  also  for  dam  But 

Mt  i,v  kholder  aj  a  promoter  in  bel 

1,'nii  to  •lI"1  :1' 

for   fake  representations   inducing  U  until!  to  purch 

and  also  to  enjoin  a  proposed  of  plaintii  .   in  ord<  r     ■ 

I       an  assessmenl  ia  multifari<  A  purchaser  of  h  :i 

broker  may  defend  again  til  broughl  by  the  broker  for  the  price 

(1I1  ■  >und  thai  the  vendor,  a  i  the  broker,  \ 

of  fraud,  bul  Buch  defen  :"'  broker  advanced 

money  to  his  customer  on  Buch  It"  the  person  fraudulently 

i,:i.  k  of  '         '  >c«    chase  and  com]  tho 

need    be    ma<  ;i"-    property    li    m  Hamilton  p 

worthless       tf   1  '  -"    ' 


failure  of  consideration,   U  ■  ad- 

ant   could    reduce    I 

\  courl  of  equity  ma; 

the  sale  on  grounds  which  wo 
be   su  ■    at    law 

held  In  o  al  law  tor  the  pur- 

price,    the  answi  ag    up 

fraud   as   a   d  Wann. 

58  Fed,  Rep.  681  i  L893).  Wh(  re  a 
corporation  sells  its  property  through 
misrepresentations,    and    in    deeding 

the  property  causes  all  Its  outstanding 
capital  stock  to  be  delivered  to  the 
vendee,  the  vendee  in  suing  to  reco 


.  |  Luced  aud 

•  deb- 
it which  1  naay 
bill   in  equity  to  wind  up 
!  to  prevent  tl  11- 
Ing  it.-                  'ti  though 
the  del                ire  not 

-.    Michigan,  ,    i::i 

a.    i:i    (1903).     Kater 
r.    Etandolph,    •        Co.    I U    B.   C.  C. 
I,  n.  y.  L  .1  .  June  27,  L908. 
lbscribers  to  stock  may  ro 
the    same    on    the    ground    that    pro- 
moters who  sold  property  to  the  com- 


be  money  need  not  allege  that    pany  had  ml  sented  the  charac 


the  stock  was  valueless,  there  being 
an  allegation  that  the  property  v 
valueless.  Keener  r.  Baker,  93  Fed. 
Rep.  377  (1S99).  A  suit  to  cancel  a 
note  given  in  payment  for  stock,  pur- 
chased by  reason  of  fraudulent  mis- 
representations, must  not  be  based 
also  on  an  alleged  agreement  that  the 
note  would  not  be  enforced.  Bass  v. 
Sanborn,  119  Mo.  App.  103    (1906). 

1  Hanrahan  r.  National,  etc.  Assoc, 
66  N.  J.  L.  80   (1901). 

2  Bradley  v.  Bradley,  165  N.  Y.  183 
(1900).  Several  persons  induced  by 
the  same  fraudulent  representations 
to  purchase  stock  may  unite  in  filing 
a  bill  in  equity  to  set  aside  the  pur 


ter  of  the  property.  This  suit  may 
be  in  equity  and  is  not  multifarious, 
although  the  relief  demanded  is  a  can- 
cellation of  the  sale  of  the  property 
and  for  damages  against  the  vendors 
and  co-conspirators  and  also  for  re- 
scission of  the  subscription.  Such  a 
suit  lies,  although  the  subscribers 
paid  in  only  $150,000  of  cash  for  $450,- 
000  of  stock.  Rule  94  of  the  federal 
courts  does  not  apply  to  such  a  case. 
Barcus  r.  Gates,  89  Fed.  Rep.  783 
(1898). 

4  Pietsch   v.   Krause,   116   Wis.    344 
(1903). 

5  Leo  v.  McCormack,  186  N.  Y.  330 
(1906). 


1042 


C  If.   XX.  j 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


[§ 


obtaining  stock  has  transferred  it  to  another  party,  or  is  about  to 
transfer  it,  an  injunction  may  be  obtained.1  The  corporation  should 
then  be  made  a  party.3 

A  purchaser  of  "watered"  stock  has  various  remedies  if  he  has 
actually  been  defrauded.3  The  remedy  against  promoters  who  have 
absorbed  the  corporate  property  is  considered  elsewhere.4 

Where  the  fraud  is  chargeable  to  the  corporate  <•:  or  third 

persons,  and  the  vendor  of  th>  ;   is  innocent,  the  vendee  can- 

not rescind  the  sale  unless  such  cor]  p  third  j 

acted   as   agents   for   the   vendor.8      A   person    induced    by    fraud   to 


l  See  §§363,  364,  infra.  Where  by 
fraud  a  corporation  has  been  induced 
to  sell  the  stock  and  it  sues  to  rec< 
back  the  same,  it  may  have  an  in- 
junction against  the  defendant 
ing  or  transferring  the  stock,  but  can- 
not enjoin  him  from  voting  it.  Maine, 
etc.  Co.  v.  Alexander,  No  :'.  11.".  N. 
v.  App.  Div.  Hi"  (1906).  Even  thongb 
i he    questions    of    fact    are    dlspul 

•  a  preliminary  injunction  may  be 
granted  to  prevent  the  transfer  of 
stock  pending  a  suit  to  recover  it  back 
on  the  ground  of  fraud  and  duress. 
Hoy  v.  Altoona,  etc.  Co.,  136  Fed.  Rep. 
483   (19( >:.  >. 

though  the  party  seeking  the 
stock  of  which  he  has  been  deprived 
by  fraud  makes  the  party  complained 
of  and  the  corporation  itself  parties 
defendant,  yet  if  the  certificates  are 
not  obtained  from  the  party  holding 
them  the  court  will  not  order  the  cor- 
poration to  issue  new  certificates.  The 
outstanding  certificates  may  pass  into 
the  hands  of  a  bona  fide  purchaser. 
Joslyn  v.  St.  Paul  Distilling  Co.,  i  i 
Minn.  183  (1S90).  Where  a  citizen 
of  Wisconsin  claims  stock  in  a  Wis- 
consin corporation  as  against  a  cit- 
izen of  Illinois,  in  whose  name  the 
stock  stands  on  the  corporate  books, 
the  corporation  is  a  necessary  party 
defendant,  and  the  case  cannot  be  re- 
moved to  the  federal  courts.  Rogers 
v.  Van  Xortwick,  45  Fed.  Rep.  513 
(1891).  See  also  §338,  supra,  and 
§  579,  infra.  Where  stock  is  deposited 
with  a  trustee  for  purposes  of   reor- 


ganization,   and    transferable    certifi- 
cates are  issued  therefor  by  the  trus- 
tee, a  claimant  of  stock  which  anol 
person  has  deposited,  and  for  wh    b 
such    other   person    has   the    tl 

cannot  compel  the  trustee 
to  d  up  the  stock  until  the  ti 

tee' 

rty  holding  it  is  a  party 
defendant     Bean   p.   An  .    l.  & 

T.  Co.,  122  X.  V.  622   (1890). 

3  See  ch.  Ill,  supra. 

■»  See  §  651,  infra.  Where  a  pro- 
moter to  whom  marly  the  entire 
stock  has  been  issued  sells  a  part  of 
it  on  the  fraudulent  representation 
tlrat  the  stock  belongs  to  the  com- 
pany, and  then  •  auses  the  corn- 
puny  to  be  wound  up,  and  himself  to 
be  released  from  certain  iptions, 

and  th<  rty  to  be  sold  by  a  trus- 

tee named  by  him,  the  court  will  ap- 
point a  receiver  at  the  instance  of  the 
party  so  defrauded,  for  the  purpose 
of  recovering  back  the  property  of 
the  company.  Du  Puy  v.  Transporta- 
tion, etc.  Co.,  82  Md.  408  (1896). 

5  Moffat  v.  Winslow,  7  Paige,  124 
(1838).  Where  the  executive  com- 
mittee of  the  corporation  represents 
the  stockholders  in  selling  their  stock 
and  makes  fraudulent  representations, 
the  sale  may  be  rescinded  even  though 
the  seller  did  not  know  or  authorize 
the  representations.  Garrett  Co.  r. 
Clark,  42  N.  Y.  Misc.  Rep.  610  (190: 
Benjamin  on  Sales  (Bennett's  ed., 
1888),  §  467a,  says  "the  only  remedy 
of  a  shareholder  in  a  joint-stock  com- 


1043 


.  mail  nl> 

ption  and  to  bold  liable 

ami  tin  .li<>  in. 

are  proper  pari iea  •!< ■: 

Equity  will  Bometimi  b  compel  ti 

357.    Fni  ml  1,1  a  Uingsi  ruU.     A  ■    mbinati 

of  [  •  frauduL  mK    •  the  pri 

tations  and  fraudulenl  pracl  aounl  riminal  c 

spiracy.8     A  vendor  i  criminal]  ob- 

taining money  under  false  and  fraud  i    be 

induced  the  vendee  to  purch  In 

statute  makii  tminal  ofl 

or  concur  in   making   any   written    t  nl    with    intenl 

deceive.  '      I         a  'riminal  i  ff<  ase  in   I  "•  nian- 

iblisb  ith  in1 

to  induce  pi  i  to  pur  I  fader  thi  a  pel 

is  Liabl         a  manag<  r  f<  ,  if  1"  "•  • 

though   he  waa  never  appoi  In    England    th  tute 

under  which   the  court  haa  po  □  the  appli<  credil 

to  dired  the  official  receiver  to  \  criminally  a  di 

all,  dir<  ct    .  o  to  be  carried  on  at  the 

expense  of  the  of  the  company.1     In   England,  in    1858,  tho 

directors  of  a  join  ;   bank  w  of  a  conspiracy 

to  defraud,  where,  knowing  the  hank  to  b  >lvent,   they  issued 

a  balance  sheel  showing  a  profit,  and  declan  d  a  dividend,  and  issued 
advertisements   inviting   the   public   to   invest   on   such    representa- 

pany,  who  has  been  induced  to  pur-  regard  to  its  value,  renders  them  lia- 

chase    shares    by    tho    fraud    of     I  inal  prosecution  for  con- 

at   of   the  company,   is  rescission  splracy.     People    p.    Snmmerfield,    18 

contract  and  restitutio  in  integ-  X.  V.  Misc.   Rep.  242   (1905).     Where 

r u in."  brokers    and    promoters    issue    bonds 

1  Mack  r.  Latta,  ITS  N.  Y.  525  greatly  in  excess  of  the  value  of  the 
(1904).  corporate   property   and   by   fictitious 

2  See  §  354,  supra.  A  company  in-  sales  give  a  high  market  quotation  of 
duced  to  enter  a  consolidation  by  the  bonds  and  borrow  money  thereon, 
misrepresentations  of  defendant  may  the  lender  may  hold  them  liable  in  a 
enforce  his  promise  to  assign  to  it  suit  for  loss  due  to  a  conspiracy.  Mc- 
certain  patents  which  would  make  the  Elroy  v.  Harnack,  213  Pa.  444  (1906). 
business  profitable.  Anderson  Car-  4  State  v.  Keyes,  196  Mo.  136  (1906). 
riage  Co.  v.  Pungs,  134  Mich.  474  6  State  v.  Ware.  71  N.  J.  L.  53 
(1903).  (1904). 

3  A  corrupt  agreement  of  several  6  Rex  v.  Lawson,  [1905]  1  K.  B.  541. 
parties,  to  sell  stock  for  more  than  7  Re  London,  etc.  Corp.  Ltd.,  [1903] 
its  worth  by  false  representations  in  1  Ch.  728. 

1044 


CH.  XX.  J 


CONTRACTS  TO  SELL — GAMBLING  SALES,  ETC. 


357. 


tions.1  Under  the  New  York  Btatutes  a  person  who  sells  stock  on 
misrepresentations  may  be  guilty  of  grand  larceny.2  An  indict- 
menl  of  a  person  for  the  unlawful  obtaining  of  money  by  selling 
worth!  Id-mining  a1         is  nol  good  when   the  stock  was  paid 

for  Dot  in  money,  but  by  checl 


i  Regina  v.  Brown,  7  Cox,  Cr.  Cas. 
442  (1858);  Regina  v.  Esdaile,  1  1 
F.  213  i  1858) ;  Regina  v.  Gurney,  n 
I  t,  Cr.  Cas.  lit.  See  Hmrell  & 
Hyde  on  Directors  and  Officers,  3d 
(Eng  i  ed..  pp.  176-182,  citing  cases; 
]  irnes  v.  Pennell,  2  H.  L  Ca  ,  197 
(  1849).  There  cannot  be  such  an  of- 
fen  Unit  by 

■ 
the  off>  ii  ••  i  tat- 

ute.    Unit  ritton,  10S  Q. 

S.  199  1 1883).  By  the  National  Hank 
by  national  banks 
constitute  a  criminal  offense  pun 
able  l>y  fine  and  Imprisonment.  It 
Is  difficult  for  a  corporate  cr<  dltor  to 
b  collection  ?  og  out  a  con- 

[racy.     I  tt  v.  Griswold,  13  N. 

X    Bupp.  192  i  1891 1. 

a  People  v,  G-arrahan,  19  n.  v.  app 


Div.  347  (1897);  aff'd,  154  N.  Y.  769. 
The  vendor  of  stock  may  be  guilty  of 
grand  larceny  where  he  brought  about 
the  sale  by  fraudulently  causing  an- 
other person  to  represent  to  the  ven- 
dee that  such  other  person  would  buy 
ics  at  a  bigher  price,  the  stock 

If  being  of  no  value.  People  p. 
Putnam,  90  N.  V.  A.pp.  Dlv.  125 
i  1904)  :    affd,    IT'.'    X.    V.    518.     The 

at  of  a  corporation  organized  for 
fraudulent  pui  who  fraudulently 

induces  a  to  purchase  stock  of 

the    corporation,    may    be    guilty    of 

Qd    larceny.      I  ,-.    Walker,   85 

N.  V.  App.  in  .  |  1903)  ;   affd,  178 

X.    V.    563.     See   In   re  London,    i 

p.  I  1903]   l  Ch.  728. 
b  Lory  r.  People  .  82  x.  i:.  Rep. 
(111.   1907). 


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